Back in November 2008, the VTsIOM polling site released some very detailed results about what peoples in the former Soviet Union think about each other. The first graph below asks people which countries they consider to be friends or allies of their country.

And these were the results. Some 74% of Belarussians, 58% of Ukrainians, 49% of Moldovans, 82% of Armenians, and 67-89% of Central Asians named Russia as a friend and ally. In contrast, only 11-17% in Georgia, Azerbaijan and Lithuania like Russia this way, but that is hardly surprising. (The Latvians are rather higher at 26%, presumably because of their large Russian minority, though far higher numbers, almost half of them, orient themselves with the other Baltic states).

The poll below is even more telling. It asks peoples in the former USSR to name which countries or blocs they would like to unite with, the main contenders being Russia, the EU, and “independence”.

Russians are mostly split between those favoring some kind of Slavic or Eurasian bloc (37% – Belarus, 29% – Ukraine, 24% – Kazakhstan), and Russia-as-is (32%); the European Union really isn’t that popular at 15%. This isn’t much different in Ukraine or Belarus. Some 56% of Belarussians and 47 of Ukrainians would like to unite with Russia, while 25% and 22% favor the EU, and 18% and 25% favor independence, respectively. Some 51% of Kazakhs favor Russia and 32% independence.

The Moldovans are equally split between Russia and the EU or independence (which in practical terms would mean the Romanian sphere of influence). The Azeris identify most strongly with Turkey, with 31% expressing a desire to join it, followed by 24% yearning for the EU and 24% for continued independence. Big majorities (65-73%) in the Central Asian nations of Tajikistan, Kyrgyzstan, and Uzbekistan would like to rejoin Russia, which is unsurprising given their relative underdevelopment and the relative success of Russification there. Georgia has always had a strong sense of national identity, including during the Soviet period, so by far the majority there wants independence (38%) or the EU (37%); only 10% wouldn’t mind falling back into Russia’s sphere of influence.

Why is this important? Because to some extent, even in semi-authoritarian systems, national leaders are to some extent beholden to popular sentiment. This is not to say, of course, that this is the only factor – an objective assessment of national interests (which are often synonymous with the interests of the ruling elites) almost always trumps anything else. But it does illustrate that the much ballyhooed “Russian resurgence” across the former USSR rests on firmer foundations than just political pressure or economic takeovers – of at least equal importance is that many of the peoples in its path back to regional hegemony aren’t actually that averse to it*.

PS. Another useful survey of attitudes towards Eurasian regional integration by Gallup: “In all countries except Azerbaijan, the median average wants at least an economic union across Eurasia”.

* The big exception is Georgia. This is where there is both a clash of primary geopolitical interests (the irreconcilability of Georgia westward path and Russia’s desire to anchor itself in the South Caucasus) and of civilizational values (AFAIK, the only social grouping in Georgia with a real pro-Russia tendency are the monarchist “People’s Orthodox Movement“). Coupled with simmering border tensions, it is probably not surprising that this developed into a flashpoint for armed conflict.

2. Putin made a conciliatory speech on the 70th anniversary of the Katyn massacre, much more so than the one a year ago. It was balanced and considered, condemning the crimes of totalitarianism, while avoiding any acknowledgement of modern Russia’s responsibility.

In a bitter irony for the Poles, three days later the firebrand Polish President Lech Kaczynski’s plane tumbled out of the sky while flying (uninvited) to attend a separate commemoration. Among the dead were assorted members of the Polish military, clergy, politicians, and Katyn victims’ families (see list).

First, putting all your eggs in one basket is pretty stupid. High-ranking politicians and generals are important national assets. They shouldn’t all be packed into one plane just to save a little money. In banana republics – which fortunately for Poland it is not – such accidents can cause state breakdown and revolution.

Second, the insistence on continuing to land in Smolensk against the advice of ground control is key to understanding the tragedy. Lech Kaczynski has a history of interference with pilots’ decisions. During the South Ossetian War, he threatened to fire the pilot for countermanding his orders to land in a war zone and instead continuing on to Azerbaijan. Though the threat wasn’t carried out, the pilot is known to have suffered from depression afterwards. The same pilot was flying the aircraft in this case. It will not be surprising if some similar, irresponsible stubbornness typical of Kaczynski was at play here. Or perhaps the pilot just really, really didn’t want to “fail” Kaczynski again.

Few people explicitly blamed Putin, the FSB, or even NKVD trees planters from the 1940′s for the crash. The exceptions were ultra-nationalist Artur Gorski (he who also tried to make Jesus Christ proclaimed King of Poland) and the ever reliable Russian liberast Novodvorskaya. There is absolutely nothing indicating a conspiracy, which in any case is highly unlikely given that this would have produced great risks for very limited payoffs.

Russia has been using the crash as an opportunity to mount a charm offensive towards Poland: Putin hugging Polish PM Donald Tusk; shows of solidarity towards Poland from Russia’s leaders and citizens; the prime-time airing of the Polish movie “Katyn”. I am almost certain that most of it is simulated, at least amongst the Russian leadership. Would America’s elites shed any real tears if Chavez, or Putin for that matter, fell out of the sky while flying to the United States? No, I don’t think so. But it seems to be working.

The fortuitous (for Russia) death of Kaczynski kills two birds with one stones. One of the most prominent and respected Polish proponents of the anti-Russian agenda is elimated, while relations with Poland can be improved so as to ease its concerns over Russia’s westwards-creeping sphere of influence.

3. In recent months, there has been talk of Poland’s reserves of shale gas, which – or so some commentators have suggested – will wean off east-central Europe from its dependency on Russian gas. US giants announced exploratory drilling will begin in Poland within the next few weeks. One oil and gas research group estimates there could be as much as 1.4tn cubic meters of unconventional gas in tight rock formations across northern and central Poland, which have recently become accessible thanks to American developments in hydraulic fracturing technology. These reserves would boost the EU proven reserves of natural gas, now at 2.8tn cubic meters, by 50%. Furthermore, Poland itself – whose own gas consumption is pretty low at 14bn cubic meters of gas (72% imported) – will become self-sufficient for decades. Poland is clearly very enthused about this, offering foreign companies excellent tax incentives for developing the shale gas.

Will this actually produce the desired results? First, the high costs mean that only 28% of gas-producing wells have generated decent profits, making investment risky. Second, they have amazingly huge decline rates – e.g., around 60% per year for the Barnett shale fields in Texas (and up to 80-90% in the Haynesville wells). This makes ramping up production quickly difficult since you have to run so hard just to keep still. Third, the projections indicate European gas production (now c. 200bn cubic meters) will decline while demand (now c. 520bn cubic meters) will increase. Poland’s 1.4tn cubic meters of shale gas reserves are insignificant relative to Russia’s 43tn cubic meters of conventional gas reserves, for which the infrastructure is already built. Finally, it is not even at all clear that Poland switching from coal to shale gas will even be that environmentally-friendly.

Now if there is the political will in Poland, it will probably be able to build up a shale gas infrastructure and ensure itself – and even its Visegrad and Baltic neighbors – energy independence for a few decades, starting from around 2020. (That period may also coincide with Nabucco coming onstream by 2015, if it gets the go ahead this year). The geopolitical configuration of Europe will change. Poland will become a far more significant pole in the European power balance than it is today, while Germany – and Britain further downstream – will become even more dependent on Russian gas, delivered by the Nord Stream pipeline bypassing Poland and the Baltics.

4. The Eyjafjallajökull volcano in Iceland erupts, covering northern Europe with a haze of ash and disrupting transatlantic flights.

There are three things to be said about this. First, people in Britain have been reporting that the sky was unusually clear, with nary a cloud in sight, and that there was a spike in temperatures, with people even sunbathing. This was to be expected following the grounding of air fleets in the affected regions, since aircraft contrails, or vapor trails, are a major source of global dimming. This effect limits the amount of solar radiation hitting the surface of the Earth, and has caused the real extent of global warming to have been underestimated. (Or put another way, if all the world’s air fleets were to vanish today, temperatures would immediately spike by about 1C).

Second, the Eyjafjallajökull volcano could trigger off the much bigger Katla volcano. Katla has seen a significantly increased incidence of tremors in the past day. In the worst scenario, albeit a pretty unlikely one, the skies over Europe could remain ashen for up to two or three years – wrecking havoc on transatlantic transport and nudging already-strained airlines into bankruptcy. However, there shouldn’t be any major cooling effect, since even the larger Katla eruptions have historically been an order of magnitude less intense than that of Mount Pinatubo in 1991. (Unless the really big one blows off, that is Laki, whose eruption in 1783 caused dearth throughout Europe). That said, the global warming-induced melting of the Icelandic glaciers could make its volcano eruptions both bigger and more frequent in the decades to come.

Finally, see this Oil Drum post about The Possible Impact of the Icelandic Volcanoes on Energy Production. In short, major Icelandic eruptions could cause energy problems due to 1) a decrease in biofuel crop yields and 2) wind turbines having to be shut down so that their turbines don’t get damaged by air particles from the eruption.

5. With the British elections on May 6th 2010 fast approaching, the key debates center around the economy. During the recession, Britain experienced a peak-to-trough fall in GDP of 6.2% and its budget deficit this year will account for 12-13% of GDP. Foreigners are beginning to look at Britain as the new “sick man of Europe”. Below are three articles which, roughly speaking, offer an “optimistic”, a “realistic”, and a “pessimistic”, respectively, view on the British economy.

A) The pain to come: A terrible recession will be followed by a lacklustre recovery, but Britain is no basket-case (Economist). ”The economy may have been lopsided before the recession, but on nothing like the scale of southern Europe. In 2007 Spain’s current-account deficit ran at 10% of GDP; Greece ran one of 14.4%. By comparison, Britain’s 2.7% was a mere bagatelle. The fall in the pound has allowed the economy to regain competitiveness in a way not open to the weaker members of the euro area. As for the resemblances with the 1970s, history is not repeating itself. Inflation has recently flared up, but at 3% in February it is tame; the post-war high, reached in 1975, was 27%… But [Britain's debt figure] is inflated by London’s role as a global financial hub where foreign banks cluster to do international business. Adjusting for this, McKinsey reckoned that debt amounted to 380% of GDP in 2008. Although this was the second-highest after Japan (459%), four other countries – Spain, South Korea, Switzerland and France – had debt above 300%… Britain’s economy was overhyped before the recession, but the gloom has been overdone since the great fall.”

B) A Prayer from the Death Bed: Great Britain Stars in Its Own Greek Tragedy (Spiegel). “The country that was once referred to as “Cool Britannia” is in a serious crisis, with a hole in its budget even bigger than Greece’s budget deficit, now at 12.2 percent. And nobody knows how to fix the problem. Indeed, the problem has become so worrisome, that the European Commission told London on Wednesday to do more to tighten its budget, … “The fiscal strategy outlined in the United Kingdom’s convergence program does not foresee the correction of the excessive deficit by the fiscal year 2014/2015, as recommended by the Council,” the European Commission said in a statement… The accountants at PricewaterhouseCoopers have calculated that starting next year, Britain would have to make across-the-board budget cuts of 5 percent a year to come close to cutting the deficit in half by 2014. But because the Brown government has already declared the budgets for health, law enforcement and schools to be off-limits, cuts of up to 10 percent – per year – are to be expected in most areas… And things could even turn out to be much worse if there is no strong economic upturn during this period. … There will also be massive cuts in low-income housing construction and transportation, translating into even more dilapidated housing, more potholes on Britain’s already miserable roads, and new cutbacks in high-speed train service. Universities have already lost close to £1 billion in funding, and various think thanks predict that the defense budget could shrink by about 15 percent between now and 2015.”

C) Election 2010: Debt – A conspiracy of silence (The Independent). ”In 1975 the UK had government interest-bearing debt of about 45 per cent of the total economy (GDP) and the debt was rising at about 8 per cent per year. We then had to crawl to the IMF in 1976.Today, that interest-bearing debt is about 65 per cent of GDP, rising nearly 13 per cent a year. A degree in economics will not be necessary to spot that things are a lot worse than in 1975… The mid-1970s IMF crisis was triggered largely by the fact that foreign buyers of government debt were so nervous of the UK’s ability to repay debt that interest rates roared into the teens. Inflation was a much bigger issue then than now, and foreigners and Brits alike also feared we intended to “repay” our debt with relatively worthless scraps of paper. So there was a buyers’ strike on government debt and we had to be bailed out. Rationally, the currency collapsed in value, and as the cost of importing oil and the like rose, so did inflation. … So how can we get out of this financial hole before our creditors get to us? There are three ways to reduce our national debt: let inflation rip to destroy the debt; increased tax revenues from higher taxes and economic growth; cut government spending. … The political debate talks of a few hundred million here and there – it needs to be about tens and scores of billions. Neither party has plans to deploy actions for the economy remotely commensurate with the size of the problem.”

I lean towards the “realistic” / “pessimistic” sides of the debate. The Government’s rosy projections of 2.5%+ growth are unlikely to materialize. Consumption is going to be kept down by consumer indebtedness, the upcoming hikes in interest rates, and increases in tax rates. There’s little room for export growth, considering the deindustrialization of the British economy. Finally, there itsenergy problems. The North Sea oil and gas fields are fast depleting and Britain’s reliance on gas supplies is increasing. Having failed to make any long-term arrangements with suppliers like Gazprom on the cheap, it will be forced to bid at spot prices on the LNG market to a greater extent than the European nations. Finally, the emerging trends towards the unraveling of liberal globalization cannot bode well for a nation that derived so much of its prosperity from open markets and international financial, legal, and consulting services.

Now what about the elections? Below is a graph of party approval ratings. Of late, the Conservatives, New Labor, and the Liberal Democrats have been running neck and neck.

[Opinion polls on British election: Conservatives, New Labor, Liberal Democrats].

My suspicions are that if the Tories win, there will be attempts at a strong fiscal rentrenchment. The shrinking of the public sector will hurt living standards, but lay the foundations for eventual stabilization. On the other hand, New Labor or the Liberal Democrats will be unwilling, or unable, to follow through will this, and the eventual result would be one default or another accompanied by a sharp drop in living standards. Another possibility is a “hung parliament”, should the three parties all win roughly equal shares of the vote (as seems to be a strong likelihood today). Such a paralysis would delay any actions to address Britain’s imbalances.

6. Demography watch.

• U.S. Birth Rate Decline Linked to Recession – small fall in US birth rates in 2009.
• On migration and population in reunification-era Korea (Randy McDonald) and discussion.
• Russia’s demography Jan-Feb 2010: relative to same period last year, births fall 0.8%, deaths fall 2.0%. Not too surprising since Russia’s recession troughed some nine months back.
• Comparative demography in the CIS states (Demoscope).
• Таджикские трудовые мигранты во время кризиса (Demoscope).

7. Energy & climate blast – lots of important reads these last two weeks.

• Online World3 simulator @ http://live.simgua.com/World.
• Confidential document reveals Obama’s hardline US climate talk strategy.
• The dark side of coal – some historical insights on energy and the economy (Ugo Bardi). 1) In a world devoid of coal or other high-EROEI energy sources, life is hard and dependent on muscle power. 2) It is justifiable, and if so to what extent, to cite the economic ramifications of “peak coal” as a contribution factor to the European crisis of 1914-45 (since oil only began to expand in a big way from the 1950′s).
• Avoiding Collapse (Global Guerrillas)
• Easter Island : A Case Study in the Response to Resource Depletion.
• Hottest Jan-Feb-March on record in 2010. Could the deniers and fudgers STFU already? More.
• The Future of Capitalism – Profits and Growth (George Mobus).
• Peak asphalt: the return of gravel roads (Ugo Bardi).
• Social Security and Medicare Funding Issues: Even Worse when One Considers Resource Constraints (Gail Tverberg).
• Increasing Global Nonrenewable Natural Resource Scarcity—An Analysis (Chris Clugston) – important reference.
• Tipping towards the unknown – “Researchers propose critical planetary boundaries, transgressing them could be catastrophic. But there is hope.”
• You think only leftist losers go on about peak oil? US military warns oil output may dip causing massive shortages by 2015.
• Dancing with the devil known as geohacking & Birth control vs. geohacking (Lou Grinzo).
• The Twilight of the Machine & A Blindness to Systems (John Michael Greer).
• An Introduction to Global Warming Impacts – a summary from Climate Progress. For another key post on Limits, see World Oil Production Forecast – Update November 2009 from Oil Drum.
• A Superstorm for Global Warming Research, an 8-part skeptic series by Spiegel. Criticized here at Real Climate.

8. Eurasia watch.

• The Failure of the Anti-Russian “Freedom Agenda” (Daniel Larison).
• Yanukovych removes Ukraine’s application to join NATO, a move that is supported by the majority of the Ukrainian population.
• Russia’s industrial production in Q1 2010 continues a slow recovery. More encouragingly, after the sudden collapse in late 2008-early 2009, Russian consumer expectations are rapidly approaching their old boomtime highs. Merrill Lynch is particularly optimistic – Russian Economy May Get ‘Biggest Bounce’ in World, making the highest yet prediction of 7% growth  for 2010 (most analysts suggest 4-6%).
• Randy McDonald writes about Soviet computers.
• A detailed study from Russia’s VTsIOM polling agency on the Internet in Russia. Summary: 81% of Russians have cell phones; 46% have computers; 38% are Internet users (23% use it daily).
• Russia Weekly Sitrep (Patrick Armstrong).
• The Sirens of Russia. Post by A Good Treaty about Russia’smigalka culture of impunity – and how it is perhaps slowly beginning to retreat under public pressure and the influence of social media.
• Russian attitudes towards Katyn (Levada). Some 50% of Russians view Poland positively, 26% negatively (AK: these figures are likely the reverse in Poland). Only 43% of Russians have heard about Katyn. Asked who was responsible for it, 19% said the USSR, 28% Nazi Germany, and 53% didn’t know. Around 15% think it was “genocide”, 38% a “crime”, 14% consider it justified under wartime conditions, and 33% didn’t answer. Only 18% think Putin should apologize for Katyn in Russia’s name, while 46% disagree. Of the latter, 47% think he shouldn’t apologize because Nazi Germany was responsible; 34% – because today’s Russia shouldn’t answer for the USSR; and 8%, because it would weaken Russia’s position in relation to Poland.
• Russia: Other Points of View analyzes Stratfor’s coverage of Russia and The Dangers of Meddling in Russia’s North Caucasus.
• The new Journal of Eurasian Studies (h/t Sean) from South Korea. I checked out the first article in its first issue: Eurasian polities as hybrid regimes: The case of Putin’s Russia, which is basically accurate: “It is argued that Russian political development under Putin is best understood not as “authoritarianization” but as a process in which Russia transitioned from a system of “competing pyramids” of machine power to a “single-pyramid” system, a system dominated by one large political machine. It turns out that in single-pyramid systems that preserve contested elections, as does Russia, public opinion matters more than in typical authoritarian regimes.”

9. Mexico and the Failed State Revisited (free Stratfor) has the counter-intuitive take that far from challenging the state, the drug cartels are actually benefiting the Mexican economy because the immense profits reaped from selling drugs to the affluent US can be reinvested into Mexico.

…It is not clear to STRATFOR that Mexico is becoming a failed state. Instead, it appears the Mexican state has accommodated itself to the situation. Rather than failing, it has developed strategies designed both to ride out the storm and to maximize the benefits of that storm for Mexico. First, while the Mexican government has lost control over matters having to do with drugs and with the borderlands of the United States, Mexico City’s control over other regions — and over areas other than drug enforcement — has not collapsed (though its lack of control over drugs could well extend to other areas eventually). Second, while drugs reshape Mexican institutions dramatically, they also, paradoxically, stabilize Mexico. …

On the whole, Mexico is a tremendous beneficiary of the drug trade. Even if some of the profits are invested overseas, the pool of remaining money flowing into Mexico creates tremendous liquidity in the Mexican economy at a time of global recession. It is difficult to trace where the drug money is going, which follows from its illegality. Certainly, drug dealers would want their money in a jurisdiction where it could not be easily seized even if tracked. U.S. asset seizure laws for drug trafficking make the United States an unlikely haven. Though money clearly flows out of Mexico, the ability of the smugglers to influence the behavior of the Mexican government by investing some of it makes Mexico a likely destination for a substantial portion of such funds.

Of course, there’s also the problem that Mexico’s oil production is plummeting as the supergiant Canterell depletes. (the state oil company is blamed for managerial fecklessness, but geological reasons are more important). An interesting scenario: if Mexico becomes a net oil importer and the US relaxes its drug policies, could it experience a liquidity crisis?

10. Ahmed Karzai and the US have fallen into a blame game of necessity. Karzai criticizes the West for electoral fraud and legitimizing the insurgency. Since NATO troops are, one way or another, going to leave Afghanistan in a few years, Karzai needs to build a base of support amongst his own people and his neighbors (Iran, China) if he wants to survive. The US in turn blames Karzai’s corruption for the sabotage of the war effort, because the alternative would be an indictment of the entire American war strategy. As of now, Karzai may be rightly feeling like Ngo Dinh Diem in South Vietnam, – the US no longer regards him as a reliable asset and he is at risk of being overthrown in favor of someone more manageable.

11. From Stratfor. There is relative optimism in Iraq and the US about the security situation as American troops continue a steady withdrawal. However, there remain questions about the governing capability of the new government and the ability of the security forces to maintain stability. Iran retains the potential to inflame ethno-sectarian strife, albeit thus far it prefers to (successfully) exercise its influence through “softer” means. The main problem is that by invading Iraq, the US has destroyed the old Iran-Iraq balance of power – and the forthcoming withdrawal of US forces will actually give Iran much better opportunities for extending their sphere of influence over Mesopotamia.

According to another source, Iraq will take 5-10 years to (re)build a military capable of defending the country against Iran or Syria. “The Iraqi plan is to stock up on superior American weapons, and train Iraqis to use that stuff with effectiveness approaching that of the Americans. That takes money, and time. Iraq is buying second-hand F-16s, but it will take three or four years to get the pilots and ground crews up to an acceptable level of performance. Along with this, the Iraqis want to buy modern anti-aircraft missile systems, and get them into service.” Also recall that it will take about a decade to ramp up Iraqi oil production, if the effort is successful.

Conclusion? The US is withdrawing from Iraq, bogged down Afghanistan, and in uncertain fiscal straits. Iraq has the potential to stand on its own feet, but will need a few years of stability. Thus, Iran will now enjoy a “window of opportunity” of around 5 years to make a play for hegemony in the Persian Gulf.

12. Palestinians Try a Less Violent Path to Resistance.

RAMALLAH, West Bank — Senior Palestinian leaders — men who once commanded militias — are joining unarmed protest marches against Israeli policies and are being arrested. Goods produced in Israeli settlements have been burned in public demonstrations. The Palestinian prime minister has entered West Bank areas officially off limits to his authority, to plant trees and declare the land part of a future state.

Something is stirring in the West Bank. With both diplomacy and armed struggle out of favor for having failed to end the Israeli occupation, the Fatah-dominated Palestinian Authority, joined by the business community, is trying to forge a third way: to rouse popular passions while avoiding violence. The idea, as Fatah struggles to revitalize its leadership, is to build a virtual state and body politic through acts of popular resistance. …

Nonviolence has never caught on here, and Israel’s military says the new approach is hardly nonviolent. But the current set of campaigns is trying to incorporate peaceful pressure in limited ways. Rajmohan Gandhi, grandson of the Indian independence leader Mahatma Gandhi, just visited Bilin, a Palestinian village with a weekly protest march. Next week, Martin Luther King III is scheduled to speak here at a conference on nonviolence.

Reminds me a bit of this scene from A Sum of All Fears.

13. Peter Lavelle interviews Middle East journalist Robert Fisk back in September 2009. If you want a ten minute video summary of why the West fails in Dar al-Islam – this is it.

14. United States watch.

• Obama Limits When U.S. Would Use Nuclear Arms to states that have nuclear weapons or haven’t renounced or violence the Non-Proliferation Treaty. It is rational and profitable for US interests.
• US gunships attack Iraqi civilians in Wikileaks scandal (see video). This is a non-story – mistakes do occasionally happen (if you really want to get all moral and uptight about this, the relevant question is why the US is in Iraq in the first place). Some might complain the soldiers were cold-hearted by laughing and making morbid jokes, but humor is a typical defense mechanism to scenes of carnage.
• Obama administration ‘looks backwards’ to punish heroes. As I’ve said before, most of the Obama administration’s “change” is more cosmetic than real. It is a continuation of Bush post-2006.
• The march to American Caesarism continues. When did it become legal to assassinate Americans? “Anwar al-Awlaqi, the New Mexico-born cleric living in Yemen, has been placed on a target list that makes him fair game for assassination by the U.S. military or CIA”. The problem isn’t so much the authorization of assassination, which is a useful anti-terrorist tool, but the fact that this further widens the gap between US liberal/rule-of-law pretensions and reality, and hence undermines its international legitimacy. After all, Israel or Russia, states that are not averse to assassinations on foreign soil, don’t portray themseves as guarantors of liberal internationalism. America does.

15. The consevative reaction in Europe spreads to Hungary, with the election of the Fidesz Party to power. By itself this is a normal development unworthy of much comment, except for the fact that the democratic left (the Socialists) have now been marginalized, and now enjoy about the same level of support as the far-right Jobbik and his Movement for a Better Hungary. This party is truly extremist – it has a “Magyar Garda” militia, its symbology draws on the banned Nazi-era Arrow Cross Party, and its rhetoric attacks the Jews above and the Roma below.

Hungary is going to face lean economic times in the years ahead and Viktor Orban of Fidesz can be expected to come under attack by a Jobbik energized by supporters dissilusioned of conventional politics. As Walter Mayr of Spiegel writes in “The Monster at Our Door”: Hungary Prepares for Shift in Power, the end result could be that Orban deserts austerity politics for the seemingly greener pastures of identity politics – for instance, it is known he is in favor of double citizenship for ethnic Hungarians outside Hungary, which could lead to clashes with Romania and Slovakia. (Though it should be stressed this is hardly unusual for Eastern Europe – for instance, Russia’s conferral of dual citizenship was one of the factors provoking conflict with Georgia over S. Ossetia and Abkhazia, and the Romanians themselves are at odds with Russia and Ukraine thanks to their issue of Romanian citizenship to Moldovans).

16. The Caucasus Emirate (Scott Stewart & Ben West), free Stratfor article about what is now the foremost jihadi group operating against Russia in the North Caucasus.

Umarov’s founding statement for the Caucasus Emirate, in which he called for the region to recognize the emirate as the rightful regional power and adopt Shariah, marked a shift from the motives of many previous militant leaders and groups, which were more nationalistic than jihadist. This trend of regional militants becoming more jihadist in their outlook increases the likelihood that they will forge substantial links with transnational jihadists such as al Qaeda — indeed, our Russian sources report that there are connections between the group and high-profile jihadists like Ilyas Kashmiri.

However, this alignment with transnational jihadists comes with a price. It could serve to distance the Caucasus Emirate from the general population, which practices a more moderate form of Islam (Sufi). This could help Moscow isolate and neutralize members of the Caucasus Emirate. Indeed, key individuals in the group such as Umarov and Kosolapov are operating in a very hostile environment and can name many of their predecessors who met their ends fighting the Russians. Both of these men have survived so far, but having prodded Moscow so provocatively, they are likely living on borrowed time.

17. Maoists kill 75 police in central India attack. Not much comment, except to note that many countries, including ostensibly succesful and democratic ones, have violent, festering insurgencies. Russia/Chechnya is hardly unique.

18. Turkey Overtaking Germany No Wishful Thinking on Paradigm Shift (h/t Randy McDonald). “Turkey’s $620-billion economy could move ahead of Germany’s to become the third-biggest in Europe by 2050, behind Russia and the UK”. Such long-term projections are pretty useless, but it’s true that in the medium-term Turkey has bright prospects, in part thanks to its demographic vigor and favorable geographical position.

19. @ any Asian readers or people familiar with the region – how accurate is this “Spenglerian” article on “Asia’s Permanent Advantage” by Chan Akya?

For the frequent traveler, there is a stark dichotomy across the world. Almost without exception, traveling with an Asian carrier to any Asian airport is a pleasure. In contrast, using any airline domiciled in Europe or North America with passage through airports in that part of the world is stunningly inconvenient. …

When you leave the airport in Shanghai and can get to the main city 30 kilometers away within eight minutes on the superfast magnetic levitation train, you cannot help but notice that the actual technology for this wonder comes from Germany. Yet, there are no such trains in operation anywhere in Europe, let alone Germany. …

Surely this is because, here in Asia, we are in the biggest cities you say. … Well, drive from Shanghai in virtually any direction and the first time you see roads that are any worse than those around the city you are a good 200 kilometers away. And even there, the roads are better than many American motorways.

Yeah alright, so the Chinese truck driver barreling towards you looks like he hasn’t slept in three days (very likely), and there is the occasional car wrapped into the milestone on the side of the road; but none of that detracts from the sheer robustness of the infrastructure. …

And then the last observation sinks in. Every single Asian city is heaving at the edges, with millions of people. Yet, crime rates are negligible and social tensions appear well under control. A far cry from the banlieu of Paris or the Turkish quarter of Berlin, for example, not to mention the public housing nightmares of Chicago or Detroit.

It is not the gargantuan dams of China or the super-efficient underground in Singapore that impresses you, but rather the fact that even the most economically backward parts of Asia have taken growth to be their mantra. What’s more, they have the financial muscle to push it through.

With that, your despondency turns to depression. How, you ask, can the “developed” world ever regain its luster?

For a start, all American and European cities will have to reinvest hundreds of billions into their cities to rejuvenate the existing infrastructure. Then the states/smaller countries will have to connect the cities to the rest of the region, install new technology infrastructure, focus on customer service and improve productivity to new heights to compete with the Asians.

Ah, but a minor detail intervenes. Who has got the money to do all that? Well, let us raise taxes you say. Problem is, no one in your country is making much money in the first place so raising taxes will simply drive consumption down and drive the deficit wider. Well, let us borrow the lot you say. Trouble is, no one has the money to lend to you at your abysmally low rates. Except the Asians – who you then recall can play tough once in a while.

And that’s about when you reconcile to the inevitable future – Asia with its apparently permanent advantage on infrastructure and operating efficiency leaving Europe and North America ever further behind. Nothing appears to have the ability to reverse this trend.

See also It’s China’s World. We’re Just Living in It (Rana Foroohar & Melinda Liu) - “The middle kingdom is rewriting the rules on trade, technology, currency, climate—you name it.” Another related post on the same theme is Coal and Treasuries by Gregor McDonald.

20. Military blast.

• The Post New START Nuclear Arsenal – a summary: “1,550 strategic warheads; 700 deployed ICBMs, deployed SLBMs and deployed nuclear capable heavy bombers; A combined limit of 800 deployed and non-deployed ICBM launchers, SLBM launchers and nuclear capable heavy bombers.” See Sublime News #7 for more details.
• Sizing Up Sukhoi’s PAK FA 5th Gen Fighter. Summary: it is a superb dog-fighter and its IRST may be the first to pick up a hostile stealth fighter, but there are questions over whether the Russian MIC is advanced enough to produce and maintain many of these complex planes (more).
• Chinese Fleet Closes In On Okinawa, increases tensions since China started drilling offshore gas halfway between Okinawa and the mainland. Also illustrates increasing ambitions of the Chinese Navy (PS. No longer PLAN) to carve out a maritime buffer space beyond its eastern seaboard.
• South Korea buys CBU-105 sensor fuzed weapons, a cluster-type bomb that is programmed to hunt for tanks below it. An excellent way of stopping any Northern armored assault, this tilts the militay balance on the peninsula further in the South’s favor.
• Andrew Barton describes environmental warfare as a “target-rich environment” and predicts it will become more prevalent. That is in line with my own thinking.
• Iran gets advanced military speedboats, illustrating its asymmetrical strategy geared at closing down the Straits of Hormuz in the event of war with Israel or the US.
• France Backs Away From The Chinese Threat – France won’t supply Pakistan with advanced military hardware since it would pass them on to Chna.
• Case in point – China copies Swedish Bv206 all-terrain vehicle.
• Russia has problems with their Yasen nuclear powers cruise-missile subs.
• Gates Says U.S. Has Conventionally Armed ICBMs. They are not a good idea.
• Iran boosts air defenses with new missile system – an upgraded version of the Hawk, a 1960′s system and probably vulnerable to Israeli/US jamming.
• India sets sights on killer drones.
• Smart trucks in Afghanistan.
• Global IT Supply-Chain Insecurity is important.
• From the Monitor scam to the Gorschkov scam, corruption in military procurement – an eternal scam.
• Future for US naval procurement looks bleak as costs rise and budgets are slashed. Substantial decline in Navy size is inevitable.

21. Things are getting more interesting in North Korea. There is danger of famine. The people are increasingly disillusioned, but unlikely to revolt. A coup by pro-Chinese military officers is a possibility. “Rumors of a North Korean submarine being responsible for the March 26th sinking of a South Korean corvette are growing more popular in the media… Survivors of the explosion agree that the blast came from outside the ship.” Watch this space.

22. Russophobe & liberast watch.

• Link to The Soviet Story propaganda flick. I haven’t yet seen it, or plan to, despite having had the chance. (The screening coincided with my gym-going time).
• David Satter, respected Russia-watched: “The present Russian leadership not only does not care about America’s security concerns, it is indifferent to Russia’s own.” Need more be said?
• The bear is back: Poland’s tragedy, Russia’s gain (Arthur Herman) – “the most insane column in the entire history of mankind”, according to Mark Adomanis.
• Putin wins again: Rebuilding imperial Russia (Ralph Peters), whom Mark Adomanis says is “very likely the single most repulsive figure in American  journalism”. More on Ralph Peters.
• Paul Goble the Propagandist flip-flops from “Muslims will take over Russia!” in 2006 to “Muslims are no longer a demographic reserve” in 2010. Either way, however, Russia is doomed according to according to Goble’s cherry-picked sources. There is something resembling a “discussion” of this article on SWP’s blog.

23. Remember what I wrote about Russians’ attitudes to Stalinism in Sublime News #7? An “interesting” discussion about it developed on a far-right forum.

24. Flotsam and jetsam.

• GDP by… language (Randy McDonald).
• Phrases people search for to arrive at poemless blog.
• Spiegel has a 7-part series on The Failed Papacy of Benedict XVI.
• Richard Dawkins plans to arrest the Pope. George Monbiot approves.
• The “Pedophile’s Paradise” (Brendan Kiley) – “Alaska Natives are accusing the Catholic Church of using their remote villages as a “dumping ground” for child-molesting priests—and blaming the president of Seattle University for letting it happen.”
• Just An ‘Average Brunette’ from the Banlieue – the three female challengers to Sarkozy from the Socialist, Communist, and Green Parties. I hope they win!
• Journalist on the run from Israel is hiding in Britain: ‘Haaretz’ writer fled to London fearing charges over exposé on Palestinian’s killing. Now while there’s no argument Israel is a liberal democracy, it is highly influenced by the prerogatives of the national security state.
• Why are so many girls lesbian or bisexual?
• Ending the Myth of ‘Market Fundamentalism’ (Dean Baker)
• «Я опознал свою дочь» – the Moscow shahidka‘s father speaks out.
• For all their problems, North Korea remains firmly committed to Juche, release “Red Star” operating system based on Linux. (h/t Randy)
• Tea Partiers Are Fairly Mainstream in Their Demographics.
• San Francisco “anti-war” rally (are commies, Islamists) according to this conservative-leaning blogger.
• Stalinist Icon (h/t Jason)
• The East German bunker that was to have been the Warsaw Pact operational center for conducting a nuclear war against NATO forces in Europe.
• Cannibal trial halted after juror falls ill looking at pictures of girl, 16, who was ‘eaten with potatoes’. Why did Russia have to cancel the death penalty in deference to European cultural Diktat?
• Dmitry Rogozin: “Sergey Kovalev is a parody and a loser compared with the great human rights activist and intellectual Andrey Sakharov”. Links to К портрету Сергея Ковалёва.
• Tourist attractions… wait a second, how can that be?!
• How do you perform in this Zombie Survival Quiz?

I used Angus Maddison’s historical statistics, CIA figures for 2009 growth except where available the results from national statistical services (Belarus & Russia), and the IMF projections for 2010 (adjusted upwards for non-Baltic nations with sharp recent falls in GDP to account for their stronger-than-expected recoveries) to create GDP (PPP) per capita indices for post-Soviet nations and Poland (generally representative of Visegrad) where the output levels of 1989 – the year of peak Soviet GDP – are set to 100.

So which national ponds look like they’ve been subjected to grenade fishing, and which ones have the liveliest fish? Drumroll…

Belarus! At least amongst the industrialized nations, this market socialist economy – mocked and despised by proponents of the Washington consensus – is now substantially more productive than it was in 1989, beating out all its peer competitors. Furthermore, unlike the Baltics or Russia, it remains one of the most equal societies on Earth. Belarus suffered less of the “catabolic collapse” observed in neighboring Russia and Ukraine in the 1990′s, and strong growth resumed earlier. This included growth in manufacturing – Belarus did not suffer from the widespread deindustrialization from which Russia has only recently, and just barely, recovered from in 2007 (and then lost again in 2009!) – and the country even developed a competitive micro-electronics industry. Interestingly, Belarus is also the only CIS nations with whom Russia had a negative migration balance (until 2005). It seems that the stability and benefits offered by Bat’ka outweighed his collective-farm-boss chique.

That said, Belarus’ relative success – shocking as it would be to neoliberal ideologues – should not be overstated. First, in 1989 it was one of the poorer members of the “industrialized nations”, and in standard macroeconomic theory, faster economic growth is, ceteris paribus, easier when you are further behind. Second, whereas Belarus is great for ordinary workers and pensioners, the more talented find it unpromising, even oppressive. Intertwined with an authoritarian political structure, the economic system is largely closed to those who don’t like toeing the party line.

Despite its economic depression from 2007, Estonia seems to have performed very well too. Enfused with post-independence optimism, it carried out its liberal reforms earlier and more completely than any other post-Soviet nation. As a result, it enjoyed a fast revival of growth from 1993, giving it a 2-year head start over Belarus and a 5-year one over Russia. Estonia is far richer and more transparent than Belarus, has a vibrant hi-tech sector, and more political freedoms (with the important exception of disenfranchised Russophones). Latvia has been somewhat less of a miracle economy. After the recent economic collapse, its economic output is now little bigger than the Soviet-era peak, and is much less equitably distributed.

In the bubbly days of 2006-2007 (and by bubbly, I do mean bubble), these economies became known as Baltic Tigers. Their liberal economic policies, balanced budgets, favorable geography, and low-wage skilled labor attracted huge credit inflows. This enabled a debt-fueled consumerist orgy, resulting in awning current account deficits. As the 2008 global credit crisis unfolded, investors took fright and capital inflows turned into capital flight. The house of cards fell down. The Baltics embarked on brutal wage deflation and budget cuts, especially in the worst-hit Latvia, to maintain their currency pegs against the Euro, acquire much-needed IMF financing, and reattain competitiveness. This is projected to take years – and that’s discounting both further shocks to the global financial system and political discontinuities (e.g. after the last Great Depression the Baltic nations became soft dictatorships).

The Balts cannot rely on a renewal of the old bubble, rising foreign protectionism precludes an export-led recovery, and the prospects for strong domestic consumption are dim because of the huge rise in debt levels. The IMF now forecasts prolonged below-trend growth, with GDP per capita only approaching their 2007 peaks by 2014 for all three Baltic nations (the same projections show Russia and Belarus converging to or overtaking the Baltic economies by that date). Just as for the old chasm between Marxism and “actually existing socialism”, whatever the merits of neoliberalism as a theoretical construct – its proponents will have to answer for its real-world disappointments.

Now we come to Russia, which has the region’s biggest and most important economy by far. It’s post-transition history is also highly complex. First, it cannot be stressed enough that the USSR did not collapse economically because of its inherent internal contradictions. It collapsed because Gorbachev aborted central planning, or more accurately ditched the coercive mechanisms that made central planning work (though granted the observable evidence of worker unrest and economic stagnation may have tipped his hand). In the absence of evolved market mechanisms, the “dictator’s surrender” only led to ruinous insider plunder, asset stripping and managerial misappropriation, all under the slogan of “liberalization” (true liberalizing reforms were far less wide-raging and generally implemented much later than in the Baltics). Output plummetted as barter arrangements replaced late Soviet scientific socialism.

As a result, Russia’s new capitalism developed in the most anarchic and perverse ways; indeed, it arguably had a greater resemblance to old Muscovite patrimonialism. A weak Tsar (President Yeltsin) bestowed rent-gathering rights unto his new boyars (the oligarchs) in exchange for their political support – a compromise he was driven to by the combination of 1) state weakness and 2) the perceived need to prevent the Communists coming to power at all costs. Putin’s cardinal achievement in his first term was to decisively shift the balance of power between Tsar and boyars back to the former, a fact confirmed by the arbitrary arrest and imprisonment of Khodorkovsky – the power-hungry robber baron who didn’t realize that the days of oligarch rule had passed. The economic crisis of 2008 led to the further reassertion of Kremlin power over the oligarchs – bailed out by a Russian state grown cash-rich from foreign energy sales, many are now little more than its glorified, well-compensated servants.

In the past decade, Russia has been in flux, metamorphosing from the chaotic, boyar-dominated, “appanage” atmosphere of the 1990′s, to the brave new world of Kremlin modernization dreams that are opening up the 2010′s. Three trends are now becoming dominant: 1) the state is becoming much more central in pushing Russia’s modernization through mercantilism (e.g. industrial tariffs), industrial policy (e.g. economic zones), and targeted investments in strategic and “sunrise” economic sectors (e.g. nanotechnology), 2) there is a concurrent, measured economic liberalization – from the 2001 flat tax reform to the raising of internal energy prices, and 3) there is a renewed attempt at social mobilization to fulfill the state’s development plans. In sum, a latter-day replay of the Petrine “revolution from above” (albeit one altered with the benefit of hindsight – Putin is careful to emphasize, even exaggerate, his Russian cultural patriotism, so as to avoid recreating the social divisions and unrest that tends to occur when a ruler is popularly seen as being in thrall to foreigners).

Russia’s post-1990 performance was far from stellar, though it should be noted that in overall per capita welfare it is still comparable to Belarus and only slightly behind Latvia (possibly ahead now) – not that much changed from the late Soviet period. Russia essentially lost two decades, like Latvia or Lithuania – and performed worse than Belarus, Estonia, and Poland (included in the graph for comparison).

This is not too surprising, since 1) Russia spent much of the 1990′s in “anarchic stasis”, a semi-failed state that had trouble maintaining any meaningful monopoly on violence, tax collection, and monetary emissions (the three vital functions of a state), 2) like the Baltics, Russia started from a relatively high base (it was already an industrialized nation), so it could hardly expect particularly rapid growth, and 3) the Kremlin only really began to focus on modernization as a priority in the mid-2000′s, as before it had been too preoccupied with consolidating the Russian state.

As I wrote in an earlier post on the Russian economy at the dawn of its late-2008 crisis (which was basically correct with the exception of the far too optimistic 2009 GDP forecast), Russia’s greatest weakness during the credit crunch was that its major corporations, the vast majority of them state or quasi-state, had come to rely on Western intermediation for accessing cheap credit. When the global credit wheel ground to a halt in late 2008, the first countries to be cut off were the emerging markets. (Having access to deep indigenous credit systems, nations like Brazil and China weathered the storm far better than Russian corporations and consumers who were suddenly cut off from cheap credit). Though the initial economic collapse was steep, Russia does not possess the long-term ailments of the Baltic states – debt has nowhere near the same level of penetration, the state remains incredibly cash-rich, and its strategic depth makes it largely invulnerable to any further retreat of globalization. Many forecasts now say that Russia will grow by 4% to 6% in 2010. In the longer-term, it has a comprehensive development plan and arguably good prospects for effecting an economic catch-up to the West.

Finally, far and away the worst post-Soviet performer amongst the industrialized nations is Ukraine. It never managed to reattain its Soviet-era level of per capita output, and that goal is now further away than ever. Comparable in its level of economic development to Belarus, Poland, and Russia in the late 1980′s, it is now far behind all three. Why? True, Russia had the gas reserves, but until the mid-2000′s Ukraine received vastly subsidized gas anyway. Furthermore, unlike Russia, Ukraine was nowhere near as burdened by “structural militarization” at the time of the collapse of the Soviet Union, nor did it retain prodigally expensive military forces or Great Power ambitions. It was also closer to Europe, directly bordering Poland. And besides, Belarus was in a similar position to Ukraine, but landlocked and shunned by the West to boot; but it nonetheless managed to do incomparably better.

I think the only good explanation for this retrogression is that Ukraine simply never left its 1990′s conditions of anarchic stasis. Its Tsar (or Hetman?) was always weak, Ukraine’s cultural cleft between Russian Orthodox East and Uniate West putting a glass ceiling to any ruler’s level of popular support at around 50% of the population. This constant problem with political legitimacy, experienced by both pro-Western and pro-Russian Presidents, stymied reform efforts and attempts to reign in oligarch power. Ukraine lagged well behind Russia, not to even mention the Baltics, in its economic liberalization, and its politicians remain representatives of oligarchic clans, not their puppet-masters as in Russia. Any sustained state-backed modernization scheme (e.g. on Putin’s Russia model) is doomed from the outset, while private investors and entrepreneurs are scared off by the unending political instability and lack of liberalization (in this respect, if Russia or Belarus is purgatory, Ukraine is hell). Long-term development is thus impossible under Ukraine’s conditions of anarchic stasis.

Below is a graph plotting the economic fortunes of the USSR’s less-developed nations (again per capita).

Azerbaijan‘s success is almost entirely tied up with the massive expansion of its oil production, especially from the mid-2000′s. Azerbaijan’s oil output rose from 0.2mn barrels a day between 1992 and 1998, to 0.4mn in 2005, and skyrocketed to 1.0mn by 2009, and as shown in the graph, the years of rapid increase were accompanied by amazingly high rates of GDP growth (up to 20-30% in a couple of years). A similar explanation would probably hold for why Kazakhstan‘s post-Soviet performance was substantially better than Russia’s, despite the many similarities between their economic systems – Kazakh oil production was 0.4mn barrels from 1992-95, 0.6mn in 1999, and 1.5mn by 2008.

(Russia produced only 22.6% more fuel energy in 2008 than in 1992. Its oil production went from an all-time peak of 11.5mn barrels in 1988, to 7.9mn in 1992, 6.0-6.5mn during 1994-99, 9.3mn in 2004, and 9.8mn by 2008 – i.e., correlated with general growth trends in its real GDP. Whereas the recovery in oil production accounted for a very substantial share of its GDP growth / recovery from 1999 to 2004, these effects became small after increases in oil production flattened out post-2004 due to geological factors (i.e. peak oil) and the political factors (the YUKOS affair); from the mid-2000′s, the main drivers of growth became retail, construction, transportation, manufacturing, and finance.)

Summation – Russia was recovering lost ground in oil production; Kazakhstan and Azerbaijan were gaining massive new ground. Translated into GDP growth over the entire transition period, Kazakh and Azeri growth appears much more impressive, even though it was much more narrowly based on increasing resource extraction.

Armenia showed impressive growth, despite that it has no such resource windfall and is a mountanous, landlocked nation bordered by unfriendly Turks to the west, the hostile Azeris to the east who are closely related to Turks (with whom it fought a war in the early 1990′s), a Georgia up north that dislikes its alliance with Russia, and with Iran to the south, which is friendly, but is an international pariah. How the Armenians managed this I don’t know, but kudos to them!

Despite the pro-Saakashvili rhetoric, Georgia is not that impressive on objective terms. The average, post-Rose Revolution 2004-2008 growth was 8%, which although ostensibly impressive was not exceptional by regional standards. Furthermore, it doesn’t mean very much for a nation 1) starting from a low economic base and 2) recovering from a massive prior GDP collapse. True, somewhat better than trainwreck Moldova, but left in the dust by its Caucasian neighbor Armenia (likewise wracked by blockade and the occasional war), and only slightly better than Russia – a nation that has a GDP per capita that is three times bigger than Georgia’s.

According to an alternate, non-rosy view, The Georgian Economy Under Saakashvili (Irakli Rukhadze and Mark Hauf), much of Georgia’s recent growth was one-off, being based on state asset sales and government lay-offs. This was accompanied by accelerating deindustrialization, continued emigration and poverty, and the destruction of all remaining safety nets. The authors say the government acquired the habit of pressuring independent businesses to provide “voluntary contributions” in return for not bankrupting them under corruption prosecutions. This is not to singularly condemn Georgia’s weak rule of law. After all, politicized interference in the economy, widespread corruption, and corporate raiding are the rule rather than the exception throughout the former USSR. The only thing that’s special about the Georgian economy is the chasm between the gushing, star-speckled rhetoric emanating from Saakashvili and his neocon cheerleaders – and the actually existing reality.

Finally, we can note that Uzbekistan saw much better growth than Tajikistan. Uzbekistan is an unreformed economy, as well as land-locked, poor, and truly authoritarian (i.e. an extreme version of Belarus). But starting from a low base really helps, I guess. On the other hand, Tajikistan saw a devastating civil war between Communists and Islamists that killed 100,00 people during the early 1990′s, and it is the post-Soviet republic that is least advanced in the demographic transition (capital diverted to sustain new mouths and remember that we are measuring GDP per capita in this post). Growth performance in Kyzgyzstan was in between Uzbekistan and Tajikistan, whereas Turkmenistan’s was as good as Uzbekistan’s.

What to Expect?

Russia has a comprehensive modernization plan, the human, administrative, and financial resources needed to implement it, and the Kremlin’s siege mentality should give it the impetus to force it through. Thus, I am reasonably confident that Russia, Belarus, and Kazakhstan will continue to see relatively fast growth. These countries have relatively high human capital (a necessary prerequisite for economic catch-up), and their recent customs union will enable bigger economies of scale. As I said before, there are many reasons to suppose that Ukraine will (re)join this Eurasian space within the next few years, at which point its anarchic stasis will finally end.

As I observed above, economic openness and transparency are not as important to economic catch-up as they are sometimes made out to be (this is NOT to imply they’re bad, however – obviously, imitating North Korea’s Juche principle or Equatorial Guinea’s kleptocracy is not the way forwards). However, they shouldn’t be treated as the be all and end all of things either. Moderate levels of corruption are nothing more than an additional tax, and it is even possible to think of situations where it can be positive (for instance, nations with impossible, idiotic regulations). Meanwhile, excessive economic openness can leave one too open to the vagaries of global casino capitalism – observe Latvia today, or Argentina 2001, for good examples. Furthermore, the next decade will likely see the retreat of globalization in tandem with peak oil and the waning of Pax Americana. In this new environment of “scarcity industrialism“, states that carve out self-sufficient dominions will fare best. Russia is aware of this, and has begun to regather its former Empire, and so is China with its fevered buyout of mines, land, and political elites around the world.

The Baltics may slowly recover under business-as-usual, though in the more globally pessimistic scenarios favored by S/O the general pattern will be stagnation, political unrest, and authoritarian reaction (especially possible in the most vulnerable member, Latvia). Central Asia does not really have the capacity for generating its own sustainable development. Far from potential markets and tyrannized by extreme climes and distances, the region is doomed to perpetual backwardness, except in so far as outside Powers like Russia or China find it in their interests to subsidize their development. In the Caucasus, the threat of instability and violence hangs permanently in the air, making any attempts at prediction even more of a futile endeveour.

The Iranian Regime and Its Strategic Culture

To recap from the first article, the most important things to know about the Iranian political system is the following: a) it is “a unique hybrid of Velayat-e Faqih (rule by Islamic jurists) and modern parliamentary democracy”, b) it is deep, murky and highly factionalized along the following lines: the old, corrupt clerical elites centered around Rafsanjani (chairman of the Assembly of Experts), the conservative technocrats represented by Larijani (Majlis speaker), and the Islamist hardliners represented by President Ahmadinejad, to whom answer the Armed Forces (Artesh) and the Islamic Revolutionary Guards Corps (IRGC) paramilitary / militia / intelligence service, c) these factions are supposed to be balanced by the Supreme Leader, Ayatollah Khamenei, but his sympathies clearly tilt towards the hardliners – which partly explains why they have been in the ascendant since Ahmadinejad’s electoral win in 2005, d) this ascendancy was reinforced by the state’s paranoia over the abortive “Green Revolution” in support of the defeated Mousavi in 2009, who is Rafsanjani’s creature and e) pro-Western liberals have next to no backing or popular support, media hype to the contrary – though Rafsanjani’s and Larijani’s cliques are more enthusiastic about reaching an accommodation with the US, all political forces strongly support the development of an indigenous nuclear infrastructure and pushing Israel into the sea (so to speak). As such, an understanding with Israel is almost certainly out of the question.

[The dense, complex labyrinth of power in Iran. Source: Stratfor]

Iran’s strategic culture – the sum of  beliefs and assumptions shared and used by its political elite uses to formulate a foreign policy – can be defined by the following elements: a need for a strong centralized state with competent security forces to preempt ethnic separatism, the conception of Shia Islam as bedrock of the national identity, belief in Iran as a leader of Islamic civilization against Western encroachment (at times verging on the millenarian), a striving for regional hegemony and an acute sense of vulnerability and encirclement by the US (which has troops in Iraq, Afghanistan, and the Gulf States) – which gives Iran an incentive to exaggerate its real military strength to dissuade an attack. This sense of vulnerability is especially acute because Iran is not a monolithic state – though its internal, Persian heartlands, walled in by mountains from all sides, are secure, it has three potential chinks in its armor.

The above map shows Iran’s nationalities and Sunni minorities. Though Persians constitute the majority at around 55-65% of the population and occupy the heartlands of Iran’s mountain fortress, there are potential flashpoints of separatist unrest in Balochistan (Balochs), Khuzestan (Arabs) and the northwest (Kurds). And although the Azeris are tightly integrated into the Iranian nation-state – the Supreme Leader, Khamenei, is himself half-Azeri, as was the failed 2009 Presidential candidate Mousavi – they still make up 20-25% of the population, occupy a geographically coherent position bordering Azerbaijan (whose pan-Turkic elements look up to Turkey), and have a moderately different political outlook (in the recent elections, the race between Mousavi and Ahmadinejad was much closer in majority-Azeri areas than it was in majority-Persian). In the case of a full democratization and rejection of its Islamist legacy, it is perhaps not unlikely to expect a “velvet divorce” between the Persians and Azeris in Iran. (It should also be noted that tellingly, all Iran’s major nuclear facilities are within the Persian heartlands, just like the USSR tended to concentrate WMD development within Russian or at least Slavic areas).

Iran’s Pursuit of the Nuclear Bomb

There are credible reports that the US has tried to stir up ethnic insurrections against Tehran since the Islamic Revolution, including by providing them with weapons and intelligence, and rumors that its intelligence services use Azerbaijan as a base to stir up Azeri dissent within Iran. In this secret war, Iran counters by maintaining powerful internal security and intelligence forces, assassinating perceived traitors abroad and maintaining a siege mentality. This starts a circle of confrontation with the US – from manipulating religious and ethnic fault lines in Iraq to force the US to the defensive (though not eschewing cooperation on shared interests like defeating the Taleban), to the ultimate bone of contention – Iran’s pursuit of an indigenous nuclear weapons production capacity and delivery systems. If it is successful in this, then it will severely undermine the US position in the strategically-critical Persian Gulf region since a) the moderate Arab states will observe the American lack of resolve and will move to guarantee their own security through self-help – perhaps ditching the US in the process or swapping it for other partners, and b) it will make Iran near strategically invulnerable to military attack because of the threat of nuclear retaliation. For this reason, it is hard to see the US – not to even mention Israel – ever allowing an Iranian bomb.

[Blue diamonds = uranium mining, read diamonds = nuclear research facilities]

Unlike Iraq’s or Syria’s nuclear weapons programs, which are / were relatively simple and limited, Iran seems to be pursuing the bomb on a larger scale, aiming to develop an indigenous capability over the entire nuclear fuel cycle and maintaining redundant, hardened nuclear facilities. It should be noted that developing nuclear weapons is rather hard, since they have to be robust, reliable, miniatured and married to delivery systems (gravity bombs, cruise missiles or ballistic missiles launched from platforms ranging from truck beds to nuclear subs). Iran has been having problems with mastering the nuclear fuel cycle, and most current estimates indicate it is still around five years from acquiring its first nuclear weapon.

Uranium nuclear fuel enrichment consists of four main steps. The first involves extracting uranium ore and processing (also known as milling) it into uranium oxide, commonly known as yellowcake. Second, most enrichment efforts — including Iran’s — then subject the yellowcake to a series of chemical reactions to create toxic uranium hexafluoride (UF6), which is useful for a variety of enrichment techniques. Third, in many cases — again including Iran’s — the UF6 then is run through “cascades” of centrifuges, or long chains of individual centrifuges connected together in a vacuum in gaseous form. Through this process, the percentage of the fissile isotope uranium 235 is increased to the point where the uranium can be used for power production. (Iran reportedly has aimed for an enrichment level of 3.5%, which is considered low-enriched uranium.) Fourth and last, once the uranium has been enriched to the desired level, it is then converted into fuel rods or pellets for use in a reactor.

It is important to note that low-enriched uranium is not the same thing as highly enriched uranium (which is considered to be greater than 20%) — or uranium enriched to levels of 80-90% uranium 235 — which is considered sufficient for use in a crude nuclear device. Producing highly enriched uranium is not simply a matter of running the cascade cycle describe above over and over again. As the uranium becomes more enriched, the technology becomes increasingly delicate. Fine separation of the UF6 molecules and the minute calibration of the centrifuges necessary to carry this out, is required for this, and it is not clear that Iran’s centrifuges are of sufficient quality to attain these high levels of enrichment.

One of the advantages of uranium is that it is easier to build a working bomb with it, since it can do with a simple gun-type explosion to create a critical mass of fissile material needed to produce a nuclear blast – but as written above, acquiring Highly-Enriched Uranium (HEU) is difficult. That is not so much the case for plutonium, a byproduct of nuclear reactors whose enrichment can be accomplished through a simpler chemical reaction (instead of very precise calibration of centrifuges). However, there are two problems in this direction: a) you need a near perfectly symmetrical implosion to compress plutonium core to supercritical mass, necessitating “the precise “lensing” of high-grade explosives” – unlike for HEU, which can do with a simple gun-type design, and b) even though Iran has got the reactor at Bushehr up and running, producing plutonium as a byproduct, it is supposed to be repatriated back to Russia and be subjected to international monitoring – diverting part of the flow will be tricky.

Iran continues to have problems in mastering the nuclear fuel cycle, relying on the 600 tons of yellowcake it bought from S. Africa three decades ago (now 75% depleted) and Russian deliveries of low-enriched uranium (subject to disruptions and even full cessation depending on the status of Russian-American relations). Iran is hobbled by poor-quality uranium reserves – its mine at Saghand contains 3000-5000 tons of uranium oxide at a density of just 500 ppm, well below the 750 ppm usually thought to be the limits of commercial viability, and there has been a slowdown in both yellowcake conversion into UF6 at Isfahan and centrifuge installation at Natanz. There have been reports that the slowdown is partly attributable to Iran’s loss of high-quality bearings imports for its centrifuges under US pressure on the suppliers, forcing it to rely on lower-quality domestic ones.

On the other hand, there are many sources saying that Iran’s activities are at a more advanced stage than generally believed:

…Ahmadinejad announced that Iran had 6,000 centrifuges operating at its uranium enrichment facility at the underground Natanz facility, double the number operating less than a year ago, a worrisome development that shows the progress Iran has made toward developing a nuclear weapon (Washington Post, July 26, 2008). The August 2009 IAEA report said the number of centrifuges had grown to 8,300 (Haaretz, August 31, 2009). ElBaradei, the director general of the IAEA, told the group’s 35-nation board that Iran had not stopped enriching uranium or answered lingering questions about its nuclear program (New York Times, September 7, 2009).

In September 2008, IAEA officials reported that enough enriched uranium to make six atom bombs (if processed to weapons grade level) disappeared from the main production facility at Isfahan. The officials suspect the material may have been moved to one of the installations spotted by American spy satellites, which intelligence officials believe are being used for covert research (Telegraph, September 12, 2008). …

David Albright of the Institute for Science and International Security said in 2008 that Iran has solved many of the problems it had with its centrifuges and they are now “running at approximately 85% of their stated target capacity, a significant increase over previous rates.” The IAEA’s 2008 report said Iran has produced nearly 1,000 pounds of low-enriched uranium; Albright says it needs a minimum of 1,500-pounds for a simple nuclear bomb, a figure it could reach in six months to two years (AP, September 24, 2008). …

The IAEA reported on November 19, 2008, that Iran had produced 1,390 pounds of low-enriched uranium suitable for nuclear fuel. That milestone is enough to produce a single nuclear weapon, about the size of the bomb dropped by the U.S. on Nagasaki according to Thomas B. Cochrane of the Natural Resources Defense Council. He noted, however, that they still needed the technological knowhow to purify the fuel and produce a warhead (New York Times, November 19, 2008). …

On September 25, 2009, it was disclosed that it had a second fuel enrichment plant. The United States was apparently aware of the facility, but it was hidden from weapons inspectors (Jerusalem Post, September 25, 2009). Meanwhile, Iran’s exiled opposition movement reported the day before that it had learned of two previously unknown sites in and near Tehran that it says are being used to build nuclear warheads (Agence France-Presse, September 25, 2009).

Separating the truth from the spin is amazingly hard, considering that Iran has motives for both exaggerating (to dissuade Israel / the US from attacking it if they know that they will fail to destroy its nuclear program anyway) and concealing (to not invite an attack, duh!, and to give propaganda ammunition to its defenders) its true strength.

The American Strategic Dilemma

As mentioned previously, the US has no intention of allowing Iran to get the bomb. If that were to happen, the new Persian empire would soon displace the US as the regional hegemon in the Middle East – the keystone of the global oil system whose cheap, liquid energy flows underwrite the trinity of globalization, US military predominance and Pax Americana. The moderate Arab states will be spooked into either setting up their own nuclear programs (permanently dooming the anti-proliferation system) or bandwagoning with the new power. Iran will be strategically invulnerable as rarely before, protected not only by its mountain walls but by the threat of nuclear retaliation – this will allow it to meddle in the affairs of its neighbors far more aggressively than it had previously dared (by supporting Hezbollah and Shia militants around the Gulf) and suborn a vulnerable Iraq to its will.

However, bombing Iran will not solve problems either. First, its nuclear program is built around deception, redundancy and hardening. Like the recent revelation of a second enrichment built under a mountain on a military base at Qom, Iran only admits to covert efforts at nuclear weaponization when it realizes its cover has been blown. Speaking of which, the facility at Qom also illustrates another feature – the amount of redundancy in its nuclear program. Since the US knew of Natanz, having a second site would have also made sense (and perhaps a third, and fourth, etc, whose existence has not yet been revealed). That way, limited bombing sorties of the sort that crippled the nuclear programs of nations like Syria or Iraq would not work in Iran. They make sure to harden these facilities against US bunker-busters, allowing a margin of safety to account for any black US capabilities. However, in the final analysis the main issue relates to how good US intelligence is on the Iranian nuclear program – if you don’t know the precise coordinated of an underground, hardened target, then no bunker-buster is strong enough to destroy it. Though the US has excellent space-based reconnaissance capabilities, they cannot pick up everything, since “research and development associated with a limited, clandestine nuclear weaponization effort can be smaller and better concealed than industrial-scale facilities for nuclear-power generation”. That would require a sophisticated human intelligence effort in Iran itself, in which the US is rather weak and relies on Mossad. Besides, the Iranians have a plethora of experienced intelligence agencies and are proficient at anti-espionage.

Second – and much more important – are the tools of retaliation at Iran’s disposal. This includes destabilizing Iraq through the use of Shia proxies, activating Shia sleeper cells in Saudi Arabia to attack its oil exporting infrastructure, missile attacks against US military bases and Gulf oil infrastructure, coordinating renewed attacks on Israel by Hezbollah, and most importantly blockading the Strait of Hormuz by anti-ship missile batteries and having its big fleet of patrol boats lay down mines. Iran’s production of 3mn barrels per day will vanish overnight, and even a few successful attacks on the 20 oil supertankers leaving the Gulf per day could in effect cut the flow of oil out of the Gulf by dramatically raising insurance rates. Considering that 17mn barrels per day, or 40% of the world’s oil exports pass through the Strait – a figure that accounts for 20% of world oil consumption – even small disruptions will be catastrophic.

Not surprisingly, Washington would prefer to first try everything possible to reach a diplomatic solution. The initial signs were seen during the past year, when Obama tried reaching out to Iran and Muslims in general (Cairo speech), but like all idealistic projects there have been no real, positive effects. If anything, Iran’s hostility hardened after what the hardliners perceived as the Western-incited unrest following Ahmadinejad’s summer electoral victory. Having failed in getting the Iranians around him in a circle singing Kumbaya (although Obama did create an impression of benign moderation (liberals) or weakness (conservatives)), things are now going to get more serious.

This will be on display in the P5 + 1 (UN Security Council and Germany) talks with Iran in Geneva from 1 October. If the Iranians refuse to budge on the nuclear issue, the US plans to impose “crippling” gasoline sanctions, for which it has been laying the framework for the last several months. It is believed this will put pressure on the Iranian regime, which massively subsidizes gasoline (to the huge detriment of its public finances) and whose automobile ownership has exploded in the past decade. However, the argument could be made that this would just reinforce Iran’s siege mentality and make it more aggressive. Alternatively, the sanctions can be rendered ineffective. Russia appreciated the US giving up on its ABM plans for Poland, but realized it for the symbolic concession it really is and has no desire to reciprocate by handing over its leverage over Iran by cooperating with Washington on sanctions. To ditch Iran, Russia will need more concrete moves like Washington dropping support for Ukraine’s and Georgia’s membership in NATO, halting its plans for Polish military modernization and informally acknowledging Russia’s sphere of influence over the post-Soviet space. As long as these conditions aren’t met, Russia can easily supply Iran’s gasoline needs by pressuring Turkmenistan and Azerbaijan. Similarly, China is unimpressed with rising US protectionism (e.g. recently introduced import tariffs on tires) and also has the spare refining capacity to help bust gasoline sanctions on Iran. Even France has recently voiced reservation after a flurry of high-level meetings between the two, a surprising twist given that France has moved much closer to Washington since 2007 under Sarkozy – though given France’s hardline anti-Iranian position, this may simply be showing its displeasure over Obama’s lack of resolve.

Then there is also the question of Afghanistan and Israel. The Taleban have a deep-rooted presence in Afghanistan and are convinced the Americans will have to leave eventually, just like the Greeks, British and Soviets before them. The idea that this place could be pacified and built into a model liberal democracy is nonsensical to say the least. Meanwhile, it is a drain on US military and fiscal resources that benefits Russia and Iran before anyone else, and one that is going to increase as NATO pulls out and if the US increases its troops there. Continuing the campaign in Afghanistan is a strategic blunder and after a face-saving surge the US will likely begin to pull out.

The Centrality of Israel

First, even as Obama superficially tried to improve relations with the Muslim world by pressuring Israel on halting the expansion of settlements in the West Bank, he made some in Israel question the strength of the US commitment to Israel’s security (despite the fact that this issue has little bearing on it). Second, Israel cannot and will not accept an Iranian bomb, not even if it leads to a clash with the US – to the US, it would be a major annoyance; to Israel, an existential risk, even despite its strengths in ABM. If Iran continues to progress on its nuclear and missile development, an Israeli strike is almost certain. And who can blame them?

If a day comes when the world of Islam is duly equipped with the arms Israel has in possession, the strategy of colonialism would face a stalemate because application of an atomic bomb would not leave any thing in Israel but the same thing would just produce damages in the Muslim world… in the future it will be the interests of colonialism that will determine existence or non-existence of Israel… Jews shall expect to be once again scattered and wandering around the globe the day when this appendix is extracted from the region and the Muslim world.

Not Ahmadinejad (he of the Holocaust denial) or Khamenei. Rafsanjani, 2003 (chairman of Assembly of Experts and main supporter of Mousavi).

Israel doesn’t care if Russia regains hegemony over the former Soviet. It doesn’t care if East-Central Europe becomes Finlandized. And though it faces the prospect of attacking Iran and facing retaliation from Hezbollah, spiking oil prices and renewing its status as an object of hatred in the Islamic world with trepidation, all that is nonetheless dwarfed by the prospect of Iran attaining a nuclear bomb.

Most commentators believe Iran is around three to five years behind the bomb, which allows Israel time to stay quiet and let the US indulge in diplomacy and arm-twisting. But this will not be the case indefinitely. There will come a critical point when it judges the Iranian program to be too far advanced already, based on information conveyed by Israel’s extensive human intelligence apparatus in Iran. And it will make the decision to strike, unilaterally if need be, but preferably involving the US at the earliest possible date to a) maximize the damage to Iran’s military infrastructure and hence constrict its ability to close the Strait and b) to more thoroughly damage Iran’s nuclear program. In any case the Israelis will have to fly over Iraqi airspace controlled by the US, and since it’s not exactly going to shoot them down, the world will believe the US was complicit in the strike on Iran anyway whatever it does. Hence the rational American response would be to coordinate the attack with Israel from the very start. It’s entirely possible this will be preceded by false-flag operations against American military or even civilian targets that will be blamed on Iran.

This gives the impression that the US is going to be prodded into this by Israel, but the reality is that by the early 2010′s its intentions may well have shifted in favor of an attack on Iran by themselves due to domestic unrest (economic problems, Obama’s “socialism”, etc), continuing Iranian intransigence (pursuit of a bomb, closer relations with Russia), Russia’s resurgence (probably) and Chinese expansionism (perhaps). At this point, it will become clear that the optimal strategy for the US would be to a) ease its imperial overstretch by pulling out of Afghanistan, b) deal with the Iranian challenge for Middle East hegemony once and for all, and c) use the resulting freeing of resources to focus more attention on containing its two aforementioned peer competitors, by rerouting military assets to East-Central Europe / the Black Sea region to counter Russia or reinforcing its presence in East Asia to counter China – whichever is perceived to be the more pressing threat to US interests at the time. With time, the US elites will realize the logic of this strategy, and will embrace it.

Potential Pitfalls of a Strike

However, there are two negative factors that might end up making an attack on Iran extremely damaging for US global power. By then, Russia will be getting more paranoid about US intentions, assuming it refuses to make real concessions on granting Russia a sphere of influence over the post-Soviet states and continues arming Poland and trying to draw Ukraine, Georgia, Central Asia, etc, closer into its orbit. Russia may up the ante by helping Iran modernize its generally obsolete military equipment, even at a commercial loss, e.g. by arming Iran with modern AA systems such as upgraded S-300, which could make life difficult for all but the most advanced, stealthy and expensive US aircraft like the F-22 Raptor and B-2 bomber (Iran already has 29 Tor M-1 systems, which have a relatively limited engagement envelope but are otherwise very good), or the latest anti-ship cruise missiles, which can pose a significant threat even to the American CVBG’s Aegis defense systems (let alone lumbering oil tankers). Today, as a militarily weak nation Iran makes a show of strength to dissuade hostile powers like the US from attacking it; tomorrow, its strength may become more real than illusory.

Second, the consequences of a shutdown of the Strait of Hormuz will only deteriorate even independently of improvements in Iran’s military potential. The reason is that world oil output peaked and will decline relentless after 2011. Meanwhile, the world economy will “recover”, pulled along by the monetary torrent unleashed during the economic crisis. This will again put immense upward pressure on oil prices, which can be expected to rise back up to around 150$ by 2011 or higher (also note that the US dollar will be weakening). The world economy will not long be able to withstand such prices; a war in the Gulf may be the straw that breaks the camel’s back.

Conclusions

This is an extremely convoluted issue which revolves around the complex interactions of a number of key actors, foremost amongst them the US, Israel, Iran and Russia, whose policies are shaped by domestic trends, ingrained strategic cultures and their perceptions of the actions, words and thoughts of other actors in the Middle East arena. The idea that the more you know the less you know, and that the only true predictions is that there will be no true predictions, is especially valid in this case.

Iran is unequivocally pursuing a nuclear bomb. The military program is camouflaged by a genuine civilian endevour and is highly redundant and hardened against attack, though it faces problems and is still 3-5 years behind maturation. Iran hopes that by acquiring the bomb and mating it with reliable delivery systems (ballistic missiles), it can obviate its chronic sense of insecurity and reinforce its claim to Islamic leadership – a claim that will acquire more credence if backed by the gun.

Unlike the US, Israel sees no big difference between Iran’s factions (both viewpoints are justified – though Rafsanjani’s clique is better disposed to the US, all favor nuclear power and the end of Israel). Understandable, Israel is adamantly against the idea of an Iranian bomb, viewing it as an existential threat, and it has made it quite clear that it will strike if Iran does not cease and desist. By necessity, this will also pull in the US into a general aeronaval confrontation with Iran. Considering the threat Iran poses to the Strait of Hormuz, through which 40% of the world’s exports pass, the US sees war as the last resort; however, the prospect of a nuclear Iran is no better, because it would fatally weaken its position amongst the moderate Arab states.

Hence, the US will try its best to solve this without resorting to war. Obama’s early charm offensive, grounded in idealism, was unsuccessful and gained him approval from the Kumbaya crowd and a reputation for weakness amongst realists. Unfortunately for him, the Iranians, the Russians, and indeed all serious nations, are ruled by realists. Meanwhile, its perceived support of Iranian “reformists” in the June elections – that is of Rafsanjani’s protégé, Mousavi – enraged the revolutionary-conservative hardliners centered around Ahmadinejad and the IRGC, further reinforced their political ascendancy and drove Iran closer to Russia.

Failing to resolve these issues diplomatically, the US will now push for “crippling” sanctions on Iran’s gasoline imports, with the quiet approval of an Israel that is feeling increasingly spurned by the US on other matters (but which likewise wants to avoid war unless everything else fails). What will happen next on this front will be decided within months at the latest, and their success or lack thereof will depend on the actions of states whose interests are if not opposed, then at least orthogonal, to those of the US. The chances of success of presenting a united stance on sanctions on the part of the “international community” are minimal – too many different actors with different goals for multilateral cooperation.

The Russian President, Medvedev, in the Aesopian language typical of Russia’s rulers, said on 23 September, “sanctions rarely lead to productive results, but in some cases, sanctions are inevitable”. The irony is that Medvedev will be the one who decides, to a large extent, whether the sanctions will lead to “productive results” – however you define that. He is interested in getting the US to recognize its sphere of influence over the former USSR and back off from militarizing Poland. It is likely that Russia will agree to the sanctions in principle (to give the US the incentive to accede to Russia’s aforementioned wishes in its Near Abroad) – hence their “inevitability”, but considering that Russia believes the US is unlikely to give those concessions, it will likely end up not honoring those same sanctions it agreed to – hence his observation that sanctions “rarely lead to productive results”.

This is because, despite America’s problems and quagmires, it is unlikely in the extreme to give Russia the breathing space for recreating a Eurasian empire – a construct it spent half a century trying to contain and undermine (“though Washington is maneuvering considerably now, balancing wars in Iraq and Afghanistan, a resurgent Russia, an intransigent Iran and a global economic crisis, Poland remains a long-term priority”). As such, any US-sponsored sanctions regime will be torpedoed by Russia, which can use its influence over Turkmenistan or Azerbaijan to circumvent any sanctions – and the results of the sanctions will be productive neither for the US (Iran will still get its gasoline) nor for Russia (no fundamental reversal of US policy towards its resurgence).

Even if Russia refrains from helping out Iran and honors the sanctions, it could still realistically hope for help from China, which has enough spare gasoline refining capacity to supply Iran’s needs, or it could cut its subsidies. This would be uncomfortable for a regime that buys social stability with gasoline subsidies, amongst other things. This is unlikely to lead to revolution by itself, however – if anything, Iran will try to diminish unrest by increasing the national sense of siege and becoming more aggressive.

Whatever the result of the sanctions, Iran is unlikely to renege on its nuclear program. This is unacceptable to Israel, and it will become ever more unacceptable for the US too. The latter will have its hands more untied by the gradual removal of troops from Iraq (plans are to leave just four “superbases” behind after a decade of occupation) and from Afghanistan (if it’s rational), and increasing domestic troubles (economic, government intrusions, etc) may push Obama towards a more bellicose foreign policy to compensate. The US will come to the conclusion that the time has come to strike. And Russia would be perfectly happy to see the Gulf burn, considering that it would massively set back Iran’s acquisition of nuclear weapons (it doesn’t want that) and lead to a massive spike in oil prices (it doesn’t mind)…

The third and last blog post on the Iranian Question will be a fictionalized account of how a US-Iranian military conflict will pan out, the weapons that will be used and how they will perform, how players like Iranians, Israelis, Saudis, Americans, Russia, etc will perceive it, the decisions taken by political leaders, and its economic and geopolitical consequences.

The next two decades saw the triumph of “Western liberal democracy as the final form of government” and the spread of the neoliberal consensus, all underwritten by American military dominance and the new resources unlocked by the opening of formerly autarkic economies. Generally speaking, this was a rather peaceful and prosperous time. Though wars continued and there was the occasional genocide in Rwanda or Darfur, the overall incidence of violence declined sharply in all categories, the sole exception being terrorism. Similarly, the opening up of world trade sharply increased consumer power in the US and Europe as China’s reserve armies of labor set about producing cheap goods, a process lubricated by cheap oil, gargantuan freighters and developments in supply-chain management. And though its flowers still bloom and the politicians smile and exude the air that nothing’s much amiss, the winds of time are shifting, the sun is already setting on this world, and darkness is about to creep in.

Quite literally. The cheap oil that underpins industrial civilization is ending, as the world approaches peak oil production – the point when about half of recoverable reserves have been taken out of the ground. The remaining half lies in remoter places and will be much harder to extract, especially taking into account that the resources for doing so will be significantly more limited due to the collapse of the world credit system, a system that should have died a free-market death in late 2008, but which limps on, zombie-like, sustained by governments whose solvency now hangs by a thread only maintained by investors still naive enough to believe in their credibility.

This is because the defining feature of this crisis is not so much even the collapse of world industrial output and trade, which was by itself unprecedented in its magnitude this century except by the Great Depression, but the sheer burden of bad debts and fiscal obligations accumulated by  governments in the developed world, especially in the Anglo-Saxon world. First, they are running unprecedented peacetime budgets – both as a consequence of their disastrous pro-cyclical spending during the fat years, and to fund the stimuluses with which they hope to get their economies out of the rut. Second, they printed lots of money under the euphemism of “quantitative easing”. Third, they carried over private losses and bad debts onto the public account – socialism for the rich, capitalism for the rest.

In the next few years, according to commentators like Willem Buiter, these reckless policies are going to lead to classic emerging-market currency crises in the Anglosphere, or “submerging markets” as he calls them. This is not surprising. Taking the United States as the most significant and typical example, to run the kind of deficits projected – 13% of GDP this year, over 10% again in 2010, and red into the rest of Obama’s term even under the rosiest projections – requires a very credible commitment to returning to a balanced budget within a limited timeframe.

First, this requires a rapid economic recovery. However, all the monetary and fiscal tools for accomplishing this have already been used at and beyond their limits. In the 1980′s, once the task of breaking inflation was accomplished, interest rates were eased back and the economy recovered rapidly. Today, interest rates have already been cut to minimal levels and the economy seems to have bottomed, but even so it remains extremely feeble, with the real unemployment rate (“U-6″) currently at 16.8% and rising. Recovery is likely to be slow as households begin to pay off their debts instead of increasing consumption, the linchpin of the US economy. If it is politically feasible (uncertain) and should there be high inflation brought on by the recent monetary splurge and once-again soaring oil prices (almost certain), interest rates will have to be raised, which risks short-circuiting a feeble recovery.

Second, even during the mis-named “Bush boom” growth was large jobless and inequality-enhancing, with half coming from distribution (the “Wal-Mart effect) and the other half from better productivity from financial services!, as measured by the number of transactions undertaken. These are not going to be repeated, the first because rising energy prices are increasingly making the JIT distribution model untenable, the second because the financial system, outside of a few well-connected insiders like Goldman Sachs and JPMorgan, now lives on government guarantees.

Third, the next years are going to see rising demands for social spending as younger Americans make themselves heard, whose worldviews are relatively more socialist and European-like. The rising number of retiring baby boomers will necesitate far more Social Security, Medicare and Medicaid spending, out of funds that will simply not be there because the cookie jars were looted a long time ago. Then there’s the whole chimera about greencollar jobs. In principle, as a convinced peakist with serious concerns about the consequences of anthropogenic global warming, I support subsidizing green industries like renewable energy and hybrid automobiles. But these are luxuries only a more prudent economy could afford, like China. In the US, it will result in very few jobs being created and will constitute further drains on its fiscal credibility – and hence the means of sustaining this very program. More spending on healthcare? The sector is already horrifically bloated, and should if anything be reduced and rationalized.

So in conclusion, the US faces years of relative stagnation, and no credible way of paying back its metastasizing public debt. As long as investors stick it out and rates remain low, this remains a sustainable, albeit unsatisfactory, state of affairs. The reason the US Treasury rates fell so low and the country even tipped over into deflation was that the global equity collapse had investors fleeing to the perceived haven of last resort – US Treasury bonds. Yet as I pointed out in Decoupling from the Unwinding, one of the effects of this crisis will be to decisively sever the links between the West and the Rest (emerging markets). In a few more years, investors will realize that whereas China has real long-term growth prospects, they are unlikely to ever see positive returns on their US bond investments, as the US gradually monetizes its debt. They will jump ship, resulting in rising rates on US debt and making it increasingly unaffordable to service. Unless they inflate it away, of course. Would you like to die by ice or fire?

Let’s whimsically set the date for this collapse for August 2012. The liberal international order, Pax Americana, will collapse with it. However, there will be numerous signs of its slow demise well beforehand, which will be reflected in geopolitical events.

The focal point is the Middle East, that great intersection of energy, power, instability and hatred. Iran is continuing in its efforts to build a nuclear bomb to consolidate the new Persian empire. It is currently strong, demographically, but destined to get weaker as the younger, sub-replacement level generations become adults. The regime is also increasingly ideologically insecure. The nation is currently at around where the Soviet Union was in the early-1980′s on its belief matrix – the egalitarian, totalitarian ideals of the Islamic Revolution are now a distant memory, clouded over by the drugs, lasciviousness, and Westernization now typical of its larger cities. Part of the population yearns for the West, disillusioned with their own society and skeptical of the clear evidence of clerical corruption. Yet the most influential clerical elites have retrenched around the hardline Ahmadinejad and the Islamic Revolutionary Guard Corps (IRCG), who want to return to a future of austere Islamic government. Thus there is currently a revival of radicalism in the Islamic Republic, less potent than in the 1980′s, yet now married to its greater technological capabilities. This revival is almost certainly destined to be short-lived, but has the potential to go out with a bang.

This possibility must be considered especially seriously given that Israel is now ruled by Benjamin Netanyahu, a man who in 2007 opined: “It’s 1938, and Iran is Germany, and Iran is racing to arm itself with atomic bombs”. It is likely that were it not for US restraint, the Israelis would have long since bombed Iranian nuclear and military facilities. They have received permission from Saudi Arabia, via backdoor diplomatic channels, to fly over their territory to do so. This is unsurprising, because the Gulf monarchies face a significant challenge from Iran, which foments Shi’ite unrest in Bahrain and parts of Saudi Arabia, and is suspected of funding a Shi’ite insurgency in northwest Yemen that threatens to spill over the borders. Though moderate Arab rulers pay lip service to Islamism, they certainly have no intention of allowing it to infringe on their political power. Iran’s other lever is its control of Hezbollah, an impressively disciplined organization that managed to (arguably) win a war against Israel in 2006. Though they do not pose an existential threat to Israel, they can create an serious political and strategic problem through massed rocket attacks, to counter which Israel is now assembling a multi-layered, world-class ABM system.

If Iran gets the bomb, it will unleash a Middle Eastern arms race, in which Saudi Arabia, Egypt and Turkey will feel compelled to build up arsenals of their own. Iran will become much more confident about sponsoring Shi’ite separatism and drawing Iraq closer into its fold. In the endgame, the US cannot allow this challenge to its hegemony in the oil-rich Middle East to go unanswered, in particular the dependence of the Gulf States and now Iraq on its military tutelage, no matter the cost of meeting the call. It will strike Iran, or give Israel the go-ahead, well before Iran comes close to testing its bomb.

The pressure will be ratcheted up gradually. If talks scheduled for 1st October 2009 fail to achieve any Iranian compromises on its nuclear program, as usual, then the US will probably activate what it calls “crippling” sanctions on Iran with the connivance of Britain and France, especially targeting the 40% of gasoline it imports. In practice, this is unlikely to achieve much, especially since Russia – having received no firm guarantees from Washington recognizing its desired sphere of influence over the post-Soviet space – will likely help Iran shrug off sanctions by allowing Iran to satisfy its shortages through imports from Russia’s Caspian ports.

This talk of Russia’s role brings us to another point. The US is currently in a profound strategic dilemma, having to choose three areas in which to exert its strength – in particular its limited manpower: a) Afghanistan / Pakistan and the “war on terror”, b) blocking the arrival of a new Persian Empire with nukes and c) containing a resurgent Russia possibly intent on rebuilding its own old empire.

The recent American successes in Iraq have generally stabilized the country, though smaller-scale violence lingers on and might well flare up again should pressure be loosened up. This necessitates that the bulk of US military manpower remains locked up in Iraq, which gives nations like Russia, which desires to reverse its post-1991 geopolitical losses, a “window of opportunity” to make its challenge. And although the US presence in Iraq is winding down, it is simultaneously becoming pressured by requirements elsewhere – as of today, counting contractors, there are more Americans fighting in Afghanistan today than the Soviets deployed at their peak. (A common counter-argument is that of the 120,000 armed US personnel stationed there, some 68,000 are contractors who mainly do things like fixing electrical lines or washing pots and pans; however, the comparison remains valid because these would be the functional equivalent of Soviet “Class C” divisions mostly concerned with logistical issues).

The Afghanistan quagmire will likely be seen by future historians as an American strategic blunder of the first magnitude. First, it developed as a simple reaction to al-Qaeda’s use of Afghanistan as a base to plot out the 9/11 attacks, yet apart from that, the expansionist Taleban were a much bigger problem for Iran and Russia than for the US (even as the US oil corporation Unocal, with the backing of the CIA, was negotiating with the Taleban over the construction of a Trans-Afghanistan Pipeline to carry natural gas from Turkmenistan to the Indian subcontinent in 1998, Iran was seriously threatening war with the Taleban for the murder of Iranian diplomats). By keeping Afghanistan and the Central Asian jihadi threat suppressed, the US uses its own resources to spare Russia’s and Iran’s from the necessary work of patrolling Afghanistan’s borders, aiding the Northern Alliance and other anti-Taleban insurgents, intercepting jihadi aid to their domestic Islamic militants and maintaining the stability of the Central Asian republics. Hence Russia’s generally quiescent attitude towards allowing the US to transport non-military supplies to Afghanistan and usage of Central Asian bases.

Second, and more importantly, the US is not fighting to win. Afghanistan is not Serbia, and it is not even Iraq. It is a proud tribal society with a total fertility rate of nearly 7 children per woman. Trying to instill “liberal democracy” is a quixotic endeavor. Preaching, let alone practicing, “human rights” is (correctly) interpreted as a sign of moral weakness, and an incentive to up the pressure. The only way to actually win in Afghanistan is through burned-earth like brutality and ruthlessness, like Cromwell’s pacification of Ireland. Anything else is a waste of time and money. As it is, the US is pouring its resources like water into the sands of the “graveyard of empires”, and taking NATO along for the ride – a strain that threatens the very survival of the alliance. This would not be nearly as critical if the jihadi threat was the only storm-on-the-horizon the US-centered world order faced; yet in combination with Iranian brinkmanship, the Russian resurgence, the Chinese mercantile challenge and the increasing reflection of the limits to growth onto the world economy, the days of Pax Americana may well be numbered. Let’s return to Iran.

From this year, the countdown will be really on as Iran reaches for the bomb, Israeli hysteria (understandably) rises and the US becomes ever more desperate for a radical solution. By 2011-12, Obama will be coming under increasing conservative pressure – an again worsening economic position and a “patriotic-reactionary” movement to counter the perceived intrusion of government onto an ever expanding array of economic and social activities – which will if anything make his administration more conductive to the thought of a foreign adventure to take the population’s mind of economic stagnation, rising poverty and perhaps by that point, capital flight. The Israelis will receive the signal to strike. Since this would draw in the US anyway, it will decide that it might as well strike Iran itself, and degrade the Iranian military as much as possible so as to circumscribe the Islamic Republic’s retaliation capabilities.

The US will have no problem in gaining air superiority and destroying a vast array of fixed Iranian targets, because the Iranian integrated air defense system is relatively obsolete and can be eluded by stealth, defeated by electronic countermeasures and neutralized. However, given the dispersed nature of Iran’s military forces it will retain a significant amount of retaliatory capacity – in particular, the ability to mine the Strait of Hormuz using fast attack craft and harass shipping with coastal shore batteries, diesel submarines in the shallow waters of the Strait, and perhaps suicide attacks from civilian-appearing vessels armed with explosives. Iran’s development of an indigenous UAV capability, by enabling it to scout out the presence of oil tankers, represents a significant force multiplier, especially if Iran also has the technological capacity to network its findings with its other military assets.

This is not to say that the War Nerd is correct when he says that any US naval assets off the coast of Iran will be blown to smithereens, which referred to a rather artificial and improbable scenario. In all likelihood the Iranian threat will be contained within weeks, the country will be thoroughly bombed into submission and perhaps the regime will be overthrown. But in its death throes, it could also kill the world economy:

Most importantly, it would not have to be effective. The mere possibility of mines — the uncertainty factor — would not only slow down the movement of tankers in the Gulf, but also spike insurance rates. Tankers cost a lot of money and their cargoes these days are incredibly expensive. Risking both ship and cargo is not something tanker owners like to do. They buy insurance. If the possibility of mines in the Gulf existed, insurance rates would not only rise, but might become altogether unavailable. Insurance and re-insurance companies these days do not have enormous appetites for unpredictable risk involving large amounts of money. And without insurance, as we saw during the tanker wars in the 1980s, owners won’t take the risk themselves.

Iran’s counter could be to increase the potential risk to the point where insurers back off. At that point, governments would have the option of insuring tankers themselves. Given how quickly governments move, particularly in what would have to be an international undertaking, oil supplies could be disrupted for days or even weeks. At this point, speculators and psychology aside, prices would spike dramatically. The creaking sound would turn into a cracking sound for the world economy.

Ergo, oil prices spike well north of 200$ per barrel in a time of global economic weakness and all-round instability. The psychological effects cannot be anything but extremely negative, and such a scenario may constitute the signal for global investors to finally throw in the towel on the US.

The third key element in near-future geopolitics, in addition to the Afghanistan imbroglio and the Iranian Question, is the continuing resurgence of Russian power across Eurasia. Far from being weakened by the economic crisis, it has used it to build up its relative strength, from politically-motivated loans to Belarus, to its decision to only enter the WTO as part of an economic bloc encompassing Belarus and Kazakhstan, to continuing pressure against Ukraine. It has also consolidated its military position in Abkhazia and South Ossetia and the state has reinforced its control over the commanding heights of the economy, suborning the last of the independent-minded oligarchs to its will. Driven by a belated recognition of its immutable geographic and climatic disadvantages that doom it to eternal backwardness and submission within the context of Westernization, it is slowly but inexorably returning to its “steady state”, its past-and-future as a Eurasian empire defined by political sovereignty, economic autarky and spiritual sobornost. The only thing still missing is an ideology, but that can be re-invented. The collapse of liberal globalization can only accelerate these trends.

As long as Washington stands in the way of this reassertion – which it has, from its unleashing of an infowar against Russia following the Yukos Affair in 2003 to its persistent championing of NATO membership for Ukraine and Georgia – it will remain Russia’s “prime enemy”, at least in the minds of those who matter. As such, Russia will do absolutely nothing to help the US maintain the current world order, which is not favorable to Russia’s interests. Expect a tense, uneasy game of give-and-take and tit-for-tat involving Russian arms sales to Iran and Venezuela, covert American support for colored revolutions across the post-Soviet space, intrigues over Central Asian allegiances and the placing of natural gas pipelines, Russian revanchism in the post-Soviet space, Russian and Chinese stalling of Western-promoted sanctions in the UN, etc… Above all, bear in mind that the Western view on Russia is fundamentally wrong, since Russia’s leaders distrust the “liberal interventionists”, “end of history” ideologues of the Clintonian era at least as much as they dislike the neocon “New Cold Warriors”.

Herein lies the gulf between the West and the Russians. The West divides the world between the Cold War and the post-Cold War world. It clearly prefers the post-Cold War world, not so much because of the social condition of Russia, but because the post-Cold War world lacked the geopolitical challenge posed by the Soviet Union — everything from wars of national liberation to the threat of nuclear war was gone. From the Russian point of view, the social chaos of the post-Cold War world was unbearable. Meanwhile, the end of a Russian challenge to the West meant from the Russian point of view that Moscow was helpless in the face of Western plans for reordering the institutions and power arrangements of the region without regard to Russian interests.

… Russians saw their efforts as a deliberate attempt to destroy Russia and the degree to which Russians are committed never to return to that time. It is hard to imagine anything as infuriating for the Russians as the reset button the Clinton administration’s Russia experts — who now dominate Obama’s Russia policy — presented the Russian leadership in all seriousness. The Russians simply do not intend to return to the Post-Cold War era Western experts recall so fondly. …

While Russia’s concerns with Georgia are the noisiest, it is not the key Russian concern in its near abroad — Ukraine is. So long as the United States is serious about including Ukraine in NATO, the United States represents a direct threat to Russian national security. A glance at a map shows why the Russians think this.

Russia remains interested in Central Europe as well. It is not seeking hegemony, but a neutral buffer zone between Germany in particular and the former Soviet Union, with former satellite states like Poland of crucial importance to Moscow.

… As the United States causes discomfort for the Russians, Russia will in turn cause discomfort for the United States. The U.S. sore spot is the Middle East, and Iran in particular. Therefore, the Russians will respond to American pressure on them where it hurts Washington the most.

The Cold Warriors don’t understand the limits of Russian power. The post-Cold Warriors don’t understand the degree to which they are distrusted by Russia, and the logic behind that distrust. The post-Cold Warriors confuse this distrust with a hangover from the Cold War rather than a direct Russian response to the post-Cold War policies they nurtured.

Finally, there’s China. Over the last decade, the world economy came to be powered by a powerful global symbiosis termed “Chimerica”, a state of affairs in which Americans spent and lent China money to build up the industrial capacity to produce ever more goods for Americans to spend on. Now as long as the limits to this unsustainable, imbalanced growth kept put – limits as in affordable oil and other commodities, access to credit, etc – the party continued.

This is no longer the case. The world economy has crashed. Chinese students laughed in the Secretary of the Treasury Tim Geithner’s face when he tried to assure them the US would keep the US dollar strong and that the trillions of dollars of Chinese investments are safe in the US. The Chinese leadership seems to agree and has started to massively step up its acquisitions of natural resourc companies, farmland and foreign elites (via politically-motivated loans at preferential rates). Though there is little overt evidence of a ditching of the dollar, this is to be expected – given that China has so much invested in the US, trying to get out visible would provoke a catastrophic scramble in which it will lose more than it gains. That said, the signals of retreat are certainly visible, especially when set against the typical opacity of China’s rulers.

Globalization allowed China to build up a massive industrial base – as of 2008, it produced 48% of the world’s steel and 50% of its cement – and it has already bought up, or stolen, the majority of key technologies needed to build an advanced industrial system. They can now afford to gradually stop subsidizing American purchases of their products and concentrate on the development of a consumer consciousness amongst their own, 1.3bn-strong population. This decision to reorient their political economy will complement current rhetoric about building the “harmonious society“, with its emphasis on reconciling socialism, regional and internal inequalities, democracy and environmentalism. From now on, growth will be slower as it is curbed by stagnant world demand, accumulating bad loans, diminishing returns, etc, – it will likely be around 5-7% a year in the 2010′s, rather than the 10% typical of the 1980′s to 2000′s. Nonetheless, it should continue at a fast enough rate to soak up the new landless labor, ease social tensions and enable it to launch a geopolitical breakout. The inevitable transition from a centrally-weak, disbalanced and commercialized nation to a centralized, internally-peaceful hegemonic empire will not be smooth, but China’s forward momentum is simply too large to derail its rise to superpower status.

Externally, China will use its rapidly growing relative strength to create a new geopolitical reality, especially as the retreat of American power becomes ever more evident in the early to mid-2010′s. As the only major industrial nation still enjoying rapid growth, it will now be the main setter of world demand for oil and other strategic commodities, putting a floor on most commodity prices in the years ahead - especially since the state is now taking advantage of low prices to diversify itself from US Treasuries and lock in or accumulate the reserves needed to power its industrialization in the decades ahead. (A related recent story is China’s plans to restrict rare earth metal exports, which if rapidly implemented could create a hi-tech crunch in the decade before mines elsewhere could reopen and ramp up production to meet global demand). China’s influence in South-East Asia, East Asia, East Africa and the Middle East will rise in counter-balance to the US, but the process is unlikely to lead to military clashes because both nations will be much more preoccupied with managing internal tensions.

In conclusion, the geopolitical winds are shifting. There is a gathering storm that will sweep away the current liberal globalized order, and a new reality of econo-political blocs competing for markets, land and resources will take its place. The root cause is the accelerating fiscal and economic collapse of the system’s underwriter, the United States. (The even deeper reason would be that limited oil and energy reserves would be more efficiently used in China to make things than spent on American gas-guzzlers).

However, these changes will appear to observers as an incomprehensible cascade of failings of the international system and spreading chaos: jihadi successes (mounting losses in Afghanistan, continuing terrorist attacks carried out by al-Qaeda’s “franchises”, the possible collapse –  or radicalization (Turkey?) – of moderate Muslim governments); state collapses (peak in world food prices, out-of-control insurgencies, falling revenues from energy exports and climatic catastrophes like drought – watch Pakistan, Mexico); the confrontation with Iran (whether or not it ends with a Middle Eastern war, this saga is only beginning to get played out); the Russian resurgence (may be manifested in renewed expansionism in the post-Soviet space – Georgia, Crimea and the Baltics are potential flashpoints – and the race of countries like Germany, Finland, Turkey and / or Japan to reach some kind of accommodation with Russia, contrary to US interests) and the continuing secular ascent of China (due to its gradual nature, this is unlikely to result in any “big events” (although a flareup over Taiwan or the South China Sea is always a possibility) – that said, in the longer run this is going to be one of the most significant geopolitical trends).

By 2019, we will look out upon a new world as different from 1989, as 1944 was from 1914, or 1991 was from 1961. A partially revived American superpower will face a real “peer competitor” in China, though their competition will be restrained by domestic troubles and a shared concern for global stability and the future of industrial civilization. Many of the world’s least developed regions will have begun to fall apart, forsaking the torturing lights of civilization for the comforting darkness of simplistic barbarism. The European Union will have fallen apart under the stresses of its contradictions and its constituent nations will have reverted to their traditional balance-of-power rivalries, while Japan decides it would be better off band wagoning with China. A more insular, nationalist and powerful Russia is a wildcard, either in the throes of demographic and economic stagnation – or enjoying new, unprecedented power accruing from its energy wealth and warming landmass. By then, the clouds will be gathering for an even greater storm – the point sometime in 2030-2050 when the limits to growth make themselves really felt, and industrial civilization falls into its moment of greatest peril. The shifting winds will have become a gale.

His big idea, an elaboration and tying together of earlier work, is that Russia’s economy is structurally uncompetitive on the world stage, and that integrating with the global economy will lead to catastrophe. This is because of his counter-intuitive observation that Russia is overpopulated. Though its population density is low on paper, the cold climate, huge landmass and poor riverine connections means that the carrying capacity of north Eurasia is nowhere near as high as that of the world’s other centers of economic and political power – the US, China, and Europe. Because manufacturing is inherently loss-making on the Eurasian plains, it is much more economically “efficient” to just ship out Russia’s mineral resources to fuel manufacturing in warmer, coastal regions such as the Pearl River Delta or the Great Lakes. No more than 20mn Russians are needed to service the pipelines and grow fat from the proceeds; the other 120mn are free to eke out a subsistence living on Russia’s marginal lands, or die out (as indeed many did during the era of neo-liberal reforms). He recommended a return to sovereignty, autarky and sobornost as the solution to these woes.

I agreed with Parshev’s analysis upon my first reading of his book in 2002, a time when I still thought Putin was no more than a better-dressed, sober gangster in Yeltsin’s mold and the country showed little signs of real recovery. Yet as evidence mounted that Russia really was prospering by the mid-2000′s and I became influenced by Krugman’s criticisms of competitiveness, I increasingly came to reject his ideas (e.g. see this comment). However, since then increasing awareness of the vital role played by protectionism in “catch-up” industrial development, the reality of peak oil and above all the economic crisis forced me into reconsidering Parshev.

Russia’s Geographic Curse

According to the geographic-determinism school of economic development, Russia is afflicted by a panoply of woes experienced by no other country or region to anywhere near the same extent. This is held to explain its special path of development, in which attempts to “catch up” with the West only end up reinforcing a Sisyphean loop of unrealized ambitions and tragic legacies.

1) Russia is too cold.

But aren’t Canada and Finland prosperous liberal democracies, despite their harsh climate? Yes, they are. But most of Canada’s 30mn-strong population is concentrated around the Great Lakes, Vancouver and Newfoundland. The former has great riverine connections with the dynamic US heartlands, while the latter two have maritime climes with excellent deep sea ports. There are a few millions living in the agriculturally productive Canadian Prairies (equivalent to Russia’s Black Earth regions). However, Canada has nowhere near so many people living so far north and so far inland as Russia.

Without central planning and subsidized energy flows, it is highly unlikely that settlements in deepest Siberia or the High Arctic could have developed into substantial population centers. Manitoba-Saskatchewan-Alberta (5.9mn) together have fewer people than the demographically weakest Russian Far East (6.7mn), let alone Siberia (20.1mn), the Urals (12.4mn) and the Volga (31.2mn) which all have similar or worse climatic conditions. Just compare the populations of the following rough climatic equivalents: Moscow (14.8mn) and Calgary (1.1mn); Irkutsk (594k) and Yellowknife (19k); Norilsk (135k) and Churchill (923).

As for Finland, it is climatically and geographically equivalent to St.-Petersburg and the Leningrad Oblast, which are atypical in having relatively mild climes and sea access during the warm seasons. Even so, Finland has an unremarkable GDP per capita compared to other developed nations, despite it having some of the best human capital in the world.

The cold makes growing seasons short and late spring droughts are a recurrent problem. This traditionally made Russian agriculture outside the southern Black Earth regions (where the cold is mitigated by exception soil fertility and access to the seas) unproductive and barely sufficient for population subsistence.

This in turn gave rise to peasant cultural traditions deeply averse to the development of capitalist enterprise, with its emphasis on individual initiative and steady capital accumulation. The classic Kluchevsky quote from the 19th century:

There is one thing of which the Great Russian is sure − that a sunny summer day is valuable, that nature would allow little time convenient for agricultural work and that a short Great Russian summer can be shortened even more by a sudden untimely turn of bad weather. This would force the Great Russian peasant to hurry up and toil in order to achieve as much as possible over a short while and take the crop in good time… In this way the Great Russian would learn to take an extraordinary but short effort, would learn to do rush, hasty work and then take a rest during forced idleness in autumn and winter. No other nation in Europe is capable of such short extraordinary effort; but, on the other hand, such lack of habit to regular, moderate, constant work is unlikely to be found anywhere in Europe.

Though peasants view capitalists with suspicion throughout the world (money relations are a threat to the village social relations that serve to guarantee subsistence to its members), the precariousness of Russian agriculture reinforced the antipathy and encouraged the formation of a strong state capable of accumulating and protecting surpluses in the good times to insure the people from dearth in the bad times. It is probably no accident that the Russian state arose out of Muscovy, one of the remotest and least agriculturally productive regions, which however compensated with overwhelming military and political power.

Of course, the influence of climatic factors is much weaker on industry and services, than on agriculture. They have higher added value and the severe cold is mitigated by Russia’s energy riches, made exploitable by the Industrial Revolution. That said, the infrastructure costs remain significantly higher than in more climatically benign nations.

As you can see from the map above, east of Poland and north of Romania, Crimea and the Caucasus, Eurasia is afflicted by deep permafrost. This necessitates laying thick, heated concrete foundations and makes constructing housing, factories and skyscrapers far more costly than in developed nations, despite Russia’s cheaper labor force.

2) Russia is too big and remote.

Russia is in the paradoxical position of being at once overpopulated and underpopulated. Overpopulated in that it is too cold and harsh to sustain a big population; underpopulated in that the population density is low, which makes transport costs per capita prohibitively high. The challenge posed by its huge size and lack of sea ports was noted as far back as the 18th century by Adam Smith in his Wealth of Nations.

…all that part of Asia which lies any considerable way north of the Euxine and Caspian seas, the ancient Scythia, the modern Tartary and Siberia, seem in all ages of the world to have been in the same barbarous and uncivilised state in which we find them at present. The Sea of Tartary is the frozen ocean which admits of no navigation, and though some of the greatest rivers in the world run through that country, they are at too great a distance from one another to carry commerce and communication through the greater part of it.

This is also a constant theme of Stratfor‘s analysis (e.g. see The Recession in Russia).

Throughout history, Russia has lacked navigable river transportation and access to ocean trading routes. Furthermore, Russia’s population is scattered across its vast territory, its natural resources are mostly found in unpopulated areas and a number of regional challengers constantly threaten its territorial integrity. Russia’s core is essentially the northeastern portion of European Russia…

With vast territory, constant expansion to the buffers and a lack of internal transportation, Russia requires a substantial amount of resources to maintain and defend its borders. It requires top-down management of the economy to focus resources on overcoming geographical impediments to development and security. As such, Russia is not a capital-rich country; it is starved for capital by its infrastructural needs, security costs, chronic low economic productivity, harsh climate and geography. Unlike the United States or the United Kingdom, where industrial and post-industrial economic development can spring forth with little or no direction thanks to favorable geography (intricate river transportation systems in the United States and access to oceanic trade routes for both) and the relative security of oceanic barriers, Russia has had to rely on firm state-driven economic development.

Railways ameliorated Russia’s situation by vastly decreasing transport costs across its barren continental swathes, thus reducing the relative advantages enjoyed by the Rimland nations through virtue of their access to sea traffic. (This development was noted more than a hundred years ago by the geopolitical theorist Mackinder, who was concerned by the strategic threat Russian railways posed to British-ruled India). Meanwhile, the telegraph, telephones, radio, TV and eventually the Internet nullified the effects of distance on information exchange.

Nonetheless, Russia continues to incur great costs on account of its cold, continental nature. Road and railway maintenance are relatively hard and expensive in Russia, which has more limited spare resources in the first place. It also largely misses out on the great productivity gains accruing from the cargo freighter revolution of the late industrial age. Outside the Moscow road rings and the Moscow – St.-Petersburg corridor, highways remain little more than directions.

3) Russia has too many enemies.

Given its origins as a settled, economically-weak civilization surrounded by foreboding plains dominated by Asiatic horsemen to the east and Germanic, Scandinavian and Polish rivals to the west, Russia’s rulers have always felt insecure. This drove them to expand the Empire since the 15th century to occupy natural buffers, as far down the North European Plain as possible, to the Carpathian Mountains to the southwest, the Caucasus and Hindu Kush to the south and the Altai Mountains, Tian Shan and Stanovoy Range in the Far East. As Catherine the Great pithily put it, “I have no way to defend my borders except to extend them”. Below is a map showing how Russia’s geo-strategists view the world:

Poor internal communications and technical deficiencies forced Moscow to main large standing armies on every potential front, incurring a constant drain on scarce resources and the productive labor pool. More resources were required for administering non-Russian lands, maintaining a formidable internal policing apparatus, and funding the development of strategic sectors, above all those tied to military applications. Security vacuums in Russia’s periphery drew in Russian troops and bureaucrats. All this makes imperial overstretch, economic inefficiency and primitive consumer markets constant features (not bugs) of any Eurasian empire.

4) Russia retains a burdensome Soviet legacy.

Though technological developments partly mitigated the negative roles of climate and geography in Russian economic development, the Soviet physical legacy of single-industry towns, “gigantism”, remote settlements, and “structural militarization” acted in the opposite direction.

Towns were built in remote areas, including the High Arctic and the Far East, regardless of costs and explicitly designed to serve a planned economy. Heating in apartment blocks was centralized, meaning that even if half the inhabitants left the rest were still entitled to utilities services. All this constituted a massive diversion of energy flows from more “efficient” purposes. Many of these towns relied on just a few large industrial employers to survive; closing the enterprise down, even if it was high unprofitable, would have resulted in humanitarian catastrophe. Incidentally, this is precisely the reason why the neoliberal reforms of the 1990′s weren’t (and probably couldn’t be) really carried through.

Stalin built up the foundations for a gargantuan military-industrial complex (MIC) centered in the remote, uninviting Urals. After the 1960′s, the MIC metastasized to such an extent as to constitute around 30% of Soviet GDP by the mid-1980′s. Though activity collapsed in the 1990′s, Russia retains a structurally militarized economy. Though currently dormant and atrophied, it can be easily reconstituted. In the mean-time the MIC continues to lock up a great deal of Russia’s human and capital resources, along with the armed forced and its vast array of security agencies.

Why America is not Russia

The US is structurally different in almost all respects. Though it has a huge continental interior, its fertile areas are interconnected by an extensive riverine network that remains ice-free throughout the winter months. It possesses excellent sea ports on both coasts. The Great Lakes region is perhaps the best place anywhere in the world for industrial development.

America’s strategic isolation and massive internal potential allow it to maintain a world class navy and expeditionary forces with ease. The US uses them calculatedly and sparingly to check the emergence of any Eurasian hegemon, the only construct that has any chance of challenging its global preeminence. And it is not afflicted by economic distortions from its deep past because America was, at least internally, a consistently free market nation since the earliest days of its founding. Its small population and abundant resources produced large per capita surpluses, sparing it from the Malthusian crises that periodically stunted older civilizations, and instead spurring on the development of free-wheeling capitalism.

From Stratfor‘s The Geography of Recession:

The most important aspect of the United States is not simply its sheer size, but the size of its usable land. Russia and China may both be similar-sized in absolute terms, but the vast majority of Russian and Chinese land is useless for agriculture, habitation or development. In contrast, courtesy of the Midwest, the United States boasts the world’s largest contiguous mass of arable land — and that mass does not include the hardly inconsequential chunks of usable territory on both the West and East coasts.

Second is the American maritime transport system. The Mississippi River, linked as it is to the Red, Missouri, Ohio and Tennessee rivers, comprises the largest interconnected network of navigable rivers in the world. In the San Francisco Bay, Chesapeake Bay and Long Island Sound/New York Bay, the United States has three of the world’s largest and best natural harbors. The series of barrier islands a few miles off the shores of Texas and the East Coast form a water-based highway — an Intracoastal Waterway — that shields American coastal shipping from all but the worst that the elements can throw at ships and ports.

The real beauty is that the two overlap with near perfect symmetry. The Intracoastal Waterway and most of the bays link up with agricultural regions and their own local river systems (such as the series of rivers that descend from the Appalachians to the East Coast), while the Greater Mississippi river network is the circulatory system of the Midwest. Even without the addition of canals, it is possible for ships to reach nearly any part of the Midwest from nearly any part of the Gulf or East coasts. The result is not just a massive ability to grow a massive amount of crops — and not just the ability to easily and cheaply move the crops to local, regional and global markets — but also the ability to use that same transport network for any other economic purpose without having to worry about food supplies.

The implications of such a confluence are deep and sustained. Where most countries need to scrape together capital to build roads and rail to establish the very foundation of an economy — transport capability — geography granted the United States a near-perfect system at no cost. That frees up U.S. capital for other pursuits and almost condemns the United States to be capital-rich. Any additional infrastructure the United States constructs is icing on the cake. (The cake itself is free — and, incidentally, the United States had so much free capital that it was able to go on to build one of the best road-and-rail networks anyway, resulting in even greater economic advantages over competitors.)

Third, geography has also ensured that the United States has very little local competition. To the north, Canada is both much colder and much more mountainous than the United States. Canada’s only navigable maritime network — the Great Lakes-St. Lawrence Seaway —is shared with the United States, and most of its usable land is hard by the American border. Often this makes it more economically advantageous for Canadian provinces to integrate with their neighbor to the south than with their co-nationals to the east and west.

Similarly, Mexico has only small chunks of land, separated by deserts and mountains, that are useful for much more than subsistence agriculture; most of Mexican territory is either too dry, too tropical or too mountainous. And Mexico completely lacks any meaningful river system for maritime transport…

With geography empowering the United States and hindering Canada and Mexico, the United States does not need to maintain a large standing military force to counter either. The Canadian border is almost completely unguarded, and the Mexican border is no more than a fence in most locations — a far cry from the sort of military standoffs that have marked more adversarial borders in human history. Not only are Canada and Mexico not major threats, but the U.S. transport network allows the United States the luxury of being able to quickly move a smaller force to deal with occasional problems rather than requiring it to station large static forces on its borders.

Like the transport network, this also helps the U.S. focus its resources on other things.

Taken together, the integrated transport network, large tracts of usable land and lack of a need for a standing military have one critical implication: The U.S. government tends to take a hands-off approach to economic management, because geography has not cursed the United States with any endemic problems. This may mean that the United States — and especially its government — comes across as disorganized, but it shifts massive amounts of labor and capital to the private sector, which for the most part allows resources to flow to wherever they will achieve the most efficient and productive results.

Russia’s Return to the Future

As I pointed out earlier here and here, Russia is returning to the future. Its demography is stabilizing after the precipitous collapse of the 1990′s, and social morale and faith in the nation is slowly returning, to the dismay of geopolitical competitors, “Russophobes” and “social progressives” alike. Russia is implementing an industrial policy aimed at manufacturing growth and technology diffusion. The state brought the regions back under its thumb and is again becoming the linchpin of the Russian economy. The party’s over for Russia’s oligarchs:

Because of the financial crisis and government consolidation, the once-powerful oligarchs no longer have a say in their future and are merely along for the ride. Indeed, they no longer constitute a powerful and distinct business “class.” Some oligarchs will survive the shakeout, but not with their independence. To some degree, they all will become part of the Kremlin machine so carefully engineered by Putin. As copper oligarch Iskander Makhmudov said in a rare interview: “The oligarchs now have mixed fortunes, but we will all end up being soldiers of Putin one day.”

Instead of liberalizing, the economic crisis has simply reinforced already latent trends in Russia’s economic development. Russia’s ongoing globalization since the 1970′s is slowly beginning to reverse itself; Russia’s decision to apply to the WTO as part of a customs union with Belarus and Kazakhstan is an early indicator of an accelerating trend. Much of what I predicted in The Importance of Self-Sufficiency half a year ago is already coming to pass:

A wave of consolidation will occur in the Russian banking industry, Russia Inc. will close the oil windfall-foreign intermediary-cheap credit loop that was its prior financing mechanism and the country will emerge with a stronger, self-sufficient financial system. The oligarchs, Moscow and the middle classes bear the brunt of the crisis, while the provinces, agriculture and domestic manufacturing benefit, thereby reinforcing already latent tendencies in national development.

Though the drop in Russia’s output was far greater than I expected, it was far worse in Ukraine and the Baltics. Ukraine’s project of Westernization has failed utterly. According to my quick back of the envelope calculations, its GDP is currently (taking into account the recent collapse) around 30-40% lower than it was in the late USSR! (Russia’s is around 0-10% lower, but it is not faced with a fiscal or political crisis). Thus, though there is a possibility of a humanitarian crisis and a demographic shock in Russia, it is much lower than in Ukraine – where in any case a post-Soviet fertility recovery is much less in evidence in the first place. Damningly, opinion polls indicate that Putin and Medvedev are by far the most popular politicians in Ukraine.

Decline and disillusionment in Ukraine, and the return of isolationist nationalism to Russia. What next? History is a guide. A fundamental feature of autarkies is that to be truly self-sufficient they need to expand their domain, much as the Bolsheviks created the Union of Soviet Socialist Republics, which in turn expanded it to COMECON. It has to expand territorially in order to have access to all the vital building blocks of an industrial economy and to be able to hold its own against other economic blocs, which are more tightly interwoven into the world market. As such, it is very likely that within the next decade Ukraine, Belarus and Kazakhstan will again become integrated with Russia, on a spectrum of possibilities ranging from an EU-like structure to a unitary state-empire.

Reintegration will create a state with 210mn souls and will significantly increase the industrial (including military-industrial) power at Moscow’s disposal by at least 50%. One has to keep in mind that Eurasia’s industrial base was meant to be unified when it was constructed during the Soviet era, and as such the gains accruing from reintegration will be more than just the sum of its parts. One of Russia’s geopolitical priorities is to thwart an independent energy corridor for the proposed Nabucco oil pipeline and to link up with its ally Armenia, so it will no doubt continue pressuring Georgia to return into its orbit. Saakashvili’s days in power are almost certainly numbered. Whether Russia will choose to expand in Central Asia is more questionable. On the one hand, they have respectable energy reserves (especially gas), constitute demographic reservoirs amidst graying Slavdom and are geopolitically important. There are few problems with radical Islam and on the whole they appreciate Russian culture. On the other hand, they will present a development burden and China will likely oppose an overt Russian reassertion in Central Asia.

I do not think these trends are possible, or even desirable, to arrest, even should the Kremlin leadership want to (they will be pulled along by the Russian people). The reasons why they are inevitable, I leave to a later post.

Why they are nothing to lament over can be answered now – because of other key global trends. Russia’s oil production very likely peaked in 2008, along with global production. Conserving what remains for its own use should be a priority; exports should only be allowed on the most favorable terms, in exchange for Western technologies, not US Treasuries, Chinese trinkets or oligarch mansions in London. One consequence is that there will be increasing competition for resources. The industrial core (the US, Europe and China) will probably strike up strategic alliances to control and influence resource-rich nations, either overtly (latter-day gunboat diplomacy) or covertly (influence operations, information wars, etc). In this world, much like in the 1930′s, the strong will beat the weak. As such, Russia’s geopolitical priorities would logically be – and this already seems to be happening – to a) maintain its military strength, including the nuclear deterrent, b) neutralize and co-opt Europe and c) extend influence over the energy-rich Arctic, Central Asia and the Middle East. To pursue these goals effectively, it needs economic sovereignty, morale, and the attributes of an empire (in Russia’s case, these are all inter-linked).

The era of childish enchantment with the West, pursued by Andropov’s successors, is coming to an end, at last dispelled by the deafening crash of globalization. Russia is returning to its past and future; its triumphs and tragedies; in other words, its history, its soul, its path, its world. The world of Surkov, Stalin and Sisyphus. A world described by Parshev.

Is the US going the way of the USSR?

Inspired in no small part by the political charade over the bail-outs and boondoggles that plague our TV screens and electronic ether, I’ve compiled a top 10 list of ways in which the US increasingly resembles the collapsing Soviet Union for your information / despair / entertainment / Schadenfreude / ridicule / etc, delete as appropriate. A list of how Russians screwed up and Americans are repeating their mistakes step by step. A list that may provoke much needed debate and change that we can really believe in. Please see the notes at the bottom for more commentary.

10

An alcohol epidemic from the 1960′s on that kept Russian life expectancy flat ever since.

Dietary catastrophe resulting in historically unprecedented obesity and diabetes rates.

9

Hated and feared for human rights violations, invasion of Afghanistan and Communist rhetoric, and its socialist model discredited.

Hated and feared for use of torture, invasion of Iraq and post-Cold War triumphalist arrogance, and its neoliberal model discredited.

8

Military overstretch, economic distortion and disaster in Afghanistan.

Imperial overstretch, runaway military budget and return to the “graveyard of empires”.

7

Wasteful investments into infrastructure, bloated bureaucracy and inefficient industry.

Decaying infrastructure, misplaced investments into suburbia, bloated financial system and hallowing out of industry.

6

Collapse in morality, bloated bureaucracy and soaring corruption.

Regulatory capture, bloated special interests and legalistic mafia.

5

Suppression of statistics and silencing of dissent.

Manipulation of statistics and ignores dissent.

4

Dependence on foreign credit from debts and oil sales.

Dependence on foreign credit from debts, “dark matter” and the $’s status as global currency reserve.

3

Young reformer takes power and talks of glasnost and perestroika while avoiding real reform.

Young “outsider” wins the elections and talk of change and hope…

2

Ethnic nationalism and separatist tendencies.

Tax revolts and state rights.

1

More and more people began to predict Soviet collapse in the late 1980′s.

More and more people are beginning to predict an American collapse now…

As late as 1990, not a single state in the Union had an obesity rate of greater than 15% of the adult population; today, not a single state (with the marginal exception of Colorado) has an obesity rate of less than 20%. The national obesity rate soared to 34%. The percentage of American adults suffering from diabetes is now 11%, and another 26% have impaired glucose tolerance. Although improvements in US life expectancy haven’t stalled, change has been slower than in most other developed countries and even then was mostly accounted for by improved medical technology, and successes in reducing tobacco smoking and overconsumption of animal fats. An economic collapse now would trim the vastly expensive healthcare system and almost certainly result in a mortality spike – especially considering that the baby boomers are now nearing retirement age.

Both the Russian and American epidemics affect poor, middle-aged people the most; a difference is that the alcohol epidemic affected men more than women, whereas in the US obesity is slightly more prevalent amongst women than men. Vodka sales made good profits for the state (via taxes) during the Soviet period and good profits for private distilleries in the post-Soviet period; the American diet makes good profits for fast food outlets and the parasitic “food processing” companies that degrade good corn into corn syrup. Perhaps the most poignant comparison is in the kinds of TV adverts that dominate the airwaves in both countries. In Russia after 9pm, every third commercial suddenly becomes about some or another kind of beer (that’s an improvement over the 1990′s, when they ran all day); in the US, day or night, every third commercial praises the virtues of some kind of meretricious fat-soaked starchy thing.

9) Throughout the early Cold War, the USSR was a source of inspiration to leftist Western intellectuals and Third World countries looking to throw off the imperialist yoke and modernize quickly. But by the early 1980′s, pressure was being applied to the Soviet Union on account of its violations of the human rights treaties it was a signitary to. Central planning remained an alien ideology to all Western societies, increasingly so as its failures became clearer. It was condemned for its invasion of Afghanistan (in reality, an intervention at the request of its new socialist government to defend them from Islamists).

The United States gained a great moral victory from the collapse of the USSR (despite it being a result of internal dynamics) and enjoyed it during the 1990′s. However, this came to an end after 2001 due to the hypocritical and immoral way it went about waging the Orwellian-sounding “war on terror”. Preemptive war on made-up pretenses,  extraordinary renditions of terrorist suspects and the neocons’ incessant freedom-rhetoric was something the world by and large couldn’t square together. This resulted in its poor showing in international approval ratings and its repeated “victories” in the “world’s greatest threats to peace” category with Iran, Israel and North Korea as regular runner-ups and after party company. Although the fairness of such characterizations can be disputed, they are ultimately immaterial since it is perceptions that matter – not right or wrong, however defined.

The central planning model of the USSR was fully discredited by the 1980′s; neoliberalism is similarly on en route to the ashcan of history.

8) The USSR was spending about 25% of its GDP on the military by the 1980′s. Not only did this squeeze consumption and contribute to stagnant real incomes from around the mid 1970′s, it divested resources from investment into renewing the capital stock, civilian R&D and improvement of human capital via education and healthcare. However, official figures were ridiculously low – around 2.5% or so of GDP – due to statistical fudging and giving purely military enterprises funny names like the Chelyabinsk Tractor and Machine Building Factory (invented example).

The US maintains unrivaled power projection capabilities, a global network of 700 military bases and the world’s most technologically advanced military force – but it comes at a steep price. While the official military budget for FY2008 is around 520bn $, to this must be added the costs of the wars in Iraq and Afghanistan (170bn $), interest on past military expenditures (170bn $), nuclear weapons (30bn $), veterans (70bn $), “homeland defense” (70bn $) and other spending on their lavish healthcare and education entitlements, military foreign aid and “black projects”. (And btw, the figures for interest, nukes and veterans are from 2005). Therefore, it is probably entirely reasonable to double the entire military budget to better appreciate its true magnitude – i.e., quite possibly close to 10% of GDP. Add in the distortions – military production has the smallest multiplier effect on the economy (machine building has the biggest), and its claim on skilled workers (something like half of R&D outlays in the US are for military applications), and you get a superpower severely hobbled by its arms’ burden.

This is not a good situation, but not critical either. Yes, it ties down a big chunk of the economy in unproductive pursuits and contributes to the institutional corruption and runaway spending that is typical of military-industrial complexes. I happen to consider that most of the procurement programs currently being pursued are useless, from unproven missile defense to the overhyped F-35 (just build a few hundred much superior F-22′s instead) to the shiny new surface warships and aircraft carriers that are of dubious value in our era of advanced cruise missiles, UAV’s and supercavitating torpedos. (But this for another post). Most poignantly, Obama is now preparing to withdraw from Iraq (where stability is not yet assured, and which is far more strategically important) to free up troops for Afghanistan, the graveyard of empires…and ignoring Soviet veterans’ warnings of what might await them. And the economy is nowhere near as dominated by the priorities of the Armed Forces as was the case in the USSR. Nonetheless, huge military spending and foreign adventures do not necessarily lead to collapse – by themselves. However, the other economic and confidence problems now facing the US now make that a realistic possibility.

7) The Soviet Union invested vast resources into industrial development. However, they were frequently inefficient, wasteful and of questionable quality; and in any case were being severely undercut by the arms burden by the 1980′s.

Although the US built up a world class public infrastructure prior to the 1980′s, since then investments in this area have dropped off. The roads in California are frequently cracked and potholed – vastly inferior to what one might find in Germany, and not much better than in Russia. One quarter of bridges are structurally deficient, in most cities the water pipeline system is a century old and the electrical grid befits a Third World country.

Even worse is that much of the “infrastructure” that was built up in the past few decades consisted of lavish homes in sururbia requiring massive inputs of cheap energy to function normally. When oil is at 10$, spending an hour driving to work is monetarily (if not spiritually) sustainable; as we pass the oil peak and other resources (almost certainly) fail to make good the gap in time, this will change as petrol soars in price, even assuming it will remain available on the open market. Due to the “psychology of preveious investments” (see James Kunstler’s work) it is unlikely Americans will summon the will to scale down its suburbia before the laws of economics and geology force them into it.

Soviet industry was inefficient and was destroyed when subjected to market forces. American industry has already been hallowed out; high productivity growth masks a huge decline in quantity and complexity of its “industrial ecosystem”. US vehicle production fell from 13.0mn to 10.8mn from 2000 to 2007, held up only by the (doomed in the long-term) SUV market which is the only sector in which the Big Three made any profits. (During the same period, Germany increased production from 5.5mn to 6.2mn and Japan from 10.1mn to 11.6mn). Its machine tool building industry has for all intents and purposes collapsed. The only marginally healthy manufacturing industries left are in aerospace and defense. This is going to have very bad consequences when inflows of cheap credit from abroad can no longer sustain the US consumption boom; the manufacturing sector that could potentially have led to a quick revival simply no longer exists.

6) Whatever the faults of the USSR in its early years, there was genuine enthusiasm for building socialism relatively untainted by corruption. This began to change rapidly for the worse from the 1970′s. The elites became exclusively concerned with their own power and wellbeing, ultimately leading to the “insider buyout” that probably best describes what happened in its dying days. The size of the bureaucracy exploded and its effectiveness plummeted. A small change for the better under Gorbachev in the mid to late 1980′s led to catastrophic collapse, endemic corruption under Yeltsin, and some improvements under Putin from a very low base. Blatant self-enrichment of the elite at society’s expense became an accepted norm.

How does this translate to the US?

Collapse in ethics, quoting Buiter in Fiscal expansions in submerging markets:

… Financial regulation and supervision was weak to non-existent, encouraging credit and asset price booms and bubbles.  Corporate governance, especially but not only in the banking sector, became increasingly subservient to the interests of the CEOs and the other top managers. There was a steady erosion in business ethics and moral standards in commerce and trade.  Regulatory capture and corruption, from petty corruption to grand corruption to state capture, became common place.  Truth-telling and trust became increasingly scarce commodities in politics and in business life.  The choice between telling the truth (the whole truth and nothing but the truth)  and telling a deliberate lie or half-truth became a tactical option.  Combined with increasing myopia, this meant that even reputational considerations no longer acted as a constraint on deliberate deception and the use of lies as a policy instrument. As part of this widespread erosion of social capital, both citizens and markets lost faith in the ability of governments to commit themselves to any future course of action that was not validated, at each future point in time, as the most opportunistic course of action at that future point in time – what macroeconomists call time-consistent policies and game theorists call ’subgame-perfect’ strategies.

Under bloated special interests, I put the bloated financial services industry, the legalistic mafia, the healthcare industry and the prison-industrial complex. Finance as a share of GDP doubled in the last 30 years, transforming it from a service industry to a rent-seeking one. The proliferation of lawyers amidst amidst burgeoning legalism in society is another example of a self-serving mafia feeding on the blood of the citizenry, as are the “justice” systems and prisons that have gone together with them (the US has an incarceration rate that is unprecedented amongst anything but totalitarian societies). Finally there’s the healthcare industry, perversely regulated in such a way as to make it far less efficient than if it were nationalized or completely private and delivering one of the worst results for the buck in the world – and like a metastasizing cancer, it’s share of GDP has also exploded in the past few decades.

5) Since the 1970′s real wages for workers in the Soviet Union ceased growing, pressed down by the demands of the military-industrial complex. When statistics began to show that the average life expectancy was stagnating and infant mortality rising, they ceased publishing them.

Real median income in the US slowly increased from 35,000$ in 1967 to 46,000$ in 2005; however, the rate of increase slowed and for the first time in modern history it didn’t exceed the level reached at the peak prior to the last recession in 2000-2001 during the growth years of the Bush Presidency. In reality however the situation is even worse because since the time of Reagan the definition of inflation used by the government was being continuously reworked to make the figures appear better than they otherwise would have been, using substitutions and hedonics to spruce up the figures (i.e. adjusting for consumers switching to other products when similar products become expensive, and trying to put values on quality improvements). If the BEA (Bureau of Economic Analysis) continued using its old measuring standards, then a) the economy would have been in stagnation during the 1990′s and recession in the 2000′s, b) inflation would have been steadily increasing to a peak of nearly 14% in 2007 and c) median incomes would have been in steep decline. According to this thesis, then, the only reason the US avoided a big fall in living standards was due to the massive expansion in credit…which brings us to the next point.

4) The Soviet Union grew rapidly in the 1950′s and 1960′s because it was easy to move plenty of rural farmhands into relatively low-skilled industrial jobs. However as labor stocks became limited and focus shifted towards improving technology and productivity, GDP growth slowed and eventually stagnated. Collapse was delayed by the onset of high oil prices, which allowed the USSR to more easily import food products, machinery and technologies. When that collapsed in the mid-1980′s, the state was forced to run up huge debts to maintain mounting entitlement obligations, an overgrown military and bail out its East European satellites. Corruption and hidden inflation overtook the state and broke it.

According to Willem Buiter writing in Can the American economy afford a Keynesian stimulus?, America is a nation in fundamental disequilibrium. It can finance its continuous double deficits by giving its foreign investors an atrocious rate of return. In prior times, they accepted this because of America’s status as the largest economy, sole superpower and global financial center. This was presumed to reduce risk, so investors traded profits for security. From 2000-2004, it is estimated that the US exported some 559bn $ of this “dark matter“, or some 5% of its GDP at the time (the UK was second with 234bn $, or a stunning 15% of GDP). It also draws immense strength from the $’s role as the global reserve currency, for instance by allowing it to comfortably buy oil at $-denominated prices even when the currency is weak.

Due to its imperial overstretch, moribund financial system and frozen credit markets prepped up only by the federal government means that American alpha is almost certainly going to disappear in the next few years. The US fiscal deficit is going to be more than 12% of GDP in 2009 and will remain in the red for at least the next few years. Once global flight to quality ceases, the US will experience difficulties borrowing due foreign fear of American reluctance to commit to servicing their external obligations without inflation. The interest rates on them are going to be punitive and so a greater amount of resources will have to go towards servicing the debt, thus triggering a potential debt crisis. Buiter predicts a global dump of US dollar assets including Treasury bonds within the next two to five years as investors lose faith in the ability of the US Federal government to generate the primary surpluses required to service its debt without selling much of it to the Fed on a permanent basis, or that the nation as a whole will be able to generate the primary surpluses to service the negative net foreign investment position without the benefit of “American alpha”.

In conclusion, the only reason the US can afford to have both guns and butter is that the outside world is willing to provide it with cheap credit. This will no longer be the case as soon as global panic subsides, and the US will face the real possibility of a debt-and-currency crisis which it will have to inflate its way out of (on which they seem to be making a good start). The 2010′s will see plummeting global oil extraction and sky-high prices. If the $ were to collapse, the imports of oil that fuel the economy will plummet and may lead to a post-Soviet-scale drop in GDP (unless the US uses its military clout to lock in Iraqi and Saudi production – however, given its fiscal problems, questions about political unity and rhetorical commitment to human rights, that would be hard to achieve).

America can take consolation in one thing, however – the collapse in Britain, which is three times as reliant on “dark matter”; which is a much bigger energy importer relative to production; whose industry is in a far more decayed state; and where real breakup is far more likely because of ethnic tensions, will be much worse.

3) When Mikhail Gorbachev (the youngest member of the Politburo) came to power he talked of increasing transparency (glasnost) and restructuring (perestroika). Yet the most dangerous moment for a bad government is when it starts to reform. In reality the Soviet system was already very probably unsalvageable by then, partly because even the leader himself continued to be a part of the system, beholden to dominant interests (in the Soviet case, to the military-industrial complex, the nomenklatura and workers) and steeped in delusions of grandeur. Even as he attempted to liberalize and solve many interlocking social and economic problems at once, social entitlements were increased, new weapons systems ordered and foreign borrowing increased. Half-measures and reckless credit giveouts to save the system led to massive waste, insider plunder and the start of the disintegration of the economy by the late 1980′s.

The similarities with Obama are striking. Obama is one of the youngest Presidential candidates ever, and talks of hope and change. He comes after the zastoi, deterioration in political and civil liberties and reckless foreign military adventures of Bush II. Like Gorby, he is immensely popular throughout the world. He plans on expanding healthcare and other social entitlements, burdening the economy with farcical green schemes* and is intent on rescuing the troubled financial system by massive infusions of credit, with no regard for the future inflationary consequences. His advisors are the same clique of insiders under previous administrations, especially the Clinton one. He is beholden to the financiers and industrial lobbying groups that fund him and the middle classes that are the bedrock of American political power (as were Soviet workers), which are now being whittled down by the collapse in credit and repossessions. Major cuts in funding for the the Armed Forces and sustainable retreat are simply not envisioned. *As anyone who reads this blog nows, I consider global warming one of the greatest challenges faced by civilization. The problem is that schemes to fund “clean coal” or implement carbon trading are too little, too late, too costly and too unreliable.

Obama is steeped in the Pax Americana mindset (just as Gorbachev was steeped in scientific socialism), which is complacent and rests on its laurels; and as such the possibility of collapse simply cannot seriously enter his mind or considerations. Therefore the truly revolutionary reform that is needed to preserve the current system is unlikely to be contemplated, if its even possible.

2) As economic and political difficulties mounted in the USSR, they were further reinforced by disintegration on ethnic lines, diverting administrative and economic resources away from what should have been more pressing matters.

Recently New Hampshire formally requested a casus foedoris with the other states of the union separately from the federal government in a RESOLUTION affirming States’ rights based on Jeffersonian principles.

That this State does therefore call on its co-States for an expression of their sentiments on acts not authorized by the federal compact. And it doubts not that their sense will be so announced as to prove their attachment unaltered to limited government, whether general or particular. And that the rights and liberties of their co-States will be exposed to no dangers by remaining embarked in a common bottom with their own. That they will concur with this State in considering acts as so palpably against the Constitution as to amount to an undisguised declaration that that compact is not meant to be the measure of the powers of the General Government, but that it will proceed in the exercise over these States, of all powers whatsoever: that they will view this as seizing the rights of the States, and consolidating them in the hands of the General Government, with a power assumed to bind the States, not merely as the cases made federal, (casus foederis,) but in all cases whatsoever, by laws made, not with their consent, but by others against their consent: that this would be to surrender the form of government we have chosen, and live under one deriving its powers from its own will, and not from our authority; and that the co-States, recurring to their natural right in cases not made federal, will concur in declaring these acts void, and of no force, and will each take measures of its own for providing that neither these acts, nor any others of the General Government not plainly and intentionally authorized by the Constitution, shall be exercised within their respective territories; and

That the said committee be authorized to communicate by writing or personal conferences, at any times or places whatever, with any person or person who may be appointed by any one or more co-States to correspond or confer with them; and that they lay their proceedings before the next session of the General Court; and

That any Act by the Congress of the United States, Executive Order of the President of the United States of America or Judicial Order by the Judicatories of the United States of America which assumes a power not delegated to the government of United States of America by the Constitution for the United States of America and which serves to diminish the liberty of the any of the several States or their citizens shall constitute a nullification of the Constitution for the United States of America by the government of the United States of America. Acts which would cause such a nullification include, but are not limited to:

I. Establishing martial law or a state of emergency within one of the States comprising the United States of America without the consent of the legislature of that State.

II. Requiring involuntary servitude, or governmental service other than a draft during a declared war, or pursuant to, or as an alternative to, incarceration after due process of law.

III. Requiring involuntary servitude or governmental service of persons under the age of 18 other than pursuant to, or as an alternative to, incarceration after due process of law.

IV. Surrendering any power delegated or not delegated to any corporation or foreign government.

V. Any act regarding religion; further limitations on freedom of political speech; or further limitations on freedom of the press.

VI. Further infringements on the right to keep and bear arms including prohibitions of type or quantity of arms or ammunition; and

That should any such act of Congress become law or Executive Order or Judicial Order be put into force, all powers previously delegated to the United States of America by the Constitution for the United States shall revert to the several States individually. Any future government of the United States of America shall require ratification of three quarters of the States seeking to form a government of the United States of America and shall not be binding upon any State not seeking to form such a government; and

That copies of this resolution be transmitted by the house clerk to the President of the United States, each member of the United States Congress, and the presiding officers of each State’s legislature.

New Hamphshire isn’t isolated. States rights bills are being pushed in nine states this year and almost half the states’ legislatures have plans to pass similar resolutions. While most are addressed to Congress or the President to back off from further violating state’s rights, New Hampshire is appealing for solidarity from other states to develop a casus feodoris / alliance to develop a counter-weight to the federal government in case it increases interference in state matters or moves towards authoritarianism to manage the consequences of the economic crisis. The incidence of tax revolts are growing.

This is all still very far from the situation in the USSR, where after all half the population wasn’t even Russia whereas the US is a nationally homogeneous nation. Nonetheless, the trends are ominous. There is no visible horizon to the end of the economic crisis, and even as late as 1989 no Soviet republic except the Baltics wanted out.

1) Economist Willem Buiter believes there will be a global dumping of $ assets within two to five years. Financial advisor James West writing in SeekingAlpha believes a US debt default and dollar collapse are “altogether likely”. Russia fund investor Eric Kraus has been lamenting the unsustainability of American disbalances for years and predicted the US will fall into a debt trap last November. The economist Nouriel Roubini, one of the few to have foreseen this crisis, predicts this recession will be far longer and deeper than any other post-war recession. Even the Economist mentioned the possibility of a US debt-and-currency crisis in one of its recent issues.

Dmitri Orlov explicitly compares the US to the USSR, and concludes that the collapse will be worse, at least in social terms, in the former. The Russian economist Mikhail Khazin predicts a 25-40% drop in American GDP. Future and trends analyst Gerard Celente, who succesfully predicted the collapse of the Soviet Union, now foresees an unprecendented fall in US economic output, tax rebellions and food riots. Russian professor Igor Panarin sees disintegration and civil war as soon as this year.