The market for state territory - Pass the hemlock

The Economist has published an intriguing little article today—asking us to imagine a world in which countries still traded land for money....

Hellenic opinion was outraged last year when Frank Schäffler, a German politician, advised “bankrupt Greeks” to “sell your islands…and sell the Acropolis too!” That is hardly practical politics: as long as Greece remains a democracy, the political, and perhaps biological, lifespan of a leader who proposed hauling down the flag over even the tiniest Aegean outcrop would be measured in hours.

The furore obscured what Mr Schäffler was proposing: lease, commercial sale or a transfer of sovereignty. The government is already selling some land. The Institute for Strategic and Development Studies, a think-tank in Athens, says the Greek state has €35 billion ($47 billion) of property immediately available, which could cover 10% of its debt. KAPPA, a business lobby, suggests €75 billion. Stefanos Manos, an ex-finance minister, says a new state investment company could manage and dispose of property worth €200 billion. But just imagine that the exasperated northerners were dreaming of something more radical: fully ceding sovereign authority.

Territorial swaps for cash seem unthinkable today. But they were once common, especially when European powers were jostling for land in the New World. The United States’ 1803 purchase of the Louisiana territory from Napoleon for $15m (now $312m) is the most famous case. Germany bought the Caroline Islands, in the Pacific, from Spain in 1899 for 25m pesetas ($107m today). And during the First World War America paid Denmark $25m ($530m) for what are now the United States Virgin Islands, mainly to stop Germany buying them.

In an era of self-determination sales of territory have come to seem anachronistic. But leases, involving a de facto transfer of control, are common. In 2010 Russia extended a deal granting Finland a canal for 50 years, and gave Ukraine concessions worth €30 billion to park its fleet at Sevastopol for 25 more years. Michael Strauss of the Centre for Diplomatic and Strategic Studies in Paris sees “no obvious reason” why countries have stopped buying and selling land. “It’s a totally legitimate way for sovereignty to change under international law.”

Arturas Zuokas, the mayor of Vilnius, has made a teasing offer to Greece; he suggested his country acquire an island as “an exclusive place for rest in the Mediterranean” and “a great global advert for Lithuania”, featuring a spa, museums and a theatre. But he did not say whether he wanted title or sovereignty. Lithuania is forecast to be the euro zone’s fastest-growing economy in 2012, but the €7m on offer would only nibble at Greece’s debts.

The thinness of the market gives little indication of what sovereignty is worth. One guide might be the net present value of future tax payments, minus the net costs of public services disbursed there. Greece’s unusual habits with tax and spending could distort that indicator; but it could tempt an outsider to try to run the territory better. Auctions are the best way of setting prices—but would risk jangling nerves. Iran might find an Aegean island a handy way of foiling NATO’s planned missile-defence shield. Perhaps Greece could scare Germany into softer terms just by threatening such a sale.

Many a private-equity firm has overestimated the profits to be wrung from buy-outs, and the sovereignty market may be no exception. When America bought Alaska from Russia for $7.2m (now $113m), in 1867, some called it folly—and how wrong they were, American schoolbooks declare. But the sceptics might be right. David Barker, a professor at the University of Iowa, says that despite its oil wealth, Alaska was so costly to develop that the Treasury has lost money on the deal.

Russia and world trade: In at last?

The Economist discusses pronouncements this week that hint at the impending arrival of the Russian Federation at its long-awaited WTO destination:

After 18 years Russia is on the verge of joining the World Trade Organisation

There was disbelief this week when Arkady Dvorkovich, adviser to President Dmitry Medvedev, told journalists that Russia was close to joining the World Trade Organisation (WTO). Russia has been “close” for ages, but the timing has always slipped. Yet after 18 years of talks, it seems that membership now beckons.

Both America and the European Union have long agreed, as have all the other 153 WTO members bar Georgia, a small former Soviet republic which fought a brief war with Russia in August 2008 and is still partly occupied. Georgia had insisted, quite reasonably, on placing international observers to monitor the movement of goods at its sovereign border, which includes the territories of Abkhazia and South Ossetia.

Russia, which has recognised the independence of Abkhazia and South Ossetia, said this compromised their status. Swiss mediators have found a deal that does not mention their status, refers to the border as a corridor and provides for monitoring not by a government agency but by a private foreign company accountable to the Swiss government. Now Georgia has said “yes”, clearing the way for Russia’s entry.

After a few days, Russia also accepted the deal. There is no doubt that Mr Medvedev would like to go down in history not just as somebody who tinkered with Russian time zones but as the man who took his country into the WTO. The final decision still lies with Vladimir Putin, Russia’s prime minister and likely future president, though he is unlikely to block it now.

As Vedomosti, Russia’s business daily, points out, Mr Putin has always been the real obstacle to Russia’s entry into the WTO. In 2009, when talks between Russia and America were going full steam, Mr Putin unexpectedly thwarted them by saying that Russia would join only with Belarus and Kazakhstan, with which it has a customs union. Mr Putin, initially eager for Russia to be in the big international clubs, has come to see some WTO demands as a politically motivated nuisance.

The benefits of WTO membership are debatable. Some estimate that Russia could gain at least $50 billion a year. Others argue that Russia would do better to stimulate exports before joining. As it is, two-thirds of exports are oil and gas, not covered by WTO rules. Apart from extractive industries and metal, few Russian goods are competitive. A World Bank report notes that Russian exporters have trouble not just entering foreign markets but surviving in them.

The real problem, however, is not trade barriers to Russia’s goods, but the country’s own inefficiency, institutionalised corruption and stifled competition. None of these problems can be solved by WTO membership. But Sergei Guriev, head of the New Economic School in Moscow, says that it would at least expose corruption and increase competition, deeply alien to Russia’s ruling bureaucracy. Indeed, the main benefit of WTO membership may be political. “It will be a sign that Russia is moving towards the civilised world,” says Mr Guriev, “not away from it.”

Guardian: Is Vladimir Putin's Eurasian dream worth the effort?

Reacting to Russian news announced a few days back, Mark Mazower in an article published in today's Guardian suggests that "The Russian prime minister's union plan is not meant as a return to the Soviet past, but he would do well to check precedent"...

In Eric Ambler's masterly interwar thriller, The Mask of Dimitrios, the puppet master pulling the strings as a seedy Europe slides hopelessly into war is the shadowy Eurasian Credit Trust. The name was deliberately chosen. For most of the last century, Eurasia was scarcely a neutral term: it evoked the whiff of racial degeneration, the prospect of civilisation overrun by eastern hordes.

But now comes the Russian prime minister, Vladimir Putin, perhaps looking to lift the attention of a restive public at home to something more elevated than a peremptorily staged presidential succession, supporting the idea of creating a Eurasian union of former Soviet-bloc nations that could become "one of the poles of the modern world, serving as an efficient link between Europe and the dynamic Asia-Pacific region".

Putin explicitly denies that this is about rebuilding the USSR. Nevertheless, there has been a lot of talk of Eurasia since the collapse of the USSR and there is a close connection between the Eurasia concept and Soviet history. Belarus and Kazakhstan have already embarked on commercial integration and the new union will hope to take that further, perhaps attracting other former Soviet republics into its orbit: Kyrgyzstan and Tajikistan are mentioned. And in a world where EU membership is effectively barred to Russia, and where the EU is promoting its own eastern partnership, led by Poland and Sweden to intensify European links with other former Soviet republics – including both Belarus and the Ukraine – one can see the logic in Russian efforts to extend internal markets, remove barriers to labour mobility and at the same time win the fight for the hearts and minds of the inhabitants of its western gateways, above all in Ukraine.

Politicians like the occasional grand vision, especially one with historical resonance. Yet will all this be worth the effort? The precedents are not reassuring. If the EU's eastern partnership smacks of an effort to reshape the region in the image of the early modern Polish-Lithuanian commonwealth – a time of Polish and Swedish regional power when merchants and ideas travelled easily between the Baltic and the Black Sea – Putin's Eurasian union seems stuck in the Soviet era. Of course, Soviet ambitions went far beyond Eurasia; they wanted influence in the Middle East, Africa and south-east Asia. And this became clear after 1945, when Stalin's Russia really did become a world power thanks to its defeat of Nazis and the Kremlin got its chance to build a second world of socialism around the globe that united eastern Europe, the Balkans and the Soviet republics with other socialist partners further afield. Ideas and technology – above all, ideas about technology and the modernisation of peasant societies – circulated across the borders of the countries in this second world, as far away as Cuba, Angola, Ethiopia and North Korea. Today some historians remind us that the "third world" was so called precisely because of the sustained tussle for its allegiances in the 1950s and 1960s between the first and second worlds. Yet all of this can be exaggerated. The second world was concentrated on eastern Europe, and other member states came and went. The rise of China weakened the ideological prestige of Moscow. And none of it was ever a match in purely economic terms for the astonishingly powerful global alliance system put together by Washington, linking the powerhouse economies of western Europe and east Asia with the oil-producing states of the Middle East.

The first world definitely won that particular struggle and globalisation – by which I mean the extraordinary combination of industrial productivity growth in American partners such as Japan and South Korea with the financial flows that reshaped finance after the 1970s – ultimately brought the Soviet second world to its knees, both because it simply could not compete internationally and because much of eastern Europe had become addicted to western debt. Overall, the effort of sustaining this vast sphere of influence probably cost the USSR far more in purely economic terms than it got back. It had one great achievement to its credit – the industrialisation along late 19th-century lines of its own backward periphery, but by the late 20th century, that was not enough.

There is a lesson here to be learned, surely, from an earlier foray into a kind of Eurasianism by Turkey. In the early 1990s, the then president Turgut Özal imagined a coming "Turkish century" based on a new union among the Turkic-speaking states of the Eurasian heartlands. After his death, it became abundantly clear that the choice between orienting the Turkish economy east or west was no kind of choice at all. Having learned that lesson, the Erdogan government is pursuing a sort of post-imperial foreign policy of its own. But what makes it much more powerful than the earlier Özal model is not only that it is oriented to the former Ottoman lands in the Balkans and the Middle East rather than to the post-Soviet Black Sea and Caspian republics, but more importantly that it is intended as a complement rather than an alternative to the increasingly European and global orientation of the Turkish economy.

In short, it is no wonder Putin stresses his new vision of deeper integration is not meant as a return to the Soviet past. The question is whether there is any alternative model that makes sense for his proposed union. If the coupling of the Russian economy to the southern Stans brings with it a decoupling from the more powerful regional dynamos to its west and east, it will end up as a drag, not a spur, to growth and Russia will pay a heavy price for an old-fashioned dream of imperial glory.

Putin's grand vision: a new Eurasian bloc with old Soviet neighbours

The Guardian, alongside many other media outlets, brings news of Vladimir Putin's expressed ambitions to (re)create a new power bloc within Eurasia:

Russian prime minister proposes 'ambitious' union across republics based on economic interests

One week after announcing that he will return to the presidency next year Vladimir Putin has laid out a grand vision to bring Russia's former Soviet neighbours back into the fold.

Putin proposes the formation of a "Eurasian union", a bloc that could boost Russia's influence on the global stage. The proposal – from the man who once dubbed the Soviet Union's collapse "the greatest geopolitical catastrophe of the 20th century" – raises the spectre of the Russian prime minister's imperial designs.

The Eurasian union would be based on a customs union with Belarus and Kazakhstan, Putin suggests in an article published in Izvestiya newspaper on Tuesday.

"We are not going to stop there, and are setting an ambitious goal before ourselves – to get to the next, even higher, level of integration – to a Eurasian union," he has written. Tajikistan and Kyrgyzstan are also expected to join, he says.

Expecting critics to say he is trying to re-form the Soviet Union, Putin says: "We are not talking about recreating the USSR in one form or another. It would be naive to try to restore or copy that which remains in the past, but close integration based on new values and a political and economic foundation is imperative."

He adds: "We received a big legacy from the Soviet Union – infrastructure, current industrial specialisation, and a common linguistic, scientific and cultural space. To use this resource together for our development is in our common interest."

Putin has formed countless Moscow-led groupings aiming to maintain the power that Russia lost with the collapse of the Soviet Union. In recent years he has focused on economic integration and has pushed for former Soviet states to adopt the rouble as a regional currency.

In 2009 Russia formed a customs union with Belarus and Kazakhstan which is due to become a "unified economic zone" next year, bringing down barriers to the movement of labour and capital.

The Eurasian union would take that one step further, Putin says.

"We propose a model of powerful, supranational union, capable of becoming one of the poles of the modern world," he writes in the article.

It will be an uphill battle. The combined GDP of the EU stood at $16 trillion last year, while the Commonwealth of Independent States, an informal grouping of former Soviet states minus the Baltics, was just $1.9tn, according to the International Monetary Fund. Putin has been at pains to describe the union as an open project into which no one would be "pushed or rushed".

He has issued, however, a thinly veiled criticism aimed at Ukraine, which has continued to seek integration with the EU rather than renew ties with Russia.

"Some of our neighbours explain their reluctance to participate in advanced integration projects in the post-Soviet space by saying it allegedly contradicts their European choice," Putin writes.

"This is a false divide. The Eurasian union will be built on universal principles of integration as an integral part of greater Europe, united by common values of freedom, democracy and market laws."

The other two members of the customs union, on which the Eurasian union would be based, have been criticised for their lack of democracy, with Belarus dubbed "the last dictatorship in Europe".

The article is Putin's first foreign policy pronouncement since he announced he would return to the presidency next year, potentially getting another 12 years in power.

Fyodor Lukyanov, editor of Russia in Global Affairs, said: "It's quite remarkable Putin would start with this.

"The logic behind it is primarily economic, and in this sense it is different from previous attempts, which were political or just decorative, to show Russian leadership."

The move could also be a sign of frustration with Russia's 18-year-long effort to join the World Trade Organisation, Lukyanov said. "The customs union was to a certain extent Putin's response to years and years of fruitless negotiations on the WTO – if global integration is not available let's turn to a regional one."

Should Russia be in the BRIC club of dynamic economies?

Jonty Bloom poses the question above for BBC Radio 4's The World Tonight program—and attempts to find an answer...

When the term "Bric" countries was coined in 2001, it was used to describe the potential for development and growth of Brazil, Russia, India and China, but some now doubt whether Russia belongs in that "club".

The Red October chocolate factory sits on the banks of the Moskva river, just a few hundred yards downstream from the Kremlin. Once - as the name suggests - it was one of the pride-and-joys of Soviet industry or, at least, of Soviet confectionery manufacturing, but now it has been transformed into luxury city centre apartments for the new super rich of Russia. It is surrounded by trendy wine bars and restaurants and, in a small way, it symbolises how Moscow has gone from the capital of communism to the city with the largest number of billionaires in the world in a few short decades.

The Kremlin is now surrounded by swanky hotels and apartment blocks, top-end jewellery and clothes shops selling exclusive Western brands, and endless traffic jams which seem to consist mainly of BMWs, Range Rovers and Bentleys.

But all of this money does not necessarily mean that Russia belongs in the same club as all the other BRIC nations.

The term was coined by Jim O'Neill, a top economist at Goldman Sachs, when he was trying to come up with a word to describe where he thought world growth and economic power was going to come from in coming decades - Brazil, Russia, India and China. These days South Africa is often added to make the word BRICS but the idea is just the same. But does Russia belong in that exclusive club?

Certainly Alexander Morozov, chief Russian economist at HSBC in Moscow, has his doubts:

"I think it would be wrong to say that Russia will be able to develop strong growth rates in coming years. Brazil, India and China can do this - they have the potential to industrialise further and employ additional labour. All the labour that Russia has is already employed.

"Therefore the efficiency gains are not the same as when you have a green-field site and just employ workers from the neighbouring village or province."

While Brazil, India and China have seen large increases in population with huge numbers of young, educated workers desperate for jobs, Russia's population went into decline after the end of the Cold War. As did much of its heavy industry. While the other three Bric nations have started industrialising almost from scratch, Russia was left with a swathe of old and appalling, inefficient industries from the Soviet era.

Anders Aslund is a Swedish economist who helped Russia privatise much of its industry in the 1990s, but he says much of it was not fit enough to survive in the private sector.

"Much of machine building has simply collapsed," he says, "and much of manufacturing as well. They were producing bad products that nobody wanted to buy."

But some Russian industries are doing well - its commodity producers. Russia is now the largest oil exporter in the world and the second largest exporter of natural gas. Its petrochemical and steel industries have also prospered. Welcome though this is, it is not what is really happening in the other Bric countries.

Some think that Russia has more in common with Saudi Arabia than with China. The Russian government, for instance, relies on oil and gas sales for 40% of its tax revenues. That means the current high oil price is filling the Kremlin's coffers like never before.

But the country's infrastructure is crumbling and, as with many oil-producing countries, corruption is rife in Russia - a further brake on economic growth and development.

Perhaps the best judge of whether Russia really deserves to be counted amongst the BRIC nations is Alexander Lebedev, the billionaire Russian oligarch, who has been outspoken in his criticism of corruption in his home country. When I interviewed him in his luxurious and well guarded offices in one of Moscow's smartest districts, he was quite clear on the subject.

"Instead of Bric it should be Bic. For the real comparison, look at what is going on in infrastructure in China. You just stand there gawping in disbelief. Why are they not doing it here?"

Russia has many things going for it, a huge under-developed land mass, massive mineral resources and some brilliant industries - nuclear power and space technology among them.

But is it really a young, vibrant, industrialising country that is taking on the West and winning, like Brazil, China and India?

Because it certainly does not feel like it is.

David Cameron at Davos: Invest in China at your peril

The Daily Mail today highlights a warning issued by UK PM David Cameron against "authoritarian capitalism" (excerpts follow):

David Cameron last night launched an extraordinary attack on the ‘authoritarian capitalism’ of China and Russia as he warned businesses to invest there at their peril. ....

Mr Cameron poured scorn on those who see ‘political leaders with the powers of juggernauts’ forcing through decisions elsewhere in the world and believe that the democratic values of the West are ‘outdated, ineffective – even an obstacle to success’.

‘I passionately disagree. It’s these values that create the climate for innovation. Look at where the big ideas come from – the Facebooks and the Spotifys – and the vast majority are from open societies,’ the PM told businessmen, economists and world leaders gathered at the World Economic Forum in Davos, Switzerland.

‘That’s because good ideas come through freedom – free thinking and the free association of like-minded people. Our values create the right climate for business, too. If you’re looking to set up a headquarters abroad, are you going to invest where your premises can be taken away from you? Where contracts are routinely dishonoured? Where there’s the threat of political upheaval? Or are you going to invest where there are property rights, the rule of law, democratic accountability? These values aren’t some quaint constitutional add-on, they are an integral and irreducible part of our success today and tomorrow.’

Though he did not refer to China and Russia directly, observers were left in little doubt which countries he was referring to in his attack on ‘authoritarian capitalism’.

Mr Cameron’s remarks risk a row with China, which he has gone out of his way to court as an economic partner since winning power. Only last November, he led Britain’s largest-ever delegation to China with 50 top business leaders joining ministers on a trade mission.

Economist: Suicide bombs in Moscow - Terror at the airport

The Economist today has a useful round-up regarding the terrorist attack on Moscow's Domodedovo Airport on Monday:

Another suicide bomb reflects the Kremlin’s difficulties with the north Caucasus

Half past four in the afternoon is peak time for international arrivals at Domodedovo, Moscow’s busiest and most efficient airport, favoured by foreign airlines. Several European flights land then. As passengers leave the baggage area, they are greeted by taxi touts. On January 24th they were met by a suicide bomb that killed 35 people and injured more than 100. It was designed to cause maximum damage and to kill foreigners and Russians alike.

This was the deadliest attack on any international airport. Nobody has claimed responsibility, but the assumption is that it is the work of Islamist fundamentalists, related to Russia’s troubled north Caucasus—though Dmitry Medvedev, Russia’s president, and Vladimir Putin, its prime minister were careful not to say so publicly.

The details remain hazy, but a male suicide bomber seems to have entered the airport building from the car park, avoiding metal detectors on his way to the arrivals area. A source close to the investigation says CCTV picked up the bomber entering the building just over an hour before the explosion. Intriguingly, the footage suggests he did not look north Caucasian.

The attack was condemned around the world yet greeted with an air of resignation in Moscow, partly because suicide bombings have become tragically common. Last March two female suicide bombers blew themselves up on the Moscow metro, killing 40 people.

A useful article as regards the motivations and methods of terrorism in the Russian Federation. A prime current example which you should read!

Guardian: US Senate approves nuclear arms control treaty with Russia

Vote on new strategic arms reduction treaty passes 71-26 after 13 Republicans and two independents vote with Democrats

http://www.guardian.co.uk/world/2010/dec/22/us-senate-new-start-approved

The US Senate ratified an arms control treaty with Russia today that reduces the number of both countries' nuclear weapons, giving President Barack Obama a major foreign policy success in the closing hours of the outgoing session of the current Congress.

Thirteen Republicans broke with their top representatives in the upper house and joined 56 Democrats and two independents to provide the necessary two-thirds vote to approve the treaty. The vote was 71-26.

The accord, which still must be approved by Russia, would restart weapons inspections as successors to President Ronald Reagan have embraced his edict of "trust, but verify".

Calling the treaty a national security imperative, Obama had pressed for its approval before a new, more Republican Congress assumes power in January.

The Obama administration has argued that the United States must show credibility in its improved relations with its former cold war foe, and that the treaty was critical to any rapprochement. The White House is counting on Russia to help pressure Iran over its nuclear ambitions.

The new strategic arms reduction treaty (Start) – signed by Obama and the Russian resident, Dmitry Medvedev, in April – would limit each country's strategic nuclear warheads to 1,550, down from the current ceiling of 2,200. It also would establish a system for monitoring and verification. US weapons inspections ended last year with the expiry of a 1991 treaty.