WINNING THE NEXT COLD WAR
By Martin Hutchinson,
Asia Times Online
Sep 19, 2007
Hong Kong
THE BEAR’S LAIR
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.
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 re-create 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
September 11, 2001, 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 Irish Republican Army
(which had considerable unofficial US backing) the Basque ETA, the
Popular Front for the Liberation of Palestine, the Palestine Liberation
Organization, Black September, the Japanese Red Army, Libya, the FALN
(Fuerzas Armadas de Liberacion Nacional of 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 September 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’ 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 European
Union and elsewhere that regards Putin as less of a menace than Bush,
while anti-US feeling in the United Nations 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 re-creation of a Russian Air Force that may well be better in
quality than the US Air Force 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 a vast 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 United States’ 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 US$361 million per aircraft. The Eurofighter Typhoon, a similar
aircraft, was also five 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 and
is expected to come into service in 2010 and to cost $30 million per
aircraft. The US 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 among
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 but competition among 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 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 toward
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 geostrategic 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 gross domestic product, 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 dotcoms, 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.