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Irwin Stelzer Warns of “Opulence over Defence” in Russia

stelzer2.jpg Stelzer: “EU free-traders who believe in the efficiency-enhancing effects of the free flow of capital see their theoretical belief foundering on the rock of their energy dependence.” From The Sunday Times:

Hugging Russian bear may lead to a mauling for EU Irwin Stelzer American Account ADAM SMITH never met Vladimir Putin, but, as with so many other things, he anticipated his appearance. Nobody can accuse the great Scot of protectionist proclivities, but he did warn that there are times when free trade takes second place to national defence. He proposed laying “some burden” on foreign commerce “when some particular sort of industry is necessary for the defence of the country … (since) defence is of much more importance than opulence”. … One might say that while relations between Putin and other expatriate Russians have been poisoned, those between the Evraz owner and Putin have not. Which suggests that when Russia decides to have Oregon Steel fall behind in deliveries of armour plate to the American military, Oregon’s management might decide, perhaps over dishes of sushi, that profit maximisation is not the only consideration. But this is trivial compared with the dilemma faced by Britain and the EU. Putin regards his nation’s oil and gas reserves as a political weapon. When challenged, he has cut off gas supplies to Ukraine and Georgia, and stopped the flow of oil through the pipeline crossing Belarus, forcing refineries in Poland, Germany, Slovakia, Hungary and the Czech Republic to dip into reserves to keep operating. Only after Belarus’s president agreed to eliminate all transit charges and, more important, cede control of Belarus’s pipeline, would Putin allow the president of Russia’s monopoly pipeline, Transneft, to open negotiations over future prices and fees. The German chancellor, Angela Merkel, called the supply cut-off “unacceptable”, which will not worry Putin unless Europe unites to solve its dependence problem — not a likely prospect. This follows on the heels of Putin’s sudden discovery that Shell’s operations in the Sakhalin gasfield were breaking environmental regulations. Given the choice of abandoning their investment entirely, or selling to state-owned Gazprom, Shell and its Japanese partners chose the lesser of the evils. … So America, Britain, Germany and other countries with histories of supporting free trade now have to make the choice with which Adam Smith confronted policymakers more than 230 years ago — defence or opulence; preventing hostile nations from gaining control over key resources, or adding a bit to national wealth by attracting more inbound investment. One Gazprom spokesman defends any such acquisition as extending consumer choice. The dealmakers, eager to make 2007 bonuses a repeat of 2006, will throw their weight behind approval. But they won’t be able to cite Adam Smith in support of opulence over defence. Which will be a comfort to Gordon Brown when the time comes to choose.

Read the complete column here.