Diplomaatia Special Edition 2012

Special edition, May 2012

Diplomaatia From the impossible to the inevitable Pages 2-3 How real is the risk of EU disintegration? Ivan Krastev analyses the lessons of the Soviet collapse.

Bridges to nowhere?

Pages 4-6 Anton La Guardia asks whether the eurozone faces a long and painful road to recovery or a long and painful death.

Angela’s flashes and a book-keeper’s prudence Pages 7-10 Quentin Peel and David Rennie analyse Germany’s and the United Kingdom’s attitudes towards Europe.

Russian awakening Pages 11-16 Putin’s return to the Kremlin will act as an accelerator of revolutionary events. Lilia Shevtsova asks if the country will implode or transform.

The myth of the Chinese way Pages 17-19 There is no deliberate Chinese economic model, argues Bobo Lo. But there are still important lessons to be drawn from the Chinese experience of modernisation.

The foreign policy of the former superpowers Pages 20-24

The future of democratic capitalism Four years ago, for the second Lennart Meri Conference, we published a special issue of Diplomaatia that focused on authoritarian capitalism. This seemed to have emerged as an assertive competitor to liberal demo­cracy: “seeking to legitimise itself as a system that is not only not inferior to Western democracy, but is much more ‘effective’ too,” as we wrote in the opening article.

Today, this relatively clear-cut rivalry has become a lot fuzzier. Some of the flagshipprojects of authoritarian capitalism are undergoing hard times. In Russia, the authoritarian economic model was dealt a serious blow by the economic crises and authoritarian politics is suddenly experiencing determined, even if disorganised pressure from an awakening society. In China, as Bobo Lo elegantly explains in this issue, a distinct authoritarian economic model, never really existed in the first place.

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But none of this has made democratic capitalism more self-confident. On the contrary, it has been undermined by the economic crises in Europe and is personified by visionless leaders, who fail to inspire their confused societies. Pro-democracy protests in the Arab world and Russia – even if the jury is still out as to the nature and quality of their outcomes – have not increased tired Western societies’ belief in the desirability and sustainability of their societal and economic models.

Not that these have been flawless: the economic crises have exposed some serious shortcomings in the systems and in the people who have managed them. Our political system, while democratic, does not always allow change any more easily or significantly than do more authoritarian models. As Ivan Krastev points out, “you can change politicians, but not policies.” More broadly, one

has to ask whether uncontained consumerism can be a way forward for a small planet of 7 billion people.

Yes, we have a crisis: not just an economic or even a political crisis, but one with strong existential and philosophical elements.

There is a deep disorientation among the populations of the Western democracies.

But economists – whatever their flaws – have one thing right. “Never let a good crisis go to waste,” is good advice, and can be useful far beyond the realms of economics. As Kurt Volker says, clinging to a disappearing past does not help. We should not fear the future, but should start to beat a path through the jungle of hard and inconvenient questions, until we can finally see, and hopefully shape, the contours ahead.

KL

Dmitri Trenin and Jackson Diehl look ahead to the foreign policy of Vladimir Putin’s third and Barack Obama’s second term.

Moving beyond the Arab Spring Pages 25-26 The West needs a new template for dealing with the Middle East, argues Kurt Volker.

Before Chicago Pages 27-28 Jüri Luik reproaches Europe for its calculating defence.

Predator drones in an age of Zeppelins Pages 29-31 The cyber-attacks on Estonia did little actual damage, but brought a hitherto unknown means of warfare into the limelight. Toomas Hendrik Ilves writes about cyber challenges.

How real is the risk of disintegration?

The lessons of the Soviet collapse Soviet disintegration was perceived as unthinkable in 1985 and declared to have been inevitable in 1995.

This leap from the ‘unthinkable’ to the ‘inevitable’ makes it a useful footnote to the current discussions on the future of Europe.

Ivan Krastev, political scientist Ivan Krastev is the chairman of the Centre for Liberal Strategies in Sofia, Bulgaria, and a permanent fellow at the Institute for Human Sciences in Vienna.

He is also one of the founders and a trustee of the European Council on Foreign Relations. His books include: The Anti-American Century (co-edited, 2007), and Shifting Obsessions: Three Essays on the Politics of Anticorruption (2004).

In 1992, the world woke up without the Soviet Union on the map. One of the world’s two superpowers had collapsed without a war, invasion or any other catastrophic development. Although the Soviets had been in irreversible decline since the 1970s nothing had pre-determined their collapse at the end of the 20th century. In 1985, 1986 and even in 1989 the disintegration of the Soviet Union was as unconceivable for the analysts of the day as the prospect of EU disintegration is for today’s experts. The Soviet empire was too big to fail, too stable to collapse, and had already survived too much turbulence. But what a difference a decade can make. What was perceived as unthinkable in 1985 was declared to have been inevitable in 1995.

And it is exactly this twist of fate, this leap from the ‘unthinkable’ to the ‘inevitable’, that makes the experience of Soviet disintegration a useful footnote to the current discussions on the European crisis and the choices that European leaders face.

Politics in turmoil After all, the present crisis has powerfully demonstrated that the risk of the EU disintegrating is not just a rhetorical device, a toy monster used by scared politicians to enforce austerity on their unhappy voters.

It is not only the European economies, but also Europe’s politics that are in turmoil.

The financial crisis has sharply reduced the

The Soviet collapse teaches us that just because the economic costs of disintegration would be very high, this is not a reason for it not to happen.

life expectancy of governments, regardless of their political colour, and has made room for the rise of populist and protest parties.

The public mood is best described as a combination of pessimism and anger. The latest Future of Europe survey, funded by the European Commission and published in April this year, demonstrates that while the majority of Europeans agree that the EU is a good place to live, their confidence in the economic performance of the Union and its capacity to play a major role in global politics has declined. More than six out of ten Europeans are convinced that the lives of those who are children today will be more difficult than the lives of people of their own generation. More troubling, almost 90 per cent of Europeans see a big gap between what the public wants and what their governments do. Only a third of Europeans feel that their vote counts in the EU and only 18 percent of Italians and 15 percent of Greeks feel that their vote counts even in their own countries. So, how unthinkable is disintegration? Is it not true that the survival of the EU will depend on the ability of leaders to manage the political, economic and psychological factors that were in play as the Soviet Union collapsed?

The Soviet order “collapsed like a house of cards,” wrote the eminent historian Martin Malia, “because it has always been a house of cards.” The EU is not a house of cards. In order to make sense of the lessons of the Soviet collapse, we should always keep in mind how dramatically different the Soviet and the EU projects are. But while the EU was never seduced by the temptations of communism and central planning, it is not immune to the vice of complexity. The EU is the most sophisticated political puzzle that history has known.

Walter Bagehot observes that “the best reason why Monarchy is a strong government is, that it is an intelligible government.” So, the mass of mankind understands it.

The EU, by contrast, is an unintelligible government that the mass of Europeans cannot understand. They cannot grasp how the Union functions and find it even more difficult to grasp what its collapse would mean. In the case of the Soviet Union, collapse meant that one state disappeared from the maps and a dozen new states came into being, and it meant the end of the communist system. But the EU is not a state. Even if the project fails, nothing would change on the maps. Even if the EU disintegrates, most, if not all the member states would remain market democracies. So, how can we define

While the EU was never seduced by the temptations of communism and central planning, it is not immune to the vice of complexity. disintegration? How can we conceptualise it? Could we speak of disintegration if one or two countries left the eurozone, or even the Union itself ? Would the end of the euro mean the end of the EU? Is the decline of the EU’s global influence an indicator of the collapse of the project? Would the reverse of some of the major achievements of European integration, such as restricting the free movement of people or abolishing the European Court of Human Rights, be enough to declare that the EU is history?

Soviet lessons The Soviet experience offers some useful hints for answering these questions.

When it comes to judging how real the risk of disintegration is, economists should not be trusted too much. There are good reasons why economists exercise such a powerful influence over decision-makers today, and there is no doubt that they are ready to offer advice on the basis of which politicians can act. But when it comes to collapse, economists have a blind spot. The Soviet collapse teaches us that just because the economic costs of disintegration would be very high, this is not a reason for it not to happen. To believe that the EU cannot disintegrate simply because it would be too costly offers only weak re-assurance that the Union will continue to be stable. Paradoxically, the belief that the Union cannot disintegrate, backed by the economists and shared by Europe’s political class, is one of the risks of disintegration. The last years of the Soviet Union are a classical manifestation of this dynamic. The perception that disintegration is ‘unthinkable’ could encourage policy makers to try to push dangerous policies under the assumption that ‘nothing really bad can happen’ in the long term, and foster the idea that anti-EU policies or rhetoric might even be helpful in the short term.

The Soviet collapse is the most powerful

Paradoxically, the

belief that the Union cannot disintegrate, backed by the

economists and

shared by Europe’s political class, is

one of the risks of disintegration.

Diplomaatia · May 2012

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The very moment that national elites start to question the future prospects of the Union, will be the moment they start to act in a way that will contribute to its collapse. demonstration that the disintegration of the EU need not be the result of a victory of antiEU forces over pro-EU forces. More likely, it will be the unintended consequence of the growing dysfunction of the system and the elites’ misreading of the political dynamics in their own societies. Reflecting on the Soviet collapse, the eminent historian Stephen Kotkin is convinced that the real question to be asked is, “why the Soviet elite destroyed its own system?” The Soviet collapse is the best demonstration that the rise of anti-integration forces can be the outcome, rather than the cause of collapse.

The Soviet experience is also a powerful demonstration that even more than the lack of reform, misguided reforms can lead to disintegration. In times of crisis, politicians are in search of a ‘silver bullet’ and it is quite often this that becomes the cause of death.

It was Gorbachev’s failure to make sense of the nature of the Soviet system – it could be preserved, but not reformed – and his misguided belief in the superiority of the socialist system that were at the root of the Soviet collapse. The European Union has its own history of trying to come up with one brave policy meant to solve almost all of its problems. The idea to hold referenda on the European Constitution, which backfired so spectacularly in France and the Netherlands, illustrates the dangers of such a course of action.

just around the corner. For the moment Europeans have no reason to doubt Germany’s devotion to the EU, but at the same time we are witness to the horrifying inability of the southern debt-ridden countries to ‘translate’ their concerns into German, and a growing failure of Germany to ‘translate’ its proposed solutions into the local languages of most of the other member states. It is not the divergence of interests, but the lack of empathy that should bother us most.

The third lesson is that if the dynamics of disintegration prevailed, the collapse of the Union would look more like a ‘bank run’ than a revolution. Paradoxically, the very fact that the EU was, and to a great extent still is, an elite project means that the real risk for its survival comes not so much from the anger of the public, but from the (mis) calculations of the elites.

In Kotkin’s apt observation in the case of the Soviet Union, “it was the central elite, rather than the independence movements of the periphery, that cashiered the Union.”

The risk is that the national elites will abandon the Union for fear of losing control, while the majority of people will remain loyal to it. The very moment that national elites start to question the future prospects of the Union, will be the moment they start to act in a way that will contribute to its collapse. The most important factor affecting the survival chances of the Union will not be the people’s disappointment, but the elites’ trust in its capacity to deal with problems.

The rise of anti-

integration forces

can be the outcome, rather than the

cause of collapse.

The second lesson from an analysis of the Soviet experience of disintegration is that in the absence of war or other extreme circumstances, the major risk to a project is not de-stabilisation on the periphery, but revolt in the centre. This does not mean that a crisis on the periphery cannot be infectious; it only means that the fate of the project will be decided in the centre. It was Russia’s decision to eradicate the Union, not the ever-present desire of the Baltic republics to run away from it, that decided the fate of the Soviet state. And it is Germany’s view of what is happening in the European Union that will more dramatically affect the future of the European project than the troubles of the Greek or Spanish economies.

When the winners of integration start to view themselves as its major victims, then politicians should be sure that big trouble is

The last and most disturbing lesson from a study of the Soviet collapse is that when disintegration threatens, political actors should bet on flexibility and constrain their natural urges towards rigidity and long-lasting solutions. Unfortunately, what we see in Europe today is a drive for rigidity. In order to get out of the current status quo of policies without politics in Brussels and politics without policies in nations, Germany, among others, is favouring a political constellation that can be best described as ‘democracy without choices’. European decision makers are trying to save the Union by opting for policy solutions that tie the hands of national governments and radically constrain the choices of the public. Voters in countries like Italy and Greece can change governments, but they

In times of crisis, politicians are in search of a ‘silver bullet’ and it is quite often this that becomes the cause of death.

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cannot change policies: economic decisionmaking has de facto been taken out of electoral politics. The expectations are that the new politics of fiscal discipline will reduce political pressure on the EU. But while experts can agree or disagree on the pros and cons of the austerity policy package, what is more important is that the failure of rigidity will automatically accelerate the crisis, making the survival of the Union more difficult.

Ten years ago, European decision-makers decided not to introduce a mechanism for leaving the common currency with the goal of making the break-up of the eurozone impossible. Now we know that this decision actually makes the eurozone more vulnerable.

Some decades ago, the German poet and dissident Wolf Biermann wrote, “I can only love, what I am also free to leave.” The current strategy of European policy makers – of favouring policies that make the price of exit unbearably high – can end up increasing rather than limiting the risk of disintegration. The Soviet collapse teaches us that in times of major crisis, the popular response to ‘there is no alternative’ is that any alternative is better. Paradoxically, flexibility is the best chance for survival.

When disintegration threatens, political actors should bet on flexibility and constrain their natural urges towards rigidity and long-lasting solutions.

The ailing euro Does the eurozone face a long and unnecessarily painful road to recovery or a long and painful death?

Soon after taking up my post in Brussels for The Economist, I visited Estonia in December 2010. I was curious about this small and relatively poor country, with a tortured history, that was bucking the economic trend of the rest of the European Union.

While almost all of its peers were officially in excessive deficit, breaching the limit of 3% of GDP, Estonia had the lowest deficit in the EU – even though it had just undergone a brutal recession. While EU countries strained under an average debt burden of about 80% of GDP, Estonia’s debt seemed absurdly low, at 8% of GDP. And while many of us in Brussels were busy speculating about whether and how the euro would break up, Estonia was enthusiastically preparing to join the single currency on the upcoming New Year’s Day.

Private collection

Anton La Guardia, journalist Anton La Guardia is the European Union correspondent for The Economist and author of the “Charlemagne” column; prior to that he was Defence and Security Correspondent. He joined the newspaper in October 2006, after spending two decades at The Daily Telegraph where he worked as Diplomatic Editor, Africa Correspondent, Middle East Correspondent and Ireland Correspondent. Anton La Guardia is the author of Holy Land, Unholy War: Israelis and Palestinians (Penguin, 2006), an account of the Middle East conflict. It is published in America as War Without End: Israelis, Palestinians and the Struggle for a Promised Land.

The Bank of Estonia’s small basement museum, displaying the bewildering succession of currencies that have circulated in Estonia, encapsulates the country’s tumultuous history. There were roubles (tsarist and Soviet), marks (imperial and Nazi) and, among these, a cherished era of Estonian money, from 1919 to 1940. After the break-up of the Soviet Union, the kroon was restored in 1992, a symbol of independence regained. The new kroon survived only a bit longer than the old one. The difference this time was that it was being surrendered voluntarily. For all the mixed feelings about losing the coins with the three lions, and adopting the bland euro banknotes with their fictitious bridges, the currency change was seen not as a loss of sovereignty but as an enhancement of national security: a step closer to ‘Europe’ in the west and further away from Russia in the east.

Economists argued that adopting the euro would also strengthen Estonia economically.

Pegged from the outset to the D-mark and then the euro, the kroon was hardly independent. Abandoning it would end speculation about devaluation, reduce transaction costs, lower interest rates and boost investment.

But there was also a sense of irritation.

Though poorer than the most troubled eurozone states, Estonia would have to contribute to the rescue of richer (and more profligate) partners. Estonia’s leaders could not understand the hesitation of other European governments to get a grip of their public finances. Anti-austerity protesters may have been flying the red flag in southern Europe, but there were none to be seen in Estonia when it underwent its adjustment. Estonians would joke that having endured the Nazis, the Soviets and hyper-inflation, they could take a few years of belt-tightening.

The correct response to the euro crisis is much debated by economists. But the course of the debt crisis, and ultimately the fate of the euro, will be determined as much by politics as by the precise nature of macroeconomic adjustment. Will the debtor states rebel against austerity? Will the creditor states get fed up with supporting others? Or will governments find the political will, and secure the democratic legitimacy, to embark on a process of much deeper fiscal, economic integration that is needed to stabilise the single currency?

The problem with the euro The eurozone bound diverse economies in a single exchange rate and a single interest rate. Plainly, it is far from being an optimal currency area. That said, most currency unions are not optimal. The difference between the euro and other currency areas is that it lacks the flexibility to make it work (labour mobility in Europe is lower than in the US or Canada) as well as the tools to absorb asymmetric shocks. It took a British prime minister, David Cameron, a self-declared Eurosceptic, to sum up the problem. Successful currency unions, he said, had some vital features in common: a lender of last resort for the state, economic integration and flexibility to deal with shocks, fiscal transfers and collective debt. “Currently it’s not that the eurozone doesn’t have all of these; it’s that it doesn’t have any of these,” Cameron said.

The most passionate Euro idealist could not have put it better.

Without a lender of last resort in the European Central Bank, which is prevented from lending directly to governments, members of the eurozone are akin to developing countries using a foreign currency: they are more easily pushed into insolvency when the markets panic. Britain and Spain have similar levels of debt and deficit, yet Britain’s borrowing costs are low while Spain’s are close to being unsustainable.

The eurozone’s response to the crisis so far has been slow, hesitating and erratic. That said, countries in danger of collapse have been rescued with hundreds of billions’ worth of loans. Greek debt has been belatedly restructured. Financial firewalls have been built and expanded. Brussels has been given greater powers to monitor national economies, and demand changes of policy backed with the threat of ‘semi-automatic’ sanctions. A fiscal compact, enshrining balanced-budget rules, has been negotiated and signed. The European Central Bank has intervened sporadically and controversially, buying up government bonds in secondary markets and spraying banks with €1 trillion worth of cheap three-year liquidity.

The eurozone’s

response to the crisis so far

has been slow,

It is possible that, had all this been done sooner and more decisively, the euro crisis might have been arrested. If Greece’s debt had been recognised immediately as unsustainable and restructured rapidly, if its first loans had been granted on concessionary rather than punitive terms, if it had been told to concentrate on structural reforms rather than drastic budget-cutting, if the ECB had been willing to wield the big bazooka more convincingly, if...if...then perhaps financial contagion might not have spread so far.

hesitating and erratic.

The result has been perverse. If the European Union and its single market were once a great ‘convergence machine’ for the economies of its members, as a recent World Bank report put it, the single currency has become an infernal engine pulling them apart. Spain and Greece are suffering from mass unemployment, yet joblessness in Germany is at a record low. The bond yields of peripheral European states may have blown out; but Germany enjoys remarkably low borrowing costs.

Southern Europe, in particular, has suffered a triple blow: the Mediterranean countries were hit hard by globalisation and the loss of low-tech industries such as textiles; they faced competition from cheaper labour in ex-communist member states when the EU was enlarged eastward; and the adoption of the euro made it hard for southern countries with a tradition of high inflation to adjust through the time-tested method of devaluation.

As matters stand, the crisis goes on. Indeed, in some ways it is getting worse. Spain is a far larger problem than Greece, Ireland or Portugal, and it could drag down Italy and perhaps even France. The firewalls, though enhanced, are inadequate to deal with this scale of problem. The relief from the central bank’s liquidity was short-lived, and loaded banks with even more dodgy sovereign bonds. Above all, the patient has not responded to the austerity medicine.

The treatment has been inadequate on two fronts: it has focused, for the most part, only on individual symptoms rather than the underlying disease. And it is unlikely to be sustainable politically. The simplistic diagnosis, offered mainly by Germany, is that the problem is due to profligacy in public spending.

There is an angry self-righteousness about German officials these days: it is a mixture Diplomaatia · May 2012

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of boastfulness about the merits of the German model, and resentment about being forced to stake hundreds of billions of euros to help others. The German word for debt, Schulden, is derived from Schuld, which also means guilt. Urged by Americans to do more to stabilise the euro, German officials reply that you cannot fight debt with more debt: the answer is fiscal consolidation to restore public finances and structural reforms to regain competitiveness.

Some of this therapy is needed. But the problem is more complex. The eurozone is afflicted by three inter-connected ills: a sovereign-debt crisis, a banking crisis and a growth crisis. Dealing with one often makes the others worse. Weak banks weaken sovereigns that are called upon to bail them out; weak sovereigns impair banks that hold their bonds. Poor growth enfeebles both the sovereigns and the banks. In turn, cutting deficits reduces growth, as does reduced lending by banks trying to restore their balance-sheets.

The underlying cause is not so much high budget deficits (though Greece certainly lied about its free-spending ways) but the current-account deficit, i.e., the net foreign borrowing by all actors, public and private (say to finance a trade deficit). Spain and Ireland were running budget surpluses before the crisis, yet were crippled by the puncturing of housing bubbles inflated by high private borrowing. Without the ability to devalue the currency or adapt monetary policy, redressing the imbalances must come through ‘internal devaluation’: bringing down real wages and prices relative to those of competitors. This was easier before 1991, when inflation around the world was higher, but has rarely been achieved since then. With the ECB determined to keep inflation at around 2%, internal devaluation brings severe recession, even deflation.

The German word for debt, Schulden, is derived from Schuld, which also means guilt. single market, particular in services, would help too, but any change will be slow. Even now, a new European patent system is being held up by a dispute between France, Britain and Germany over the location of a new patent court. Maybe Estonia should put up its hand to host it.

Solutions, in theory So what should be done? Economists are full of ideas, particularly when the problem is addressed Europe-wide and rather than simply in terms of adjustment in the most troubled economies.

In macro-economic policy, deficit countries could cut payroll taxes to reduce labour costs and raise VAT to discourage imports; the effect would be magnified if surplus states did the opposite. Germany could help by stimulating its economy through spending or tax cuts, or at least by slowing down its own budget consolidation. The ECB could loosen monetary policy further and let inflation run higher, especially in Germany, to give more space for southern countries to regain competitiveness without being pushed into self-defeating deflation.

Debt in many

advanced economies has reached levels exceeded only

A return to growth would relieve many of the strains. But for all the excited talk of a new ‘growth compact’ in the wake of the expected election of François Hollande, the Socialist candidate in the French presidential election, there is little agreement on how it might be achieved.

Moreover, the euro’s design flaws need to be repaired through greater fiscal federalism. A ‘banking union’, with a European system to wind down or recapitalise troubled banks and a Europewide bank-deposit insurance scheme, would help break the feedback loop between weak banks and weak sovereigns. A ‘fiscal union’ in which all or part of the national debts are mutualised as joint Eurobonds would stop markets pushing sovereigns into insolvency, and would create a European asset that banks could hold. Moreover, if these were financed through federal taxes Eurobonds would be even more of a safe asset. Instead of providing liquidity indirectly to banks, the ECB could declare that it stands fully behind solvent sovereigns, just as the Fed stands behind the America government.

during the second world war.

Forget the idea of an expansionary fiscal contraction. Time and again, deficit-cutting targets have been missed because recession has turned out to be unexpectedly deep. Indeed, the latest evidence is that, in a downturn, the multiplier effect of fiscal belt-tightening is more acute, leading to even deeper recession. That said, fiscal stimulus is out of the question for most, particularly countries under pressure in the bond markets. Debt in many advanced economies has reached levels exceeded only during the second world war, and all the evidence is that high debt stifles long-term growth. Sooner or later, most European countries will have to start working off their debt. So the trick will be to relax the pace of deficit-cutting in the short term, while reassuring markets with a credible programme of debt reduction in the medium and long term.

Structural reforms are vital to boosting growth, but these are unlikely to produce big results in the short term. Deepening the 5

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All this makes economic sense. America has worst deficit and debt levels than the eurozone in aggregate terms, yet the dollar is a refuge for investors fleeing the euro. If the American system has been fired into financial granite; the euro is still crumbly chalk.

The question is: is such transformation feasible politically, or even desirable?

What about the politics?

The crisis has pushed European governments further and faster down the road of economic integration than many would have expected. But it is also raising profound questions about sovereignty and national identity.

When the newly-elected Belgian government was told by the Commission it had to do more to balance its public finances or face the threat of EU sanctions, one minister lashed out: “Who knows Olli Rehn? Who has ever seen Olli Rehn’s face? Who knows where he comes from and what he has done?

Nobody. Yet he tells us how we should conduct economic policy. Europe has no democratic legitimacy to do this.”

Olli Rehn, in case anyone does not know, is the Finnish commissioner for economic and monetary affairs. He speaks softly, but carries a big stick: the power to scrutinise national budgets, demand changes to economic policies and to recommend sanctions, which must be approved by ministers ‘semiautomatically’, i.e., they can only be blocked if there is a weighted majority against them.

This month his economic forecasts will set the stage for ‘country-specific recommendations’. The big test will come if France is deemed to be missing its target to bring the deficit below 3% of GDP next year. Will Mr Rehn really tell a newly elected French president how he can and cannot spend French taxpayers’ money?

The political problem runs deeper still. To judge from the first round of the French presidential election, the fall of the Dutch government, and opinion polls in Greece, resistance against austerity is rising. And a big chunk of the electorate is supporting anti-immigrant, anti-EU parties. It is often the low-skilled and poorly educated – the supposed losers from globalisation – who are most openly in revolt. For them, the EU is not the solution but the problem. It has brought either austerity, or migrants, or unwanted economic competition, or all three.

Wittingly or unwittingly, the EU erodes national democracies in several ways. It eviscerates national governments, who are seen to be increasingly powerless as competences are shifted to Brussels. The EU, moreover, imposes itself to an unprecedented degree on the policies of memberstates, especially in economic policy. And

If the American system has been fired into financial granite; the euro is still crumbly chalk.

Will Mr Rehn really tell a newly elected French president how he can and cannot spend French taxpayers’ money?

If voters cannot choose how wealth is created, spent and distributed, what is the point of national democracy?

the Brussels institutions are too remote and Byzantine for citizens to feel they have a direct say in the decisions they take.

Legislation is proposed by the European Commission, the EU’s civil service (drawn up behind closed doors by an appointed college). Laws must then be approved by the Council of Ministers (where governments also strike bargains behind closed doors) and the European Parliament (where alliances shift from issue to issue). Differences must then be resolved by haggling among all three bodies. The system is accountable to lots of people, but not directly to voters.

asts to claim they were making another step towards federal Europe and euro-sceptics to insist that national interests were being preserved. When problems cropped up, another half-step might be called for. Or if a proposal for integration ran into resistance, the European bureaucracy would wait for a more propitious political alignment.

For decades time was deemed to be on the side of the European project, slowly eroding national frontiers and building up a sense of European common purpose.

Legitimacy for Europe, though imperfect, would be secured through concrete achievements: prosperity and freedom of movement.

For decades,

time was deemed to be on the side

Much of the time citizens do not much notice or care. The EU’s business is often too technocratic and complex to evince strong political emotions. But the development of ‘economic governance’ is a different matter. If voters cannot choose how wealth is created, spent and distributed, what is the point of national democracy?

A voter can throw out a government that drives the economy to the wall. But he or she cannot throw out the bums in Brussels if Mr Rehn and his colleagues screw up. The IMF, for instance, quite openly thinks the eurozone is getting its policy horribly wrong.

But the crisis has inverted this equation. Time is running against the euro. Markets demand answers: is the euro a coherent economic zone that will survive, or merely a collection of national units that can and will break up? As long as they suspect weaker members will fall out of the euro, they will dump their bonds. And the more the crisis drags on, the more citizens become disenchanted with the European project.

of the European project.

Increasingly, the talk in Brussels is of increasing the powers of the European Parliament, having pan-European parties run for election, holding direct elections for the president of the European Commission and, perhaps, merging the post with that of the president of the European Council (who represents leaders and chairs their summits).

European governments and citizens may have other ideas.

At such moments, Eurocrats reach for American history books for inspiration. The Federalist papers of 1787-88 argue that trying to coerce a group of sovereign states to follow common rules is ultimately doomed. Leagues and confederacies are like feudal baronies: sooner or later somebody breaks the rules.

And attempts to bring them into line lead to anarchy, tyranny and war. Europe is not at the point where, as the Federalist papers argue, it is about to revert to “bloody wars in which one half of the confederacy has displayed its banners against the other half.” But many a citizen feels an economic conflict is well underway.

forged from conflict with others. There is no European demos.

America resolved the question of national identity first, by fighting a war of independence and creating a political union. From there it was easier to create a fiscal union.

But Europe is doing things backwards. It created the euro partly in the hope of fostering political union. Fiscal integration is being pushed not to preserve freedom and a new nation, but to save a failing currency and a political project supported mainly by the elite.

In any case, the embers of Europeanism are dying. The memory of the second world war is fading, and the old Soviet foe has collapsed.

And who, among today’s mediocrities could pretend to be a new Hamilton? The crisis has confirmed countries in their prejudices. Germans see Greeks as indolent and corrupt; do they really want to commit the German cheque-book to Greece fully and indefinitely? And having portrayed Angela Merkel and Wolfgang Schaüble as the embodiment of the old Nazi invader, are Greeks ready to be forever bound to German strictures?

If the eurozone cannot, or will not commit to deeper integration, then it would be wise to consider how disintegration might take place, and how best to manage it. Would it be better for strong states like Germany to leave? Or would it be best to cut off the weakest members? This is an uncomfortable discussion. Merely being heard to talk about such things may exacerbate the crisis.

As is apparent from the submissions to the Wolfson prize in Britain, to be conferred on the authors of the best plan for monetary divorce, a break-up would be acutely painful for all. That helps explain why, for all the disenchantment, leaders are straining to keep the euro going. Nicolas Sarkozy may have been ready to wreck the Schengen free-travel zone in his call for the restoration of national borders, but he knew better than to talk of a restoration of national currencies. But someone, somewhere needs to be thinking about an orderly break-up, because the most agonising way to go would be a chaotic collapse that would wreck the other benefits of European integration, such as the single market.

Europe is doing things backwards. It created

Hamilton and all that The problem of fragility of the eurozone, and of the EU’s democratic deficit, comes down to the same question: the hybrid nature of European economic and political integration, and the ambiguity about the ultimate aim of the European project. Is the EU it a collection of sovereign states, like the United Nations? Or is it the start of the United States of Europe?

If it is an international organisation, then most power must remain with sovereign governments and Brussels must be subservient to them. The European Commission must be a mere arbiter between members, messy as this may be. But if the EU, or maybe just the eurozone, is a proto-federation, then the problems are more easily resolved. More fiscal federalism will stabilise the euro, and more political federalism will grant a greater democratic mandate to European institutions.

the euro partly in

For Alexander Hamilton, the leading author of the Federalist papers, the solution to the problem was to create a strong American federal government, acting directly on the citizen rather than through the constituent states. With the adoption of America’s federal constitution, Hamilton became treasury secretary. The federal government assumed the war debts of the ex-colonies, issued new national bonds backed by direct taxes and minted its own currency. Hamilton’s new financial system helped transform the young republic from a basket-case into an economic powerhouse.

the hope of fostering political union.

So will Europe have its Hamiltonian moment? Probably not. America in Hamilton’s time was a young, post-revolutionary republic. Its founding fathers had the prestige to refashion the nation to confront military and economic threats.

Hamilton’s assumption of state debt was contentious: virtuous states did not think they should pay for lax ones. Yet for Hamilton, assuming the debt was a necessary price of liberty. Europe, by contrast, is an older and more diverse place, with each country boasting of a national identity often

Will Europe have its Hamiltonian moment?

Politicians have long avoided the question. Indeed, the European project has only been able to move forward by retaining a large dose of ambiguity about the finalité politique: the political end-point. The method devised by Jean Monnet, the EU’s forefather, was to move in half-steps, justified on technocratic merit. This allowed euro-enthusi-

Probably not.

The most hopeful scenario for the eurozone is that it faces a long and unnecessarily painful road to recovery, with the adjustment placed almost entirely on deficit countries.

But the euro could just as well face a long and painful death.

Where would that leave Estonia? It would have a strong claim to join a successor currency union, perhaps a ‘northern’ euro with Germany and others that believe in solid fiscal discipline. Still, the Bank of Estonia should make sure it knows where it has left the printing plates for the old kroon banknotes. In a few years’ time, perhaps, those coins with the three lions will be resurrected yet again. And the bank’s museum will have a new display of a funny old currency called the euro, depicting fictitious bridges that go from nowhere to nowhere.

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Angela’s flashes Chancellor Merkel knows perfectly well that possible EU reforms are profoundly important political issues, and hugely controversial. But she has decided that only with fundamental reforms can European monetary union survive.

The 20th anniversary of the signing of the Maastricht treaty passed largely unremarked in Europe on February 7th as the crisis in the eurozone preoccupied governments and the financial markets. But in Berlin, the pact that laid the foundations for the EU’s common currency was heralded by Chancellor Angela Merkel.

In a speech to young Europeans sitting amidst the Greek antiquities of the Neues Museum, the normally cautious German leader spelt out more clearly than ever before the main elements of her vision of how to solve the eurozone crisis long-term.

to remain with the European Council, where the nation states rule supreme. Both Mr Hollande and Mr Sarkozy want to curb the independence of the European Central Bank – something to which Ms Merkel is deeply wedded. They want the ECB to incorporate a commitment to economic growth, alongside the requirement to fight inflation and maintain a strong currency, in its statutes.

Ms Merkel’s vision might not only clash with that of her closest ally. It would also imply dramatic changes in the distribution of power between Brussels and the member states. Such a big change might require a referendum in Germany itself – something every chancellor since the second world war has sought to avoid.

“Without

doubt, we

need more

Much was familiar. Eurozone countries need both budget austerity to reduce their debts and structural reforms to boost their competitiveness and employment. They must recreate trust in their finances and in each other.

Then she turned to the construction of the EU. “Without doubt, we need more and not less Europe,” Ms Merkel declared. “That’s why it’s necessary to create a political union, something that wasn’t done when the euro was launched.”

and not less Europe.”

Quentin Peel, journalist

Quentin Peel is the Berlin correspondent of the Financial Times. He is also an associate editor, responsible for leader and feature writing, and writes a foreign affairs column, ‘Between The Lines’.

Quentin has worked at the FT since 1975. Between 1976 and 1994 he served successively as southern Africa correspondent, Africa editor, European Community correspondent and Brussels bureau chief, Moscow correspondent, and chief correspondent in Germany. On his return to London he became foreign editor. An earlier version of this article was published in the Financial Times on February 10.

The French presidential election campaign has underlined very real differences between the two nations that see themselves as the dual motor of the EU. 7

Diplomaatia · May 2012

She went on to suggest that this political union – “there will still be a lot of argument about it” – would be organised around the existing bodies of the soon-to-be 28-nation bloc. The European Commission would – with competences transferred to it by nation states – act as a government reporting to a strong European parliament. The European Council of Ministers would function as a second legislative chamber. The European Court of Justice would be the highest judicial authority. “We believe that we will stand better together if we are ready to transfer competences step by step to Europe,” she said.

“That is just about as federalist as you can get,” says Henrik Enderlein of the Hertie School of Government in Berlin. “Is she serious? That is the real question. She is very good at the rhetoric. But I do take it seriously that she wants to move towards political union.”

It is a vision that could cause alarm in France, Germany’s closest European ally.

The French presidential election campaign has underlined very real differences between the two nations that see themselves as the dual motor of the EU. Both Nicolas Sarkozy and François Hollande share a much more ‘intergovernmental’ than ‘federalist’ view of the future.

For a start, Paris (whether Gaullist or Socialist) does not want the Commission to become Europe’s government: it wants that job

But what does ‘political union’, a term abandoned in recent years by most EU leaders for fear of alarming their increasingly eurosceptic electorates, really mean? The detailed vision of Ms Merkel – the continent’s dominant political leader, widely seen as having the future of the euro in her thrall – remains unclear.

She talks of a ‘fiscal union’ but her definition sounds like fiscal discipline. She insists there should not be a ‘transfer union’ in which Germany guarantees the borrowings of its partners. She is still resisting a move to jointly-guaranteed eurobonds, which others such as France and Italy would endorse.

From Washington to Westminster, political leaders complain that they understand neither the tactics nor the strategy of the German government and its chancellor in the crisis. They see conflicting signals, ranging from a rigid insistence on budget discipline to a willingness to turn a blind eye to the unorthodox monetary policies of the European Central Bank. Ms Merkel says she will “do what it takes” to save the euro, but then constantly seems to block the view of most partners on the need for a bigger ‘firewall’ to prevent contagion.

Ms Merkel seeks to reconcile a domestic constituency that is essentially pro-European but still decidedly hostile to bailing out the eurozone’s debtor nations.

Close advisers confirm that the chancellor has indeed been thinking long and hard about reforms of the EU that go far beyond the recent ‘fiscal compact’.

Part of the problem lies in the constant debate within Germany, and within Ms Merkel’s centre-right government, about the way forward. A confused communications strategy tries to reconcile the demands of the competing ministries of finance, foreign affairs and the chancellor’s office itself. And Ms Merkel seeks to reconcile a domestic constituency that is essentially pro-European but still decidedly hostile to bailing out the eurozone’s debtor nations.

In countries such as Greece and Spain, undergoing ferocious austerity programmes to meet German-led demands to reduce their public debt and budget deficits, the chancellor is caricatured as a jackbooted bully. Yet at home she is seen as cautious and pragmatic, a natural conciliator: she is the most popular politician in the country and her Christian Democratic Union is well ahead of its rivals in the polls.

“I don’t think she is a visionary, and we don’t want a visionary in Germany,” says Almut Möller of DGAP, the German Council on Foreign Relations. “She has no institutional vision.”

Yet the chancellor’s advisers say that has changed. The turning point was last July.

“Two things came together,” says Ulrike Guérot of the European Council on Foreign Relations. The first was Italy coming under attack from financial markets almost as soon as EU leaders had finalised an agreement in June aimed at promoting calm. The second was when pro-Europeans in the CDU warned Ms Merkel she was in danger of losing the debate in Germany. They said: “we are losing our constituency in the centre and not gaining anything on the right.”

The next phase would be more intrusive: co-ordinating or even harmonising taxes, with budgets

supervised by the Commission and all eurozone finance ministers.

Party officials argued that the chancellor needed a narrative to persuade her sceptical supporters to vote for a series of bills in the Bundestag needed to pay for the eurozone rescue plans. “For the Germans the message has to be: if we are going to have a transfer union anyway, we need a political union to control things,” says Daniela Schwarzer of SWP, the German institute for international and security affairs.

Close advisers confirm that the chancellor has indeed been thinking long and hard about reforms of the EU that go far beyond the recent ‘fiscal compact’ of budgetary rules agreed as an intergovernmental treaty last month by 25 of the 27 members. At a series

of meetings with fellow European leaders at Schloss Meseberg, her baroque government retreat outside Berlin, she urged them to spell out their ideas of how the EU should look in 10 years’ time. To her obvious frustration, they were all much more focused on the present crisis. Yet she has given only hints of her own thinking in a series of statements and speeches.

“She is quite clever in not spelling it out,” says Joachim Fritz-Vannahme of the Europe’s Future programme at the Bertelsmann foundation. “She is playing chess. She knows what she has to do. She knows it will take time. And she knows it will be very controversial.”

It is, he adds, “a vision for the transformation of the EU – or at least the eurozone – in a very short time frame: three to five years. Political union is not a very clear concept. She doesn’t dare speak about a United States of Europe, but she is thinking about what has to be in it.”

Conversations with senior officials and political analysts in Berlin reveal a lot more detailed thinking than Ms Merkel has demonstrated publicly. The ‘fiscal compact’ is seen as just a first step to make the rules of budget discipline genuinely binding on all eurozone members: they must put a commitment to balanced budgets into their national constitutions, or equivalent legislation. In exchange, Germany proposed and is the principal financier of the permanent European Stability Mechanism, due to start operating in July. It is in effect a €500bn European monetary fund to deal with debt crises in the 17-member monetary union.

At that stage, many leading German officials and politicians privately concede, the introduction of eurobonds might become irresistible. The concept would provide cheaper financing for the most indebted eurozone states. It is still fiercely resisted in Ms Merkel’s CDU and by the liberal Free Democrats, junior partner in the coalition. The chancellor herself sounds sceptical. But Wolfgang Schäuble, her passionately pro-European finance minister, has always said “not yet” rather than “never” to the bonds. (Both the main opposition parties, the centre-left Social Democrats and the environmentalist Greens, are in favour.)

Yet eurobonds and a loss of budgetary autonomy would be likely to fall foul of the constitutional court. “Any loss of sovereignty would be problematic” for the court, says Ms Schwarzer. “It would probably mean having a referendum. But the big problem for Germany isn’t just the constitutional court: it’s also Paris.”

Confrontation with France could come in a third phase of EU reforms, in which the Commission would become the real European economic government and the European Council would become a legislature alongside the European parliament. “The reality is that Germany is starting this reflection and other countries are not,” says Ms Guérot.

“France has to have the debate. They are not ready to give up the Fifth Republic.”

For Ms Merkel it is a question of the democratic legitimacy of the entire integration process. She sees a dangerous disconnection between national politics, and national parliaments, and the European parliament. Her party wants to see the Commission president directly elected.

The chancellor knows perfectly well that these are profoundly important political issues, and hugely controversial. But she has decided that only with such fundamental reforms can European monetary union survive.

The good thing for Germany, says Mr FritzVannahme, is that she is not a bully – in spite of the Mediterranean caricatures. “She is a lady, but not an iron lady,” he says. “She is also a scientist, and that is perhaps part of her problem. For politics is not an exact science.”

The rules agreed would set ceilings for national spending and borrowing but would not interfere with tax and spending choices.

But the next phase contemplated in Berlin would be more intrusive: co-ordinating or even harmonising taxes, with budgets supervised by the Commission and all eurozone finance ministers. They would be able to insist on certain spending priorities, to ensure competitiveness and growth targets were met and that adequate funds were devoted to areas such as education. It would mean a big transfer of sovereignty away from national capitals and parliaments.

In a third phase of reforms, the Commission would become the real European economic government and the European Council would become a legislature alongside the European parliament.

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A book-keeper’s approach to Europe The British will not give Europe their hearts, for a host of reasons. So be it. But when assessing the worth of EU membership, let them at least keep their heads.

Britain never fell in love with the European Union. For the British, belonging to the European club has always been an affair of the head, not the heart. Membership resembles an accounting exercise in which the benefits – above all access to the EU’s single market – must be weighed constantly against the costs, whether from lost sovereignty, contributions to the EU budget or the burden of EU regulation.

Private collection

David Rennie, journalist

There is no point bewailing this chilly, Anglo-Saxon approach. Each member of the EU has its own distinctive relationship with the European project, bound up irrevocably with history, culture and geography. The French and Germans chose Europe as their vehicle for reconciliation and – especially in the case of France – as a lever for continuing to exercise global influence. Many smaller members simply assume that they cannot go it alone in a globalised world. Some, as young democracies, saw joining Europe as a guarantee that they belonged to a Western world of modernity and openness and would not slide back into tyranny. In some countries, citizens sought better governance from Brussels technocrats than they believed they would receive from local politicians.

“Shackled to a continental corpse”?

Start with the single market. It may seem hard to remember it now, when Margaret Thatcher is associated with the handbagswinging prime minister demanding her money back from the EU budget or telling those dreaming of a political and economic union: “No, no, no”, but Mrs Thatcher’s support was crucial to the foundation of the single market. Working hand in hand with federalists in Brussels, the British Conservative leader of the 1980s understood the huge benefits of sweeping away national barriers to trade within the European club. She understood clearly that this would involve some losses of sovereignty, telling the House of Commons in London that if all single market decisions were taken by unanimity, the project would never get off the ground. In passionate tones, she told members of parliament about the foolish European rules that forced British lorries to drive home empty after taking a load to the continent, or blocked British insurance companies from buying up insurance firms elsewhere in Europe.

Like it or not,

David Rennie is the British political editor of The Economist and author of its “Bagehot” column. From 2007 to 2010, he wrote The Economist’s “Charlemagne” column on the EU, while based in Brussels. Before joining the Economist he was a foreign correspondent for the Daily Telegraph, with staff postings in Sydney, Beijing, Washington DC and Brussels.

Britain’s accession, nearly 40 years

ago, was founded

Like it or not, Britain’s accession, nearly 40 years ago, was founded from the first moment on a cost-benefit analysis, amid a resigned sense that the economies of the European continent simply looked more dynamic than exhausted, strike-bound, 1970s Britain. Yet that does not mean that Britain’s approach is above criticism. For, if a country is going to approach Europe like a book-keeper, it needs to be sure not to miscalculate its profits and losses. The British have long been inclined to pessimism when it comes to the negative aspects of EU membership, and too quick to assume that Britain is losing at every turn.

from the first

moment on a costbenefit analysis.

Now, in a new and alarming development, the British political classes are becoming too pessimistic about the positive sides of membership, too. On right and left, politicians are repudiating Britain’s biggest European victories. Above all, successive British governments of the 1980s and 1990s achieved two big, mutually reinforcing wins: first, the

Each member of the EU has its own distinctive relationship with the European project, bound up irrevocably with history, culture and geography.

9

creation of the single market, and later, enlargement of the EU to take in countries of the former communist bloc. Both developments nudged the Union in the direction of Anglo-Saxon openness, free trade and intergovernmentalism. Both pushed the project away from rival visions of the EU as a deeply integrated, statist United States of Europe.

Yet both those wins are now in danger of being misremembered by the same British political parties that once fought for them.

Diplomaatia · May 2012

Mrs Thatcher later changed her mind. In retirement, she came to believe that she had been betrayed over the creation of the single market and that market access would have been secured far more safely by simply using global trade agreements, avoiding any pooling of sovereignty. This political inheritance has left its mark on today’s Conservative politicians, who have a paradoxical relationship with the single market. On the one hand, the post-Thatcherite Conservative identity revolves around free trade, free markets, a suspicion of intervention by national governments and a belief in free and undistorted competition. As a result, a majority of Conservative members of parliament think of single market membership as the best (or the only good) thing about EU membership.

But on the other hand, many of those same politicians dislike supra-national regulation by unelected bureaucrats in Brussels. Their

If a country is going to approach Europe like a book-keeper, it needs to be sure not to miscalculate its profits and losses. great error is not to see that you cannot have one without the other. Only a supra-national referee can slap down national governments tempted by the lures of protectionism, or of pouring market-distorting state aid into firms identified as ‘national champions’.

All that would be tricky enough, but now a new political argument can be heard among British Conservatives, inspired by months of ghastly news headlines about massively indebted European governments, falling growth rates and fast-greying populations.

The old binary calculation – is Britain paying too dearly for the prize of access to European markets? – is being complicated by a new question: is being part of the European economic bloc much of a prize at all?

Once, the most powerful British Eurosceptic arguments were all to do with sovereignty, and the threat of the jackboot of Brussels stamping on ancient British freedoms. Now, with many British voters convinced that the European single currency is on the point of collapse, the most potent line of attack is the assertion that Britain is “shackled to a continental corpse”. Britain should be seeking new growth opportunities in the emerging world, and trying to expand its trade with such giants as China, India or Brazil, this argument goes. But Britain is instead bound to a sclerotic, slow-growing, ageing, over-regulated Europe that is fast losing its relevance.

Such arguments appeal greatly to many Brit-

For its British backers, the internal market was explicitly intended to unleash beneficial competition within the EU’s borders.

supposedly kill British businesses. That is not to say that the EU is not capable of excessive regulation: it is, and some of the plans for financial supervision emerging from EU discussions at the moment would be genuinely damaging to the City of London. But Britain’s real challenge is competitiveness, and making and selling the sorts of goods and (above all) services that are likely to sell in the 21st century. In that quest to stay competitive, it would be a grave blunder to decide that Europe’s single market was more a liability than an asset.

Opening the labour markets – smart, right and problematic Then comes the second big British win that is being misremembered: the EU’s enlargement to east and central Europe. This was a project which enjoyed cross-party support. The Conservative prime minister John Major and his Labour successor Tony Blair were both in the vanguard of EU leaders pushing hard for the enlargement of the EU to take in countries of the ex-Communist bloc, often against strong opposition from such countries as France.

Both Mr Major and Mr Blair understood what they were doing. Not only did western Europe have a moral duty to heal the divisions of the Cold War. Enlarging the club to take the newly-democratic, mostly pro-American and freemarket-minded countries of east and central Europe also secured Britain new allies around the Brussels summit table.

ish voters. They pander to a sense of British exceptionalism, and they stir memories of Britain as a great maritime trading nation, free to roam the world’s oceans in search of new markets and exchanges.

Tell a typical British Eurosceptic that half of Britain’s trade is with the rest of the EU (and some 40% with the eurozone countries that use the single currency) and he will retort: “exactly, they are in danger of dragging us under if we cannot cut ourselves free from endless EU environmental, social and employment rules that are choking our businesses.”

Remind the same Eurosceptic that his country still trades more with Ireland than with Brazil, China, Russia and India put together, and he will cry: “that’s my point precisely: we are tied to the wrong markets”.

But such arguments rest on a double miscalculation. First, if Britain – the largest and loudest spokesman for free market liberalism within the club – walked away from the councils of Brussels, those regulations would almost certainly become more burdensome, and would still ensnare the British. Britain is not some nimble sailing ship that can sever its mooring lines and set off round the world’s oceans. The British Isles will always lie a short distance off the coast of France, and will thus for the foreseeable future be massively affected by the market rules and regulations operating on the continent.

Second, it is too easy to blame EU membership for Britain’s relative lack of success when it comes to emerging market exports. Germany, a world champion in selling to the Chinese, is a part of the EU, bound by the same employment, social and environmental rules that

Widening the club made deepening it much harder, thwarting those who dreamed of turning the EU into a federal union (not least because after decades of Soviet occupation, several of the newcomers shared British wariness about calls to pool sovereignty). The new members were hungry, low-cost centres of production, with a self-interest in promoting competition within the single market. Much of the time (though not always) the newcomers could be counted on to resist calls from the French or southern European rivals to harmonise labour rules, tax rates or pay upwards. In effect, enlargement brought globalisation within the borders of the single market, blocking any plans by protectionist governments to turn the EU into a Fortress Europe, vainly erecting barriers against globalisation.

Alone of all major EU economies, Britain under Tony Blair opened its labour markets to Poland, the Baltic republics, the Czech Republic, Hungary and the other nations that joined the EU in 2004. It was the right thing to do.

Yet fast-forward to the present day and that second British victory is being repudiated by politicians of the left and right. A big development in British public opinion is the identification of ‘Europe’ with ‘immigration’, and a loss of control over Britain’s borders. On British doorsteps, politicians of all parties report complaints about the hundreds of thousands of eastern Europeans who arrived in Britain after 2004, shocking officials who had initially predicted that just tens of thousands would come. Voters angrily complain about newcomers taking jobs, and overwhelming such public services as housing, schools and hospitals – though such generalised grumbling often co-exists with admissions that individual Poles, Latvians, Estonians, Czechs and so on are hard-working and well-educated, and probably more attractive as employees than many native Britons. In the face of such public anger, politicians from both the

Conservative and Labour Parties have rushed to question the 2004 opening of labour markets. When Romania and Bulgaria joined the EU in 2007, Britain’s then Labour government slapped on labour market restrictions.

rope – but also the pragmatic and smart thing: attracting the best-educated who wished to work legally, while pushing lower-skilled migrants (large numbers of whom would have come anyway) into legal, taxable work.

More recently, the opposition Labour Party has linked the question of eastern workers to the pain of a ‘squeezed middle’ or of middle- and low-income salaried workers, seen as victims of globalisation. Some senior Labour figures, such as Ed Balls, the party’s chief finance spokesman, have called for Britain to tighten rules governing the free movement of workers, a founding EU principle. The Labour leader, Ed Miliband, whose own grandparents were Polish refugees, told the BBC in April 2011 that the previous Labour government “got it wrong” on immigration and “clearly underestimated the number of people coming in from Poland”. Labour, he suggested, had no choice but to address voters’ fears that incomers were putting pressure on wages and housing—though “some of that is real and some of it isn’t,” he admitted.

That is not to pretend that competition from newcomers is easy for native Britons. Today’s Conservative ministers have a point when they argue that successive Labour governments between 1997 and 2010 used EU immigration as a ‘sticking plaster’ covering up deep structural flaws within the British economy, whether the immobility of many Britons who will not travel to find work, or decades of failure in British state schooling. But it is hardly fair to blame better-qualified easterners for showing up such flaws: nor plausible to imagine that excluding competition from better-qualified outsiders would have magically invigorated the British labour force. Ever since Margaret Thatcher stirred the British from corporatist torpor in the 1970s, reversing the country’s seemingly unstoppable decline, successive British governments have embraced competition and sought to make it work for their country. Enlarging the EU to take in east and central Europe was an act of great historical justice.

But it also helped to make highcost, sluggish Old Europe more competitive, overnight. That was a British win.

In effect,

enlargement brought

globalisation within the

The Conservatives, with their strong commitment to free trade and open borders, have tied themselves up in knots.

Ministers have praised the hard-working nature of many Polish and eastern migrants, and acknowledged their appeal to British employers. Yet they have called Mr Blair’s 2004 opening of labour markets a “huge mistake”, and called on employers to hire British applicants for jobs wherever possible.

borders of the

single market.

Yet if politicians pretend that Britain wilfully chose to ignore a much better alternative to labour market opening in 2004, they are indulging in a historical fantasy.

In 2004, all existing EU members granted exCommunist newcomers rights of free entry and temporary residence (but not free rights to work). Once poorer neighbours do not enjoy free access to your country, the most likely consequence of closing legal routes to work is an expansion of the black market for casual, untaxed labour. This duly happened all over Western Europe, notably in Germany, home to an estimated 400,000 Poles despite seven years of tough work restrictions. Furthermore, even those tough restrictions were full of loopholes. Under EU rules, the selfemployed are excluded from transitional labour market controls or professional quotas.

Easterners calling themselves ‘self-employed’ in Germany duly doubled after 2004. By offering all easterners the chance to work legally from day one, Britain attracted lots of the sort of eastern migrants who would only consider working legally: graduates and those with the best educations. Britain became known for openness, and duly attracted a much bigger share of young, skilled migrants and graduates than Germany did. In short, when it comes to the 2004 enlargement and labour market opening, Britain did the right thing – backing free movement across a united Eu-

Over and above issues of migration, enlargement brought real problems to the EU, not least because some countries joined before their democratic or judicial systems were truly ready. But keeping east and central Europe at arms length would not have accelerated reforms in the former Communist bloc. Enlargement happened in the nick of time.

There are parallels with the creation of the single market. For its British backers, the internal market was explicitly intended to unleash beneficial competition within the EU’s borders. Years of fudge and compromise have followed, it is true. The single market remains incomplete, with Europe sadly failing to achieve its potential in such fields as services or digital commerce. With public austerity causing voter rage across the union, calls for protectionism remain a threat. But if the single market had never been created, it is hard to believe that intra-EU trade would be greater, or that Europeans would be safer from the forces of global competition.

By all means, let the British continue to weigh European membership in a balance, placing costs on one side and benefits on another. But let British politicians do this honestly and soberly, properly weighing the benefits of historic British victories in Europe and resisting the emotional temptation prematurely to declare the project irrelevant or even dead and buried. The British will not give Europe their hearts, for a host of reasons. So be it. But when assessing the worth of EU membership, let them at least keep their heads.

The single market remains incomplete, with Europe sadly failing to achieve its potential in such fields as services or digital commerce.

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Russia is awakening: will it implode or transform?

Putin’s return to the Kremlin will act as a powerful accelerator of revolutionary events, if only because his leadership means that the logic of personalised power will not allow regime change.

an alternative be found before the Russian Matrix collapses, or after it starts to disintegrate? And what price will Russians have to pay for the end of a phenomenon that has failed to bow out gracefully?

Victory or defeat?

For the time being the Russian chattering classes are engaged in more down to earth discussions. ‘Who won and who lost?’ is the question that Russians continue to debate after the apparent ebbing of December’s tide of protest. The opposition community has triumphantly claimed that the December Movement changed the country and that the authorities will be forced to back down, but the majority is gloomy, believing that the protests ended with failure; Putin has returned to the Kremlin to stay there forever.

Lilia Shevtsova, political analyst

Lilia Shevtsova is a Senior Associate at the Carnegie Moscow Center and a Chair of the Russian Domestic Politics and Political Institutions Project. She is the author of Lonely Power, Russia–Lost in Transition: The Yeltsin and Putin Legacies, Putin’s Russia, Yeltsin’s Russia and Change or Decay (co-authored with Andrew Wood).

Have you ever seen how a tsunami begins?

The first wave comes slowly and subsides, then another one dies in the sand, and another one… until, after a treacherous lull, the water rises high and crushes everything in its way. This is what Russia may have in store – the country has already passed the fork before which other options might have been (at least, theoretically) feasible.

Russia has once again failed to find a graceful exit from its centuries-long wanderings in the dark and is instead rushing along a familiar path of fury, rebellion and revenge.

Putin’s return to the Kremlin and the ruling team’s arrogant demonstration that they are prepared to rule indefinitely have buried all hopes of a velvet reform from the top, leaving Russia only one solution – pressure from below. Revolution has always been Russia’s way of cleansing the scene for another cycle of personalised power, each time in a more ruthless and predatory form. It is still unclear this time whether Russia can free itself from its historical trap and find another way out of its predicament.

There is one certainty at least – the personalised power system is in decline. But many questions remain unanswered: will the agony end with rot that will sap the life of generations to come? Or will it implode? Will

Russia has once again failed to find a graceful exit from its centuries-long wanderings in the dark and is instead rushing along a familiar path of fury, rebellion and revenge.

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Diplomaatia · May 2012

Who is right? Let us look at the arguments of both sides. The optimists are ready to argue that pressure from the rallies will force the regime to deliver liberalisation. “Look,” they say, “the Kremlin is adopting legislature on political parties, promising to hold direct elections for governors, and discussing the convening of a Constitutional Assembly.” Some optimists cannot contain their euphoria: “Stop whining,” they urge, “the opposition has been invited to take part in meetings with the president and opposition leaders are being allowed onto the television. And most importantly: there has been no repression! Onwards towards future conquests!”

I have to admit that this reaction baffles me. I cannot understand what the Kremlin’s ‘liberalisation package’ can change. Create competition? But between whom? The amendments to the party law approved by the Duma do encourage political competition – but between dozens of small fish. The regime is still protected by cast iron barricades in the form of the registration of parties by permit, the Justice Ministry’s ability to destroy any party under any pretext, and the Kremlin’s refusal to allow the formation of electoral blocs. The executive branch has retained intact the machinery for arbitrary rule and even made it more effective.

So what should we rejoice in, I thought as I listened to the fanfares? The fact that the Kremlin takes pleasure in watching the hustle and bustle of the political arena while keeping all the party mice within the sights of the Justice Ministry‘s gun?

The Kremlin spin doctors who suggested this elegant ruse should be congratulated – allow everyone access (the more the better) and at the same time keep everyone under tight control. Meanwhile, the masochists among the opposition can enjoy another gift from the Kremlin in the form of the law on the

‘direct’ election of governors, although this, naturally, comes with a presidential ‘filter’.

Other evidence of the supposed thaw, turned out to be a measured form of access to the political and media arena, but only for selected (by the Kremlin, of course) representatives of the opposition and civil society who have been allowed to attend meetings with the president, to sit on the presidential and government ‘councils’ or to take part in carefully orchestrated (and always taped) political TV talk shows. This access is supposed to accomplish three goals: firstly, to create a more civilised image of the Kremlin bosses, making it possible for them to dine with Obama and other Western leaders without awkwardness; secondly, to discredit the opposition members who accept an invitation to sit at the table with the authorities, by making them look naïve or lightweight; and

There is one certainty at least – the personalised power system is in decline.

Television, with its skilled propagandists, has effortlessly turned the opposition into participants in some kind of free-for-all bazaar, leaving the audience perplexed.

What kind of fight against corruption can there be, when the regime is only able to replicate itself with the aid of corruption?

thirdly, to bring new conformists (who I call ‘adaptants’ – people ready to adapt to any rules of the game offered by the authorities) into the sphere to serve the regime.

So far, the authorities’ ‘all-enveloping’ approach – its attempt to suffocate the opposition in its embraces – has been working.

Some of the Kremlin’s opponents have agreed to play the authorities’ game and allowed the regime to lure them onto its playing field, where they have no chance of winning. The official TV channels showed Dmitri Medvedev listening attentively to the rally leaders at his residence (who would have imagined even a short time ago that such a thing would be possible!) creating a much more liberal image of the regime, but giving nothing in return. Television, with its skilled propagandists, has effortlessly turned the opposition into participants in some kind of free-for-all bazaar, leaving the audience perplexed: “Well, they are all the same!” The opposition and the protest leaders’ desire to ‘reach out’ to society at large through television has been understandable.

But one could hardly dismiss the impression that they looked like virgins, lecturing in a brothel on the preservation of innocence, as the madam looked on.

Another example of the Kremlin’s ‘embracing’ tactics has been the creation of working groups under Medvedev’s chairmanship with the participation of the opposition (the less significant Medvedev becomes, the more groups he creates). One such group recently discussed new means for fighting corruption. “The fight against corruption is entering a new phase,” announced one Kremlin critic suddenly. It would be hard to be more perplexed: what kind of fight against corruption can there be, when the regime is only able to replicate itself with the aid of corruption? And what kind of success in the fight against corruption has Medvedev, whose presidency is viewed as the most corrupt in recent Russian history, achieved? But after all, if you have praised the authorities, you have to look for the proof that you were right and the rationale for your participation in a joint project with the regime. Embracing the opposition in this way, as Russian practice demonstrates, has always been more productive in neutralising dissent than outright repression.

It is clear why some representatives of the opposition and the protest movement have been trying to find grounds for enthusiasm, and why some of them have been willing to enter into a dialogue with the Kremlin. In a situation where the regime has not met a single demand of the December Movement, there is a natural desire to find at least some evidence that the people who took to the streets actually achieved something. Otherwise, they will stay in their kitchens next time and the energy behind the protest will evaporate. Besides, I can imagine that some of the opposition figures and protesters may really believe that the authorities have sensed their own weakness and are ready to embark on change. And it is better to achieve such change by sitting around the table than by taking to the streets and making yourself the target of police batons. If this is the case, these hopes will have been a success for a regime that survives by inciting hopes.

Meanwhile, political history has proved that hopes are merely disappointments delayed; the Russian opposition and protest leaders have yet to learn this truth. Hopefully, with Putin back in the Kremlin, ready to be tougher and less ambivalent than Medvedev, the opposition will have fewer pretexts for seeking friendship with the authorities.

In fact, there is nothing new in the Russian regime’s response to the awakening society.

It is all about flexibility in application: on the eve of Putin’s inauguration, the ruling team decided to alleviate the discontent of the ‘angry citizen’ with promises of liberalisation.

For those who don’t believe in the Kremlin’s promises, there are other measures of influence in the state’s arsenal and the authorities will soon start to demonstrate more

toughness – the Kremlin cannot allow this liberal carnival to go on. Today’s Russian rulers remember the experience of the Soviet Union – Gorbachev opened the window too far and the Soviet elite fell out. Putin’s team has learned the lesson and they know too well the nature of the Russian system: any real liberalisation could only disrupt its power vertical and the house of cards could start to crumble.

Does all of this mean that those who say that the first Russian protest movement of the century has ended in failure are right? They are wrong too – a black and white view does not make sense in the Russian reality. One of the paradoxes is that although the wave of protest has dwindled, the anger and frustration in society has grown, and without legal channels for its articulation, it is becoming more destructive for both Putin’s regime and the system he personalises.

Time to learn lessons Let me give a run-down of the most apparent consequences of the Russian city rebellion. It ended a protracted political paralysis in Russia and demonstrated that society, at least its urban part, is still breathing. A new generation appeared on the stage, which feels suffocated living in its stuffy closet. Those with illusions regarding Putin’s regime have suddenly felt that they have been manipulated.

Broad segments of the Russian population have understood the importance of the notion of legitimacy and they have refused Putin’s team the right to rule.

Those who took to the streets in the harsh Russian winter have opened a page of mass dissent in Russia’s post-communist history.

In a few short months, Russian society has travelled along a path that would have taken decades at other times. But before Russia starts its new narrative it will need to deliberate on some lessons from its unexpected awakening. I will offer the most important of them.

regime’s advantage, by creating the impression that the system of personalised rule can be improved by fair elections. Today the Russian opposition needs to deliberate on how both the ruling class and the rules of the game can be changed (i.e. a reform of both the regime and the constitution is needed). In some countries that have emerged from autocracy, the reform of the regime and the constitution was carried out by the old parliament, and new elections then followed. In others, elections were held first, and the new government proposed a new constitution and a new political system to society. In every case, however, the old order left under pressure from below.

The civic leaders have broadened the base of the protest by engaging previously apolitical strata of society and they have introduced a moral and ethical dimension to the process. However, none of them has yet demonstrated a willingness to play the role of a Russian Havel, Michnik or Geremek – to become a professional opposition politician. Meanwhile, the new protest movement needs politicisation, both of its tools and of its leadership. After all, the question is no longer about influencing the regime, but changing it. Rejection needs to be complemented by a structured political agenda.

Historically, dialogue between an opposition and a regime has been successful (for the opposition) on one condition alone: that it was backed by a powerful social movement, which forced the regime to make concessions. In the absence of such support one can go and listen to what the Kremlin is offering, and even make one’s own demands, but the results of such meetings cannot bring any dividends. On the contrary, dialogue from a position of weakness usually ends with the opposition dancing to the Kremlin’s tune or decrepitating. The Russian opposition and the leaders of the protest movement have yet to acknowledge this truth.

Political history

has proved that

The Russian developments also demonstrated that it is time to get rid of the euphoria surrounding social communication networks and their role in organising the political space. Of course, without the new communications it is unlikely that a protest movement would have arisen. But there is a reverse side to the coin as well – an enthusiasm for communication at the expense of content. The web can bring people out onto the streets. But nowhere has the web been able to play the role of uniting people into an effective political organisation. The web provokes a new form of social atomisation as well. And those in Russia who are calling for a return to the routine work of organising political parties and are seeking their own combination of internet and political tools are without doubt right.

hopes are merely disappointments delayed.

The Decembrist agenda and its slogan “For Fair Elections” gave people clear evidence of the usurpation of power by the ruling team. But this agenda, like the slogan itself, does not have transformational potential.

Moreover, at some point the Decembrists have started, inadvertently, to work to the

“We do not need your blueprints, we are people of action,” the young generation of dissenters would say, shrugging dismissively at the old political opposition and human

Embracing the opposition, as Russian practice demonstrates, has always been more productive in neutralising dissent than outright repression.

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rights defenders. In short, you leave and we will take over – your function has been exhausted. There is some truth in the fact that the generation of ‘political pensioners’, as the old political opposition and the previous generation of dissenting intellectuals have been called, has failed to rouse Russia, or even to prepare it for new protests. But without the participation of the opposition’s older generation, the new political anger would hardly have been organised.

Moreover, is it possible to replace strategy with action, or political movement with protest theatre? How can one take to the streets, without giving any thought to the kind of state one wants to construct?

Even if the protest movement took the upper hand, what would their next step be without a blueprint for a new system and a map to get there?

It would, however, be mistaken to see the economy as the driving force of the protests.

Why then did open dissent not erupt during the economic downfall in 2008? Why did people take to the streets when the economic situation was stagnant, but still not that gloomy? The Russian turbulence does not fit the cliché of being a movement of the middle class only; the December Movement’s social base has been much broader, encompassing a wide range of urban residents unhappy with their situation with wide variations in age, incomes and political preferences. They did have a level of education in common (70 percent were graduates1) meaning that Putin’s regime had antagonised the most advanced part of Russian society. What could become crucial for further developments is that the December Movement has demonstrated that Putin and his regime have lost Moscow; and those leaders who lose the capital do not have a political future in Russia.

Is it possible to

replace strategy

The petro-state still has the resources

with action,

to guarantee the support of the

or political

paternalistically oriented social base that

movement with

depends on budget hand outs.

protest theatre?

There is another problem that the Russian protest movement will have to think about: the fact that the Decembrist movement has captured the dissent of the urban population and emphasised political freedoms. Their protest has only shown how deep the fragmentation of Russian society has become.

At least at the beginning, the ‘other’ Russia – the Russia of small cities and company towns with their growing social and economic frustration and their failure to understand how their problems could be connected to political freedoms – was not on the radar of Moscow’s angry citizen.. And if the next city protest fails to throw a line to this other Russia, the latter will once again start to search for a charismatic leader and a populist answer. In this context, the recent explosion of protest in sleepy Astrakhan, triggered by the anti-election fraud hunger strike of mayoral candidate Oleg Shein, which has been supported by members of the Decembrist movement, is a hopeful sign that the other Russia has started to rise up, and that its population understands the linkage between their social grievances and freedom.

The rebellion changed neither the balance of forces at the top nor the political order.

Looking back, one has to admit that it never could have become a game changer. The Decembrist Movement was a completely systemic phenomenon – the protesters demanded honest rules of the game within the framework of personalised power. This did not threaten the system’s cornerstone of the monopoly of power cemented in the Russian constitution. Part of its leadership emerged in a spontaneous way. It loathed politics and hoped just to ‘influence’ the authorities.

Apparently, the awakening citizenry, still forming their political convictions, needed confirmation that the system cannot be transformed by the current leaders – which they got in the most persuasive way. The end of any illusions about the system, which further accelerated Russian society’s political education, has been the most significant outcome of the first midwinter Russian Spring. The lack of institutional change only deepened the search for anti-systemic solutions, politicising and radicalising the protest. The urban citizenry that took part in the first protest wave moved from demanding a more honest system to demanding a new one.

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Diplomaatia · May 2012

A political funeral? Not yet!

The patient may have woken, but he cannot yet leave the hospital where he has been kept for years, drugged and tangled. His keepers have rushed to silence him – if cajoling will not help they are ready to shackle him. But he is becoming more and more restless. And at some point he may become so agitated that he will destroy everything around him. At the moment, though, the patient seems ready to allow his keepers to calm him down. But in Russia impressions can be deceptive.

There are many factors that continue to mitigate the Russian situation and could keep both Putin’s regime and the system limping on for an indefinite time. The key economic and political conditions for maintaining the Russian status quo are well known: the deep-reaching demoralisation of society; the people’s populist expectations, still looking with hope to the state; the squabbles and infighting among the opposition groups and its leaders; and the lack of a consolidated political alternative that could acquire a broad social base.

Other factors are well known by all Russia observers. I would highlight several that will definitely have far reaching impacts on Russia’s future trajectory. The first is the Russian petro-state – the dependency of the country on commodities that has allowed the rentier ruling class to emerge, with its parasitic lifestyle and total lack of concern for Russian national interests. The petro-state still has the resources to guarantee the support of the paternalistically oriented social base that depends on budget hand outs.

The second powerful hindrance is the leftovers of the neo-imperial mentality in the mindset of the ruling elites and in broad sections of the population, coupled with the existence of the institutional elements of the

former empire in the current functioning of the Russian state: the unitarian character of the Russian ‘Federation’; the stubborn attempts of the Kremlin to continue talking about its ‘areas of interest’; the ‘gas wars’ with Ukraine and Belarus; the hot war with Georgia; the laments about NATO expansion and the attempts to force the world to agree with the Finlandisation of the former Soviet space; and the building of the Eurasian Union (for what?). The fact that the Kremlin is not ready and would not in any case be able to pursue the idea of Soviet restoration, and tries instead to find more pragmatic means to pursue its agenda, does not mean that the Russian elite has erased imperialist longing from its mind. There is only one reason for this: the personalised power system cannot reproduce itself without a desire to preserve great power status and areas of influence; the latter being the blood vessels for the former.

I would even argue that in a situation when the domestic influence of the regime has started to wane, its desire to compensate for its internal weakness through a more assertive statist and neo-imperialist policy abroad could increase – at least this has always been the logic of the Russian Matrix as it fights for survival.

The moment the Russian elite proves it has no ambition to influence other states and is ready to build a real Federation will be the end of Russian neo-imperialism. Today, however, even Russian liberals stop being liberals when they start to talk about Ukraine, the Russian-Ukrainian ‘brotherhood’ and the ‘one nation’.

The third factor is the role and mentality of the Russian intellectual class. It is the ‘thinking minority’ that has always been the engine of civilisational change. The demoralised state of Russia’s intelligentsia is one of the main causes of both Russia’s failure to embark on a new path after 1991, and of its current stagnation. It seemed that the Russian intelligentsia ended its role as the opponent of autocracy when the communist state collapsed in 1991. The emergence of a new form of autocratic power – the Yeltsin presidency – left Russia’s intellectuals lost and disoriented. Most have been unwilling to risk taking a stand against a new personalised power system disguised as a democracy. Some have become propagandists, strategists and experts in the service of the personalised rule. Between them, they are the gravediggers of the intelligentsia in its traditional role of bearer of moral and

The urban citizenry that took part in the first protest wave moved from demanding a more honest system to demanding a new one.

reputational principles. The demise of the intellectual class has deprived Russia of the crucial source of renewal that independent intellectuals have traditionally provided in the history of authoritarian societies (including in Russia).

One of the most important factions of the intellectual class – those liberals who were ready to serve the system – delivered the most crushing blow to the chances of liberal democratic change in Russia. These ‘systemic liberals’, operating within the official Russian system and serving the government in different capacities, while at the same time trying to monopolise the right to speak on behalf of liberalism and democracy not only occupy a ’grey zone’ devoid of clear principles and direction (the best environment for a personalised power system), but also discredit liberal-democratic norms. Society will still to have to make its own assessment of the role of these ‘systemic liberals’ in the

The personalised power system cannot reproduce itself without a desire to preserve great power status and areas of influence.

Russia has been lacking one of the most important dimensions that make liberal democratic change possible – the people who take part in broader political life and “should be of sufficient high quality”.

restoration of one-man rule in Russia. This will be complicated by the need to analyse the ‘contribution’ of those bright and popular personalities who serve the new Russian autocracy as ‘court liberals’, and at the same time represent themselves as the bearers of normative values. A lot of friendships will be buried and a lot of emotions will rise.2 But still, one has to acknowledge one sad truth: Russia has been lacking one of the most important dimensions that make liberal democratic change possible. Joseph A. Schumpeter called it the “human material of politics”, that is, the people who take part in broader political life and “should be of sufficient high quality.”3 Explaining what this quality means, Juan Linz mentions among several indicators, “the commitment to … values or goals relevant for collectivity, without, however, pursuing them irrespectively of consequences.”4 The Russian ‘political class’, by and large, is the plain antithesis of what both Schumpeter and Linz describe.

The reasons for the demoralisation of the intellectual elite remain to be analysed: the lingering legacy of Communism (but why then have the new European elites and political class in the Baltic states managed to demonstrate “sufficient high quality”?) or the legacy of the 1990s when the new version of Russian personalised rule re-emerged under liberal slogans with the voluntary help of intellectuals?

The liberals’ hopes for reform from above, that became animated during Medvedev’s presidency, turned out to be just another myth. True, this was apparent from the very beginning, but this hope helped the hopefuls look liberal while at the same time being part of the court. Meanwhile, the authorities’ liberal rhetoric set against a nonliberal reality only made the public more cynical and mistrustful of the whole idea of reform and modernisation. This is one of the results of Medvedev’s presidency: one of the most cynical plots in recent Russian history that has not only helped to preserve the old leader in the shadow of an imitation one, but deepened the degradation of Russian politics.

The risk that a state constructed from incompatible civilisational pieces could fall apart is present no matter whether the regime liberalises or strengthens its hold on power.

One thing that is clear today is that Russia cannot transform so long as the North Caucasus problem remains unresolved. With the North Caucasus as it is, Russia cannot get itself in any kind of order or become a modern state.

can escape the brotherly embraces of Kremlin leaders. Western leaders can avoid presenting ‘reset’ as something which it is not – as a strategic breakthrough rather than a tactical trade-off. No one coerces the Obama administration to take part in that sham offered by the Kremlin, the dialogue between the ‘civil societies’ under the control of the Russian state official responsible for political crack down.

The fifth and final factor is a phenomenon requiring serious analysis that, regretfully, neither Russian liberals nor Western observers, for reasons not difficult to guess, are ready to start. Those who have tried to raise this issue are viewed by the community, which prefers less divisive postures, as ‘radicals’ or ‘idealists’.

The factor is the role of the West in helping traditional Russia to survive. Several issues should be taken into account. For starters, Western civilisation, in the eyes of a significant part of the Russian population, has lost its role as the alternative to a personalised power system. Partly, this is the result of the current Western ‘malaise’. Western intellectual and political gurus have been pretty candid in acknowledging the state of the Western model. Francis Fukuyama writes of “dysfunctional America,”5 Zbigniew Brzezinski warns of Western decay,6 and Walter Laqueur announces “the slow death of Europe.”7 Naturally, this Western crisis does not inspire liberal hopes within Russian society.

The role of Western politicians, pundits and journalists in the Kremlin’s staged ‘operas’, like the Valdai Club and Yaroslavl Forum, that have become an instrument of their co-option by the Kremlin, is another form of the legitimacy that the West provides to the Russian system (hopefully unintentionally). In the eyes of Russian society the West has turned into a laundry machine for Russia’s corrupt elite and has formed a powerful ‘service class’ that includes politicians, bankers and PR agencies who help the personal integration of the Russian political class into Western society. This integration only increases the Russian elite’s brazen behaviour and lack of accountability. It even legitimises its criminality. The recent shares swap between the American Exxon Mobile and the Russian Rosneft, that has made American shareholders the owners of stolen Yukos assets, is the latest example of the help the West provides the Russian system.

However, it is less the recent Western crisis that has delivered a blow to pro-Western moods in Russia, and much more the policy of Western governments with respect to the Kremlin, which is viewed as connivance with or even an open appeasement of the Russian political regime. The latest edition of the Western course toward Russia – the U.S. ‘reset’ and the EU’s ‘Partnership for Modernisation’ are considered by many liberal minded Russians as a legitimisation of the personalised power system, giving it additional strength to survive. For the first time, openly harsh criticism of Western policy towards the Kremlin can be heard from Russian liberals and democrats.8

Fears of imminent collapse, the lack of a new strategy and actors who would pursue it and powerful entrenched interests force the Russian elite and intellectual circles to build new hopes for change within the current regime. Today they argue, under the pressure of the mood within society, the ‘new’ Putin 2.0 will be forced to carry out reform, even if he is unwilling and therefore has to be supported. “Putin still could become a reformer and is capable of dexterous management under the pressure of tough reality!” the fans of Russia’s personalised power would insist.

True, they can’t answer the question: if Putin was destined to become the transformer, why did he not transform Russia earlier?

Certainly, leaders can change their previous course under the pressure of circumstances, but in Russia’s case it is a change from the personalised power system, and not simply a change of course and regime that are needed. Russia needs transformation, not reform to make the autocracy more effective. For transformation to succeed, Putin’s team would have to renounce its monopoly on power, which is the main source of the country’s degradation, and open it to fair and honest competition. They would have to perform political hara-kiri. Besides, if Putin really is ready for change, why did he not start with fair presidential elections?

Russia cannot

transform so long as the North Caucasus problem remains unresolved.

The Kremlin’s willingness to

let local sultans

The fourth factor helping to prolong the life of Russian authoritarianism is the widespread fear among various sections of the public that upsetting the status quo could lead to another state collapse.

Not even the regime’s opponents are ready for such a development. In reality, it is the Kremlin’s policy of survival that undermines the Russian state and has already triggered the process of disintegration. The price the Kremlin pays to ‘pacify’ Chechnya and the North Caucasus is evidence of the Russian state’s fragility. The Kremlin’s willingness to let local sultans establish their regimes there reflects the process of state atrophy. The dictatorship in Chechnya amounts to a form of Kremlin-sanctioned anti-constitutional coup. It is hard to believe that this construction, which goes against all common sense, can last: Russia is ‘paying tribute’ to Chechnya, and at the same time positioning itself as a regional and even a global leader; such a construction surely contains the seeds of self-destruction.

establish their regimes there reflects the

I would expect my Western colleagues to say: “Come on! You are talking rubbish!

What do you expect the West to do – isolate Russia? Stop trading or negotiating nuclear weapons cuts?” Of course, not – I am not so irresponsible or naïve. The Russian opposition and the liberal critics of the West do not expect Western governments to fight for Russian democracy and freedom – this is an agenda for Russians. But in pursuing trade or security relations with Russia, the Western governments are not forced to play the game ‘Let’s Pretend!’ with the Kremlin. The West

process of state atrophy.

As for the idea of modernisation in the economic area only, the authorities have been attempting to pursue this policy throughout these last years, but with what results? How

How can one carry out economic liberalisation while at the same time strengthening the state’s monopoly and control over the economy?

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The authorities’ passion for costly mega-projects, from the Sochi Olympics to the APEC summit and the soccer World Cup, is also a sign that the system has entered a dead end. can one carry out economic liberalisation while at the same time strengthening the state’s monopoly and control over the economy? How do you fight corruption if you turn the parliament into a circus and bury independent courts and media? The ‘modernisation from the top’ idea is still popular among some Russian liberals who are fascinated by the Lee Kuan Yew ‘thesis’. Ironically, so far not a single Russian leader has shown any inclination to follow Lee’s path.

There is another variation of the ‘modernisation from the top’ myth – a belief in ‘gradual’ reform. Supporters of the ‘gradual’ path assert that reform should begin first in education, healthcare, and agriculture, say, and only then spread further. But how do you reform these sectors without de-monopolising them and opening them to competition, and without the rule of law and independent courts? The authorities’ continued monopoly on power makes any real reform impossible, even in just these limited sectors.

Potential attempts to ‘gradually’ introduce competition and the rule of law raise further questions. Who gets to decide which forces will be allowed to make use of competition and fair laws, and how do you introduce these things ‘one step at a time’? First in specially designated zones separate from the rest of the country and only then in other areas of life? But does anyone believe that this kind of ‘gradual’ approach can actually work?

The West has made its own contribution to Russian mythology. The most popular has been the hope that Medvedev would be a reforming president, which even astute Western observers fell victim to. Brzezinski wrote about Medvedev as, “the most prominent spokesman for the modernisation=democratisation school of thought.” Other Western observers have even more grandiose plans for the Russian regime. Thus, Charles Kupchan believes that Russia may be “uniquely poised to help build bridges between the Western order and whatever comes next (!)” and Moscow could become “a particularly useful arbiter (!) in negotiating the shape of a post-Western order.”9 This mythology not only helps the Russian Matrix to survive but distorts the Western view of the world.

Suicidal statecraft Meanwhile, the variables that have so far helped the Russian system to stay afloat are now accelerating its decline. The mechanism that Arnold Toynbee defined as “suicidal statecraft” has gone into action: the system, in attempting to deal with new challenges using old methods, is undermining itself.

The Kremlin’s blatant manipulation of dem15

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ocratic institutions, such during the 20112012 elections, that became trademarks of the Putin system erode the legitimacy of a regime that has no other mechanisms (in particular inheritance-based or ideological) to justify its continuation. The commodities-based economy also accelerates the system’s decay. Russia fits the same pattern of decline that has befallen other petro-states that did not manage to democratise before their commodities boom began. The fact that some petro-states in the Arab world (for instance, Saudi Arabia) demonstrate survivability, does not change the axiom. The Arab revolutions of 2011 have proved how fragile ‘petro-stability’ can be. Tame, obedient institutions ensure an external calm, but the lack of channels through which the population can express its various interests leaves people with no choice but to take to the streets, thus further undermining stability. Putin’s return to the Kremlin means the growth of anger and the rejection of the regime even by social groups that had been submissive to the authorities, but are not ready to see Russia return to a Brezhnev-type of degradation.

In our reflections on the Russian system’s future we should not forget one fact: Putin’s regime relies not only on the security and law enforcement agencies, but is made up primarily of people who have come from the special services or are close to them. They have repression in their genes. For the first time in Russia’s history, not only are the security agencies not under civil control, but they have established their own regime.

This regime has nothing in common with either Praetorian Realism, which defines a scenario for imposing order on civil chaos in modernising lands,10 or Matrix Realism, but shares similarities with the army’s role in the institutional arrangements of the Arab states.11 The Russian Praetorian security service officers turned bureaucrats serve one purpose – pursuing their corporatist interests at any price. Such regimes are not only doomed themselves but will also pull into the abyss the state they incarnate.

Another confirmation of degradation is the intertwining of crime, business, and the law enforcement and security agencies that has become the key characteristic of Putin’s Russia. Why can the authorities not clear their stables? Why do they save the rank and file perpetrators clearly fingered in the Magnitsky case, even at tremendous cost to the regime’s own reputation? It is not that the authorities are implicated in each and every crime and need to dispel suspicions against them, but rather that any cleanout of personnel would undermine the power vertical edifice the Kremlin has built and would violate the regime’s fundamental principle that in return for their loyalty, those who serve it are guaranteed impunity. This mutual backscratching between the authorities and the agencies at its service is pushing the system into its final stage of decay.

The Khodorkovsky and Lebedev case demonstrates another of the system’s fundamental principles: wield a strong hand! This explains why, having made Khodorkovsky and Lebedev a demonstration of his total grip on power, Putin cannot now release them: their release would be perceived as the end of the Putin era. Business has become hostage to the system and can exist only if it plays by the system’s rules. But even when it plays by the rules it still cannot protect itself from the authorities and law enforcement agencies, which engage in mass extortion.13 The authorities’ passion for costly megaprojects, from the Sochi Olympics to the APEC summit and the soccer World Cup, is also a sign that the system has entered a dead end. No responsible government in a country with 22,9 million people living below the poverty line would take on such commitments. The Kremlin under Putin is following the typical logic of dictatorships, mobilising the population through displays of grandeur.

The system, in attempting to

The use of Western technology to help ensure the regime’s continuity and monopoly has also exhausted its potential.

Spreading the use of new generation technology requires a free society and free individuals. The pitiful attempt to establish a closed ‘modernisation zone’ in Skolkovo only confirms that the old model for perpetuating the regime no longer works; and Skolkovo itself looks unlikely to have much chance of success now that everyone knows the hollow role played by its ‘godfather’, Medvedev.

deal with new

challenges using old methods, is

The authorities’ obsession with personal enrichment – especially among people from the security agencies – is another factor speeding up the regime’s decline. This obsession makes the regime more repressive, as it defends its rights to the assets it has gathered. But at the same time, this ‘commercialisation’ of the state’s repressive machinery undermines the system, as corrupt security agencies lose their ability to effectively protect it (the historical examples are illustrative: Sparta and the Ottoman Empire fell when the Spartans and Janissaries began to get involved in commerce and trade).12

undermining itself.

The collapse of Soviet technical infrastructure is another sign of the looming crisis.

It is ironic that Russia today continues to survive thanks to the USSR, but the planes, trains, ships, mines, roads, and industry inherited from the Soviet era are collapsing, exploding, and becoming unfit for use, while the post-communist regimes have not managed to build a new infrastructure to replace them.

Meanwhile, the Russian elite attempts to maintain balance in the country by creating phantom challenges and imitating responses to them. The Russian elite is battling NATO, preparing to counter a nuclear strike or even fight a nuclear war (see Russia’s Military Doctrine), attempting to keep control of Russia’s neighbours, clearing the stage at home of any potential opposition, while preparing to fight the ‘Orange revolution’ and defend the Motherland from the ‘fifth column’. The system, seen until recently as a highly adaptable mechanism, is losing its flexibility and becoming rigid. It risks turning into an inadequate organisation responding to imaginary threats and becoming dangerous for its

own population and the outside world. The Russian Matrix still can survive but it is losing its resilience.

Russia’s ruling class is not only depriving society of all that makes it viable, but is also setting a trap for itself. The most effective means that humanity has developed so far to ensure continued survival (including that of the elite) is free competition. The Russian ruling team’s attempts to secure a lifelong monopoly are a sign of its lack of confidence, and its inability to govern a free society. A monopoly on power must be constantly defended and this makes it impossible for those who hold it to feel sure they can step down without fearing for their lives. The fate of rulers who have either lost or were forced into a desperate defence of their power in recent years cannot but worry Russia’s elite.

The latest round of Putin’s power shows that the ruling team has decided to stake all it has and to keep playing, dooming the country to dramatic developments ahead.

The Russian elite attempts to maintain balance in the country by creating phantom challenges and imitating responses to them.

A system of autocracy cannot (even if the leader wants it to) reform itself gradually from above.

One thing is quite obvious: a system of autocracy cannot (even if the leader wants it to) reform itself gradually from above. So, only one way is left – from below. Putin’s return to the Kremlin will act as a powerful accelerator of revolutionary events, if only because his leadership means that the logic of personalised power will not allow regime change.

Anyway, the logic of the agony has already started to work its way out. One can predict the authorities’ increasing reliance on force, or the threat of force, which masks not only their lack of confidence, but also the cracks in the very foundations of the system. When the Kremlin turns to broader violence, it will mean the last chapter in Putin’s narrative has begun. But whether it will be the end of the regime only, or the end of the personalised power system, is too early to say.

Crisis and then what?

Meanwhile, discontent is spreading through society. The public showed no particular enthusiasm at the news that Putin was seeking a new term in office: 31 percent of respondents approved of the move (these people make up the Putin regime’s core support base), 20 percent were not happy with the idea, and 41 percent said they had “no particular feelings about it” (3 percent did not know).14

ing increasing discontent with the situation in many areas of life. Most Russians think that the situation has worsened in all areas, with the exception of foreign policy (reflecting public support for Putin’s neo-imperial course). Around 82 percent of respondents think that corruption in Russia has increased or stayed at its former level. Almost half of respondents believe they have lost rather than gained over the last years, although 51 percent of respondents say that, “life is hard but bearable”.17 This willingness to endure and to look for ways to survive rather than turn to open protest is one of the main reasons for the country’s apparent calm. Only 25 percent of respondents regard mass protests as a possibility, and only 21 percent are willing to take part in them. These figures may look small, but in reality they represent millions of people.

The public perceive the state and its security and law enforcement agencies as a hostile force. Seventy-three percent of respondents think that the gap between rich and poor has widened over the last decade, 52 percent think that there are more thieves and corruption in the country’s leadership now than in the 1990s, and more than half of respondents expressed certainty that elections are unfair.18 All of this reflects society’s alienation from the state authorities.

The Russian system cannot meet the domestic and external challenges. It is not able to guarantee the security and wellbeing of its population. It cannot even secure the interests of its ruling class, which explain why its numerous representatives prefer to store their ‘golden parachutes’ outside Russia. One can only be struck by the cynicism of the Russian elite. Usually the first sign of decay is the failure of the elite: not simply their inability to change outmoded institutions but also their inability to perceive that a failure has taken place. In Russia the ruling elite understands the suicidal path they are on, but are unable to change it. On the contrary, the ruling establishment is busy trying to pass its positions to its children or friends, which means that it will defend the system until the end.

stantly clamp down on or discredit any sign of opposition activity. In this situation it is possible that Russia will not manage to build a real alternative before the system openly disintegrates.

This would greatly complicate any attempts to set new rules based on liberal-democratic principles. The old system’s spontaneous collapse and public discontent could bring about a repeat of 1991 and the regeneration of the personalised system in new packaging cannot be excluded. Whatever the case, the system’s death agony is approaching faster than the political forces can find a peaceful exit solution. This makes Russia not only a challenge for its society but for the world as well.

1 According to Levada Center polls, the majority of the protesters constituted experts and mid-level managers, journalists and students. Interview with Lev Gudkov, “Dissatisfaction with Authorities is Intensifying,” Izvestia, March 6, 2012.

2 At the moment there are few among the Russian liberals who are ready to start the ‘moral cleansing process’ following Andrei Illarionov’s campaign to discuss Yegor Gaidar’s role in the new Russian history.

3 Joseph A. Schumpeter (1947) (New York: Harper and Brothers) pp. 290-291.

4 Juan J. Linz (1997) “Some Thoughts on the Victory and Future of Democracy,” in Democracy Victory and Crisis, ed. Axel Hadenius (Cambridge: Cambridge University Press) p.421.

5 Francis Fukuyama, “American Political Dysfunction,” http://www.the-american-interest.com/ article.cfm?piece=1114.

6 Zbigniew Brzezinski, “Zbigniew Brzezinski Receives Jury du Prix Tocqueville Prize,” http:// csis.org/publication/zbigniew-brzezinskis-de-tocqueville-prize-speech.

7 Walter Laqueur, “The Slow death of Europe,” http://nationalinterest.org/ commentary/why-theeuro-the-least-europes-worries-5767.

In Russia the ruling

8 Zbigniew Brzezinski admitted the existence of the “commercial stampede driven by the Western European businessmen (not to mention some former politicians), anxious to capitalize on Russia’s resources while indifferent to the importance of shared values”, Zbigniew Brzezinski (2012) (NewYork: Basic Books) p.146.

elite understands

9 Charles A. Kupchan (2012) (Oxford: Oxford University Press) p.111.

Putin’s personal popularity rating still remains relatively high, but this ‘Teflon president’ phenomenon can be explained: people in Russia realise that there is only one real institution in the country – the presidency – and so long as people are not yet able to solve their own economic problems, they are not ready to let Putin’s rating take a tumble, fearing the chaos that might ensue. But their criticism of Putin’s government and the country’s general policy course shows that people have no illusions about Putin and his regime – 59 percent of the respondents view them as either people who “are thinking about their interests or weak and incompetent people” and only 23 percent believe that Putin and his team know how to solve the country’s problems.15

the suicidal path but is unable to change it.

If the Russian public are not increasingly weary of Putin himself, they are showing an ever clearer rejection of the system and its basic principles. Only 33 percent of respondents think that “power should be concentrated in one pair of strong hands”, while 59 percent of respondents take the view that “society should be built on the foundation of democratic freedom”.16 People are show-

All this means that Russia has no means or time to escape the approaching political and social crisis. But a crisis will provide a chance for a political alternative to emerge and for the ruling establishment to fragment. If the opposition fails to use this chance, Russia will either enter a period of protracted rot, or its ruling elite will attempt to freeze the situation by turning to mass repression, which could be a temporary solution but would only defer the turmoil and revenge. Whatever scenario prevails (including liberalisation), Russia will have problems in preserving its current geographical format.

The only way to transform Russia is to eliminate the old triad of personalised power, the integration of power and business, and imperial ambitions. But the political and social actors ready to start this process have yet to emerge. In theory, such actors could emerge from mid-level innovation-linked business, parts of the intelligentsia, and young people, but it is hard to see what prospects this process might have when the authorities con-

10 Francis Fukuyama, “Political Order in Egypt,” The American Interest, May-June 2011.

11 Robert Springborg and Clement M. Henry “Army Guys,” The American Interest, May-June 2011.

12 The success of the samurai during the Meiji restoration could have been an argument in favour of Japanese uniqueness but for one fact: the Japanese ability to adapt to the Western rules of the game.

13 The use of force against business has become a distinguishing feature of today’s Russia (according to independent sources one in three people in detention is a businessperson, and one in six people in prison is a businessperson) and this makes it impossible to build an effective economy.

14 http://www.levada.ru/07-10-2011/vladimirputin-i-ego-tretii-srok.

15 www.levada.ru/03-04-2012/rossiyane-opoliticheskom-rezhime-i-lyudyakh-kotorym-prinadlezhit-vlast.

16 http://www.levada.ru/10-08-2011/oblagopoluchii-naseleniya-i-demokratii-v-strane.

17 http://www.levada.ru/18-10-2011/krizis-vrossii.

18 http://www.levada.ru/18-10-2011/krizis-vrossii.

Diplomaatia · May 2012

16

What can we learn from China’s modernisation?

If the ‘China model’ has little to offer Russia or the West, there are still important lessons to be drawn from the Chinese experience of modernisation.

At a time of economic and political crisis across much of the West, state capitalism has emerged as the latest fashion in modernisation. Western as well as non-Western commentators speak of the demise of the Washington consensus of democratic liberalism, and the emergence in its place of a Beijing consensus, defined by top-down modernisation. According to this narrative, the West has lost the battle of ideas as well as of growth rates; the shift in the global centre of gravity toward Asia marks a normative as well as an economic and strategic transformation. The East is taking advantage of the irrevocable decline of the West to supplant its influence, institutions, and values.

demonstrations, the Party cracked down on political and economic freedoms. But after Deng Xiaoping’s ‘southern tour’ in 1992, during which he advocated opening up the economy, the remainder of the decade proved to be a golden period for Chinese capitalism.

Small and medium-sized enterprises (SMEs) flourished and became the principal driver of national growth. Meanwhile, Beijing initiated a root-and-branch reform of China’s moribund state-owned enterprises (SOEs), and negotiated the country’s accession to the World Trade Organization. More recently, since 2003 Hu Jintao’s path of ‘scientific development’ has seen a renewed emphasis on the themes of social equality and the leading role of SOEs in the economy.

One of the reasons

why the Chinese do not seek to spread the gospel of a

‘Chinese economic

model’ is that they

Bobo Lo, political analyst

This discourse is striking for several reasons, the most notable being that it is based on a series of misconceptions and halftruths. A mythology has arisen that is profoundly at odds with the actual experience of modernisation in countries such as China. People speak of borrowing from the ‘China model’, but are largely ignorant about what this means. Instead, they are operating from an idealised – and essentially fictional – template.

Bobo Lo is an independent scholar and consultant. His previous positions include Director of the Russia and China Programmes at the Centre for European Reform (CER); Head of the Russia and Eurasia Programme at Chatham House; and Deputy Head of Mission at the Australian Embassy in Moscow.

He writes extensively on Russian and Chinese foreign policy. His books include Axis of Convenience: Moscow, Beijing and the New Geopolitics (2008), Vladimir Putin and the Evolution of Russian Foreign Policy (2003), and Russian Foreign Policy in the Post-Soviet Era: Reality, Illusion and Mythmaking (2002).

that such a thing actually exists.

Four myths of state capitalism In fact, there is much that we can learn from China. But it is unfortunate that the story of its modernisation has been reduced to crude stereotypes and even caricature. Four myths, in particular, have emerged as ‘truth’.

Myth no.1: The China model represents a cohesive approach to tackling the challenges of modernisation.

There is no single ‘China model’. Since the beginning of the reform era in 1978, China has tried many approaches to development.

First, there was the break-up of the commune system, whereby the Communist Party allowed peasants to sell their surplus produce for individual profit. Then the 1980s saw a significant devolution of economic decisionmaking powers to the provinces, along with limited political liberalisation. Following the June 1989 suppression of the Tiananmen

A mythology has arisen that is profoundly at odds with the actual experience of modernisation in countries such as China.

17

What this record demonstrates is that there is no timeless set of prescriptions to the challenges of modernisation. Instead, the past 35 years have highlighted a wide range of often contradictory policies. This lack of consistency is evident even today. There are significant differences between the SME-driven capitalism of China’s coastal provinces, the much greater influence of SOEs in the industrial northeast, and the dirigiste and authoritarian management in major urban centres such as Chongqing – the province of the ousted Bo Xilai.

do not believe

Diplomaatia · May 2012

Given this confusion, it is absurd to pretend that the China model represents a cohesive body of economic thinking. Tellingly, this myth is much more widespread in the West – and Russia – than it is in China. One of the reasons why the Chinese do not seek to spread the gospel of a ‘Chinese economic model’ is that they do not believe that such a thing actually exists, at least not in a form that can be usefully applied in other countries.

Myth no.2: Only the state can develop and implement a strategic vision of the national interest.

The Chinese Communist Party (CCP) has cultivated the image of wise and far-sighted leadership, the opposite of Western democratic governments which are constantly deflected by the need to pander to demanding electorates and powerful business interests.

That it should engage in such myth-making is hardly surprising; to a greater or lesser extent, all governments pretend to have a coherent ‘strategic vision’. What is astonishing, however, is that so many Western commentators have imbued the Chinese

leadership with mythical qualities of clear thinking and single-mindedness.

This is bogus on several counts. First, the record of Chinese modernisation since the death of Mao emphatically disproves the notion of an omniscient party managing reform in a steady and systematic fashion. As the multiplicity of ‘China models’ indicates, there have been huge, and sometimes involuntary, fluctuations in economic and social policy.

Second, Chinese decision-making is certainly not immune from popular pressures. The Communist Party may not be democratically accountable, but it remains acutely sensitive to public discontent, especially when this has the potential to lead to serious social instability. It is only too aware that throughout Chinese history ruling dynasties have fallen whenever they have lost popular legitimacy; the most common form of regime change has been peasant rebellion, caused by intolerable hardships.

The Communist Party may not be democratically accountable, but it remains acutely sensitive to public discontent.

– and the Party – had no choice. Liberalisation was crucial to economic growth and, by extension, to the CCP’s continuing legitimacy.

The Party’s greatest achievement during the reform era has been to get out of the way of progress.

Third, as the Bo Xilai scandal has demonstrated so graphically, the actions of the Chinese party-state frequently belie the Confucian (and Communist) ideal of selfless, enlightened governance. While corruption has not yet attained the exceptional levels of Russia, the fusion of political power and special interests remains very strong. This skews decision-making in ways that have very little to do with the duty of a larger national interest. Suffice to note here the cosy lending arrangements between China’s banks and its SOEs, which have significantly reduced the incentives to improve productivity and efficiency.

Myth no.3: The China experience demonstrates the superiority of statist, top-down modernisation.

This is the most pernicious myth of all. The success of Chinese modernisation has come not because the Communist Party has reinforced its control over the economy, but because it has done almost the exact opposite. Since 1978, China has gone from being a completely state-owned economy to one where SMEs account for 65 per cent of GDP and 80 per cent of employment. With the exception of the state enterprise reforms of the late 1990s, virtually every major economic change has been bottom-up. Thus, agricultural reform occurred because a small number of peasants were willing to risk the wrath of the authorities by retaining surplus produce for private profit. In the 1990s, China’s SME sector expanded exponentially as a result of the individual initiative of millions of would-be entrepreneurs. By contrast, the Party’s top-down attempts to address systemic problems, such as worsening corruption, widening income inequalities, and environmental degradation, have been conspicuously unsuccessful.

At the same time, the Chinese leadership has been careful to appropriate the mythology of modernisation. It has talked up the Party’s strategic role, while in practice ‘leading from behind’, and improvising where necessary. But we should be under no illusions: the Party has presided over, rather than directed, China’s transformation.

Myth no.4: Chinese modernisation has been successful because the Communist Party has pursued a gradualist approach to reform.

One of the enduring clichés of recent times is that China has modernised more successfully than Russia because it introduced reforms gradually, with due regard for their social and political consequences.

In other words, it undertook evolutionary change, in contrast to the ‘shock therapy’ of the Yeltsin administration.

But if the ‘China model’ has little to offer Russia or the West, there are still important lessons to be drawn from the Chinese experience of modernisation.

1. Liberalise the economy.

The key to China’s success has been economic and social liberalisation on an epic scale.

The economic emancipation of hundreds of millions of Chinese has been the decisive factor in transforming a predominantly agrarian backwater into the world’s fastest growing economy. This has been paralleled by a huge expansion in personal freedoms.

Although China remains an authoritarian political system, with considerable powers of repression, the vast majority of the population enjoys rights and opportunities unprecedented in the country’s history.

The key to China’s success has

From time to time, the Party has attempted to put the state back into ‘state capitalism’. But for the most part, it has been pragmatic enough to realise that SMEs, despite their apparent ideological unsoundness, hold the key to national prosperity and social stability.

SMEs are also the vanguard of China’s growing influence in the world.

For all the notoriety of China’s energy corporations, it is the low-cost manufacturing exports of SMEs that have had the greatest impact on the global economy.

been economic and social

This assessment is hopelessly flawed, not least because the failure of Russia’s economic reforms in the 1990s was less a case of ‘too much, too soon’, than of ‘too little, too late’. But the most egregious fiction is that China’s reform process has been gradual and incremental. The reality is that China has undergone a revolutionary transformation. A once completely state-owned economy is now driven largely by SMEs. Mao’s ‘iron rice bowl’ of cradle-to-grave social welfare has been systematically dismantled. One of the most egalitarian societies in the world has become one of the most unequal, with a Gini coefficient far in excess of that of developed countries. And an overwhelmingly rural society has undergone a process of mass urbanisation, as a result of which more than half the population now lives in towns and cities.

liberalisation on an epic scale.

Virtually every

major economic

change has been bottom-up.

In fact, the Party’s greatest achievement during the reform era has been to get out of the way of progress. It was smart enough, for example, to realise that the rural commune system was unsustainable if China was to feed itself. Similarly, in the 1990s Deng Xiaoping understood that the Party needed to encourage private enterprise, and open the country to Western technology and investment, if China was to modernise. Despite reservations about the subversive nature of such influences, Deng recognised that China

Six principles of highly effective modernisation

This transformation has been largely positive. In particular, the rise of some 300 million people from grinding poverty is a truly remarkable achievement. But it is simply untrue – and morally bankrupt – to pretend that there have not been huge costs and plenty of casualties along the way. For example, the restructuring of state enterprises resulted in 46 million lay-offs between 1996 and 2001 – a ‘shock therapy’ infinitely more shocking than Yeltsin’s tepid reforms. (It is sobering to think that if a proportionate downsizing were to occur in Russia today, it would entail the loss of around 5 million jobs.) However one assesses China’s modernisation, one thing is clear: it has been neither gradual nor smooth.

The Chinese leadership has talked up the Party’s strategic role, while in practice ‘leading from behind’, and improvising where necessary.

2. Decentralise decision-making.

Despite the appearance of central direction, notably in the form of 5-year plans, the CCP has devolved most decision-making powers to the provinces. These in turn delegate authority and responsibility to the city, county, township, and village levels. Some sectors of the economy, such as banking, financial services, and natural resources remain under Beijing’s tight control. But overall the Chinese economy works as a decentralised system, an important reason why there are substantial variations in the ‘China model’ across different provinces.

Decentralisation has its problems. As the latest scandal in Chongqing has shown, provinces can become individual fiefdoms, in which the nexus between local bureaucracies and special interests lends itself to chronic corruption. Nevertheless, this semiautonomous arrangement has been a vast improvement on the over-centralised system under Mao, in which the oppressive hand of the Party crushed individual initiative and ensured China’s continuing backwardness.

The reform era has shown that decentralisation is critical to modernisation. Conversely, Putin’s Russia proves that (over-)centralisation is a real brake on reform.

3. Reform from the bottom up.

The Chinese experience has also demonstrated that real reform – and transformative change – is far more likely to come from the bottom up than from the top down.

With the exception of the restructuring of the SOEs, the major landmarks in China’s modernisation – agricultural reform, the Diplomaatia · May 2012

18

spectacular growth of SMEs, the proliferation of ties with foreign companies, the growth of Special Economic Zones (SEZs) – have come about because of local pressure, not central direction. The case of the SEZs is especially instructive. The CCP’s generally light touch has paid major dividends, in contrast to Russia where such zones have consistently under-performed because of oppressive levels of corruption and bureaucratic meddling.

sia: cautious, ‘incremental’ reform is tantamount to no reform at all.

5. Adapt to circumstances.

One of the striking achievements of the Communist Party post-Mao has been its ability to reinvent itself in response to changing circumstances.

Whereas Mao imposed his vision, often with disastrous consequences (Great Leap Forward, Cultural Revolution), the modern CCP has adopted a generally flexible and undogmatic approach.

Particularly since the early 1990s, it has been good at identifying what the people want – reasonable stability, economic growth, personal opportunity and space – and allowing them to realise these aspirations.

From time to time, the leadership laments the decline of socialist values, but in practice it has done very little to foist these onto the population. It is only too aware that today’s supreme god is materialism, not MarxismLeninism, and that propitiating its demands is key to the Party’s longevity.

Even in a one-

party state such

as China, micro-

It is instructive to compare the success of economic liberalisation in China with the sad fate of political reforms. Whereas the former has flourished because the state has largely butted out, the latter have withered on the vine precisely because the Party has been determined to ‘control’ democratisation, even at the very lowest (village) level.

This confirms a fundamental truth, namely, that authoritarian regimes naturally incline to the status quo, leaving the real drivers of change to come from below.

management is simply not feasible.

Bottom-up reform and the decentralisation of decision-making represent tacit recognition of the limits of state power. Even in a one-party state such as China, micro-management is simply not feasible. A key difference between the Chinese Communist leadership and the Putin regime in Russia is that the former has absorbed this lesson, while the latter continues to believe that it can govern effectively through an illusory ‘power vertical’.

Moral

6. Freshen up the leadership.

Adapting to change is not only about policymaking, but also policy-makers. After the super-concentration of power under Mao during the Cultural Revolution, the Party has done everything to prevent this happening again. First, it has made the transition from arbitrary personalised rule to institutionalised collective leadership. With each political succession, the position of China’s leader has become progressively less ‘paramount’ – from Mao to Deng to Jiang Zemin to Hu Jintao. Hu’s designated successor, Xi Jinping, will be weaker relative to his colleagues in the Politburo Standing Committee (PSC) than any of his predecessors. It is worth noting in this connection that the main ‘defect’ of the disgraced Chongqing party chief, Bo Xilai, was not corruption or even his authoritarian methods, but an all too obvious personal ambition. With the memory of Mao still so vivid, there was growing anxiety about the possibility of another authoritarian charismatic rising to dominant power.

disapproval is not

4. Be bold.

a reliable basis for making analytical

China’s transformation has come about because leaders such as Deng Xiaoping and Zhu Rongji (premier from 1998 to 2003) recognised the need for radical change to drag China into the modern age. Of course, this radicalism was far gentler than Mao’s Great Leap Forward (which led to the death by starvation of 30 million people between 1959 and 1962) or the Cultural Revolution (1966-76). Nevertheless, Deng and Zhu acted decisively because they judged – correctly – that China had passed the point where it could afford ‘stepby-step’ reform, which would inevitably be clogged up by bureaucratic and political obstacles. Accordingly, they were prepared to take social and ideological risks: allowing the expansion of private enterprise, growing income disparities, mass consumerism, and the disintegration of the social welfare system.

judgments.

Current Party leader Hu Jintao has been notably more conservative in his approach to reform, but even today the Party continues to preside over transformative change, reflected in rapid urbanisation, the greatest consumption boom in history, and the reorientation of the Chinese economy toward domestically driven growth. The Party continues to talk up social justice and stability, but in the meantime change is proceeding at breakneck speed. The obverse of the Chinese lesson is demonstrated by Putin’s Rus19

Diplomaatia · May 2012

Of course, collective leadership can degenerate over time into stagnation – as occurred in the Soviet Union during the Brezhnev era (1964-82). The difference, however, is that PSC members are limited to serving a fixed two-term, 10-year period. This not only prevents the concentration of power in a single individual, but also ensures a regular political succession based on the influx of younger talent coming up through the ranks.

The contrast with the Putin regime could scarcely be greater. Under ‘Chinese rules’, Putin would have retired – permanently – in 2008, while other senior figures such as Igor Sechin and Sergei Ivanov would also have left the scene years ago. Instead, with no such restrictions in place, the Russian political system has become increasingly personalised and ossified. Such sclerosis is directly antithetical to modernisation, since the ruling elite fears that change would threaten its commercial interests and hold on power.

The Party is only too aware that today’s supreme god is materialism, not Marxism-Leninism, and that propitiating its demands is key to the Party’s longevity.

A cautionary conclusion Much of the discussion in the West about China’s modernisation tends to be heavily coloured by normative bias. On the one hand, there are those who see China as offering a new model of governance. They cling to a utopian vision of stable economic growth and social order, in contrast to the ‘anarchy’ of democratic capitalism. Typically, advocates of this view swallow the mythology of a ‘China model’, and ascribe to Chinese policy-makers a wisdom and sense of moral compass that bear little resemblance to reality. On a more nakedly self-interested level, some authoritarian regimes look to the example of China as quasi-intellectual justification for the imposition of ever more ‘order’ and the concentration of political power.

On the other hand, many Western policymakers and thinkers are desperate to prove a diametrically opposite thesis – that an authoritarian regime such as China’s cannot possibly be sustained in a post-modern century. They proceed from a sense of liberal evangelism, and the belief that democracies are by their very nature more stable and functional than non-democracies. Events, they argue, will eventually punish the authoritarian unrighteous. Unfortunately, in today’s world this smacks of wishful thinking. Moral disapproval is not a reliable basis for making analytical judgments. If it were, then the confident predictions about the imminent demise of the Chinese Communist Party in the wake of the 1989 Tiananmen massacre would have been vindicated. Instead, the global financial crisis has revealed plenty of exceptions in both directions: some liberal democracies are more functional and stable than others, while authoritarian regimes too vary hugely in competence and effectiveness.

Under ‘Chinese rules’, Putin would have retired – permanently – in 2008.

Normatively driven assessments of one kind and another are all the more unhelpful because they tend to be based on misconceptions and lazy stereotypes. That China is an authoritarian political system is not in doubt. But, paradoxically, the secret of its success has been the extraordinary degree of economic and social liberalisation that has taken place over the past three decades. Ultimately, this is the real lesson of the Chinese experience. Yet it is one that will continue to be ignored as long as advocates and critics alike believe in the mirage of a ‘China model’ of state capitalism.

What will Putin do in foreign policy?

It is tempting to say there will be no major change in Moscow’s foreign policy. However, each of the three previous four-year presidential terms – two of Putin and one Medvedev’s – has been marked by a different policy toward the West.

In a 2007 interview, Vladimir Putin uttered the memorable phrase, “Since the death of Mahatma Gandhi, there is no one in the world worth talking to any longer”. Like so many jokes, this one contains an insight. By the end of his second presidential term, Putin had grown tired of his international obligations, and of most foreign leaders he had to deal with. For four years from 2008, Putin enjoyed a break from the many formalities of presidential diplomacy to focus on managing Russia – its elites and its huddled masses – and, of course, its natural resources and money flows.

Dmitri Trenin,

Putin, of course, stayed in charge all along. He was the power not so much behind as above the throne. He placed his full trust in Dmitri Medvedev, sending him to his first G8 summit barely a month after his inauguration.

He definitely benefited from Medvedev’s likeability, his mild manners and encouraging rhetoric, particularly in the West. He hoped that Medvedev would succeed where Putin himself either would not or could not go: with the governments and publics of America and Europe, and their points of reference in Russia, the liberal intelligentsia.

sian interests no matter how things would turn out. As Medvedev sent his envoy to the Transitional Council in Benghazi, Putin’s emissary was playing chess with Gaddafi in Tripoli. In the end, both Putin and Medvedev became embittered, as NATO went beyond the UN Security Council mandate, an infringement of the world order that both men in Moscow had been seeking to uphold.

Now that Putin is back in the Kremlin, and the sources of formal and informal power in Russia are again united in one person, it is tempting to say there will be no major change in Moscow’s foreign policy. In general terms, and for the immediate future, this may be right. However, it is safer not to jump to premature conclusions. Although Putin has become, by now, firmly associated in the Western mind with a hard-line approach to foreign affairs, each of the three previous four-year presidential terms – two of his own and one Medvedev’s – has been marked by a different policy toward the West. The sixyear period opening in 2012 is likely to follow that pattern.

Putin, of course,

stayed in charge all

political analyst Dmitri V. Trenin is Director of the Carnegie Moscow Center, a Senior Associate of the Carnegie Endowment for International Peace and Chair of the Moscow Center’s Foreign and Security Policy Program. His recent book, Post-Imperium: A Eurasian Story was published in 2011 by the Carnegie Endowment.

Initially, Putin aspired to an alliance with the United States and integration with the European Union. The symbol of that policy course was Putin’s reaction to 9/11, and its manifesto, his speech in October 2001 delivered in German in the German Bundestag. The period that followed was marked by disenchantment and alienation. Its manifesto was the Munich speech of February 2007, and the war with Georgia 18 months later was to become its symbol.

Finally, there was a period of relative stability in Russo-Western relations, symbolised by the U.S.-Russian reset and the EU- Russian ‘Partnership for Modernisation’.

along. He was the

Still, Putin had to approve all the major decisions formally taken by his junior partner. In August 2008, he literally called the shots in the brief war with Georgia. In July 2009, after a breakfast meeting with Barack Obama at his dacha outside Moscow, he gave the go-ahead on the Russian side to the policy of ‘reset’. True, the USRussian ‘reset’ would hardly have been possible, at least in the form it actually took, had Putin, rather than Medvedev, been formally in power, but it would have gone nowhere without Putin’s blessing. Meantime, Putin himself successfully engaged the Poles, even kneeling in 2010 at the Katyn memorial.

power not so much

behind as above the throne.

In 2011, Putin and Medvedev took seemingly diverging approaches to dealing with the Libyan crisis. In reality though, there was far less divergence between the Russian Premier and his President than met the eye. With no love lost between Muammar Gaddafi and either member of the tandem, and the uncertainty about the outcome of the uprising, their goal was to limit the damage to Rus-

The US-Russian ‘reset’ would hardly have been possible, had Putin, rather than Medvedev, been formally in power, but it would have gone nowhere without Putin’s blessing.

Looking ahead, it is important to keep in mind that Russia’s foreign policy is still largely reactive. Vladimir Putin himself is more a tactician and an operative than a strategist, although occasionally, like on 9/11, he may have strategic insights. He does not so much initiate or control developments as respond to them or use the opportunities that present themselves. He is thoroughly nonideological (although deeply conservative) and wholly transactional. He much prefers business people to politicians. He knows real power when he sees it and treats those who can only make speeches with disdain.

Domestically, Putin’s take four in foreign policy will be based on the realities of contemporary Russia. After the tumultuous peDiplomaatia · May 2012

20

Russia’s foreign policy is still largely reactive. Vladimir Putin himself is more a tactician and an operative than a strategist. riod between the Duma elections in December 2011 and the Presidential ones in March 2012, Russia has entered a new period in its political development. This period could be called the ‘Russian Awakening’, and it is driven by fundamental social changes in society. This process will continue unevenly, but it can hardly be stopped, much less reversed. As it unfolds, the basic elements of Putin’s system of governance will be increasingly challenged. Unless that system finds the potential to transform itself, which quite a few people doubt, it may be overwhelmed.

In the field of politico-military relations, the centrepiece of the Moscow-Washington agenda since the days of the Cold War, the issue of missile defence is absolutely key. By the time of Putin’s third inauguration, Moscow had hardened its approach, demanding from Washington not only a legally-binding agreement reassuring it that U.S. missile defences in Europe would not affect the integrity of the Russian nuclear deterrent, but also that the Americans give the Russians the exact technical parameters of the interceptors they deploy. Both requirements are absolute non-starters with Republicans in Washington, who are wary of President Obama’s ‘flexibility’ at the negotiating table.

Putin knows

real power when he sees it and

Putin probably realises that his legitimacy as President will critically depend on Russia’s economic performance. That, in turn, is still governed by the oil price.

Currently, this is relatively high, but the Russian government’s social obligations have grown substantially.

Even though the government sounds confident that it can withstand a significant drop in the oil price, to $70 per barrel, and still keep its key obligations for two years, such a drop would deal a major blow to the federal budget: the break-even price, which stood at only $40 in 2007, is now as high as $110.

treats those who can only make

Obama’s re-election in November is thus a sine qua non condition for any U.S.Russian agreement on missile defence, but this condition alone is not sufficient.

Will Putin be able to keep his cool, confident that the U.S. plans in Europe present no real threat to the Russian strategic weapons, as the more competent Russian experts claim? Or will he reach out for an agreement with the U.S. and, in order to do so, be prepared to modify Moscow’s current approach? If so, will he drop the ‘legally binding’ mantra, a belated reaction to NATO’s eastern enlargement, which Gorbachev supposedly could have prevented with the stroke of (George H.W. Bush’s) pen?

Will he appreciate the value of missile defence cooperation as a strategic game changer with the United States and the West? He might – or he might not. A lot will depend on what he gets in return from the U.S. side.

In either case, it will be a momentous decision on his part. A game changer can turn into a game spoiler.

speeches with disdain.

Putin may not use the word modernisation as often as Medvedev did, and the progress in ‘modernisation partnerships’ with the advanced countries may not be monitored as closely, but Putin hardly needs to be convinced that his economic agenda of ‘new industrialisation’ only has a chance of success if there is a flow of capital investment and technology from Europe and the United States. Putin’s method, however, is different from Medvedev’s: less focus on innovation, no hint at political reform as part of ‘modernisation’, and a heavy emphasis on striking specific business deals.

Strategic agenda with the US It is logical that Putin does not need trouble with the United States. However, the U.S. dimension of Russia’s foreign policy is among its most challenging. Domestically, Putin has been using crude anti-Americanism against his liberal opponents, accusing them of being in the U.S. government’s pay. The Kremlin rejects official American support for Russia’s civil society institutions as interference in its internal affairs. The prospect of the U.S. Senate passing something like the Magnitsky amendment to impose sanctions on Russian officials connected with the lawyer’s death in prison could set a serious precedent.

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All other issues in arms control, whether dealing with non-strategic nuclear weapons in Europe or the strategic non-nuclear ones that the United States possesses, or conventional forces in Europe and America’s precision-guided weapons worldwide, not to speak of a newer New START, appear dependent for the moment on the situation in missile defence. It is possible, of course, that no U.S.-Russian agreement on missile defence will be concluded in the next few years – Russian strategic systems may be affected starting from 2020 – but that will probably

mean that a lot of arms control issues will be held in abeyance for some time.

Meantime, Putin is likely to be promoting U.S.-Russian business interaction, to broaden the base of the relationship, still poised shakily on the arms control perch. He has resolved to improve Russia’s investment climate and move the country from the 120th position in the global Doing Business index to a more decent 40th. In 2011 and 2012, he blessed two deals between ExxonMobil and Rosneft, and he clearly hopes that the two companies’ alliance in the Arctic will give Russia a measure of lobbying power in the United States.

Economic agenda with Europe As regards Europe, Moscow’s agenda is predominantly economic. Russia’s accession to the WTO arguably allows it to move towards a free-trade zone arrangement with the EU, but building up the institutional base of the relationship is hard. A general partnership and cooperation agreement, to replace the one that expired in 2007, is still being negotiated. Russia’s efforts to gain a visa-free regime for its nationals in Schengen countries are yielding only incremental progress in a Europe wary of immigration.

Although Putin’s personal relations with Chancellor Angela Merkel of Germany may not be too close, they are solid enough. For Moscow, Berlin will remain Europe’s principal national capital. Putin can be expected to redouble his efforts to woo the German business community to his version of a greater Europe, stretching from Lisbon to Vladivostok, which he laid out in the autumn of 2010. Paris takes second place in Moscow’s order of European priorities, and there, Putin will emphasise economic relations over international political issues, not to speak of values. Indeed, the latter two could be a source of Franco-Russian friction.

Putin can be expected to pursue further the process of historical reconciliation with Poland, and consolidate the more normal relations between Moscow and Warsaw that he and the Polish Prime Minister Donald Tusk have built. It is an open question whether the reconciliation process can be expanded to involve one or more of the Baltic states, which suffer from much the same historical grievances as the Poles. Should Putin go for this, he could score an important point not only in Riga, Tallinn, and Vilnius, but also

As ‘the Russian Awakening’ unfolds, the basic elements of Putin’s system of governance will be increasingly challenged.

Putin is certainly no ally of the Iranian regime, or of its leaders. Moscow’s best bet is an agreement between Tehran and the international community. in Brussels and Washington. His own recent Polish experience is a powerful argument in favour of moving along that path. For this, however, he will need partners in the Baltics, confident enough to engage the big neighbour to the east.

A view to the East East of the EU, Putin’s big project will be the Eurasian Union (EAU), which he outlined as an idea in the fall of 2011. On closer inspection, the EAU looks far less like a USSR redux than a pragmatic economic arrangement of three countries – Belarus, Kazakhstan and Russia – to create a medium-sized common market of 165 million consumers, 140-plus of them in the Russian Federation. Putin will try to endow that market with its own version of Schengen, but he will hardly be able to transform it into a political union.

A union of strict equals will not satisfy Moscow; while a union built on the model of a jointstock company, with each partner wielding as much weight as its economic potential would allow, would be unacceptable to Astana and Minsk.

Putin will be tough with the

Ukrainians, but he will probably try to avoid new crises, whether about gas

prices and transit or other issues.

Putin may continue to woo Ukraine to join the customs union with Russia and its two other partners, but Kyiv will balk at entering into too close integration with Moscow, for fear of being dominated. Putin will be tough with the Ukrainians, but he will probably try to avoid new crises, whether about gas prices and transit or other issues. Instead, he will talk tough and bide his time, expecting that a Ukrainian leadership hard-pressed for money and receiving no meaningful support from the EU, will turn to Russia as the saviour of last resort, and will have to accept his terms of engagement.

Across the Black Sea in the South Caucasus, Putin will refuse to deal with Georgia’s Mikheil Saakashvili, waiting for the completion of his presidential mandate in 2013, after which he might make a fresh attempt to engage Saakashvili’s successor. Russia, of course, will not withdraw its recognition of Abkhazia and South Ossetia, but it may propose to re-establish diplomatic relations and start a dialogue with Tbilisi. In the run-up to the 2014 Winter Olympics in Sochi, just a few miles from the Abkhazian border, Putin will be interested in enhancing security across the North Caucasus and offering an olive branch to post-Saakashvili Georgia. He can also be expected to strongly discourage Azerbaijan and Armenia from resuming the war over Nagorno-Karabakh.

Putin has long been well respected in China, where they prefer him to Medvedev. He will try as hard as he can to maintain the generally good-neighbourly relations with Beijing, to engage them in cross-border trade and investment, and to cooperate with China both globally, as within the UN Security Council and in such public relations exercises as BRICs, and regionally, as in Central Asia by means of the Shanghai Cooperation Organisation. At the same time, Putin sees the challenge posed to Russia by China’s rise, and will seek to rebalance the relationship through development projects in Russia’s Far East and Siberia, integration of Central Asian states within Moscow-led bodies, and outreach to Beijing’s neighbours – and rivals – from Delhi to Hanoi. By hosting an APEC summit in September 2012 in Vladivostok, Putin will promote Russia as a Pacific power.

Putin is certainly no ally of the Iranian regime, or of its leaders. Moscow’s best bet is an agreement between Tehran and the international community, which allows for some enrichment in Iran under strict international monitoring, but safely excludes two of the worst options: an Iranian nuclear bomb and a U.S.-Israeli attack against Iran. As in the case of North Korea, Moscow will remain sceptical of international sanctions, believing them to be counter-productive, beyond a certain point. However, should diplomatic efforts fail and an attack be launched, Russia can be expected to condemn it strongly. As a result, Russo-American relations could experience a new low, and Russo-Chinese ties may grow closer instead.

Finally, on developments in the Arab world Putin will continue with Moscow’s current approach. It has three main elements. On the top, there are the issues of the global order.

Russia will continue to insist that international military intervention in the Arab civil wars is inadmissible, and a forcible regime change engineered from abroad is out of the question. All solutions must be locally led, with international organisations – the UN and the Arab League – acting as facilitators and/or observers. At the middle level, Russia will continue to see the Arab popular uprisings as paving the way for Arab radicals and even extremists. A Western-style democracy in the Arab world will continue to be seen, from Moscow, as remote or highly unlikely. And at the bottom level, Russia will be concerned about its own interests in the countries concerned, although in all cases they are rather limited.

Putin sees the

challenge posed to Russia by

China’s rise.

Putin is potentially the only Russian leader who can do a deal with Japan on the disputed islands. Reputed to be a strong nationalist, he can get away with ceding territory, while gaining a major strategic breakthrough. Indeed, ridding the Russo-Japanese relations of the territorial issue and transforming then into something similar to the RussoGerman ones would give Moscow’s position in the Asia-Pacific a powerful boost. At this point, all this is highly speculative. Whether Putin is ready to deal, whether an appropriate formula of settlement can be worked out and, crucially, whether Japanese politicians will be capable of a compromise cannot, of course, be ascertained at the moment.

The irony of history is that, two decades after the end of the Cold War, Moscow has no geopolitical interests in the region which was a major battleground in the U.S.-Soviet global rivalry. To the extent that Russians feel any empathy towards the countries of the Middle East, they focus on Israel, the Holy Land, where they can travel without a visa and where a fifth of the population is Russophone. And, it is appropriate to add, Vladimir Putin is definitely the most proIsrael head of state Russia has ever had.

On the issues pertaining to the Muslim world, Putin has already indicated where he stands. He will help the U.S. and its NATO allies to transit from Afghanistan across Russia. Moscow will be a party to discussions about a regional security framework for post-American Afghanistan. Russia may be ready to participate in some economic reconstruction efforts in Afghanistan, if the conditions are propitious for that. Russia, however, will not intervene again in the country where the Soviet Union spent a lost decade. The Russians will be pragmatic when judging how to respond to possible Taliban successes in Afghanistan after the bulk of the U.S. forces leave. In any event, Russia will be focusing on Central Asia to prevent its destabilisation and to stem the flow of drugs from Afghanistan.

A Western-style democracy in the Arab world will continue to be seen, from Moscow, as remote or highly unlikely.

Diplomaatia · May 2012

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What will Obama do in foreign policy?

The first question about an Obama second term is whether he will be able to preserve U.S. interests in the continuing turmoil of the Middle East. But a second is whether his implicit calculation that the autocracies of Russia and China will remain stable for another five years will prove accurate.

The delay strategy has not always worked.

A U.S. attempt to buy time in East Asia through a food-for-nuclear-freeze deal with North Korea backfired when the new regime of Kim Jong Eun tested a long-range rocket on April 12. But the administration’s cautious response – it settled for a statement by the UN Security Council rather than seeking a new sanctions resolution – reflected the same approach of prioritising the avoidance of a crisis. Even if Pyongyang carries out a nuclear weapons test, as some outside experts expect, Obama’s answer will likely be minimalist.

Jackson Diehl, journalist

Jackson Diehl is an editorial page editor of the Washington Post.

“Give me space.”

With those words, uttered to Russian President Dmitri Medvedev during what he thought was a private moment on March 26, Barack Obama summed up his foreign policy for 2012 – as well as his answer to the question of what he might do with a second term as U.S. president. For now, Obama’s strategy is to delay the biggest decisions facing his administration abroad – from Europe and Russia to the Middle East and East Asia – and to avoid spelling out how he might handle them in 2013 and beyond.

In the case of Medvedev, Obama’s request for space came in the context of Russian demands for concessions on NATO’s plans for European missile defence. Rather than respond when pressed by the lameduck Russian president, Obama offered that “after my election I have more flexibility” to solve “all these issues, but particularly missile defence.”

The critical test of the policy will be the negotiations with Iran on its nuclear programme due to resume on May 23 in Baghdad. The United States and its five partners in the talks are pushing for an interim deal with Tehran that would put the most dangerous elements of the Iranian programme on hold, while postponing a more lasting settlement. Success would mean Iran ending its enrichment of uranium to high levels (currently up to 20 percent purity), the export of its stockpile of some 100 kilograms of this highly-enriched fuel, and the de facto shutdown of the underground Fordow facility near Qom. Such a bargain would push the threat of a crisis with Iran – and a military strike by Israel – past November. But failure of the talks might have the opposite effect. In particular, if Iran presses ahead with enrichment at Fordow in the coming months an Israeli strike could become inevitable. The Baghdad meeting could thus be the hinge between the success of Obama’s election year strategy and a crisis that would intrude upon – and perhaps deeply influence – the U.S. election.

Obama’s campaign

Barring such an emergency, Obama’s campaign message on foreign policy will focus on the past rather than the future. So far the incumbent has been making two main points in his stump speeches: that Osama bin Laden was killed by an operation he ordered; and that U.S. troops have come home from Iraq and begun to withdraw from Afghanistan. “The tide of war is receding,” is the signature phrase of Obama’s speeches to a war-weary American public. As the campaign heats up, that will likely be coupled with the charge that a Mitt Romney presidency would reverse this trend, given Romney’s hawkish rhetoric on Iran. In the meantime, Obama will strongly resist any action of his own to undercut his applause line – which is why Syrians can expect continuing U.S. passivity.

message on foreign policy will focus on

Arms control is hardly the only issue Obama is trying to put off. In the Middle East, the United States is steadfastly resisting being drawn into the incipient civil war in Syria, depending instead on weak UN peace initiatives. A week before meeting Medvedev, Obama phoned Palestinian president Mahmoud Abbas and urged him to refrain from provoking a new crisis with Israel by carrying out his threat to dissolve the Palestinian Authority. In Afghanistan, the White House has rebuffed calls from the left for a change of strategy while putting off until after the election the announcement of what will likely be an accelerated troop withdrawal plan for 2013.

the past rather than the future.

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Diplomaatia · May 2012

It is tempting to conclude that Obama’s election-year game makes it impossible to know how he would manage foreign affairs in a second term. But beneath the political camouflage the president has offered several important signals about his intentions.

One came in that meeting with Medvedev in Seoul, in which Obama underlined his interest in answering Russian objections about missile defence. As he explained in a press conference the following day, Obama hopes to negotiate a new U.S.-Russia strategic arms control agreement early in his second term – something that would require an accord on the planned European system. In Washington, the expectation is that Obama will meet Russia’s demand for a written guarantee that the NATO deployment will not pose a threat to Russian nuclear forces – a concession that would probably provoke a backlash in the U.S. Congress, if not in Europe.

Obama has been signaling his intention to focus on doing business with a Vladimir Putin restored to the Russian presidency – while ignoring the signs that his autocracy may be vulnerable.

cial from the city of Chongqing at the U.S. consulate in Chengdu, which occurred just days before Xi’s visit. The incident triggered a political crisis in China that has led to the purging of Chongqing’s populist Communist leader, Bo Xilai; this opaque power struggle has all too clearly illuminated the instability built into the Chinese political system.

What is striking about Obama’s likely strategy is that it appears to ignore what could be seen as the lesson of the single biggest global event of the last four years, the Arab uprising.

More broadly, Obama has been signaling his intention to focus on doing business with a Vladimir Putin restored to the Russian presidency – while essentially ignoring the signs that his autocracy may be vulnerable to a surging opposition and a weakening economy. Days after Putin’s election in a March 4 vote that international observers described as neither free nor fair, the White House issued a statement saying that Obama had called Putin “to congratulate him on his recent victory” and propose that “the successful reset in relations should be built on in the coming years.” The statement made no mention of democracy or human rights in Russia, and Obama has said nothing on the subject since the election.

Obama has invited Putin to meet him in Washington before the NATO Summit this month to discuss an agenda that will include the new nuclear pact. He has deferred to Putin on Syria, supporting the Moscow-backed Annan plan in the hope that Putin will help broker a deal between dictator Bashar al Assad and the Syrian opposition. White House lobbyists are pressing hard, meanwhile, for the repeal of a 1974 law limiting U.S. trade with Russia, while resisting a Congressional initiative, supported by many Democrats, that would tie the repeal to a new law punishing Russian human rights abusers.

“At a time of great challenges around the world, cooperation between the United States and Russia is absolutely critical to world peace and stability,” Obama said in Seoul. In other words, the ‘reset’ of U.S.-Russian relations during Obama’s first term will be redoubled in a second – and implicitly, a bet made that Putin will remain in power for many more years.

Obama has made the same wager on China’s Xi Jinpeng, who is expected to take over leadership of the Communist Party later this year and, like Putin, expects to remain in power for a decade. When Xi made an introductory visit to Washington in mid-February he was treated with kid gloves: Obama devoted one vaguely-worded sentence to the subject of human rights during his greeting at the Oval Office, instead focusing on trade and geopolitical issues.

Even more striking has been official Washington’s strict silence on the subject of the attempted defection of a senior police offi-

The ‘reset’ of U.S.-Russian relations during Obama’s first term will be redoubled in a second – and implicitly, a bet made that Putin will remain in power for many more years.

Yet the Obama administration appears to regard the affair as irrelevant to its policy: Obama remains focused on forging a relationship with Xi. Just as his priority with Putin is arms control, Obama’s China policy centres on issues, like the valuation of the yuan, that depend on striking deals with leaders – while overlooking their domestic policies and challenges, including human rights.

This likely strategy is, of course, broadly consistent with Obama’s first term policy, which elevated ‘engagement’ with other leaders, from Putin to Iran’s Ali Khamenei, to something approaching an ideology. What is striking is that this appears to ignore what could be seen as the lesson of the single biggest global event of the last four years, the Arab uprising. In the Middle East, Obama also aimed at working with autocratic leaders like Assad and Egypt’s Hosni Mubarak; his Cairo address in 2009, with its focus on “mutual respect” and the need for a solution to the Arab-Israeli conflict, was aimed as much at them as at their people.

In 2009 and 2010, Obama ignored warnings that Khamenei was intractably opposed to détente with the United States, and that Mubarak’s attempt to perpetuate his autocracy was unsustainable. The result was that he was wrongfooted first by the Iranian Green movement of 2009, and then by the revolutions in Tunisia and Egypt 18 months later.

In both cases the U.S. reaction was weak; critical opportunities to promote democratic change were missed.

society is completely different from what it was at the turn of the 20th century,” said an op-ed he authored that was published by The Washington Post before the presidential election. “People are becoming more affluent, educated and demanding. The results of our efforts are new demands on the government and the advance of the middle class above the narrow objective of guaranteeing their own prosperity.”

In theory, Putin’s recognition of the problem might lead him to address it by liberalising the political system and attracting greater Western investment in the next several years. But if it is authentic, liberalisation will inevitably threaten Putin and his circle of ex-KGB men. Free media will ask what happened to the billions of dollars that have been siphoned out of state companies and deposited in foreign bank accounts. A parliament with a real opposition would investigate who was behind the murder of journalists like Anna Politkovskaya, gunned down on Putin’s birthday in 2006, and of dissidents such as former spy Alexander Litvinenko, who was poisoned by radiation in London.

This is why many experts on Russia in Washington expect that Putin will refrain from reforms and stick to the repression and anti-American policies he has adopted in recent months. That, of course, could end up strengthening the opposition movement, and possibly touch off a Russian version of the Arab Spring. Either way, a U.S. policy focused on redoubling the deal making of the first term is likely to be undercut.

A similar risk exists in China. Even if this year’s leadership transition goes forward without further incident, China faces a deeper threat to its political and economic model. In a remarkable report cowritten with the World Bank and released early this year, Chinese technocrats at the Development Research Center of the State Council concluded that to sustain its economic growth in the next 20 years, “it is imperative that China adjusts its development strategy,” including by allowing free debate, establishing the rule of law and opening up the political process.

In China as in Russia, the autocratic system that the world

takes for granted is

The first question about an Obama second term is whether he will be able to preserve U.S. interests in the continuing turmoil of the Middle East, and avoid a military conflict with Iran, or Iran’s acquisition of a nuclear weapon. But a second is whether his implicit calculation that the autocracies of Russia and China will remain stable for another five years will prove accurate.

unsustainable.

In the case of Russia, there is plenty of room for doubt. The strategy employed by Putin for the last dozen years – purchasing the tolerance of Russians for political repression with a rising living standard financed by oil and gas exports – is likely exhausted. Though he has promised hundreds of billions of dollars in pay increases for teachers and doctors and in subsidies for children and students, not to mention $790 billion in new military spending, Putin is unlikely to find the necessary funding. The oil price needed to balance Russia’s budget has risen from $34 a barrel in 2007 to $117 this year, and outside estimates of the price that Putin will require to meet his pledges range from $130 to $150.

The conclusion of China 2030 sounds a lot like that of Putin: “The rising ranks of the middle class and higher education levels will inevitably increase the demand for better social governance and greater opportunities for participation in public policy debate and implementation. Unmet, these demands could raise social tensions.”

Though the language is bureaucratic, the message is unmistakable: in China as in Russia, the autocratic system that the world takes for granted is unsustainable. If there is one clear conclusion to be drawn about Obama’s plans for a second term, it is that he has chosen to disregard this warning.

What is more, even Putin recognises that the old political bargain is breaking down. “Our Diplomaatia · May 2012

24

Time to re-think: why the Arab Spring is good for security We need to fundamentally rethink where the Middle East region is headed, and where U.S. and Western interests truly lie; and the sooner we do it, the more favourable the outcome will be.

• In Libya, the UN and NATO were at first only willing to ‘protect civilians’ while avoiding direct intervention, as though it was possible to protect civilians without weapons against a heavily armed Gaddafi regime. The UK, France, Qatar, the UAE, and –from behind –the United States later opted to help the rebels with regime change, while Germany and others stood on the sidelines. Now that Gaddafi is gone, we are again extraordinarily passive as city-states with militias struggle to reintegrate into a stable nation and other groups seek to exploit the chaos.

The Arab Spring continues to ripple.

• In Bahrain, we look away from repression, judging that the strategic imperative of a bulwark against Iran –including a major US naval base –takes precedence over popular demands for greater freedom and justice.

Kurt Volker, analyst

Kurt Volker, a former US Ambassador to NATO, is a Professor of Practice at Arizona State University, and a senior fellow at the Center for Transatlantic Relations at Johns Hopkins University’s School of Advanced International Studies

Conventional wisdom in the West is that while we admire some of the aspirations behind the Arab Spring, we should not get carried away, because the reality is far more messy: Islamists risk coming to power, semiauthoritarian militaries seek to re-establish dominance, old security relationships are in turmoil, the Egypt-Israeli peace settlement may come undone, and the broader disagreements among Arabs and Jews, or among Sunnis and Shias, may drive even further conflict.

This leads to a cautious, case-by-case, reactive approach to each of the individual Arab uprisings as it occurs. People see a tradeoff between values and security, and opt for security.

• In Tunisia, Ben Ali was gone before the West knew what happened. So it was easy to get behind the change after it occurred. We are now pleasantly surprised that we can work with an Islamic-based party in government that is for the most part behaving with tolerance and respect towards the wider population.

• In Egypt, fearing both the rise of Islamists and threats to the Camp David accords, the West backed Hosni Mubarak until it became entirely untenable, leaving a population deeply sceptical of Western motives. In the aftermath of his departure, the West has again been remarkably tolerant of the military authorities in Cairo.

People see a trade-off between values and security, and opt for security.

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Diplomaatia · May 2012

• In Syria, we are on the sidelines while Bashar al-Assad murders over 10,000 of his own people. The international community has no plan.

The Arab Spring continues to ripple, whether in prompting governments such as Morocco and Jordan to continue to push forward with reforms and Qatar to modernise, or in spotlighting regional demands for justice, while other less liberal regimes hold on tight and hope the tide of demands for reform will somehow pass them by.

But about this we can be sure: the old order of the Middle East, where entrenched authoritarian regimes maintain power by repressing people politically, economically and religiously, is going away and never coming back.

The people of the region are demanding change, and one way or another, they will get it.

The old order of the Middle East is going away and never coming back.

The Western response thus far has been one of clinging to this disappearing past. Fearing what change might mean, we have been frozen in the headlights –by inaction, we have continued de facto to support regimes long after their actions have become indefensible, and we have been extremely reluctant to step in to support the people when those regimes use brutal violence against them. We do this not out of dedication to these regimes, but because we do not want to face the costs of change –the potential instability, increased Islamism and extremism, ethnic or religious violence, or conflict even among nations.

Through inaction, we leave the playing field open to those who have their own agenda to impose on the Arab world.

But if change is coming anyway, we will face the costs no matter what. We may delay the departure of such regimes, but we cannot prevent it. And indeed, the costs will be higher if we are seen by the people of the region as hypocritically standing against them –mouthing support for freedom and democracy, while doing nothing to stop those who are doing their best to prevent the realisation of these very values.

Moreover, through inaction, we leave the playing field open to those who have their own agenda to impose on the Arab world: intolerant Islamist extremists, who seek to hijack change; Iran, which seeks to extend its influence; military establishments representing the fading order, which seek to reimpose control through force; and outside powers, such as Russia, who seek to play for influence, rather than the interests of the people. Yet again, though we fear the costs of change, the costs will be higher still if those who do not support the democratic aspirations of the people are the ones to shape the outcomes.

extreme, there will never be stability and long-term security as long as one extreme or the other is allowed to dominate. On both extremes, there are well-financed and wellarmed actors seeking to impose either authoritarianism or extremism in the immediate term. In this situation, the people need support wherever they can get it.

Second, Islam is a part of society in the broader Middle East and North Africa, just as Christianity is part of Europe or Judaism is part of Israel. It would be wholly undemocratic to attempt to separate people from their faith –and indeed only lead to future instability. Rejecting Islam as a legitimate force in Middle East politics, would paint the West as hypocritical (what would we say about the Christian Democratic parties of Europe, for example?) and motivated by anti-Islamic fear, rather than support for democratic rights. Instead, one needs to stress values of peace, tolerance, and respect for democratic institutions independent from, and not inconsistent with, religious belief.

Again, this is the space where the majority of the populations of this region would like to be.

We face a situation

where the only way to assure our long-

Finally, we must simply recognise that if our security is fundamentally linked to the staying power of the old order and old regimes, then our security is on very shaky ground indeed.

We had better start making alternative plans, before it is too late.

term security is

To the extent that Islamist parties do come to power, they will immediately be challenged with delivering for the people. It is easy to rally support when one is the lone, courageous organisation standing up to a dictator. To retain support as a government, however, one must address the needs of the people. Either Islamists will adapt and do so, or their hold on power will be short-lived. In no case is it in the interests of the West to allow Islamists to provoke the population, while escaping the disciplines of governance.

through supporting our values.

Sorting all this out requires a fundamental rethinking of where the region is headed, and where U.S. and Western interests truly lie. It requires the understanding that rather than facing a conflict between our security interests and our values, we face a situation where the only way to assure our long-term security is through supporting our values.

To do this, we must come to grips with a few basic things.

First, there is no simple dichotomy between authoritarianism and Islamist extremism.

There is a vast, diverse space between the two, a space that the overwhelming majority of people in the region long to occupy.

With the majority unwilling to accept either

A Middle East that provides a space for Islam, justice, tolerance, democracy, and economic development would be a far greater influence on Iran, than Iran is on the Middle East.

Third, Iran is one of the most serious strategic threats faced by the West and Arab countries alike. But rather than seeing a bulwark of cooperation with strong-arm regimes as the only way to contain this threat, we should think about the effects that reform in the Middle East can have on eliminating the Iranian threat from within.

ence on Iran, than Iran is on the Middle East.

In the face of the power of democratic ideals –ideals for which the Iranian people themselves yearn –the regime in Iran will find itself facing another Persian Spring. The threat of Shia-Sunni conflict, propelled by well-armed authoritarians, can be replaced

by Sunni and Shia alike asserting their common human and democratic rights.

Fourth, the demand for greater freedom, justice and democratic rights does not stop with the Arab world or Iran. One can equally see the waves of the Arab Spring washing ashore in Central Asia, Russia, and China.

Those who struggle for freedom and justice in their own societies take heart when outsiders stand for core human values –just ask Aung San Suu Kyi in Burma, Mikhail Khodorkovsy in Russia, widows of the disappeared in Belarus, or Chen Guangcheng in China.

To the degree we see democratic values take root and expand in these wider swathes of the world, we will all be safer and more secure.

It is a big leap to let go of the habits and security structures of the past, and move on to something new. What we need to recognise is that sooner or later, we will have to make that leap, and the sooner we do it, the more favourable the outcome will be for our own interests.

It is a mistaken framework to think of the Arab Spring as a question of values versus interests. Instead, it is a question of shortterm versus long-term. In the long-term, democratic change will indeed be better for both our values and our interests. The problem is how to manage the dislocations this will cause in the short-term. Other actors are actively competing in this short-term environment, with a view towards shifting the long-term outcome. Surely the West should become more engaged in these short-term crises and dislocations –not less –in order to foster the best outcomes for the people of the region, and our own long-term values and interests.

Today, Iran exerts influence in the Middle East through proxies such as the Assad regime in Syria, Hezbollah and Hamas.

Removal of Assad and continued counterpressure on extremists would already deal a heavy blow to Iran’s influence.

But even more profoundly, a Middle East that provides a space for all things –Islam, justice, tolerance, democracy, and economic development –would be a far greater influDiplomaatia · May 2012

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Europe’s calculating defence In national defence, Europe is still, or again, relying excessively on the military capabilities of the United States.

share of NATO defense spending has now risen to more than 75 percent – at a time when politically painful budget and benefit cuts are being considered at home.” He warns us that this attitude could undermine NATO in the long term: “Indeed, if current trends in the decline of European defense capabilities are not halted and reversed, future U.S. political leaders – those for whom the Cold War was not the formative experience that it was for me – may not consider the return on America’s investment in NATO worth the cost.”1

Who will pay?

Jüri Luik, diplomat

Jüri Luik is Permanent Representative of Estonia to NATO. Previously, he has served as Estonian Ambassador to Washington and Minister of Defence.

This article reflects his personal views.

The prime focus of the Chicago NATO Summit ties in with its venue on the territory of NATO’s most powerful Ally – the United States. What role will America play in Europe in the next 10–15 years and what will be their joint contribution in the global arena? A positive role requires that both parties agree to harness sufficient political will and resources for cooperation. While large numbers of NATO member states are slashing their defence expenditures, the most rigorous cost cutting efforts are concentrated in Europe. The U.S. basic expenditure level is adequate to allow some budget reductions without directly affecting the military capabilities of the United States and NATO, although admittedly it curbs the political will of U.S. politicians to invest in Europe’s defence. People in Washington are asking themselves why they should invest in joint defence between the United States and Europe if the Europeans refuse to do so. To alleviate the situation, NATO Secretary General Rasmussen has tabled a package of ‘smart defence’ initiatives, which will be discussed in Chicago.

Washington has expressed its concerns both privately and publicly. Previous U.S. Secretary of Defense Robert Gates stated in his valedictory speech, delivered at the SDA think-tank in Brussels, that during the Cold War U.S. defence investments made up roughly 50 percent of all NATO military spending. Let us not forget that back then it was imperative to pursue massive armament programmes, which could easily be pushed through Congress. Gates added: “But some two decades after the collapse of the Berlin Wall, the U.S.

People in Washington are asking themselves why they should invest in joint defence between the United States and Europe if the Europeans refuse to do so.

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Gates’s speech aroused widespread indignation in Europe at the time, but unfortunately the process of decline he described has only intensified. U.S. defence expenditure in 2011 made up a significant 4.85% of its GDP. In Europe, there are only two countries that invest more than two percent in defence: Great Britain and Greece (both are planning cuts). France, Poland, Turkey and Estonia hover around, or slightly below, the two percent mark. As a state that stuck to reasonable defence expenditures despite the dire economic situation, we are a role model for other Allies. While it is clear that Estonia alone cannot reverse the general trend, the fulfilment of our duties extends us the moral right to criticise Europe’s overall defence expenditures (which I am exercising in this article).

National defence budgets in some European countries are shockingly small: around one percent in 2011 and significantly less than that in 2012. The defence expenditures of Europe as a whole also give serious cause for alarm (in 2011, the North American section of NATO invested 4.5% of their joint GDP in defence, while Europe’s joint investment was 1.6%). Obviously, all this stems from economic difficulties, but increasingly also from the perception that future military operations will be less aggressive and will require fewer resources than past conflicts. In reality, human casualties and army deployment have occurred in conflict situations only in Afghanistan – in a war that no one wants to relive. Air wars in Kosovo and in Libya were completed without a single fatality on NATO’s side; the same applied to the peacekeeping mission in Bosnia. In addition, NATO personnel and equipment have not been damaged in the course of Operation Active Endeavour against terrorism or Operation Ocean Shield to combat piracy.

The quite vague notion of the end of the Cold War provides the primary intellectual justification for new cuts. True, NATO’s Strategic Concept reads as follows: “Today, the Euro-Atlantic area is at peace and the threat of a conventional attack against NATO territory is low.” Still, it is added with foresight in

the next paragraph that “the conventional threat cannot be ignored.”2 It was already during the debates on the Strategic Concept that I highlighted the illusionary character of the absence of conventional threats. For a moment, let us leave aside big power confrontation and concentrate on potential scenarios of the actual operations that have been completed. If Milosevic had not surrendered, the need to deploy land forces would eventually have arisen. If the Northern Alliance had not been willing to fight the Taliban, NATO would have had to take on the task. Arguments like that justified the inclusion of some quite reasonable formulations in the text of the Strategic Concept, but sadly many European nations have refrained from upholding them. Let me state right away that the following countries are just examples; I do not wish to cast aspersions on any of them. During the Cold War, the Netherlands Corps defended a strategically crucial section – the upper part of the northern flank – including access to the Danish Straits of strategic significance. Today, the Dutch have decided to liquidate their entire armour capability. The Netherlands’ two tank battalions, equipped with German Leopard 2s, are to be scrapped and the tanks sold. The Dutch will have no armour capability. The cutbacks will also reduce the number of fighter jets and minesweepers and will eliminate 12,000 of the armed forces’ 59,000 personnel.3

The quite vague notion of the end of the Cold War provides the primary intellectual justification for new cuts.

Warfare is expensive, but ‘safe’ for the United States – and Europe has serious difficulties in keeping up with it.

NATO includes four military great powers, of which Great Britain has embarked on the most radical force slashing. Drastic cuts will be implemented in almost all branches of the armed forces; in heavy armour, around 40 percent of all tanks and heavy artillery will be reduced. British units intended to protect Europe will be withdrawn from Germany where 20,000 service personnel are currently stationed – the withdrawal will be complete by 2020.4 For years, there has been talk about a gap between the military capabilities of the United States and Europe, which is usually taken to mean modern technology, for example, precision-guided weaponry. Ultramodern weaponry renders warfare safer for NATO personnel and reduces civilian casualties.

For example, Tomahawk missiles, launched from ships a couple of hundred kilometres away and guided by GPS, show an 85% accuracy rate. Today, aircraft are also equipped with precision-guided munitions which enabled the targeting only of Gaddafi soldiers in Libya, where the operation’s key objective was to retain local support, and to do so with such surreal accuracy that there were almost no fully verified reports of civilian casualties afterwards. Warfare is expensive, but ‘safe’ for the United States – and Europe has serious difficulties in keeping up with it.

However, the examples of the Netherlands and Great Britain have highlighted another emerging out-of-balance category of capabilities which in NATO parlance are referred to as ‘high-end’ or heavy armour capabilities, meant for land war, including territorial defence. Inevitably, this situation increases the U.S. role in defending Europe and places under question the broader defence doctrine of flexible response developed by U.S. Defence Secretary McNamara in the late 1960s. NATO has followed this doctrine to the present day, including, albeit without explicitly saying so, in the new Strategic Concept. NATO has to have at its disposal a sufficiently wide range of forces to retaliate against every attack in the most effective manner, thereby guaranteeing credible deterrence.

Even smart defence requires resources.

It does not matter how smart your

moves are, you still cannot produce

something from nothing.

NATO is feverishly working to compensate for emerging capability gaps through joint action, which is why Rasmussen’s smart defence initiatives got a strong positive reception in political circles. We are often faced with inevitable choices, for example, the smart defence project for air policing in the Baltic states is inevitable because the Baltic states cannot afford to buy the aircraft themselves. While initiatives, such as the joint Anglo-French project for the exploitation of the aircraft carrier de Gaulle, will help the Brits to survive the ten years which they will spend without their own aircraft carrier due to austerity measures.

It is more difficult to develop real joint capabilities, for example, the Strategic Airlift Capability (SAC) with C-17 transport aircraft or the Alliance Ground Surveillance (AGS) system with Global Hawk unmanned aerial vehicles. These initiatives are built on the notion that common efforts make it possible to

enhance military capabilities economically.

Still, the United States is the key participant in the initiatives, meaning that without its financial contribution these systems would not exist. But most importantly, the gaps that have appeared as a result of cost cutting can be filled with ‘smart defence’ only to the minimum extent, which is far from making a real difference. Even smart defence requires resources. It does not matter how smart your moves are, you still cannot produce something from nothing.

The United States continues to be indispensable The perception that ‘after all, the Cold War is over’ puts Europe’s capability of sharing an equal burden in major operations with U.S. conventional forces at serious risk. So, Europe’s economising defence is not the ‘smart defence’ the NATO Secretary General aspires to, but rather a ‘calculating defence’.

The Europeans are implicitly counting on the United States as they calculate that NATO’s total capabilities will not be reduced – only that the burden of costs will be reallocated amongst its members. The United States can meet all the needs many times over. Let us not forget that U.S. military spending accounted for 41 percent of the world total in 2011, followed by China with 8.2 percent, Russia with 4.1 percent and the UK and France with 3.6 percent each.5 If we add the expenditures of other NATO member states to that of the United States, then their potential opponents are left with meagre resources. In addition, it should be kept in mind that the opponents do not form a united bloc like NATO, which is why their resources cannot be aggregated in a similar manner.

The U.S. defence budget totals around one trillion dollars. The country can go to war anywhere on this planet; it commands a total of 11 carrier battle groups. Non-NATO countries hold only five aircraft carriers between themselves – India, China, Russia, Brazil and Thailand each have one. Or another example: 100 Tomahawk missiles were launched during the first night of the operation in Libya – 90 by the United States, 10 by others. The average cost of one missile is 1.4 million dollars, so the United States must have blown up around 126 million dollars in a few hours. As stated earlier, the United States is also reducing its armed forces, but the cuts – even if they are large – are insignificant in their effect on global power relations.

When will Washington lose interest?

across Europe when the U.S. president began to shift his focus from the classic priorities of the United States to the Pacific region.

President Barack Obama said in a speech to the Australian Parliament in November 2011: “As President, I have, therefore, made a deliberate and strategic decision – as a Pacific nation, the United States will play a larger and long-term role in shaping this region and its future, by upholding core principles and in close partnership with our allies and friends.”6 As proof of the new strategic focus, President Obama announced the establishment of a new military base in Darwin in Australia’s Northern Territory, which is surely the only U.S. military base set up after the Cold War, with the exception of the temporary bases established during the operations in Iraq and in Afghanistan.

Admittedly, U.S. officials have stressed in their explanations that this was not a re-orientation – the Pacific region had simply been neglected for too long (the United States also being a Pacific nation). U.S. forces in Europe continue to form the largest contingent of the United States outside its territory; the European Union is the biggest trade partner for the United States; we share the same values. But it is also a fact that since President Bush, the Americans have not sought a protégé in Europe, but a partner who could contribute to military cooperation with the United States on an equal, or at least a meaningful, basis. Europe too harboured the same ambition, which was reflected in its desire to possess an independent defence capability for use in the framework of both NATO and the European Union. The reality today is that this grand plan is quietly falling through and the United States must increasingly take on the familiar role from the Cold War era of Europe’s protector.

1 “The Security and Defense Agenda (Future of NATO),” a speech by Robert Gates delivered on June 10, 2011, http://www.defense.gov/speeches/ speech.aspx?speechid=1581.

2 NATO Strategic Concept, adopted at the Lisbon Summit in 2010, http://www.nato.int/strategicconcept/pdf/Strat_Concept_web_en.pdf.

3 Matt Steinglass, “Dutch Tank Crews Take Aim at Cutbacks,” Financial Times, April 29, 2011, http:// www.ft.com/cms/s/0/43f66c04-71ca-11e0-9adf00144feabdc0.html#axzz1tips4100.

4 Securing Britain in an Age of Uncertainty: The Strategic Defence and Security Review, October 2010, HM Government, http://www.official-documents.gov. uk/document/cm79/7948/7948.pdf.

5 “Recent Trends in Military Expenditure”, SIPRI, 2011, http://www.sipri.org/research/armaments/ milex/resultoutput/trends/recent_trends_default.

6 “Remarks by President Obama to the Australian Parliament,” November 17, 2011, http:// www.whitehouse.gov/the-press-office/2011/11/17/ remarks-president-obama-australian-parliament.

Europe’s defence cuts will considerably increase the political role of the United States, which is why it is also in Estonia’s interest to concentrate on this relationship as much as possible. The importance attached to the U.S. role by those who are actually dramatically slashing their defence budgets was demonstrated by the wave of anxiety that swept

Since President Bush, the Americans have not sought a protégé in Europe, but a partner who could contribute to military cooperation with the United States on an equal, or at least a meaningful, basis.

Diplomaatia · May 2012

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Cyber-defence: the next challenge The cyber-attacks on Estonia in 2007 alerted the world to a new challenge. Much remains to be done to address it.

Most accounts of cyber-war, cyber-attacks and the militarisation of the cyber-world begin with a description of the Distributed Denial of Service (or DDoS) attacks on Estonian government sites, banks, newspapers and so on in April-May 2007. With hindsight we can say that while those attacks were certainly disruptive and a nuisance, they posed none of the danger that we face today, when sophisticated worms can be used to cause major damage to critical infrastructure. Moreover, the dangers posed by cyber-attacks can be far more subtle, unnoticed even, but ultimately destructive of national wealth. Escalation has been rapid, akin to the development of air power less than a century ago.

Toomas Hendrik Ilves

Toomas Hendrik Ilves is the President of Estonia. He has earlier been Estonia’s foreign minister, ambassador to the US and a member of the European Parliament. In the 1980s he worked for Radio Free Europe. This article is a revised version of a lecture given at the Kennedy School of Government at Harvard University.

Although aerial bombing had been used earlier, the attacks on English towns on 19 January 1915, during World War I, created wider awareness of the potential of air power. Two German Zeppelins dropped 24 fifty-kilogramme bombs and three-kilogramme incendiaries on the towns of Great Yarmouth, Sheringham, King’s Lynn, and the surrounding villages. Four people were killed, 16 injured, and damage was estimated at £7,740. The public and media reaction to what today or even in World War II would be considered a minor bombing was shock.

I would argue that the DDoS attacks on Estonia in 2007 were akin to the Kaiser’s two Zeppelins: a hitherto largely unknown weapon, causing an enormous amount of press coverage, but ultimately a minor skirmish.

Given the rapid development of weaponised cyber since, a more appropriate analogy might be the thirty years from the Kaiser’s Zeppelins to Hiroshima, which in terms of civilian death rate from aerial bombardment constitutes some kind of equivalent of Moore’s law. Indeed, I would argue that what we face in the cyber-world are not Zeppelins, but a Predator drone operating in a conflict where everyone else is at the level of the Zeppelin and World War I defensive technology.

Yet the broad outlines of the threats – the far greater threats – we face today were already visible in 2007.

To briefly summarise the attacks of 2007 and why they were significant: first of all, they were primitive. DDoS attacks shut down servers by overloading them with queries.

What we face in the cyber-world is a Predator drone operating in a conflict where everyone else is at the level of the Zeppelin and World War I defensive technology.

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Diplomaatia · May 2012

This is accomplished by botnets, networks of robot or bot computers – computers of everyday users that have been infected by malware and hijacked to send out messages in the case of spam or server-specific queries, without the knowledge of the infected computer user. Most often, bots are downloaded via porn sites but they can just as easily be inadvertently downloaded from thousands of seemingly innocuous sites on the web. Botnets, however, are illegal. Bots are controlled and connected to each other by criminal groups that rent out their services, mostly to send spam. Botnets are rented by the hour or day by spammers.

But botnets can also be used to target specific servers. Before the 2007 attacks on Estonia, this was largely done for extortion: attacking the website of a company highly reliant on the internet and demanding money to end the overloading of their server. DDoS attacks were also occasionally used to target a specific site for other reasons, as we have continued to see in the case of the group Anonymous who, for example, claimed credit for attacking the servers of companies that suspended payment programmes for Wikileaks. As Irina Borogan and Andrei Soldatov note in a recent article in OpenDemocracy, hacking e-mails and DDoS attacks have become common features of political life in Russia, with liberals hacking Kremlin youth organisations like Nashi, who in turn seem to specialise in shutting down opposition sites with DDoS attacks. They conclude: “For Russian cyber-criminals hacking remains first and foremost a business: they will take political orders, but only on a commercial basis, and even then they prefer to work not for the security services, but for Kremlin youth organisations, since this work brings them huge profits without any risk of losing their anonymity.”

The 2007 attack on Estonia differed in one degree from the battles of hackers and spammers. It was the first attack to target a country: its government sites, banks, newspapers, even the emergency number 112.

While the initial attacks in late April and early May were characteristic of Nashi activists, using DDoS programs to hit various sites in Estonia, the culmination of the attacks on 9 May, coinciding with the day the Russians consider VE-day, already had the signature of cyber-criminals acting on a far more massive level, motivated by profit. It was clearly ordered and paid for: the CERT (Computer Emergency Response Team) histogram of attacks showed not a Gaussian curve but a discrete attack, beginning on 9 May at 00:00:00 GMT and ending at 24:00:00 GMT. When I asked the CERT how that was possible, why not a Gaussian distribution, the head of CERT said, “that’s what they paid for.” Who, of course, we cannot determine

since the hijacked computers were all over the world. We can say there was a strong correlation but we cannot prove cause.

The final point is that the attacks were political. They were a response to the Estonian government’s decision to move a statue of a Soviet ‘liberator’ to a less disruptive location. They used a different means than usual, but were, nonetheless, the continuation of policy by other means; which I need not remind the reader, is von Clausewitz’s definition of war.

To sum up, the importance of the attacks and why they are relevant: the cyber-attacks were a first in that they were directed at a country, they were ordered by someone, i.e. they were organised, they were political and were thus, ultimately, an act of war. Few, if any, wanted to admit this at the time.

At the time of the attacks, governments had not yet fully recognised the threats posed by the cyber-world, or the vulnerabilities of modern, liberal democratic states and societies.

Or that cyber-attacks were not just something for geeks to be worried about, but rather that as the new ‘equaliser’, they allowed even small non-state actors to wreak enormous damage on countries and their economies. And most importantly, that had these kind of attacks been carried out with kinetic weaponry, NATO, as a very minimum, would be holding discussions under Article 4, and perhaps even invoking Article 5.

The cyber-attacks against Estonia were political and were thus, ultimately, an act of war. Few, if any, wanted to admit this at the time.

We can safely assume that any military conflict in the future will involve a cyber element.

Yet, if we thought then that DDoS tie-ins to military conflict were a problem, then today we see things altogether differently. Stuxnet brought home to all the enormous vulnerability of SCADA – Supervisory Control and Data Acquisition – systems, which run not just Iranian uranium enrichment centrifuges, but increasingly underlie our day-to-day life: everywhere from stacking our just-intime delivery of milk in the supermarket to the toner in our copying machines. They run your car, they run hydroelectric dams, air traffic control, and nuclear power plants.

The integration of internet-based feedback systems into virtually all aspects of daily life has proceeded without much notice. Only when the Stuxnet virus disrupted an almost airtight computer system did people begin to think more broadly of the implications of attacks on the computer systems that today run much of what we would call modern life. While many remain sceptical, much in the way that one hundred years ago European militaries were sceptical about the use of air power, a simulation in March in the U.S. with President Obama’s participation showed how it would be possible to shut down the electrical system of New York.

petitive advantage. Contrast Europe’s investment goals in R&D with NATOs defence expenditures. The EU has set a goal for its member states to invest 3% of GDP in R&D, a goal few meet. But then again, few meet the NATO goal of defence expenditure of 2% of GDP. A company that invests hundreds of millions or even billions of dollars in new products can see it all evaporate if the research is stolen: the value of the product comes from those years of creative work and the dollars invested in developing it. Yet it can all be stolen. At which point someone else somewhere else has obtained for free what your country’s best and brightest have developed. You lose the tax revenue, someone else reaps the profits. Testifying before the U.S. Congress in March, Shawn Henry, the outgoing Executive Assistant Director of the FBI, spoke of a company that lost in one weekend ten years-worth of research and development amounting to a billion U.S. dollars of investment. Someone had hacked into the company computers and sucked out all the research work.

Intellectual

property is what makes Western

This is piracy. Pure and simple. And it is as dangerous and threatening for modern states as piracy in its more primitive forms was off the Barbary Coast at the beginning of the 19th Century, or today off the coast of Somalia.

economies run.

Meanwhile a new worm, Duqu, thought to be derived from the Stuxnet worm and possibly a case of military blowback, or the turnaround of a weapon by the initial recipients, emerged in September 2011 – but no longer specifically designed to operate on Iranian enrichment centrifuges.

Clearly a new form of cyber-threat needs to be addressed, one potentially far more dangerous than the DDoS attacks that put Estonia on the map.

The cyber-attacks were also an own-goal as Estonia benefited from them – although this was a one-off; these benefits will accrue to no one else. Cyber-security is today’s growth field, with no better testimonial than the fact that both NATO’s Cooperative Cyber Defence Centre of Excellence and the European Union’s IT Agency are located in Tallinn.

Yet, despite all this, I want to stress that we concentrate far too much on the so-called hard security side of cyber in our discussions.

Although hard security is important, I am convinced that the real battles are going on and will affect our security and well-being in altogether different ways from those generally discussed. Far more important to us than the asymmetrical nature of DDoS-type cyberattacks, or the still largely potential threats of Stuxnet/Duqu-style attacks on our critical infrastructure, is our economy. Slowly, the understanding is dawning that warfare need not hit state or civilian infrastructure, but rather our economies, through piracy; perhaps we are too fixated on the militarisation of cyber, rather than state-sponsored theft.

In other words, in the immortal words of Bill Clinton, “It’s the economy, stupid.”

The genuine military capabilities of DDoS attacks became evident a year later during the Georgian-Russian war of 2008. DDoS attacks were found to have been co-ordinated with kinetic attacks in the traditional military domains: air, land and sea. David Hollis, a senior analyst in the U.S. Department of Defense outlined in the January 2011 issue of the Small Wars Journal how Russian military operations were closely co-ordinated with DDoS attacks, targeting specific geographical locations for disruption so as to cause panic among the civilian population.

The attacks, Hollis also points out, hindered Georgian strategic communication at the national level. From this, we can safely assume that any military conflict in the future will involve a cyber element.

For technologically advanced countries, the theft of intellectual property can cripple or at least severely wound our economies. Let us be clear that much of what makes modern economies function and prosper is the product of huge R&D investments, both public and private. Intellectual property, be it new software or hardware, pharmaceutical products, design or any of the other advanced products that make life today so different from even 1991, is what makes Western economies run. Discussions of the emergence of BRICs and other acronymic economic powerhouses tend to skip the fact that innovation, research, and development are words not often used to assess their rise. Yet innovation is at the heart of what allows the Western liberal democracies to maintain their com-

In other respects, there was nothing unusual about the attacks. They were primitive. They were a major nuisance, and could have led to fatalities, such as when the server of the emergency telephone line 112 was attacked, but this lasted only a short time.

As is the case with classical, marine piracy, intellectual property piracy is not only a threat to our economies, it is also a threat that falls into the category of Public Private Partnerships, PPP in the standard jargon of government-business financing, where state actors condone or turn a blind eye to it, if it benefits their economies – just as it was to the Barbary States under Ottoman rule. And as with the Barbary pirates, cyber-attacks against our companies can be met head on only with concerted state action.

This leads me to one final point about the challenges we must address, now that we have slowly reached the point where we can recognise that cyber-attacks and cyber-wars are a major threat, and not just the child’s play of misguided hacker-geeks.

Today the PPP paradigm that we see in both the militarised cyber-warfare of the botnet type and the systematic theft of our companies’ intellectual property should give us pause to rethink our own relations with the private sector. Last year, I shared a talk and panel discussion with Carl Bildt on cyber-security at the Swedish Foreign Policy Institute in Stockholm, where during the Q&A the head of cyber-security for a global IT company stood up and asked point blank: “Why are you [government people] not working with us? We are attacked just as much as you and probably more.”

I cannot say who is attacked more, but his point made me rethink my views on cyber-security. A few weeks later, I asked the then head of cyber-security for the British MoD why the UK had suddenly taken such an outspoken position on the need to work jointly on cyber-defence. Her answer was more or less the same: our companies are coming under massive attack.

This is true everywhere in the West, where Intellectual Property is a key component of our national wealth. It may be difficult to steal a country’s oil, or its agricultural or even manufacturing wealth, but the billions and billions – as well as the years – invested in intellectual property can all be stolen in a matter of minutes, or a weekend. This is industrial-strength piracy and a genuine security threat, not just the worry of Hollywood film companies.

As an aside, I should mention here that as flawed as parts of the ACTA legislation may be, piracy is a far bigger problem than downloading films for personal use. We certainly would not want to condone piracy against our health records or, here in Estonia, the newest software being developed by Skype.

While Freedom House ranks Estonia as number one in the world in internet freedom (followed by the United States and Germany) we need to ensure that this freedom is secure from those who would abuse it.

Cyber-threats have been a source of worry to national defence establishments for years.

Unfortunately, for too long cyber-threats have been strictly national concerns, and have remained stuck in the intelligence paradigm (where little is shared), rather than the co-operation and interoperability paradigm of, for example, NATO. We can put an American bomb on a French plane, but we a loath to share knowledge in the cyber domain.

Yet progress has been made. NATO took a significant step forward at its Summit in Lisbon in November 2010, when it incorporated cyber-security into the new Strategic Concept.

Estonia certainly hopes that in May in Chicago we will move further beyond this.

Another significant milestone, whose importance I believe cannot be overstated for the future of warfare, is the announcement by the U.S. Department of Defense in Spring 2011 that cyber-attacks can constitute a military attack, and thus are open to a military – perhaps even kinetic – response. This idea of not necessarily using the same methods to counter-attack is a sensible development all around.

We in the democratic West have wobbled and waffled no end on this issue – a tricky one, admittedly, given the difficulty of ascribing responsibility and the even more difficult issue of what constitutes a proportional response. But the U.S. has leapt into the breach; I hope our other Allies will soon do the same.

Clearly the policy makers in NATO have realised that cyber-attacks are attacks, period, and that all the same rules apply to them as they do in other forms of warfare. No longer is it the ‘gee-whiz, look at what those geeks can come up with’ phenomenon we encountered here five years ago, when our government sites were shut down in a coordinated effort that, ultimately, could only have been activated by a state actor, no matter what the affiliations or lack thereof, of the actual perpetrators.

In short, we have recognised, perhaps a bit belatedly, that an attack is an attack. Yet I would argue that that is only the beginning.

We have realised in NATO that we are vulnerable and that cyber can be weaponised. And Diplomaatia · May 2012

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that we have to do something, together, at the NATO level. The challenge now is what.

Let me in broad brushstrokes outline some of what we should be thinking about.

First, we need to understand how computerised, and hence vulnerable, we have become – and only in a matter of three or four years. SCADA systems today control virtually everything. And where we don’t use SCADA systems, we in Estonia have made the computerisation of government services not only a priority, but also our leading edge in modernisation. Be it on-line voting, e-health (I chair the EU Commission on e-health, and I assure you that with our burgeoning demographic and ageing problem, we will no matter what rely evermore on e-health systems), banking or taxes, we become more complex and more vulnerable. We need to pay far more attention to our vulnerabil­ ities Second, we must look at cyber-threats not through the symmetrical state-state paradigm that we used to view virtually all conflict before 9/11. Cyber-threats, cyber-attacks insofar as we have been able to determine their provenance, are like Al Qaeda, performed by networked non-state actors. The ultimate command and the funding may be a state actor, but it is far more convenient both financially as well as in terms of deniability to subcontract jobs to botnet operators, i.e. quasi-organised crime networks or to the proverbial ‘just a bunch of computer science student hackers’ or even to a justifiably enraged ‘civil society’ as we heard during the Estonian and Georgian cyberattacks. A rather silly line parroted by people who wouldn’t know a botnet from a hairnet.

If we step up a level from Intellectual Property to more military action, we must accept that in a connected world our vulnerabilities are no longer restricted to military and industrial targets. I have already mentioned SCADA systems controlling, for example, nuclear plants. But consider an attack on the New York Stock Exchange. If the basis of our relative economic success – our private sector – comes under attack from state actors, we have to come up with new ways of talking to and sharing with the private sector. This of course will run against the grain of how we have been doing things. Yet we need to address the problem.

As I see it, there are two issues. First, we need to come up with new ways to talk to the private sector. Security clearances, sharing of sensitive information – in both directions from government to private sector and vice versa – need to be made far less ad hoc, far more based on rules that would allow us a greater deal of flexibility to face new threats, without at the same time allowing the crony-capitalism that destroys democracies.

Second, however, we on the state-side of things need the brains that today go to the private side of cyber. Let us be honest: Estonia cannot pay for the genius software developer at Skype. But then again the U.S. Department of Defense is most likely unable to hire the top guns at Apple, Microsoft or Google. The other side(s) can. Back during the Manhattan project the U.S. could hire Edward Teller or Robert Oppenheimer for a professor’s salary. But nuclear physicists could only work for a university or for the government.

Today neither a university nor the government can afford the private sector cyber equivalent of an Edward Teller.

And all too often, cyber issues

are considered a technical or

Like terrorists, those who perpetrate cyber-attacks are rarely in uniform and do not even necessarily engage in this as their day job. Often they are linked to organised crime, like Taliban fighters who are perhaps involved in growing poppies or smuggling opium and, when the need arises, will engage militarily. As in the piracy of intellectual property, what we see at least in the case of DDoS attacks, for example in the GeorgianRussian war, is a new form of Public-PrivatePartnership.

intelligence

All this puts governments at a disadvantage in developing cyber-defence. We cannot necessarily afford the best and the brightest. In Estonia, we have developed one solution to this problem, the Cyber Defence League: a cyber-home guard or national guard. These are weekend warriors with pony-tails, computer geeks who have high-paying day jobs running IT departments, working at software companies, or banks. We offer them the opportunity to help with our defence. Not running around the woods in camouflage suits, but building our cyber-defence capability. Today we have about 150 volunteer computer experts in the Cyber Defence League, not a bad number for a country with a military of 4000. They are motivated and patriotic, and – let’s be honest – it’s sexy to work on these things.

issue but not a

national security issue.

All of this should sound like the talk of ten years ago about asymmetric warfare and alQaeda. This is asymmetric. Small numbers of non-state actors or state contracted non-state actors can wreak havoc on nation-states far in excess of what Al-Qaeda can.Al-Qaeda can immobilise a city, cyber can immobilise a country. But the asymmetry is not only in numbers.

What I suspect, is that we, like the governments in authoritarian mafia-states already have, will need to rethink government-private sector relations. We in the liberal democratic West, in countries with low scores on the Transparency International Corruption Index, have built a solid firewall between the private and public sectors. Even the term Public-Private Partnership attests to the relative separation of the two. No such separation exists in mercantilistic or authoritarian kleptocratic regimes. One serves the other.

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We are only starting out but I mention this initiative as the kind of creative solution that we need to consider if we are to be able to guarantee the highly sophisticated e-services, and the highly R&D-driven companies, a modern society depends upon. When threats are no longer classic threats, our responses can no longer be classic either. At least if we want to maintain the upper hand.

Estonia’s experience in the past twenty years reflects this: we became pioneers in the use

Cyber is asymmetric, where small numbers of non-state actors or state contracted non-state actors can wreak havoc on nation-states far in excess of what Al-Qaeda can. of ICT in government first because it seemed the best, if not the only way to leapfrog decades of backwardness caused by awful Soviet rule. Information technology and its use in the public sector, as well as the private, became the engine of our rapid development, and enabled us to become a leader in offering innovative solutions, which we gladly share with others. Then, almost as if on cue, we also became the world’s first victim of purposeful, directed, massive and across the board attacks against our public ICT infrastructure, media, and banking. And, thence one of the world’s centres of cyber-defence and security.

Part of the solution also lies in NATO. First, we need to use the Chicago Summit to keep up the momentum: a momentum that seems to have diminished since the last summit in Lisbon. To put things into perspective, the awareness of cyber-threats in Allied capitals is much better than it was three or five years ago. Yet that is not enough. Many Allies are still in the ‘so what’ phase when it comes to defining their critical information infrastructure, defining vulnerabilities and so on. Two thirds of Allies do not plan to draft national cyber-security strategies, five Allies have not been bothered to sign the Cyber Defence Memorandum of Understanding with NATO, and so on.

need for common standards to ensure interoperability, just as we have with conventional military hardware or exercises or language skills.

With the EU we have more or less the same issue: stove-piping, with cyber issues dealt with across four different Directorates General. In the European Union we face the additional problem of widely varying degrees of understanding of cyber among the member states. There is greater awareness in countries where IT plays a more important role in governance and the economy, and a concomitant lower awareness where IT use is less broad.

So to sum up, if we continue to treat cyber issues like intelligence and do not share capabilities, best practices and so on, if we do not adopt basic common definitions and platform principles, if we do not think long and hard about how to work with the private sector on these same issues, we will face a very hard time. Instead of a ‘need to know’ mindset, we must adopt a ‘need to share’ mindset.

The first step for everyone should be to take a long hard look at the threats we face. There are some very new ways out there to conduct policy by other means.

Second, cuts in defence spending do not help. It is a fact that national security was one of the first areas of national budgets to be cut in most capitals as soon as the financial problems started. As a footnote, I am proud to say that Estonia was the only Ally whose share of the budget for defence was not cut or stabilised, but increased. Cyber-security has fallen victim to an overall trend of defence being downplayed. And all too often, cyber is considered a technical or intelligence issue, but not a national security one.

Third, and equally importantly, until you have done your homework you cannot meaningfully cooperate internationally. You do not come to the North Atlantic Council asking for Article 5 when a primitive DDoS attacks your government website. You have to have a national strategy and legal framework in place to deal with threats. You have to have a CERT to turn to. Cyberdefence capabilities are now part of NATO´s overall capability planning process. Yet the problem is that sovereign nations often don’t fulfil the capability development targets that Allies have collectively agreed to. This results in capability gaps. Cyber-defence capabilities will not be immune to this. NATO should collectively stress the

Instead of a ‘need to know’ mindset, we must adopt a ‘need to share’ mindset.

Diplomaatia Issued by International Centre for Defence Studies Editor-in-Chief Iivi Anna Masso Editor of special issue Kadri Liik Language editor Tony Lawrence Designer Kristjan Mändmaa Layout Piia Ruber Photos Annika Haas and Age Peterson (unless stated otherwise)

The Advisory Board of Diplomaatia: Toomas Hendrik Ilves, Lauri Almann, Indrek Kannik, Siim Kallas, Andres Kasekamp, Riina Kionka, Jüri Luik, Tiit Matsulevitš, Marianne Mikko, Sven Mikser, Kaarel Tarand, Raul Mälk, Sven Sakkov, Enn Soosaar, Harri Tiido Address: Toom-Rüütli 12-6, 10130, Tallinn Telephone 6949340 E.mail: kadri.liik@icds.ee, iivi.masso@icds.ee Web page: www.diplomaatia.ee

Diplomaatia · May 2012

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