Sunday, September 23, 2007

Towards A Cold War World

Towards a Cold War world
By Martin Hutchinson
September 17, 2007

Martin Hutchinson is the author of "Great Conservatives" (Academica Press, 2005) -- details can be found on the Web site

It is now becoming clear that whether or not he relinquishes the presidency nominally, Vladimir Putin will remain in effective control of Russia for many years after 2008. In that event, his “spook” economic and political priorities, honed during his decades with the KGB, will doubtless rule Russian policy. Since Putin appears most comfortable in a cold war world, that is what we are likely to return to. It is not an attractive prospect.

In order to have a cold war, you need adversaries of approximately comparable strength. The West cannot have a cold war with Al Qaeda, which has neither the military nor economic strength to challenge it by conventional means. At the opposite extreme, the Soviet bloc was a worthy Cold War opponent, not so much because of its economy which was always fairly feeble, but because of its dedication to military might, which allowed it to punch far above its demographic or economic weight in world councils.

Putin is now trying to recreate the Soviet position. He has one major disadvantage: a population of only 141 million which is tending to decline. He has on the other hand an enormous advantage over the Soviet Union. That is intelligent exploitation of Russia’s immense energy resources in a period of high oil prices, not so much to confront the West directly, but to attract allies into a bloc that will be large enough and powerful enough to do so. A second minor advantage is that he is not ideologically compelled to defend an indefensible economic and political system. Allies who stand alongside Putin are not forced to adopt Communism, but can retain whatever bizarre political, economic and religious beliefs they already have, uniting only in hatred of the common adversary.

Had the West in general and the United States in particular not made several serious mistakes since 2000, Putin would not be in a position even to dream of realizing his disreputable ambitions. The 9/11 attacks differed only modestly in scale and not at all in kind from myriad previous terrorist attacks that had afflicted the Western world over the previous 30 years, while by chance largely sparing the United States. The IRA (which had considerable unofficial US backing) the Basque ETA, the PFLP, the PLO, Black September, the Japanese Red Army, Libya, the FALN (Puerto Rico), the Armenian Secret Army, the Soviet Union, the Medellin cartel and Kosovo, to make a partial list, all undertook terrorist incidents in Western countries killing more than 10 people in each over the 30 years after 1970.

Terrorism is an unfortunate and ineradicable danger of modern life. It is becoming clear that nothing in the 9/11 attacks justified selecting one particular group of terrorists and reorienting US foreign policy around it. By doing so, the United States tied its military forces down in Iraq and Afghanistan, allowed the various Islamic terrorist groups to consolidate and alienated potentially neutral countries such as Iran and leftist political groups throughout the West. Moreover, by focusing foreign policy so completely on “Islamofascist” terrorism, other challenges, notably those presented by Putin’s Russia and Hugo Chavez’s resource-controlling Venezuela, were neglected.

In 2001 a challenge by Putin’s Russia to the US would have been met by a united West and laughed off the international stage. Had President George W. Bush pursued the “modest” foreign policy on which he was elected in 2000 that would very likely still be the case. Instead, there is today a disgruntled element in the EU and elsewhere that regards Putin as less of a menace than Bush, while anti-US feeling in the UN and the EU has prevented effective blocking action in the ex-Soviet “near abroad” of Georgia, Ukraine and Kazakhstan. Beyond those countries, Putin has quite rich and potentially powerful allies in Iran and Venezuela. China is at best neutral and even in Japan opposition groups have taken to denouncing US policy. Even Putin’s nuclear buildup, renunciation of arms control, detonation of record-sized bombs and recreation of a Russian air force that may well be better in quality than the USAF have been met with little response.

Higher defense spending is a priority for the United States and still more for the EU, which has allowed its defenses to fall to pathetically low levels. Both the US and the EU have permitted defense procurement to become an incredible sinkhole of corruption, “industrial policy” and lobbying, while Putin’s Russia has spent resources in what is for governments an efficient manner. During the pacific 1990s, the Russian defense equipment sector fell far behind those of the West, but there is no question that under Putin it has been catching up fast

To take one example, the F-22 Raptor fighter aircraft was originally put out to tender in 1986, but the first aircraft was not delivered until 2003. The current estimate of its production cost is $361 million per aircraft. The Eurofighter Typhoon, a similar aircraft, was also 5 years late into production and costs $440 million per aircraft. The Russian PAK-FA, a derivative of the SU-47 Berkut, appears to be at least comparable or better in capability, is expected to come into service in 2010 and to cost $30 million per aircraft. The United States and the EU may have larger economies than Russia, but at anything like that cost differential, their economic advantage is negated. Thus it is a matter of urgency to de-fund the lobbying belt around Washington (let alone that around Brussels), strip down the military procurement process and compete on a level playing field against a lower cost, more efficient adversary.

One source of Russian efficiency has been competition. Putin’s people understand far better than the old Soviet bureaucracy how incentives and competition can be used to spur innovation. While defense production has remained in the state sector, competition between different agencies has deliberately been fostered, with substantial bonus payments to the management and staff of agencies that prove successful in an endeavor. Thus aircraft development, for example, occurs in both the Sukhoi and Mikoyan agencies. This produces a system considerably more efficient than the US defense procurement system, where the companies are largely private sector but competition between them is determined by who hires the best-connected lobbyists.

Outside the defense sector, a new cold war will bring challenges in energy. With Venezuela and Iran as allies, Russia will control a high proportion of the world’s oil supplies. Whereas today the Arab Middle East controls the majority of the world’s oil output, Venezuela’s Orinoco tar sands make it a much more important oil source over a 10-year time frame and Iran too will benefit from Russian technology and oil industry know-how. The old Soviet Union brought very little to its clients in terms of technological capability in fields outside defense. However Russia used the period of openness to Western influences well, modernizing its oil sector and bringing its technology up to cutting-edge levels. It is now unlikely that Russia will fall back since competitive forces have been maintained. Russia will use the energy supplies to which it has preferential access to influence policy in such oil-thirsty countries as China, and to browbeat customers in strategically important but politically feeble places such as the EU.

Globalization will go partly into reverse. Something like the old CoCom convention, which prevented sales of high technology equipment to the Soviet bloc, will need to be reinvented – its feeble successor, the Wassenaar Arrangement, has Russia as a member. High tech investment will be diverted to a large extent towards devising defense mechanisms against possible cyber-attacks. Barriers will be erected against takeovers by Russian state controlled behemoths. Indeed, such barriers could reasonably be erected against all takeovers by state-controlled companies, although this would be a little unfair to the admirable Temasek Holdings of Singapore (which in any case is more like an exceptionally well run and benign conglomerate than a state.) Trade will become somewhat less free, although the protectionist impulses thrown up by Cold War suspicion may be somewhat balanced by a geo-strategic need to play nice with Third World countries wishing to export to the US and Western Europe. Gross World Product growth will be lower than it might otherwise be, and more of it will be concentrated in unproductive defense and security sectors.

The one positive effect of a new Cold War might be in weeding out public sector waste in the US and Western Europe. Russian public spending is only 21% of GDP, below the US level and far below levels in the EU. The country runs a large budget surplus and its finances are further buttressed by soaring receipts from the 13% “flat tax” that Putin introduced when he came to office in 2001. While Russia has huge corruption and an overstuffed military, it wastes much less than the West in unproductive social spending, wasteful subsidies to agriculture and politically-directed “pork-barrel” projects. To accommodate higher defense spending without plunging its economies into recession, it is likely that the West will have to adopt a Russian – and in this respect, more capitalist – approach to its taxation system and public spending priorities.

Is there any way to prevent the escalation of this debilitating competition? Well yes, there is. The whole point of being capitalist is that one has good access to capital and uses it wisely. Russia, when given access to capital, tends to waste it, stashing it away in Swiss bank accounts and spending it on soccer clubs and call girls. However since 1995 Western central banks have used their almost unlimited ability to create money to make capital extremely cheap, in fact almost worthless as demonstrated by the huge number of insane dot-coms, vulgar oversized housing developments and megalomaniac empire-building takeover artists it has funded.

In recent years, this has also allowed the world economy to grow at a higher rate than is sustainable, raising the prices of energy, commodities and shipping ad infinitum. In other words, we have negated our advantage in capital availability and artificially enhanced Russia’s advantage in energy and natural resources.

The solution is thus quite simple – a prolonged period of much higher real interest rates, which will raise the value of capital. That will enhance our relative economic advantage and depress the price of oil and other commodities, thus forcing Russia and its satraps Venezuela and Iran into bankruptcy. A similar period of tight money and low commodity prices was instrumental in defeating the Soviet Union in the late 1980s – there is indeed a good case to be made that Paul Volcker did more to win the Cold War than Ronald Reagan! The process can be repeated now.

There are other ways of winning wars beyond mere armaments.