Peter L. Berger's Blog, page 175

Mattis Given Authority to Set Troop Levels in Afghanistan

President Trump today delegated to Secretary of Defense Jim Mattis the authority to set troop levels in Afghanistan. Reuters:

U.S. President Donald Trump has given Defense Secretary Jim Mattis the authority to set troop levels in Afghanistan, a U.S. official told Reuters on Tuesday, opening the door for future troop increases requested by the U.S. commander.

The official, who spoke on condition of anonymity, said no immediate decision had been made about the troop levels, which are now set at about 8,400. [….]

It has been four months since Army General John Nicholson, who leads U.S. and international forces in Afghanistan, said he needed “a few thousand” additional forces, some potentially drawn from U.S. allies.

Current and former U.S. officials say discussions revolve around adding 3,000 to 5,000 troops.

President Trump made a similar decision in regards to Iraq and Syria in April. As we wrote at the time, the ability to deploy American soldiers overseas is one of the greatest powers and carries with it some of the greatest responsibilities of the commander-in-chief. President Obama was accused of micromanaging troop deployments and engaging in semantic arguments about whether or not non-combat special operations forces constituted “boots on the ground” in Syria.

That President Trump is moving past that, in and of itself, may be a good thing. But the consequences of American military actions, including ultimate responsibility for American military casualties, still lie with the President. That’s particularly salient for Afghanistan, a conflict that is not going well. The satirical site DuffelBlog perhaps best captured the irony of National Security Advisor H.R. McMaster’s support for a mini-surge in Afghanistan with the headline “‘Dereliction of Duty’ author urges escalation of unwinnable, never-ending war.”

Afghanistan is not Vietnam, and the costs of maintaining a few extra thousand troops in the country might end up being pretty low compared with the blood and treasure we’ve already spent there. But whatever number of troops we have in Afghanistan, and whether that number is picked by the President or the Pentagon, it seems unlikely to accomplish anything beyond a preservation of the status quo in this seemingly interminable conflict.

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Pride and Prejudice in Northern Ireland

The media response to the prospect of a deal between the Conservatives and the Democratic Unionist Party (DUP) should give Northern Irish MPs some pause for thought. Northern Ireland issues were off the table of national politics throughout much of the seven weeks of the election campaign. The DUP were excluded from national televised debates, even though they were defending the same number of seats in the House of Commons as were the Liberal Democrats; the exit poll did not include the views of Northern Irish voters; and the long list of results on the BBC website includes such miniscule English parties as the Workers Revolutionary Party while excluding much larger entities from Northern Ireland, such as Traditional Unionist Voice, the leader of which, Jim Allister, is a former MEP. The extraordinary result of this election, which has led to negotiations toward a Conservative-DUP deal, has put the province’s distinctive political culture firmly on the radar of national media. But the response to the deal has been vitriolic—a powerful reminder that even many friends of the union find Northern Ireland politics to be toxic.

It is not that British media are opposed in principle to seeing Westminster politicians cooperate with their colleagues from Northern Ireland. Unionist parties from the province have a long history of participating in Westminster power-sharing deals. David Cameron formed an alliance with the Ulster Unionist Party in 2010. The DUP were prepared to work with either Labour or the Conservatives in the aftermath of the hung parliament of 2015, and, as the leaked Hillary Clinton emails suggest, they were actively being courted by Labour. As this ideological flexibility suggests, the DUP are not especially right wing: analysis of their voting record indicates that their MPs have tended to support Labour motions on finance bills. So there is nothing inevitable or necessarily stabilizing about their prospective pact with Theresa May: The experience of multiple governments has been that, as former Chancellor Kenneth Clarke put it in 2010, “you can always do a deal with an Ulsterman, but it’s not the way to run a modern, sophisticated society.” This lack of interest in economic policy might suggest why British media criticism of the DUP has tended to overlook the party’s participation in a badly managed renewable energy scheme that has cost UK taxpayers around £500 million. Earlier this year, Sinn Fein, the DUP’s power-sharing partner in Stormont, used the scandal surrounding this scheme to bring down the province’s devolved government—which is still to be replaced.

Instead, media criticism has focused on the DUP’s policies on “social issues”—and, in particular, abortion and same-sex marriage. While social media is ablaze with indignation, commentators often forget that the DUP’s position on abortion was shared by Sinn Fein until 2015 and is still shared by the SDLP, Labour’s “sister party” in Northern Ireland. The DUP shares its rejection of same-sex marriage with: Barack Obama when he stood for election in 2008; the 22 Labour and 134 Conservative MPs who voted against the second reading of the Marriage (Same Sex Couples) Bill in February 2013; and, in fact, the legal provision of the majority of countries in the European Union. The DUP’s position on abortion and same-sex marriage is shared by Northern Ireland’s Catholic bishops, whose pre-election guidance encouraged the faithful to support candidates who endorsed these views—in effect, discouraging Catholics from supporting their traditional and most obvious political representatives—as well as all the largest Protestant denominations. Meanwhile, the claim that the DUP has close links with paramilitaries is being evidenced by the unsolicited and unwanted endorsement of individual candidates by the Loyalist Communities Council—an organisation set up, ironically, by Jonathan Powell, Tony Blair’s former Chief of Staff.

But the indignation continues and has reached beyond the party in question to lampoon views that are widely shared across the two communities by resorting to crude images that connive with the prejudices of racists from a bygone era.

British press has resurrected thick Paddy peasants of C19th cartoons – just stuck bowler hats and orange sashes on them. pic.twitter.com/3KFZLy4Lrz

— Damian Thompson (@holysmoke) June 12, 2017

These cartoons evoke the widespread stereotyping of the Irish in 19th-century print culture. They suggest the extent to which Northern Ireland’s unionists have failed to make their case with their partners in the union they wish to maintain, and the extent to which journalists in the metropolitan center cannot differentiate between communities that have struggled over centuries, and at the cost of tens of thousands of lives, to articulate competing narratives of British and Irish identity. But the hostility, imprecision, and prejudice of the British media response to the potential electoral pact indicates that the DUP and its 36 percent of the Northern Ireland vote may have more in common with their nationalist neighbors than they do with the values and aspirations of the metropolitan center around which they have built their identity. For too many London journalists, everyone in the province is Irish.

These are some of what Frantz Fanon might have called the “pitfalls of national consciousness” for Northern Ireland’s unionists. Four centuries after their colonies were established in the northeast of the island, as one veteran commentator on Northern Ireland politics has noted, “White Protestant British Irish folk in Northern Ireland are routinely abused and demonised in a way no other group on these islands are.” Locked in poverty in a “failed state,” that generates from internal tax revenue little more than half of its running costs, protestant working-class boys experience some of the most significant educational disadvantages of any social group within the UK. In Northern Ireland, the descendants of the colonists are abject: “In the past we made history and now it is being made of us,” as Jean-Paul Sartre put it in his preface to Fanon’s The Wretched of the Earth (1961). Fighting for status in Northern Ireland, and fighting for identity within the competing narratives of “British values,” the Protestant working class is caught between the devil and the DUP.

But perhaps the lazy London journalists are right: Perhaps Northern Ireland’s voters do have more in common than they realize. Before they found themselves at the center of a media vortex, it was easy for unionist voters to underestimate the differences between the “social values” that are widely shared on both sides of the sectarian division—as evidenced by the commonalities between the DUP manifesto and the guidance of the Catholic bishops—and those that are current in the rest of the UK. The sudden elevation of the DUP offers a lightning rod for criticism, illustrates that their loyalty is to a Britain that no longer exists, and proves that in terms of social issues they have far more in common with faithful Irish Catholics than with most friends of the union in Westminster.

This is not to propose a solution for the intractable problem of the future of Northern Ireland, for the problem is structural. Northern Ireland’s position as a “failed state,” which gathers in tax revenue only half of what the government spends on it, militates against the possibility of any near-future integration with the Republic. Its financial situation works well for unionist politicians, who use this dependence on external finance to further embed the province within the structures of the UK, but it presents a problem for Irish nationalists—who, having moved support to Sinn Fein, a party that abstains from taking any seats in Westminster, are now without any Parliamentary representation for the first time since 1966. The nationalists will need to oversee a significant reduction in state supply if they are ever to achieve the reunification of the island. Yet unionist voters are locked into dependence on the financial largesse of a very ambivalent “mainland.”

Whatever form it takes, the future of Northern Ireland cannot be secure without major structural changes. A reduction of the gap between tax revenue and public expenditures will make a nationalist future viable, while the reduction of poverty and the educational deficit within Protestant working-class communities is necessary to sustain any unionist future. It remains to be seen whether the Conservative-DUP deal will facilitate either of these possibilities. Kenneth Clarke was patronizing, but he might also have been right: “You can always do a deal with an Ulsterman,” even when it’s in no one’s best interests.

The post Pride and Prejudice in Northern Ireland appeared first on The American Interest.

Comey’s Brain: An Insider’s Perspective

I don’t know either James Comey or Donald Trump. Each says the other is lying, but only one is compulsively dishonest, so Comey’s version is likely closer to the truth. But is it the whole truth?

To find out, let’s explore the mind of James Comey before, during and after the key meeting with Trump of February 14th.    Since I presume to be your guide in this quest, you deserve to know my qualifications.   They are as follows: I was a career bureaucrat myself for many years, some of them spent in thrall to superiors of mind-bending ineptitude who nonetheless had power over my career.    I know by experience that to succeed in that situation you need good tactical skills, a flatterer’s amiability, constant wariness, and an instinct for self-preservation. An ability to manipulate the narrative is also a definite plus. You may retain principles, but principles are fragile support in Washington, and you won’t stand on yours too often.   Above all, you need a sense of what the other man is actually after—what his real priorities are.

What follows is an entirely fictitious attempt to get at what Comey might have been thinking as he played out his part in the present drama. The names haven’t been changed because no one in the story is entirely innocent, but any resemblance to what actually happened is purely coincidental.  Perhaps Comey is as he presents himself in public: the sort of man who walks naked into the arena, the sort stunned into silence by duplicity.   You, valued reader, must decide.

Comey speaks, beginning with the meeting of February 14th:

“I was prepared, of course. I am always prepared. When Trump sent everyone else out of the room, I knew the subject would be Flynn and the Russians. Trump was obsessed with those investigations to the exclusion of almost anything else. He didn’t know the details, but he knew the news wasn’t good and bound to get worse. He had counted on Sessions to keep the lid on, but Sessions, who had Russian problems of his own, had sniffed what was brewing and promptly recused himself. Now Trump would come after me: He had no other choice.

“My goal was to remain Director of the FBI, permanently if I could manage it, but at least long enough to finish the Russian investigation and nail Flynn and the rest of them. It was a prosecutor’s dream: a once-in-a-lifetime mixture of ambition, sedition, corruption and money. Trump’s goal, I knew, was compromise or co-opt me so I wouldn’t be a threat to him. Just how he would go about that I couldn’t predict. For my part, I would play for time, and thought I knew how: the ‘Thomas More gambit.’

“As the product of a Catholic education, I knew the story well. Thomas More’s predicament was a bit like mine. He, too, fell under the sway of an erratic and domineering superior who would do literally anything to get what he wanted. He, too, must refuse on principle to do as he was asked. He could not consent, but he could not confront; so he chose silence.

“When the others had departed, I knew that Trump was about to make his pitch. I would not agree. But if there were any path to avoid confrontation—to not disagree—I would take it. And Trump did leave an opening, as I was sure he would. He was cunning enough not to give me a direct order about Flynn and Russia. But he could ask me a favor. The background was his comment at our earlier meeting that he expected my total loyalty. I knew what he meant: I could stay at the FBI, but he would want favors in return. It was all by implication, of course—nothing actionable. But he’d been a little too cunning. Since he hadn’t given me a direct order, I could avoid a direct response. So, as I had planned and would later describe in my public testimony, I said nothing. My face remained blank. If he wanted to take my silence as consent, fine. I would not disabuse him.

“It helped that I assured him that he, personally, was not under investigation. That was no more than the truth. I didn’t mention that Watergate had not begun with Nixon but had led to Nixon. I think he already had some inkling of that. It’s perhaps why he’s awake to tweet at three a.m.

“Leaving that meeting I knew the clock was ticking. My tactic of silence would work only for so long. More, after all, had lost his head. Perhaps I could push the investigation fast enough, or orchestrate public disclosure with sufficient skill, to make myself invulnerable at the FBI. More likely, Trump would catch on quickly that I had no intention of blocking the investigations, and he would fire me. In either case, I wanted a special prosecutor.

“A few days later, with the investigations moving as before, Trump made a final effort. He called and mentioned ‘that thing’ we had. He was talking about the agreement he thought we had made. I didn’t respond, but it was my signal to get Bob Mueller in place. I knew Bob was willing. Rod Rosenstein, eager to get himself out of the line of fire, was quick to take up the suggestion.

“That left me vulnerable on a couple of points, but they were easily dealt with in my public testimony. The trick is to admit your fault before the adversary has a chance to point it out. So I talked about leaking the contents of the memo I had written after the White House session. I was bluff and honest. (Fans of Harry Flashman will recognize the tactic.) For the rest, I simply planted a question with Senator Susan Collins’s staff. So it came to pass that during my open testimony she asked why I hadn’t told the President immediately that his request—indeed, the entire conversation—was inappropriate. I said it was a good question, and I should know because I wrote it. I responded that I was merely an honest but naive public servant who had been stunned into silence, or words to that effect. I admitted that if I were a stronger man…and so forth.

“Frankly, I think I laid it on a bit thick. When I watch the video, it comes across as too glib. I should have agonized a bit before answering. Oh well, it was a small error, and no one seems to have noticed.

“It is said by Trump supporters that I took a swing at the Great Man and whiffed. Not true: It ain’t over ’til it’s over, and I’m not the only batter. Bob Mueller is in place, both Sessions and Rosenstein have been neutered, my old colleagues at the FBI are more determined that ever, the press is at full bay, and even Congress is showing a little spine.

“The Good Book tells us that what they have said in the dark will be heard in the daylight, and what they have whispered to someone in secret will be shouted from the rooftop. That’s what every good prosecutor believes. It’s just a matter of time.”

The post Comey’s Brain: An Insider’s Perspective appeared first on The American Interest.

What Violence Means

Governing magazine places this morning’s attack on Republican congressmen in the context of a series of violent episodes that are shaking our political system with increasing intensity.

Wednesday’s shooting is merely the latest indication that violence appears to be creeping closer to the center of American politics. On the eve of winning a special congressional election in Montana, Greg Gianforte pummeled a reporter. Not long after, a congressional candidate in Iowa announced she was dropping her bid, in part due to death threats. In Texas, a group of legislators got into a heated argument over a bill to ban sanctuary city policies. They’ve been arguing ever since about which of them threatened another with death, including an alleged suggestion that one lawmaker deserved a bullet in his head.

To this one could add the murders of two Good Samaritans coming to the aid of Muslims on a train in Portland last month, and the violent left-wing protests and attacks on speakers at Berkeley and Middlebury. But today’s ambush of a group of elected officials with a semi-automatic rifle, apparently motivated by partisan hatred, cuts closer to the heart of our political system than any of the other episodes of recent months.

This trend is deeply worrisome—not only because of the innocent people harmed but because of what it says about the health of our political system. The essence of state-building is the process of controlling violence—taking it out of the hands of private individuals and clans and militias and subordinating it to legitimate institutions that are accountable to the rule of law. Politics can often seem trite or maddening or absurd, but it is at its core the best tool that human beings have developed to reduce the rate at which they kill each other over values and resources. When that process is short-circuited through murder, it is a sign of political decay—a step backward away from a modern state and toward a state of nature. Eruptions of violence are a sign that the skin of the body politic is getting thinner, exposing the sinews beneath the surface.

There is a temptation after violent episodes like these to tar our political opponents by association. This itself is also a part of our political degeneration—another step in the process of turning violence into a political tool. We should resist the urge. While it may be cathartic for partisans (especially Republicans, who infer, accurately, that they are subject to a brutal double standards when it comes to these sorts of events) blaming and finger-pointing after lone-wolf attacks will only accelerate the political pollution that drives marginal people to bypass our conflict-defusing institutions and rely on force to advance their political ends.

Senate Slaps New Sanctions On Russia

The Senate voted overwhelmingly on Wednesday to punish Russia for its interference in the 2016 election with an amendment that codifies existing sanctions on Moscow, imposes new ones, and establishes that Congress alone has the authority to remove them. The Washington Examiner explains: 

The amendment would sanction Russia for a variety of misdeeds, including the nation’s encroachment into Ukraine and aggressive actions in Syria, by codifying punishment put in place under the Obama administration. But the recent Russian cyberhacking into the Democratic National Committee is what primarily pushed Democrats and Republicans to seek additional sanctions. […]

Democrats had threatened to block the Iran sanctions bill unless lawmakers included an amendment to punish Russia.

The amendment includes new sanctions on “key sectors of Russia’s economy,” according to the Senate Foreign Affairs Committee, including mining, metals, shipping and railways.

The sanctions would also target “corrupt” Russian individuals, such as those perpetuating human rights abuses or supplying weapons to Syrian President Bashar Assad.

The sanctions measure could go to the House as early as tomorrow, and from there swiftly to the President’s desk.

But the Trump Administration has already made clear its distaste for the amendment. In Senate testimony yesterday, Secretary of State Rex Tillerson argued that the new sanctions were “ill-timed” and could close off promising new channels recently opened with Moscow. He repeated the message in the House today, asserting that the president should “have the flexibility to adjust sanctions to meet the needs of … an evolving diplomatic situation.”

Some may be inclined to see Tillerson’s opposition as more vague evidence of nefarious wrongdoing between Trump and Russia. But it’s actually an argument that would have found a happy home in the Obama Administration, circa 2012. Then as now, the White House was pursuing rapprochement with Russia while Congress was pushing hard for legislation that would punish Russia—in that case, the landmark Magnitsky Act. The Obamans fought Magnitsky tooth and nail, arguing that the bill was redundant, unnecessary, and inappropriately handicapped the executive’s ability to punish Russia of its own accord. Ultimately, Obama signed the measure into law in part because Congress had shrewdly tied it to a repeal of the Soviet-era Jackson-Vanik amendment, a priority that Obama was unwilling to cast aside to veto Magnitsky.

In many ways, the same dilemma is playing out today. Trump, like Obama, clearly wants a more cooperative relationship with Russia; Trump, like Obama, does not want to derail that agenda by provoking Moscow’s ire. And today’s Congress, like that in 2012, shows no attention of complying with those priorities. Even tying the new sanctions to a larger Iranian bill is an echo of the past: Congress is effectively daring the President to derail another foreign policy priority and overrule an overwhelming bipartisan majority, all for the sake of a Russia-friendly veto.

Will Trump take that dare and veto the bill anyway? Given the current political firestorm around Russia, probably not: with half the country eager to prove Trump is a Kremlin stooge, Trump has far more to lose from conceding to Russia than Obama ever did. But the whole episode is another reminder of what we have been saying all along: Trump’s fervent hopes for a better relationship with Russia, just like Bush’s and Obama’s before him, are likely to be dashed when confronted with political realities and the abiding skepticism of a Congress that is all too eager to tie his hands.

The IEA Thinks the Oil Glut Problem Is Getting Worse

Oil prices plunged more than 3 percent today, but it wasn’t OPEC’s increasingly flimsy production cut coalition that had traders so skittish. Rather, it was the International Energy Agency’s (IEA) new report that suggests that American oil supplies are going to exacerbate the problem producers are contending with in the market today: the global glut of crude. The FT reports:

The IEA expects global demand will increase by 1.4m barrels a day next year — up from 1.3m b/d in 2017 — as China and India take total consumption above 100m b/d for the first time in the second half of the year.

But this increase in demand is set to be outpaced by growth in supply. Total non-Opec production in 2018, led by the US, is set to rise by 1.5m b/d — or more than double the rate of growth this year.

The upshot of all of this is as obvious as it will be disheartening to petrostates: the oil market will swing further into oversupply next year. This change is being driven by producers outside of OPEC, but it’s the United States that is expected to be pulling most of that weight, as the IEA projects it will supply more than half of the extra 1.5 million barrels per day that non-OPEC producers will be upping their output by next year.

And if that wasn’t bad enough for OPEC and its ilk, consider that there’s a very real possibility that the United States shale industry could outperform even the IEA’s bullish expectations. “Such is the dynamism of this extraordinary, very diverse industry it is possible that growth will be faster,” the IEA notes.

This is the new oil reality, and it’s not a comfortable place for the old guard. For upstart U.S. shale producers, however, it’s an opportunity to prove their mettle by continuing to outperform expectations even as prices fall well below $50 per barrel. Frackers are proving they can exist and even thrive in this new price environment—how will petrostates hold up?

The Illinois Meltdown

Years of cascading fiscal crisis and insoluble political gridlock have driven the Land of Lincoln to the edge of the abyss. Politico reports:

Illinois has compiled $14.6 billion in unpaid bills. It’s running a deficit of $6 billion, and its pension liability has soared to $130 billion.

That’s not the worst of it. The state’s nearly two-year failure to pass a budget has sent its bond ratings careening toward junk level, downgraded a staggering eight notches below most other states.

With university enrollments plummeting, large-scale social service agencies shuttering and the Chicago Public Schools forced to borrow just to stay open through the end of this school year, Illinois is beginning to devolve into something like a banana republic — and it’s about to have the most expensive election the state has ever seen.

The collapse of governance in America’s fifth-largest state is on a different scale from the problems (and there are many) in other indebted state capitals. But it may not stay that way. Mismanaged pension funds, bloated bureaucracies and special interest carveouts are endemic to blue model governance, especially in big blue cities like Chicago. As the fiscal vise tightens, these institutional failures stand to spill over into the political system, generating vicious fights over resources that bring governance to a standstill.

There is plenty of blame to go around in the Illinois political class—including for Democrats who are circling the wagons around a failed status quo, and for Republicans, who have not produced sustainable fixes beyond holding the line and starving the beast. Meanwhile, the people at the bottom, who rely most on the state’s decaying services, will bear the brunt of the impact from the meltdown.

Pennsylvania Passes Pension “Overhaul”

After years of kicking the can down the road, Pennsylvania has enacted legislation that lawmakers hope will put a significant dent in future public pension funding shortfalls:

The compromise measure will move most future state and public school workers at least partly into 401(k)-style plans to help shore up the deeply underfunded pension system and shift market risk from taxpayers to employees. An independent analysis estimates the state will save $5 billion to $20 billion over 30 years, depending on investment performance.

On the one hand, it’s good that state lawmakers have woken up to the fact that the first step of getting out of a pension hole is to stop digging. This measure will help Pennsylvania limit the growth of its massive, $62 billion pension debt.

It’s also a better fit for a 21st-century employment scene increasingly characterized by career changes and job flexibility. The state’s old, traditional defined-benefit pensions only vest after ten years, tying workers down to jobs they may no longer want or be suited for. Workers with a portable, defined contribution system—properly administered—benefit from the added career mobility.

But by and large this legislation isn’t as big a step forward as lawmakers and Pennsylvania’s Governor Tom Wolf are making it out to be. The new system does little to address the problem of debts racked up by the kind of public pension shenanigans that should be all-too-familiar to Via Meadia readers:

Pennsylvania’s pension crunch dates to a 2001 move by the legislature to sweeten benefits, combined with subsequent underfunding by state government and school districts, and weak investment returns, particularly after the 2008 financial crash.

So the digging may have stopped, but Pennsylvania’s hole is still a deep one.

The Ukrainian Reformation

Walter Russell Mead: Welcome to Washington! Let me begin by asking—what brings you here?

Oleksandr Danylyuk: I’m here to attend the spring meetings, the premier events of the financial world. We have a pretty busy agenda—meetings with the IMF, the World Bank, and private investors as well. I’m doing all this because we are preparing to tap the market after a break of several years. It’s part of our IMF program, but more importantly, any normal state should have access to markets, to attract financing when necessary.

WRM: Will these bonds be denominated in dollars, euros, hryvnia?

OD: They will be standard euro bonds.

WRM: There’s been an issue with some Russian debt that hadn’t been restructured. Has that been more or less resolved or is it still weighing on Ukraine and the capital markets?

OD: So-called Russian debt! As you know, the London court ruled in favor of Russia, but we have appealed. We’re going along with this process to defend our position, and we have very good reason to believe that we will win.

WRM: While you’ve been in Washington have you met, or do you plan to meet, with anybody from the Trump Administration?

OD: Yes. Obviously the main purpose of this trip is the meetings with the IMF and World Bank. But while I’m here we’ll meet with members of the Trump Administration—Secretary [of Commerce Wilbur] Ross, for example. We also have a meeting with some advisers from the National Economic Council. I think we’ll need to make a separate trip for even more meetings! It’s very important to keep in contact with the new Administration, as the broad support of America is essential for us.

WRM: Ukraine had several years of negative economic growth. More recently there’s been a turnaround, though we’re now seeing some growth predictions scaled back a bit. The Ukrainian government is predicting, what, about 1.9 percent?

OD: 2.2 percent.

The annexation of Crimea and our industrial areas in East Ukraine had a profound negative impact on our economy, especially because Russia had previously been our main economic partner. We had two years—actually, three years—of consecutive decreases in GDP.

But since then, we have refocused on other markets and implemented reforms, which are now producing growth. It’s not dramatic growth, but it’s important that we broke the trend. This past year it was 2.2 percent. This year we would have predicted 3 percent, maybe even a bit higher. But then the Russians confiscated some companies on uncontrolled territory, and we took countermeasures. That set us back. As a result, we’ve reduced our growth forecast by 1 percent. So it will be 2.2 percent for this year as well. We’ll do our best to compensate for that.

WRM: When you look at the progress of Ukrainian reform over the past few years, what would you say is the brightest spot?

OD: The most difficult decision was the takeover of the largest bank in the country, PrivatBank. It’s not really a reform, but a lot of thought and effort went into it. It was quite risky because PrivatBank had a very large number of depositors—22 million.

WRM: There are, what, 42 million people in the country? So it is a large share.

OD: Yes, very substantial. And that’s just the size of the bank. Its share of payment transactions was huge—70 percent. But more importantly, it was owned by two oligarchs, who controlled several media outlets and had interests in other companies. The decision to nationalize it was very difficult.

We worked together with the National Bank, the Prime Minister, and the President. And despite all the complexity, we did it without taking any risks. This bank is now state-owned, and the Minister of Finance is a shareholder. Unfortunately, the result is that the Finance Minister now owns 55 percent of the banking system. That’s not where you want to be, right? It wasn’t our goal. The next task is figuring out how to use the state’s shares in the banking sector. That requires even more work.

As for reforms, I cannot say that we have fully completed any. I don’t consider the process to be enough; reforms need to bring results. But we have achieved a lot on anti-corruption. Specifically, we put in place a new anti-corruption structure—actually, that one was completed, I would say. We started in 2014 by creating the National Anti-Corruption Bureau [NABU] from scratch, because none of the law-enforcement agencies were able to perform that function. Some organizations are just impossible to reform. So the new institution was put in place, but it took some time to start working properly.

Second was the National Agency for Prevention of Corruption. Whereas NABU investigates suspected cases of corruption, this agency analyzes the asset declarations, conflicts of interest, and financing for political parties in order to prevent corruption.

The last component was the introduction of mandatory electronic asset declarations for all high-level officials and civil servants. This was an unprecedented step; few if any other countries put a comparable amount of information into the public domain. These three elements are now starting to bring results.

We learned during the investigation of corruption cases that courts create something worse than a bottleneck—a barrier, I would say. Even if the National Anti-Corruption Bureau put together a case, it could get stuck in court. This reduces the effectiveness of the whole system. The next step will be to set up the special anti-corruption court, which will happen at the beginning of next year. That should complete the anti-corruption infrastructure.

The results? Very recently, the National Anti-Corruption Bureau arrested the head of the state fiscal service, the highest official to be arrested for corruption so far. It’s a strong signal to everyone that we are very serious about this.

Meanwhile, we have an energy reform, which is not completed yet. It will take a lot of changes before we get where we want to be, but until that’s done the market will not work properly.

I’m also working on a budget reform at the moment, but it won’t be completed in a year either. This past year, we did a sort of pilot program. We built into the budget process the foundations for health care and education reform. These must be addressed in the budget process or they won’t happen.

Instead of a typical budget process, in which we get requests from different ministries, then put them together and say “Okay, we have less money than you want, so let’s cut things down somehow,” we did something different. We sat with them and said, “Listen, what reforms do you want to do? We will only finance reforms. You want to do healthcare? What exactly do you want to do with healthcare and how can we help you?” Those who came in saying “It’s all wonderful, everything’s okay, we just want some money to fund the institution”—their programs were the first to be cut. This year we’ll institutionalize the process, so it will not be something the Ministry of Finance just chooses to do. The new budget code will prescribe it. We will also move to a three-year budget, because no reform can be completed within a couple of months or a year.

WRM: When Americans try to figure out what’s going on in Ukraine, one of the things that surprises people is that there are these very powerful forces of opposition to reform, sometimes inside state institutions, sometimes outside. Ukraine has had three revolutions since 1990. Yet the French somehow seem to do their revolutions more thoroughly.

OD: They had guillotines! But these are banned by the European Union.

WRM: Well, sometimes they just use lampposts.

OD: Turkey’s trying to get back to that point.

WRM: Yes, exactly. Are we going to suggest a Turkish option for Ukraine? But seriously, it is interesting that the state still seems so powerless to change itself, much less reorder society. Why is that process so slow? Why have so many revolutions not revolutionized?

OD: It’s not the state that reforms itself. The people need to elect the right leaders to reform the state and then support those leaders’ positions. Not all reforms are pleasant. Some of them are very unpopular and difficult.

WRM: Which are the most unpopular and painful reforms?

OD: At the moment the most difficult reform ahead of us is pension reform. Many countries went through it; Ukraine didn’t. It was constantly postponed.

WRM: Pension reform never means a pension increase. It means a pension decrease.

OD: Actually, the unpleasant part of the reform will be complemented by an increase in pensions, because it’s very important to propose a balanced solution.

In the beginning of 2014, people would have accepted any kind of reform. They understood it was important, they saw the changes already occurring, they were ready. But three years have now passed and their patience has decreased. So now we need to be especially careful with such a reform. We cannot avoid it—that would be wrong. It is necessary and should have been done years ago. It’s our responsibility to do it. We’re not populists; we are people who want to make reforms and be proud of them.

But in order for this reform to be accepted, it needs to be fair. Even if people don’t like something, if they feel it’s fair they accept it. In the current system, one worker may have a higher pension than a coworker at the same level, or have the right to retire early. The question is why. It doesn’t make any sense! So there will be some increases in pensions, simply to balance out the disparities.

WRM: What is the normal retirement age in Ukraine?

OD: The way it works is that there is a statutory retirement age. For men it’s 60. For women it’s 58 at the moment.

WRM: A lot of American women will be interested in immigrating to Ukraine.

OD: The bad news is that it increases every year by half a year. If we were to advertise we’d say: Go to Ukraine now, because in one year it will be 58 and a half, and then 59.

WRM: How much is the median pension that people can expect to get?

OD: The minimum is 2,400 hryvnia, which is less than $100. The average pension is, I would guess, about $120.

WRM: Again, to try to help Americans understand what that means. What do you need to live in Ukraine?

OD: It’s difficult to live on a pension.

WRM: The pension would put you below the poverty rate?

OD: Just a little bit above, which is not good. Many pensioners still work, and often their families have to help, too. Of course, we want to increase pensions overall. But the economy is not there yet.

WRM: I’m trying to help Americans understand the reform discussion, because it’s very hard for them to see. The prices of a lot of things go up with reforms. Energy reform would raise the price of heating and cooking. By how much? Will someone with a small pension, one that may be reformed in some way, see his rent go up as part of the reform? How does all that work?

OD: One of the good things about Ukraine is that renting is quite rare, because most people own their houses and apartments.

WRM: Did this happen after the breakup of the Soviet Union?

OD: Yes, pretty much everything was privatized for free, I believe. In terms of utilities, gas is a big part of the problem. Many houses were built at a time when the Russian Republic supplied gas within the Soviet Union.

WRM: At very low prices.

OD: Yes, it was very cheap. And so the houses were not built to be energy efficient. After the Soviet Union fell, utility bills were high unless the state subsidized them. So the state subsidized gas for many years. As a result, no one bothered with energy efficiency, because if gas is cheap, why should you save? Meanwhile, we were still dependent on Russia, and we were losing money because of the state subsidies. After the decision this past year to move to market prices for gas, our gas monopoly NaftoGaz, which used to incur losses because of the gas rates policy, has become profitable. It doesn’t mean that people pay market prices, however—or not always. We provide targeted subsidies.

WRM: It’s a household subsidy, not a gas subsidy?

OD: Exactly. We provide subsidies to households that need them, and many do. So people ask, “What did you change?” We changed a lot. Now people are motivated to save. As people get used to saving on energy and the economy develops, the number of people receiving subsidies will go down. But at the moment we are still putting the incentives in place—both for energy efficiency and for increasing gas production. It is all coming together.

Here is an illustration of the old system. Somebody who had a 1,000 square-meter house (there are such people) and somebody who had a 50 square-meter apartment paid the same rate. The amount the state spent on subsidizing the 1,000 square-meter house could have covered hundreds of small apartments. That is just unfair. And it was financed with taxpayers’ money.

WRM: Because of economic decline and structural changes, the average household consumption in Ukraine has been falling for many years. How sharp is that decline in living standards? Again, how can we help an American audience understand what’s happening to people in Ukraine?

OD: Again, I don’t have the statistics right now. But my speculation is that average household consumption has fallen by about a third since the conflict in Eastern Ukraine started. It’s quite a significant drop.

WRM: How does that translate into politics, and has it affected political support for reform? Because people say, “Okay, we have all these revolutionaries and reformers and the more we elect them the poorer we get.” Is this creating political problems for the government?

OD: It’s unavoidable, unfortunately. Populists are on the rise in Europe now, and they play on this dissatisfaction with reforms. But there is no other way. Delaying reforms for too long kills a country, because even if somebody comes along later wanting to make them, by then people are unable to tolerate it and the country self-destructs. Of course we wanted to achieve more over the past three years, but it is what it is.

We are about to make two very important reforms, pension and market reform, that cannot be delayed. They need to be done or people will not get their pensions in a few years. Since the current system is unsustainable, refusing to make reforms would be like playing hot potato. We’d just be passing it along—and we cannot afford to do so.

WRM: What keeps you up at night when you think about the future of Ukraine or the future of the reform program? What worries you most?

OD: The better question is, “What keeps you up for part of the night?”, because part of the night I’m in the office, working. As for the remaining part, sometimes while I sleep my brain is still going and I wake up in the morning with the solution.

What worries me is the possibility that we could miss the window of opportunity for reform. That doesn’t mean that it’s the end of the world—I don’t believe it’s a matter of “do this now or you lose the country.” I just believe it’s our duty to help people live better lives. If we fail now, the opportunity will come again, but we will be weaker, and many people who need it now will go without help. That worries me. I’m extremely happy that we’re finally going to enact this pension reform after so many years of discussion. The populists are painting it as disastrous, almost like homicide, but that’s absolutely stupid. It’s the action of a responsible government.

WRM: When you think about what would make your term in office a success, what do you think of? What signs should I be looking for to determine whether the administration is achieving its goals?

OD: Are you asking about the government or the Ministry of Finance?

WRM: The Ministry of Finance.

OD: We are not a typical ministry of finance. If you just look narrowly at what our Ministry of Finance usually does, its agenda might include tax reform, institutional reform of state fiscal services, a midterm budget, the creation of a financial investigation unit, and the elimination of the tax police, an oppressive historical relic. That would be a small agenda.

But we’re more than that. I brought in a team of reformers who had been working in other areas. For me, it’s extremely important that we start healthcare reform either this year or next. This year we will make progress on education reform. We did some interesting things this past year, including some changes of the stipend system for students. Can you imagine? We dared to take on the most active part of society. We just said, “Listen, 70 percent of you should not be getting stipends.”

WRM: Don’t tell American students this or they’ll want one, too.

OD: I received a stipend myself at one time, so I’m not against them in principle. But the system didn’t take into account how successful students were. So we separated it into two parts. A limited number of people now receive an academic stipend, which incentivizes good study habits, and a larger number of people receive a need-based stipend. We tried it this past year, and received pushback—people said, “How can you do this? You should not touch students. They’re very active. Everybody will hate us.” But guess what? We’ve got support from the students themselves, because they think about their future. Do not underestimate people.

WRM: One final question. What would you like from the United States? Not just speaking as the Finance Minister, but as a member of the Ukrainian government. What does Ukraine want from the United States?

OD: I don’t have a Christmas wish list. I believe in our potential and I think we have to do the work ourselves. But there are certain areas where we need support. For example, the situation in the east of the country. Although we did everything possible to reform our military, we lack the training and weaponry to counterbalance the much-larger Russian army. And sometimes we need support for our institutions. For example, the financial investigation unit (which we are planning to set up soon) and the National Anti-Corruption Bureau (which has already been set up) would be impossible for us to create on our own; we just don’t have the experience. In order to do these things quickly and successfully, we need assistance from the American government.

Now, financially we’ve got support, but only for the short term. I believe that by 2018 or 2019 we will be on the road to a self-sustaining economy. But these are difficult times in Europe, and it is hard to find political support there. We still need the United States to maintain sanctions against Russia and to strengthen them if Russia acts badly. That’s what really helps, because the Russian economy is suffering. The sanctions change its behavior.

WRM: Thank you very much.

Tillerson Threatens “Secondary Sanctions” on North Korea

The Trump administration is threatening “secondary sanctions” if North Korea’s trading partners do not clamp down, reports the Financial Times: 

 Testifying before Congress, Mr Tillerson said the US government had been urging countries to enforce existing UN sanctions, but that it was approaching the point where it would have to determine whether it needed to place what are referred to as “secondary sanctions” on countries that are not complying with the UN measures.

“We are in a stage where we are moving into this next effort of are we going to have to . . . start taking secondary sanctions because countries we’ve provided information to [about North Korea] have not, or are unwilling, or don’t have the ability to do that,” Mr Tillerson told the Senate foreign relations committee on Tuesday.

Tillerson went on to say that China’s recent record on pressuring Pyongyang was “uneven,” and that the issue of Chinese companies dealing with North Korea would be at the top of his agenda when he meets with Chinese officials next week. He also said that the administration was trying to get China and Russia to cut off fuel supplies to the regime, which Beijing has already taken some tentative steps toward doing.

One thing is clear: the Trump Administration remains laser-focused on the North Korea threat. Talk of these secondary sanctions—which have never been used before on North Korea—suggests the Administration is losing patience as other countries fail to do their part.