A propos of Richard’s post on how the French used to behave in Cote d’Ivoire, let’s not forget how another member of the Security Council P5 – Russia – is behaving right now. Why, you might wonder, should Russia be blocking moves in the Security Council to step up the international community’s level of intervention in Cote d’Ivoire?  

Concerned about implications for its own restive regions, such as Chechnya, Russia has traditionally sought to thwart Security Council actions regarding nations’ sovereignty. But one western diplomat said Russian considerations over Ivory Coast were “90 per cent about oil, 10 per cent about sovereignty”.

Lukoil, Russia’s second biggest oil producer, has stakes in three deep-water blocks off the Ivorian coast, part of a largely untapped 1,000km oil frontier. Lukoil acquired its interests during Mr Gbagbo’s rule and changes of power in Africa have often been followed by reviews of oil and mineral rights.

Behind the dense forest of exotic acronyms is a simple fact: the catch-all classification ‘emerging markets’ has lost much of its usefulness. It was invented in the 1980s, by World Bank economist Antoine van Agtmael, to replace the now-defunct acronym LEDCs (or ‘less economically developed countries’) by which the West had until then blithely referred to the rest of the world. The term ‘emerging markets’ served as a useful way to refer to fast-growing although crisis-prone markets like Russia, China and Mexico.

Within the term ‘emerging markets’ was quite a 1980s-assumption: these markets would follow the development route laid down by ‘developed’ economies, until they arrived in the neo-liberal end point reached by the US, the UK and other western countries. And the phrase also came to have strong associations with the currency and debt crises of the 1980s and 1990s.

But things have changed. The bigger emerging market countries have now overtaken the weaker developed markets, not just in total GDP, but also in the pricing they pay on their sovereign debt. Emerging market countries like China and Russia have accumulated trillions of dollars in foreign exchange reserves, and are now the main creditors of western sovereigns. In the 1980s, emerging markets depended on the west for capital inflows. Now the situation is reversed, and the US and EU depend on China to buy their sovereign debt.

It was partly to recognize this shift in economic power to emerging markets that Goldman Sachs economist Jim O’Neill introduced the now-famous acronym BRICs (Brazil, Russia, India and China) in 2001. It was a runaway success. A decade on, and MSCI has launched a BRIC index, there are several BRIC-focused funds, BRIC-focused blogs, BRIC conferences, and the leaders of the BRIC countries even held their own BRIC summit in 2009. 

However, the success of the acronym, and the increase in capital flows to BRIC markets that followed, quickly led to questions and criticisms of the BRIC tag. In 2008, for example, when Russia’s economy slid into recession following the war with Georgia and the Credit Crunch, some analysts suggested Russia should be dropped from the grouping. This suggestion was sufficiently alarming to Russia that it organized not one but two BRIC summits in Russia in 2009. .

Beyond BRICs

Some analysts and economists have pointed out that the BRIC grouping misses out as much as it includes. Jerome Booth of emerging market fund manager Ashmore Investment says: “I came up with CEMENT: Countries in Emerging Markets Excluded by New Terminology.” What, for example, about Indonesia, which has a bigger population than Russia, greater political stability than India, and an economy set to grow by 7% in 2011? Both Morgan Stanley and emerging market fund manager Templeton have suggested turning the BRICs into BRIICs.

What about Turkey, which emerged from the Credit Crunch in remarkably robust health? Its stock market is up 12% year-to-date, while the MSCI BRIC index is down 2%. Turkish president Abdullah Gul told the Financial Times it “wouldn’t be surprising we start talking about BRIC plus T” – although that acronym hardly rolls off the tongue.

Other investment banks, perhaps jealous of the kudos Goldman won with its BRIC creation, have tried to make their own acronyms go viral. HSBC’s ex-CEO Michael Geoghegan tried to float CIVETS: Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. He said: “Each has large, young, growing population. Each has a diverse and dynamic economy. And each, in relative terms, is politically stable.”

But investors did not take CIVETS to heart (one says: “BRIC sounds big and serious. Isn’t a civet some kind of animal hormone gland?), and the acronym lasted little longer than Geoghegan, who is departing from HSBC.

Rival firm Standard Chartered has tried this year to introduce the ‘7% Club’, which would include any market whose economy is growing at rates of 7% a year or more. Standard Chartered says: “Focusing too much on BRICs has its limitations. One is that there are several other countries that are not far behind and could plausibly be in the top four within a decade or two, most likely displacing Russia or possibly Brazil.”

Having an acronym with a fluid membership allows for any outperformers to join and underperformers to drop out. But the 7% membership rule makes for some strange members in the club: China, India, Vietnam, but also Turkmenistan, Sudan, Sierra Leone and Chad. Anyone for Sudanese debt?

Goldman Sachs’s Jim O’Neill has sought to create a new acronym to acknowledge the rising stars coming after the BRICs in emerging markets: Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey and Vietnam. He has dubbed these countries the ‘Next 11’, which is probably catchier than, say, SKIVE PIMP BNT.

The NEXT 11 tag has already had some success – Castlestone Management launched a Next 11 fund in August 2010, and BNP Paribas launched a Next 11 ETF.  Jeffrey Sacks, emerging market debt portfolio manager at Principal Global Investors in New York, says: “The Next 11 tag is interesting because it catches the middle tier of rising stars, and all the markets in it share quite similar economic fundamentals.”

Its the PIIGS, STUPID

Meanwhile, a sign of the times of how bad things have got for developed markets is analysts have started to invent acronyms to group them together in ‘bad groups’. The main example of this is the PIGS acronym, for the weaker Eurozone economies of Portugal, Italy, Greece and Spain, although some analysts prefer to include Ireland to make it PIIGS.

No one has owned up to inventing PIGS, indeed, Barclays Capital analysts have been banned from using it, as it has led to fury among PIGS policy-makers, with one Portuguese politician calling it a racist plot fried up by the British media to deflect attention away from the weak UK economy. The British press responded by inventing its own acronym, STUPID, to include the high deficit economies of Spain, Turkey, UK, Portugal, Italy and Dubai.

But some investors warn that such acronyms, droll as they are, can make the markets less safe. Gerard Fitzpatrick, senior portfolio manager at Russell Investments in London, says: “These acronyms can spread systemic risk. They create herd behaviour, with investors mindlessly running from anything tarred with the PIGS brush.” Jerome Booth agrees: “The problem with all these acronyms is they’re short-cuts. They save you the effort of thinking. Thinking is hard work.”

But these sorts of neural shortcuts are not confined to acronyms. There are many types of classifications and groupings that have a big influence on investor behaviour, but which can be arbitrary or misleading if followed too religiously. Perhaps the most influential classification is how sovereigns are treated by big index providers like MSCI and S&P’s.

For example, investors and analysts have been expecting MSCI to upgrade Taiwan and South Korea, both of which are investment grade, to ‘developed market status’. However, it has yet to do so, despite other indices like S&P and FTSE graduating these countries.

Bankers in the GCC have also long been waiting for MSCI to upgrade GCC markets like the UAE from ‘frontier’ to ‘emerging’, which would instantly lead to large capital inflows from index-tracker funds. But so far they’ve waited in vain.

Another huge driver of investor behaviour is the stamp given sovereigns by rating agencies. Indeed, whole economic policies are designed with a view to preserving ratings, as the British government’s anxiety about the UK losing its AAA sovereign rating show this year. Much of Russian finance minister’s economic policy from 2001-2003 was designed to win Russia an investment grade credit rating, which it finally did in 2003 – although financial reforms notably dropped off following that achievement.

The loss of investment grade, meanwhile, can be a traumatic event – take Standard & Poor’s downgrade of Greece to junk status in April 2010, which was enough to cause the EU to call for rating agencies to act in a “responsible and rigorous way”, during “this very difficult and sensitive period”. The other rating agencies then followed suit, leading to Greece falling out of the MSCI investment grade index.

The rating a sovereign is given has a huge impact, then, on its market perception and on its domestic economic policy – on government spending on schools, hospitals and other critical public services.  And yet, if the Credit Crunch has shown anything, it is that rating agencies are over-worked and under-qualified organizations manned by analysts who would often far rather be working at an investment bank. They are just as prone to inaccuracy and fallibility as other areas of the market.

One investor says: “There are all sorts of classifications and generalizations that get slavishly followed and  which prevent people from looking at fundamentals. And the media is responsible for a lot of it. It’s journalists who are most obsessed with coming up with catchphrases, or awards, or lists of ‘who’s hot’. Too many investors outsource their thinking to analysts or hacks. People need to think for themselves.” Think for ourselves? PIIGS might fly.

Enjoy this? There’s more by me on psychology and philosophy at my blog, The Politics of Wellbeing.

The conflict had several immediate results.

Already fraught relations between Moscow and Tbilisi plunged to new depths and diplomatic relations were severed.

Russia and three other countries recognised the independence of the breakaway Georgian regions of South Ossetia and Abkhazia.

And relations between Russia and the West – the US and the EU – deteriorated to their worst level since the collapse of the USSR – there was even talk of a new Cold War from western politicians.

The Cold War analogies led some commentators to argue Russian foreign policy had taken a decisive anti-western turn and things could and/or should never be the same again

Two years later, the one thing that seems unlikely to ever be the same again is the shape and size of Georgia. If recognition from Russia was not enough, the recent International Court of Justice opinion that Kosovo’s unilateral declaration of independence was not against international law, makes it even less probable Tibilsi could regain control of its lost regions.

But otherwise those predictions and talk of a new Cold War couldn’t appear more misplaced.

Russian relations with Georgia remain hostile. Although the border has reopened in places and some business links survive, ties look set to remain frosty as long as Prime Minister Putin and President Saakashvili remain in office, given their dispute now has a personal animus that goes beyond the geo-political.

But when it comes to relations with the western powers, over the past year things have improved significantly.

One of President Obama’s most successful foreign policy initiatives to date has been the ‘reset’ of relations with Russia that has led to a new nuclear arms control agreement, START 2, but Washington appears to have been pushing at an open door. Though the talks over START took a bit longer than expected and the Russians bargained hard, President Medvedev genuinely seemed to want to do a deal.

When it comes to Europe, the Russians were reaching out to their arch rivals, the Poles, even before the tragic air crash in Russia that killed the Polish President and many of the country’s elite in April. Mr Putin, who has a reputation for playing hardball, handled the consequences of the disaster with a sensitivity that surprised many and Poland has reciprocated.

Russia knows Poland is now an important player in the EU and the overtures to Warsaw show Moscow wants to improve relations with the wider EU, damaged in the past few years by disputes from the disruption of gas supplies via Ukraine, to the killing of the former Russian agent, Alexander Litvinienko, in London.

What lies behind this change of policy in Moscow?

The reasons for the change of approach from Russia were outlined in a leaked Foreign Ministry paper in May  and they appear to be highly pragmatic.

The economic crisis came as huge shock to Russia’s leaders as the economy shrank by up to 10%. The fall in global economic activity led to a big fall in the price of oil on which Russia depends for much of its GDP.

The penny seems to have dropped in Moscow  that the oil and gas industry need to be much more efficient and the country needs to diversify away from reliance on the energy sector. So President Medvedev and Prime Minister Putin want to modernise the Russian economy, and they have decided they need good relations with the western economies to get access to investment and technology.

Last month, Russian Foreign Minister, Sergei Lavrov, wrote a significant essay in Russia in Global Affairs explaining the policy change in more depth

So is Moscow turning  westwards, rather than to its new partners in the BRIC bloc – China, India and Brazil – when it really needs help?.

Well this change could be a sign that the talk of the shifting balance of power in the world is overblown.

Equally, it could well be a sign that the emergence of new powers, alongside the presence of the traditional western powers, has given all states more options in foreign policy – and a country like Russia, which sees national interest through the lens of realpolitik, can pick its horses for courses in the global arena.

The World Tonight is broadcast at 22.00 UK time on BBC Radio 4 and online

A nuclear free world isn’t an ignoble goal, but it needs to be approached realistically. Focusing on the stockpiles of the United States and Russia and limiting U.S. options for use of nuclear weapons does nothing to change the calculus of Tehran and Pyongyang.

Henry Kissinger, who is now among the chief proponents of nuclear disarmament, wrote in 1957 in his landmark study Nuclear Weapons and Foreign Policy that “A renunciation of force, by eliminating the penalty for intransigence, will therefore place the international order at the mercy of its most ruthless or irresponsible members.”

Our unwillingness to penalize countries such as Iran, North Korea, and Syria for their illicit activities only empowers them. It sends the message to other states potentially seeking nuclear weapons that the path to a weapon can be pursued with few repercussions.

If President Obama were truly concerned about the future of the international nonproliferation regime, he would follow his recent disarmament “accomplishments” with some serious action to ensure that rogue regimes realize that there is a price to be paid by those who choose to pursue nuclear weapons.

You have to love the “If President Obama were truly concerned…” line. Of course, the President is just pretending to be worried about the issue – it’s all part of his cunning plan to sell America out to foreign and socialist overlords. Or something like that.

A causal reader would also be left thinking that Kissinger opposed the treaty, when of course he is right behind it, issuing a joint statement with George Shultz, William Perry, and Sam Nunn:

We strongly endorse the goals of this Treaty, and we hope that after careful and expeditious review that both the United States Senate and the Russian Federal Assembly will be able to ratify the Treaty.

Obama is following the (bi-partisan) playbook that Kissinger, Schultz, Perry and Nunn set out in their 2008 A World Free of Nuclear Weapons op-ed. It recommended:

• “Changing the Cold War posture of deployed nuclear weapons to increase warning time and thereby reduce the danger of an accidental or unauthorized use of a nuclear weapon.
• Continuing to reduce substantially the size of nuclear forces in all states that possess them.
• Eliminating short-range nuclear weapons designed to be forward-deployed.
• Initiating a bipartisan process with the Senate, including understandings to increase confidence and provide for periodic review, to achieve ratification of the Comprehensive Test Ban Treaty, taking advantage of recent technical advances, and working to secure ratification by other key states.
• Providing the highest possible standards of security for all stocks of weapons, weapons-usable plutonium, and highly enriched uranium everywhere in the world.
• Getting control of the uranium enrichment process, combined with the guarantee that uranium for nuclear power reactors could be obtained at a reasonable price, first from the Nuclear Suppliers Group and then from the International Atomic Energy Agency (IAEA) or other controlled international reserves. It will also be necessary to deal with proliferation issues presented by spent fuel from reactors producing electricity.
• Halting the production of fissile material for weapons globally; phasing out the use of highly enriched uranium in civil commerce and removing weapons-usable uranium from research facilities around the world and rendering the materials safe.
• Redoubling our efforts to resolve regional confrontations and conflicts that give rise to new nuclear powers.”

Is there any issue serious enough not be used as a partisan football in the US? I fear not.

Today, Joe Lieberman (an independent these days, who caucuses with the Democrats) took to Fox News to claim that ratification would be impossible unless the administration extracted concessions from Russia on missile defence and began to build a new generation of nuclear weapons:

We have to make darned sure our nuclear warheads are capable, are modern as world leaders arrived in Washington for the start of a major nuclear summit. I’m going to be real hesitant to vote for this treaty unless we have a commitment from the administration that they’re prepared to modernize our nuclear stockpile.

For the Republicans, Lamar Alexander said there was ‘not  a chance’ of ratification in 2010 – and that consideration of the treaty should wait until 2011.

What credibility does Obama’s nuclear strategy have if it lacks backing at home? Not much, I fear.

Asked about this, President Obama sounds reasonably confident that all will run smoothly. He also has harsh words for Sarah Palin too, who has suggested that American citizens would ‘rise up’ against his ‘unbelievable’ and ‘unacceptable’ nuclear posture (great cartoon version of her oratory, here).

STEPHANOPOULOS: So, you have no doubt you’re going to get the eight Republicans you need to ratify this treaty?

OBAMA: Well, you know, the — listen, I’ve now been in Washington for long enough that, for me to say I have no doubt (LAUGHS) about how the Senate operates would be foolish. I feel confident that leaders like Dick Lugar — who actually was somebody I worked very closely with when I was in the Senate on issues of bomb control — when they have had the opportunity to fully evaluate this treaty, [they] will come to the conclusion that this is in the best interest of the United States. But I will also say to those in the Senate who have questions, is that this is absolutely vital for us to deal with the broader issues of nuclear proliferation, that are probably the number one threat that we face in the future.

STEPHANOPOULOS: I want to get to some of those broader issues. Because you’re also facing criticism on that. Sarah Palin, taking aim at your decision to restrict the use of nuclear weapons. Your pledge not to strike nations, non-nuclear nations, who abide by the nonproliferation treaty. Here’s what she said. She said, “It’s unbelievable, no other administration would do it.” And then she likened it to kids on the playground. She said you’re like a kid who says, “Punch me in the face, and I’m not going to retaliate.” Your response?

OBAMA: I really have no response. Because last I checked, Sarah Palin’s not much of an expert on nuclear issues.

STEPHANOPOULOS: But the string of criticism has been out there among other Republicans as well. They think you’re restricting use of nuclear weapons too much.

OBAMA: And what I would say to them is that if the secretary of defense and the chairman of the Joints Chiefs of Staff are comfortable with it, I’m probably going to take my advice from them and not from Sarah Palin.

STEPHANOPOULOS: But not concerned about her criticisms?

OBAMA: No.

It’s commonplace to describe the financial crisis as a once-in-a-century event, but I question whether that is the case. Perhaps we’re not in the midst of a short-lived financial shock, but a long crisis that stretches back into the 1990s.

Here’s Paul Blustein on Alan Greenspan:

The Fed chief told the G-7 that in almost fifty years of watching the U.S. economy, he had never witnessed anything like the drying up of markets in the previous days and weeks.

Greenspan wasn’t speaking in Autumn 2008 when Lehman’s collapsed, however, but ten years’ earlier in the wake of the spectacular blow-up of Long-Term Capital Management, which lost $4.5 billion almost overnight in what the fund’s principals post-rationalised as a 100-year flood.

Long-Term (with its superbly hubristic name) was brought low by derivatives, just as Lehman’s would be a decade later.

(Robert Rubin, Clinton’s Treasury Secretary, was one of those left picking up the pieces – part of ‘the committee to save the world’, with Greenspan and Larry Summers. Rubin went on to preside over Citigroup as it needed a succession of massively expensive bailouts, when its derivatives tanked in the subprime crisis.)

The proximate cause of Long-Term’s failure was Russia’s Rouble crisis, when the country defaulted on its debt after the IMF refused to mount a second bailout.

The Russian crisis itself came in the midst of a long series of dramatic economic failures that hits the world between 1997 and 1999, mostly in East Asia (Thailand, South Korea, Indonesia etc), but which also battered Brazil and would devastate Argentina in 2002. Blustein again:

Time and again, panics in financial markets proved impervious to the ministrations of the people responsible for global economic policymaking.

IMF bailouts fell flat in one crisis-stricken country after another, with the announcements of enormous international loan packages followed by crashes in currencies and sever economic setbacks that the rescues were supposed to avert.

Greenspan believed that the crisis of 1997-1999 was caused by “more investment monies flow[ing] into these economies than could be profitably employed at modest risk.”

Ben Bernanke,his successor at the Fed, took a similar view. In 2005, he argued that, in response to the crisis, East Asian countries became net exporters of capital, rather than net importers. Even countries such as China, which had survived the crisis unscathed, built up reserves, in part to hedge against future financial turbulence.

In practice, these countries increased reserves through the expedient of issuing debt to their citizens, thereby mobilizing domestic saving, and then using the proceeds to buy U.S. Treasury securities and other assets.

Effectively, governments have acted as financial intermediaries, channeling domestic saving away from local uses and into international capital markets.

In the meantime, the money that had flowed into emerging markets was looking for a home. During the dot.com era, it found it in technology stocks. But they crashed in 2001, costing investors $5 trillion of losses. To restart the party, Greenspan then cut interest rates savagely (and even more so after 9/11). Rates were down at1% well into 2004.

As a result, the United States (and the UK and various other deficit countries) were faced by the toxic combination of low interest rates and what Bernanke dubbed a ‘global savings glut’ (e.g. lots of capital competing to find risk).

And my, how the debtors loved it! Bankers went stark raving mad, lending standards collapsed, and a massive asset price bubble was inflated. It ended in a colossal hangover (mostly confined to the West, it should be remembered), once US housing prices finally started to fall in March 2006.

In a seminar I led at Brookings with Bruce Jones earlier this week (discussing our recent paper with Alex on globalization’s woes), I argued that perhaps we should stop pretending the financial crisis started in 2007, but should instead picture it as a truly global crisis that has had (so far) three main waypoints:

• The East Asian crisis (with hits on other countries outside Asia).
• The dot.com crash.
• The ‘subprime’ crisis, (which may itself be triggering another wave of sovereign debt crises).

Admittedly, there was some push back to the notion that we are in the midst not of a shock, but of a slow motion car crash. But the connections seem strong to me. At the very least, it unwarranted to claim that recent events have been ‘unprecedented’ accidents that will only occur every century or so.

It all makes me think of The Way Things Go, a famous and fantastic film by the Swiss artists Peter Fischli and David Weiss – in which you watch unfold a chain reaction of levers, pulleys, slides, seesaws, and lots of whizzes, bangs and explosions. The full film is half an hour long, but the short clip at the top of this post gives you a flavour.

The analogy is not perfect though. Fischli and Weiss understood the causality that tied together their mish mash of junk and chemicals. They could tell you where it was all going to end up. Their whole thing had been intelligently designed.

Our economy, I think, has surpassed human understanding. We can bash, poke and kick it, and hope it will start running smoothly again. But it would be foolish to trust those who confidently pronounce this crisis over, and even less those who claim to know what is coming next.

Update: Alex sends me this 1999 essay on Long-Term Capital Management by Michael Lewis, who has written a much heralded book on the recent crash. Here’s an extract:

It is interesting to see how people respond when the assumptions that get them out of bed in the morning are declared ridiculous by the wider world. There is obviously now a very great social pressure on the young professors [who reinvented bond trading and whose models blew up Long-Term] to abandon the thing they cherish most, their hyperrational view of the world…

Oddly, the question that occupies them is not whether to push on with their models of financial behavior but how to improve the models in light of what has happened to them. ”The solution,” [Nobel Prize winner and Long-Term partner] Robert Merton says, ”is not to go back to the old, simple methods. That never works. You can’t go back. The world has changed. And the solution is greater complexity.”

- Kenneth Weisbrode explores the “reinventing diplomacy” debate, suggesting that “while America thinks in terms of networks, the rest of the world is busy connecting circuits.” Writing in The World Today, Christopher Hill assesses the current challenges facing UK foreign policy, the difficult decisions that lie ahead, and where future priorities may lie. “If it is to serve us well over the longer term”, he argues, UK foreign  and security policy “needs a radical overhaul of its underlying outlook”.

- Elsewhere, The Atlantic Monthly‘s Joshua Green offers a wide-ranging profile of US Treasury Secretary, Timothy Geithner – “a superstar of the bureaucracy” – assessing his influence on President Obama and his central role in shaping the US response to the global financial crisis.

- Finally, discussing European immigration Brigid Grauman highlights the example of Switzerland, suggesting that the rest of Europe would do well to learn the lessons of participatory democracy in promoting integration and fostering multiculturalism. Over at Foreign Policy, meanwhile, Steve Kettmann assesses the recent buffeting taken by the country’s international image, asking if the Swiss stance on neutrality is still feasible in an age of interconnectedness.