Ukraine resistance proves problem for Russia
The mood is changing in Crimea.
On Friday the Russians took over, largely unopposed by their Ukrainian counterparts. Perhaps in the confused aftermath of events in Kiev, the Ukrainians were still wondering whose orders they were supposed to follow.
But today there are large groups of Ukrainian soldiers who resist the new authority in Crimea, who refuse to surrender their bases and their ships, and who are slowly starting to create problems for the Russians.
Perhaps a decision has been taken to fight back? So far it has been done peacefully, but each time the troops are pushing the boundaries, hoping to show the world that Ukrainians are being bullied by their Russian masters.
The international community may have given up on Crimea. It is clear the new government in Kiev has not.
Which brings us to the events of today.
'Insults and obscenities'
Russian troops fired into air as Ukrainians marched on a Crimean air base
The Russian guard at the airfield in Sevastopol must have considered the prospect of a confrontation like this. Marching towards them was a column of 300 unarmed Ukrainian soldiers, with their flag proudly displayed.
The Russians fired over their heads but on went the Ukrainians, marching in line, singing their anthem, in defiance.
One volley after the other went over their head and, as they neared the barriers, the rifles of the Russian soldiers were lowered.
This airfield at Sevastopol is home to the MiG fighters of the Ukrainian air force.
For several days the troops loyal to Kiev had been confined to their barracks - but now the Russian and Ukrainian commanders were face to face.
The two sides shouted insults and obscenities as the officers tried to calm the situation.
The Ukrainian officer was demanding joint patrol of his airfield. His Russian counterpart radioed the demand to his superiors. It ended in stalemate.
'Noose tightening'
A line of pro-Russian militants has been guarding the Russian-occupied Belbek airbase
It is what the international community fears most: a confrontation that spills out of control and leads to war.
The deadline for Ukrainian forces to put down arms came and went this morning. Moscow said there was no such ultimatum. But President Putin giving his first press conference since the crisis began said using force to protect Russians in Ukraine remained a "last resort".
There is no question the noose is now tightening around those who refuse to submit to the new authority in Crimea. And it is getting ever more hostile.
Around the bases the pro-Russian supporters are threatening journalists and the families of the soldiers locked inside. Some wives are bravely sneaking in food parcels and supplies but how long will they be allowed such access?
In the port there has been plenty of activity. The Ukrainian sailors, going nowhere, have now dressed the railings of their ships in mattresses, to stop the Russians fixing grappling hooks.
Last night in anticipation of a pre-emptive move, a crane ship was manoeuvred into the mouth of the harbour.
It belongs to the Russian Black Sea fleet. It is not a complete blockade but the message it sends is abundantly clear - and this morning there were five Russian naval ships patrolling the bay, back and forth they went.
As we filmed, a group of young Russian-speakers came to remonstrate. "This is normal," they said. "We want the Russians. You are telling the world lies. They are not occupiers."
Soviet history and glory
Russia says it is a legitimate cause to defend the rights of people like this who look east rather than west.
And probably they are the majority in Crimea though no doubt there are significant minorities, such as the Tatar community, who do not want to be annexed, who do not want to be part of the Russian Federation.
At the same time the Kremlin, of course, aims to defend its strategic interests.
Would the Americans be any different? It is their access to the Black Sea, not to mention a land synonymous with Soviet history and glory.
On the east coast of the peninsula, in Kerch, the Russians are now strengthening their forces. The ferry terminal has been taken. Perhaps more hardware will be moved across the straits.
Yesterday the Russian Prime Minister, Dmitri Medvedev, said his government would build a bridge from Russia to Kerch. It reinforces the Kremlin's desire to be ever attached to Crimea.

Why finance is good for us
A new call to arms
Finance and the Good Society.
SINCE the September 2008 meltdown plunged much of the global economy into deep recession, no one has had a good word to say about finance or financial innovation. Adair Turner, Britain's leading financial regulator, has given well-received speeches questioning whether much of finance is “socially useful” and arguing that it should be a smaller part of the economy. As for financial innovation, a comment by the former chairman of the Federal Reserve, Paul Volcker, that the only useful new concept in living memory is the ATM has garnered widespread sympathy, as has the admission that the day his grandson said he wanted to be a financial engineer was “one of the saddest” of his life.
In this context “Finance and the Good Society” is so contrarian as to be shocking—all the more so because its author, Robert Shiller, is no head-in-the-sand capitalist nor a highly paid Wall Street shill. The Yale economics professor was one of the earliest critics of the efficient-market hypothesis that underpinned much of the financial innovation in securities markets of the past 30 years or so. He has become something of a Cassandra, giving warning of bubbles in many financial markets, including American property before the recent crash. He even inspired the phrase “irrational exuberance” in a presentation about share prices to Alan Greenspan, then chairman of the Fed, in 2006.
Mr Shiller writes that “imperfect as our financial system is, I still find myself admiring it for what it does, and imagining how much more impressive it can be in the future.” Ranging widely—from Adam Smith, Karl Marx and Friedrich Nietzsche to Damien Hirst and the latest findings of neuroscience—Mr Shiller argues convincingly that the good society requires an effective financial sector, and the way to extend the good life to more people is not to shrink the sector nor “restrain financial innovation but instead to release it”. That does not mean that fraudsters and others who broke the law during the bubble years should go unpunished, of course, and Mr Shiller rightly calls for financial innovation to take place in a “way that supports the stewardship of society's assets”, a philosophical underpinning that Wall Street's financial innovators seem to have been steadily forgetting since the 1980s.
He starts the book by going through each component of the financial industry, looking at investment managers, mortgage lenders and accountants, as well as lobbyists, educators and philanthropists. Mr Shiller explains the role they play in advancing the greater good, and, in so far as they contributed to the latest financial mess, he analyses what they did wrong and how they might be made virtuous again. Some solutions have already come about, such as renouncing the notion that house prices will never fall, a belief that contributed to the catastrophic mispricing of securitised mortgages. Indeed, Mr Shiller argues that for finance to be further democratised, it should “develop new and better mortgage institutions”.
Mr Shiller is himself a financial innovator in housing finance, having helped design a widely used home-price index. He has tried for years to launch a viable market in futures contracts pegged to house prices, that, as he rightly argues, would have stopped the housing bubble getting so big, or at least made its consequences less calamitous. He also sees opportunities for governments to limit the impact of the economic cycle on public finances by creating debt securities whose payments automatically vary in step with the rate of GDP growth or decline. And he reprises his proposal for securities tied to the income of a particular profession, allowing people to hedge the lifetime earnings risk they take when opting to enter one profession over another.
Mr Shiller's measured writing can seem slightly Panglossian at times, especially when he heaps praise on accountants and regulators. “Finance and the Good Society” would certainly have benefited from an extra chapter summarising the author's various proposals for reform. All too many of them suffer from being delivered as asides to his narrative. Yet, at a time, he says, when fear is curbing financial innovation and the political climate could “prevent financial capitalism from progressing in ways that could benefit all citizens”, Mr Shiller's sensible message demands urgent attention.

Wall Street analysis
In need of therapy
Exile on Wall Street: One Analyst's Fight to Save the Big Banks from Themselves.
By Mike Mayo. Wiley; 208 pages; $29.95 and £19.99. Buy from Amazon.com, Amazon.co.uk
MIKE MAYO likes to ask blunt questions about issues that no one else will touch. To some, his queries are sparklers that light up dreary quarterly earnings calls between the heads of major banks and financial analysts; to others, they come from nowhere, rockets that bring down banking's high-fliers.
Mr Mayo is a well-known bank analyst who currently works for Crédit Agricole Securities USA. He has been a star attraction at half a dozen firms, is beloved by the media, followed by clients, and loathed by whatever institution happens to have earned his derision. This approach has cost him a succession of jobs, but it has not stopped him from having a successful career. There are many reasons for this. Mr Mayo hates being criticised, but has few reservations about criticising others. He has a deep belief in capitalism, but holds many of its leading practitioners in contempt; J.P. Morgan's Jamie Dimon is almost alone in drawing praise. He writhes if he feels his employers are disloyal, yet shows little loyalty himself, seemingly always on the prowl for a better opportunity.
Such qualities are vital in a profession where objectivity is important and constantly tested. For the friendly analyst there are gourmet meals, rides on private jets, subsidised nights at strip clubs and, with luck, a bigger slice of profits. By contrast, when in 1999 Mr Mayo issued a 1,000-page report, telling the industry he covered that the good times were over, the consequences were uncomfortable. The report made his reputation but cost him his job. In describing his struggles in the intervening years, he writes: “Large banks have enough clout to beat the living daylights out of anybody who gets in the way—politicians, the press, or analysts like me.”
Markets can be equally unkind. Some of his best calls, notably a persistent scepticism about Citigroup, took years to be proved right. If he had run his own fund, Mr Mayo says, he would have made a lot of money over time, but “I probably would have folded several times as well.” Sometimes, notably in the case of Lehman Brothers, his view proved too optimistic.
But why, overall, aren't the big financial firms, and the analysts who cover them, better at the job? Mr Mayo offers the usual reasons: corruption, lousy disclosure, ridiculous compensation packages for incompetent managers who are overseen by incompetent regulators, conflicts of interests that are little short of rife. All of this he illustrates with names and dates, a close-up view of venality that, by itself, makes “Exile on Wall Street” a story worth reading. Since the financial crisis, Mr Mayo's 1999 report has become the conventional wisdom. To create another stir, he may need to become positive.

Global marketing
Local heroes
All Business is Local: Why Place Matters More Than Ever in a Global Virtual World.
“I HAVE written this book as an antidote to conventional wisdom that the world is flat and that globalisation should preoccupy us all,” says John Quelch, dean of the CEIBS, China's foremost business school. This is, at most, an age of semi-globalisation, argues Mr Quelch, who has co-written his book with Katherine Jocz, a research associate at Harvard Business School, predicting that the world will never be entirely global or local. Company bosses who focus too much on glamorous global strategy and the big picture risk getting burned in a world where the vast majority of business transactions are local.
Mr Quelch is one of a small but increasingly vocal group of academics who see great virtues in globalisation but warn of the pitfalls of a single-minded focus on a global, interconnected world. An expert in marketing and branding, he uses his insights to give companies pointers about how they can navigate a world where location can matter more than ever. The world's best global brands, he says, are also the world's best local brands. McDonald's has a global marketing slogan (“I'm lovin' it”) and a global look with the omnipresent golden arches, but its menu is attuned to local palates and customs. In Vienna McDonald's serves a Wiener Frühstück with dark bread rolls and Austrian-style coffee, in Delhi a vegetarian burger and in Bangkok a McSpicy Chicken Burger.
To make his case Mr Quelch explores what he calls the “psychological place”, which means consumers' mental associations with places. He then goes into the “physical place”, looking at the ways the environment influences a consumer's needs and wants. He also discusses the virtual and physical marketplaces.
Of the four Ps of marketing (Product, Price, Promotion and Place) it is place that matters most, says Mr Quelch. In China Western companies do well only if they understand the local distribution system and select the right suppliers in a very fragmented market. In other words they need huge amounts of local knowledge to succeed.
The authors, who write with authority, make essentially one point. It is an important one and the numerous examples of Western companies' failures to set up shop profitably in China show how tricky it is to get it right. Reading this book will make them aware of the complexity of a world that is at once flat, spiky, globalised and local
Hands across the world
Managing power networks should be a priority How Networks Can Revolutionise the World.
By Paul Ormerod. Faber and Faber; 308 pages; £12.99. Buy from Amazon.co.uk
AS THE world gets more connected, there is an increasingly urgent need for policymakers to understand and manage the “network effects” that occur in situations where links to other people influence a person’s decisions. The financial crisis that brought the global economy to its knees was the result in part of a failure by governments to understand the power of network effects. And if they do not buck up their ideas, argues Paul Ormerod, a British economist, there could be worse to come as information technology and globalisation entwines humanity together ever more thoroughly.
To understand many of the decisions that people make, the “rational utility maximisation” of homo economicus must be abandoned, argues Mr Ormerod. In simple language, instead of calculating how to best achieve what they want in splendid isolation, people in networks mostly opt to follow the crowd—a choice that is rational in its way, based on the assumption that in aggregate the crowd is better informed than the individual. On the other hand, even in a network, people decide to go their own way often enough to make network effects extremely hard to predict.
One challenge in understanding network effects is to spot the differences between several sorts of network. In a “scale free” network, most people have only a few connections to others, giving potentially massive influence to a minority with a “hub” of a large number of connections. In a “weighted” network, a well-known person or organisation carries far more influence than others.
In a “small-world” network, people typically have a small number of connections, but those they are connected to also tend to be directly connected to each other. There are influential people in a small-world network, but this tends to come from connections to an unusually diverse set of people, rather than having an unusually large number of connections. Then there are “random” networks, based on connections that people may not even know exist—the sort of network that can pass around a contagious disease from someone sneezing on a bus full of strangers.
“Positive Linking” begins oddly, focusing on 16th-century English Protestantism and 20th-century soccer hooliganism while largely ignoring Facebook and other new social media. It then meanders through a history of rationality in economics before finally getting to Mr Ormerod’s key point about half way through. But serious consideration should be given to his big idea, that policymakers should practise “positive linking”, understanding network effects and trying to use them and influence the design of networks to achieve better outcomes for society. For instance, one reason why pockets of unusually high unemployment exist, he argues, is that those communities tend to be outside the right networks. A policy of fixing that network failure could make a big difference.

Free exchange
On the origin of specie
Theories on where money comes from say something about where the dollar and euro will go
MONEY is perhaps the most basic building-block in economics. It helps states collect taxes to fund public goods. It allows producers to specialise and reap gains from trade. It is clear what it does, but its origins are a mystery. Some argue that money has its roots in the power of the state. Others claim the origin of money is a purely private matter: it would exist even if governments did not. This debate is long-running but it informs some of the most pressing monetary questions of today.
Money fulfils three main functions. First, it must be a medium of exchange, easily traded for goods and services. Second, it must be a store of value, so that it can be saved and used for consumption in the future. Third, it must be a unit of account, a useful measuring-stick. Lots of things can do these jobs. Tea, salt and cattle have all been used as money. In Britain’s prisons, inmates currently favour shower-gel capsules or rosary beads.
The use of money stretches back millennia. Electrum, an alloy of gold and silver, was used to make coins in Lydia (now western Turkey) in around 650BC. The first paper money circulated in China in around 1000AD. The Aztecs used cocoa beans as cash until the 12th century. The puzzle is how people agreed what to use.
Karl Menger, an Austrian economist, set out one school of thought as long ago as 1892*. In his version of events, the monetisation of an economy starts when agricultural communities move away from subsistence farming and start to specialise. This brings efficiency gains but means that trade with others becomes necessary. The problem is that operating markets on the basis of barter is a pain: you have to scout around looking for the rare person who wants what you have and has what you want.
Money evolves to reduce barter costs, with some things working better than others. The commodity used as money should not lose value when it is bought and sold. So clothing is a bad money, since no one places the same value on second-hand clothes as new ones. Instead, something that is portable, durable (fruit and vegetables are out) and divisible into smaller pieces is needed. Menger called this property “saleableness”. Spices and shells are highly saleable, explaining their use as money. Government plays no role here. The origin of money is a market-led response to barter costs, in which the best money is that which minimises the costs of trade. Menger’s is a good description of how informal monies, such as those used by prisoners, originate.
But the story just doesn’t match the facts in most monetary economies, according to a 1998 paper** by Charles Goodhart of the London School of Economics. Take the widespread use of precious metals as money. A Mengerian would say that this happens because metals are durable, divisible and portable: that makes them an ideal medium of exchange. But it is incredibly hard to value raw metals, Mr Goodhart argued, so the cost of using them in trade is high. It is much easier to assess the value of a bag of salt or a cow than a lump of metal. Raw metals fail Menger’s own saleableness test.
This problem explains why metal money has circulated not in lumps but as coins, with a regulated amount of metal in each coin. But history shows that minting developed not as a private-sector attempt to minimise the costs of trading, but as a government operation. It was state intervention, not the private market, that made metal specie work as money.
That suggests another theory is needed, in which the state plays a bigger role in the origin of money. Mr Goodhart called this the “Cartalist” theory. The fiscal wing of government has a huge incentive to move its economy away from barter. Once money exists, income and expenditure can be measured. That means they can be taxed. And the public purse gets a second boost from seigniorage, the difference between the value of the coins and the cost of producing them. On this account, governments impose taxes payable only in money, creating a demand for money that means it will be widely accepted as payment for goods. The state forces the economy away from barter for its own fiscal purposes.
Mr Goodhart used monetary history to test these competing theories. He examined the overthrow of Rome and a period in the tenth century when the Japanese government stopped minting coins. If the origin of money were purely private, these shocks should have had no monetary effects. But after Rome’s collapse, traders resorted to barter; in Japan they started to use rice instead of coins. There is a clear link between fiscal power and money.
The struggle for life
The evidence suggests that only “informal” monies can spring up purely privately. But informal money can exist on the grandest scale. The dollar’s position as the world’s reserve currency is not mandated by any government, for example. Its pre-eminence outside America rests on it being the best option for international transactions. Once a competitor currency becomes preferable, firms and other governments will move on. The good news for the dollar is that the Chinese yuan is not yet widely accepted and suffers from higher inflation, reducing its usefulness. But a shift in the world’s reserve currency could be swifter than many assume.
The dollar’s other competitor, the euro, has deeper problems. Its origins were not private. Nor is it a proper Cartalist money, backed by a nation state. This means it lacks a foundation in the power of either the market or the state. In his paper, written a year before the euro was introduced, Mr Goodhart was prescient, highlighting “an unprecedented divorce between the main monetary and fiscal authorities”. Cartalists, he said “worry whether the divorce may not have some unforeseen side effects”.

My dollar, my rules
American regulators threaten an emerging-markets bank
IN RECENT years Standard Chartered’s shares have traded at a premium to its peers in large part because its businesses are focused on Africa, Asia and the Middle East. Although headquartered in London, only 5% of group pre-tax profit in 2011 directly stemmed from the Americas, Britain and Europe. The bank has been able to sell itself as a play on the bounciest parts of the world economy, and the ones least exposed to the Western regulatory minefield.
No longer. The bank’s shares swooned this week (see chart) after the New York State Department of Financial Services (DFS) issued an inflammatory 27-page order, labelling Standard Chartered a “rogue” institution and accusing it of “grave violations of law” for allegedly hiding 60,000 transactions, totalling $250 billion, to enable Iran to evade American sanctions. That, the DFS said, exposed America’s financial system to “terrorists, weapons dealers, drug kingpins and corrupt regimes”. A footnote in the order said that in the course of investigating Iranian transactions, evidence was uncovered of similar “schemes” on behalf of other countries sanctioned by America, such as Libya and Myanmar.
The sensationalist language describes some sensational charges. The DFS says Standard Chartered’s actions were the result of a “documented willingness of its most senior management to deceive regulators and violate US law”. The suspect transactions took place between 2001 and 2007, a period when sanctions against Iran were largely imposed only by America and even then could be avoided by using a “U-turn” transaction whereby dollar-based payments could pass through America on condition they did not end there, were not rerouted directly to Iran, and were tightly documented.
According to the DFS, from 2001 Standard Chartered began doing business with the central bank of Iran on behalf of the National Iranian Oil Company, which received $500m a day in dollar payments. The order alleges that Standard Chartered’s legal counsel said the client and the purpose of these payments should not be identified. As a result, any reference to Iranian clients in wire transfers was masked. Over time the masking process became so large that it was automated.
The DFS says this did not sit well with everyone. In 2006, according to the order, Standard Chartered’s (unnamed) chief executive for the Americas sent a message to an (also unnamed) group executive director in London warning that the Iranian business had the “potential to cause very serious or even catastrophic reputational damage to the group” as well as “serious criminal liability” to management “e.g. you and I”. According to a branch officer interviewed by regulators, the unnamed director replied: “You f---ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?”
As if all that were not enough, the order alleges that Standard Chartered’s deception was aided by Deloitte & Touche, which had been hired by the bank in 2004 as a result of a prior settlement with regulators to provide an independent report on its compliance failures. Instead, the DFS alleges that Deloitte provided Standard Chartered with confidential reports on other banks that gave it insights into how regulators were investigating Iranian transfers; and then, at the bank’s request, drafted a “watered-down” version of a report that deleted references to sensitive payments.
Standard Chartered must now appear before the DFS on August 15th to explain, among other things, why it should not be stripped of its licence to operate in New York. That sanction is extremely rare but it is not to be taken lightly. Although its purely American operations are negligible, Standard Chartered’s wholesale franchise rests on providing a financial bridge between the 70 countries in which it does operate, much of it denominated in dollars that must pass through America’s financial system. The bank also has strong ties with American institutions, providing, for example, “sub-custodian” services in African and Asian countries for JPMorgan Chase, Northern Trust and State Street.
Rather than the contrite blather that typically follows any criticism from a politician or government agency, the bank’s response was almost as scathing as the report. Standard Chartered said it “strongly rejects the position and portrayal of facts” presented by the regulator, and that over 99.9% of the Iranian transactions complied with the U-turn rules and only $14m of them were in breach of those rules. Deloitte was equally emphatic in its denials, saying it “had no knowledge of any alleged misconduct…and categorically denies that it aided in any way any violation of law by the Bank.”
British politicians are also getting in on the act, with some accusing US regulators of pursuing an anti-London agenda following recent investigations into HSBC and Barclays. There are reports of disquiet among other American agencies about the DFS’s aggressive stance. The DFS is newly created: some suspect it of grandstanding.
The bank’s shares recovered a bit on August 8th as investors reassessed the likelihood of the worst outcomes. The last time New York authorities revoked the licence of a major bank was in the 1990s. That was the notorious BCCI; Standard Chartered is an unlikely addition to this club. But it still faces a tough task to restore its advantage over other banks. A stand-off with the regulators sets the stage for prolonged uncertainty. A big fine may be unavoidable. Above all, investors have been reminded that Standard Chartered’s vaunted emerging-market franchise is vulnerable to the conflicting values of those markets and the country that prints the world’s reserve currency.

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After the bloodiest week in Ukraine’s history as an independent state, the last twenty four hours have seen a dramatic turn of events including: - A signed agreement between President Yanukovych and the opposition political leaders to end the crisis
- A promise of early Presidential Elections
- A unanimous vote (386-0) in the Verkhovna Rada, Ukraine’s Parliament, to return to the 2004 Constitution that greatly reduces Presidential powers
- The decision to free, by a vote of 310 lawmakers, former Prime MinisterYulia Tymoshenko, Yanukovych’s long time political rival and perhaps the most charismatic political figure in the country
- Yanukovych has fled from Kiev, presumably ending his reign
Yet the future for Ukraine remains uncertain. As welcome as the developments are, many of the underlying reasons for the crisis are still very much in force and none can be expected to be resolved in the near future.
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First, there is the agreement itself, which is largely symbolic. The opposition leaders, Vitali Klitschko, Oleh Tyahnybok, and Arseniy Yatsenyuk have little official authority, other than their positions in Parliament and in their respective parties. Also, their own political future is unclear.
Klitschko, whom I’ve met on several occasions and always found to be intelligent, honest and sincere, is a world champion boxer with little political experience—the US Ambassador was overheardsaying that he needs to do his political homework. Tyahnybok is considered too radical to be a viable leader and Yatsenyuk will likely be overshadowed now that Tymoshenko, the leader of his party, will be freed.
Tymoshenko herself is another wildcard. Always a firebrand—think of Sarah Palin on steroids with exponentially more intelligence—she’s sure to want to settle scores after 30 months in prison. The former “gas princess” took no part in the discussions and will not be beholden to any assurances given in order to achieve the agreement.
Second, there is Russia. Vladimir Putin’s representative, Russian Human Rights Commissioner Vladimir Lukin, left Kiev without signing the agreement. It is doubtful that the Russian President has not given up his intentions to form a Eurasian Customs Union of former Soviet states.
Further, a victory for the opposition in Ukraine can only be seen as a loss for Putin at home. We can expect that he will do everything in his power, starting with trade sanctions, to undermine the fragile peace that has been established. Otherwise, he risks emboldening the opposition in Russia that he has worked so hard—and so brutally—to put down.
Third, is the political divisions within Ukraine itself. As I’ve explained before, these have been much overblown in the western press, but they still exist and are important. While Yanukovych himself has little support, polls show only a moderate preference for the EU over Putin’s Customs Union.
Fourth is the corruption, which is difficult to truly comprehend unless you’ve experienced it personally. Sure, there is corruption everywhere and it’s easy to dismiss the what goes on in Ukraine as a more virulent cousin of Chris Christie’s bridge scandal. Yet in Ukraine, the problem is not so much that politicians become intoxicated by power as it is that people go into politics primarily for monetary gain.
If you are in business, it makes good financial sense to invest in a seat in Parliament, where you are given immunity from criminal prosecution. From there, you are free to do just about anything—from extortion to violent crime—and rest assured that you will face no consequences.
And that corruption pervades every facet of society. In Ukraine, you don’t pay taxes so much as negotiate with a tax collector who is more interested in his own cut than filling the government’s coffers. Medical treatment is free, but the quality you receive is often proportional to the bribe you pay your doctor.
Finally, there is the Maidan itself. Kiev’s central square is normally the type of place you take your family on weekends to shop in the underground mall, enjoy a drink of kvass or simply meet friends, spend the day and people watch.
Yet in troubled times, it becomes the center of political unrest. Stages—as well as barricades—are erected, speeches are made and people hunker down in the bitter cold (for some reason, revolutions in Ukraine always seem to happen in the dead of winter).
Through the years, the Maidan has become more than a mere geographic location, but a symbol of the ultimate sovereignty of the people over those whose job it is to serve them.
Many of those who braved the police baton—and during the past week the sniper’s bullet—were also there during the Orange Revolution in 2004. Some of them camped there for weeks at a time. Others came at night and went back to their regular jobs in the morning, eyes red from lack of sleep and tear gas.
All remember the betrayals of the last decade and suffered injury and privation in the hopes that this time would be different. A common saying goes that everywhere else, people wake up to a new day, but in Ukraine, they always wake up to yesterday. The people of Maidan are desperately seeking tomorrow.
And many do not accept this agreement. They fear that once the eyes of the world find another crisis, they will be cast aside once again. Politicians will make their backroom deals, announced reforms will be reversed and the game will go on. They don’t want Yanukovych in office another day. They want him in jail or worse.
Although the shooting has stopped, Ukraine remains a mess. While much has happened, little has changed and, if there is a future, it is far in the distance.
Yet still I am hopeful. The Ukrainian people are injured and angry, but they are also intelligent, cultured and—above all things—patient. They are searching for solutions, not miracles. They want a government that serves them instead of one that oppresses and steals from them. Their most fervent desire is to live a “normal life” in a “normal country.”
I spent the late 1990’s in Poland and I’ve seen a deeply troubled and dysfunctional society transform itself into an emerging economic power. We’ve learned lessons and know how to make it happen.
First, Yanukovych must not return. If the past three months has shown us anything it is that nobody wants him in Ukraine. Not his erstwhile political allies—28 of his Party of Regions MP’s defected yesterday—not the oligarchs and certainly not the Maidan. Nobody. To jail or to exile, but he must go.
Second, is greater integration with Europe. That doesn’t have to mean a split from Russia, but as anyone who saw the vast corruption, intolerance and incompetence on display at the Olympics in Sochi could tell you, Putin’s way is not the way forward.
Integration with Europe in not a mere matter of changing alliances, theascension process itself is essential to progress. The reforms needed in Ukraine are almost beyond comprehension. Think about the much needed tax reform process in the US—already stalled for years—and then multiply that by a thousand.
Virtually every aspect of public life—from the judiciary, to the civil code to the very structure of the government itself—needs to be transformed. Each reform will bring concentrated losses to an entrenched set of special interests and diffuse benefits to the general public. Even the most educated electorate couldn’t hope to keep track.
However, EU ascension requirements play the role of a valuable shorthand. It’s binary. Either the government is fulfilling its obligations or it isn’t. We should remember it wasn’t a heroic leader that brought Poland into modern prosperity but a fairly boring former communist apparatchik.
Lastly, Ukraine will need financial assistance. Although the amount of money involved will not be enormous, there will still be complicated issues. Previous aid packages ended up in Swiss bank accounts, so strict controls will be essential. However, Putin will be happy to offer billions with few strings attached, except personal loyalty and a rejection of the EU.
So the story is far from over. I would give Ukraine no better than a 50/50 shot and I’m an optimist. In truth, with so much that needs to be done, so many competing interests and a dizzying array of moving parts, nobody can say for sure what the future holds for Ukraine.
The only thing that is certain is that the Maidan still stands, it’s watching and, if betrayed, it will surely rise up again.
Update: The Ukrainian Parliament has voted unanimously (328-0) to impeach President Yanukovych. It appears that Parliament will run the country until new presidential elections are held in three months. The EU is expected to appoint a special envoy soon.

Launching aircraft
Proof by induction
READERS of a certain age may remember “Fireball XL5”, a children’s television programme devised by Gerry Anderson about a spacecraft of that name. Instead of taking off vertically, as real spacecraft do, Fireball XL5 sat on a rocket-propelled trolley that accelerated it horizontally to launch speed.
And that, in effect, is what engineers at Airbus, Europe’s largest civil-aviation company, are proposing in their latest bout of blue-sky thinking. Apart from the fact that the trolley would be powered by linear-induction motors (specialised electric motors currently employed in high-speed trains like the one that runs to and from Shanghai’s airport) rather than rockets, they are suggesting that the fantasy of 1962 might become the reality of 2050.
Mindful that many passengers are already nervous about the whole process of getting a plane airborne, the engineers prefer to call their proposal “Eco-climb”. But the idea is straight out of “Fireball”. The aircraft to be launched would sit on a platform that ran along a track where the runway would otherwise be. The platform would accelerate to take-off speed, at which point the plane would lift into the air powered by its own engines.
Taking off in this way would both save fuel and make life more pleasant for those who live near airports. Aircraft engines are optimised for level flight at cruising speed in the stratosphere. Using them to accelerate a plane on the ground wastes a lot of fuel. An induction-motor-powered platform, by contrast, would be optimised for the job at hand. It could launch the plane at higher speed, letting it climb faster. That would save fuel, too. It would also mean fewer people on the ground suffered aircraft noise. And it could do all this from a track that was a third shorter than a conventional runway.
Altogether, according to Airbus’s back-of-the-envelope calculations, Eco-climb would reduce fuel consumption by 3% on a typical 900km (560-mile) flight, even with existing aircraft designs. But it would also allow for the design of lighter aircraft, with smaller engines, which would cut fuel consumption, noise and emissions further.
Nor is the idea complete fantasy. General Atomics, an American military contractor, has already built and tested a linear-induction-motor-based system of this sort at an airbase at Lakehurst, New Jersey. The General Atomics system is now being scaled up to be fitted on a new generation of aircraft carriers for the American navy.
A launcher powered by a linear-induction motor has several advantages over the steam-driven catapults used on existing aircraft carriers, according to General Atomics. Whereas a steam catapult lets rip with a constant force, the speed and power of a linear motor can be controlled to provide smooth acceleration. That extends the life of an aircraft by subjecting it to less stress. It also makes for a more comfortable take off. And the launch shuttle can brake quickly once the plane has lifted off (and then return for another launch) by reversing the current running through the motor.
What works in a military context might not, of course, be appropriate for civil aviation—one reason why nobody has considered equipping airports with steam catapults. But the smooth operation of a linear motor means the take-off force could be kept within the 2.5g typically felt in a modern airliner dashing along a runway. Passengers need not be subjected to “Top Gun” levels of acceleration.
It might be possible to use linear motors for landings, too. Carrier-style arrester wires would cause too much damage and would hardly be comfortable for passengers. But if an incoming aircraft landed on a moving platform equipped with a linear motor, the current in the motor could then be reversed to slow it down. That might mean planes could do without landing gear, saving still more weight. Even Mr Anderson didn’t think of that one. Fireball XL5 landed vertically, on retro-rockets.

Germany’s federal states
Givers and takers
Germans fear a European transfer union because they hate their own one
AS THEY do about once a decade, the Germans are again fighting over their domestic “transfer union,” in which tax revenues are redistributed among the 16 federal Länder (states). But this time the euro crisis provides a new twist, for the currency zone’s southern countries are of late demanding “solidarity” from Germany in a form that sounds suspiciously like an even bigger transfer union. Hence the parallel in German minds: some states are makers, others are takers. The dynamic and fiscally responsible Bavaria, in this analogy, plays the role of Germany, backed by other good budgeters such as Hesse and Baden-Württemberg (Finland and the Netherlands, say). The city state of Berlin (“poor but sexy”, as its mayor has described it) becomes a “German Greece”, alongside other weaklings such as Thuringia or Bremen (Portugal or Spain).
Germany’s system of financial equalisation is “socialism among states”, says Christian Kelders of the economics ministry of Bavaria, which pays half of the total transfers of €7.3 billion ($9.5 billion) a year. It leads to “perverse incentives” by punishing Länder that raise more tax revenues and rewarding those that collect less, agrees Luise Hölscher of the finance ministry of Hesse, which gives the most per person. On October 23rd the centre-right Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU), agreed to push for reform. Separately, Bavaria will take its complaint to Germany’s constitutional court, where Hesse will probably join as plaintiff.
The EU is already a small transfer union of sorts, with a budget worth about 1% of the union’s GDP (see Charlemagne). It could become a much bigger one, if the embryonic "banking union" is extended to include joint bank-deposit guarantees, or if the union starts issuing joint Eurobonds. European leaders may also create a separate euro-zone budget.
By contrast, Germany’s system redistributes states’ revenues, irrespective of their indebtedness or spending, thus reducing differences in funding per person. The city states of Berlin, Bremen and Hamburg are even allowed to inflate their populations by 35% in this calculation, on the theory that they also serve commuters from surrounding states. Thus a state whose funding per person is 70% of the average, say, ends up at 91% after redistribution. One that starts at 120% ends at about 106%. Beyond this “horizontal” redistribution, the federal government also “vertically” tops up the transfers. Separately, all Germans still pay a “solidarity surcharge” to the Länder in the former East Germany.
The recipients love this system. Berlin, which gets 41% of the transfers, rebuts southern whining as a populist “Bavarian reflex”. Berlin’s finance ministry points out that the city is reducing its deficits very responsibly. To call Berlin a German Greece is nonsense, says its finance minister. Besides, Bavaria was for decades itself a taker.
And yet there are lessons in Germany’s federal experience for Europe, says Hesse’s Ms Hölscher. When economic differences become big, redistribution can lead to conflict, especially if the givers have no influence over what the takers do with their money. Bavarians, for instance, are irate that their students pay to attend university, whereas Berlin makes education free, even as Bavaria subsidises Berlin’s budget.
Sooner or later, regions may rebel. Thus Wilfried Scharnagl, a veteran Bavarian politician of the centre-right and the author of “Bavaria Can Also Go It Alone”, says that Germany’s system “lames the weak and weakens the strong.” If Bavaria is at risk of ending up in a double transfer union under the oppression of both Brussels and Berlin, it should, he thinks, secede.

India's government Rejigged again
AS WITH comedy, timing matters when delivering a political punchline. On October 28th India’s prime minister, Manmohan Singh, at last reshuffled his cabinet. It was long overdue, made necessary by the departure in September of a coalition ally, and more generally by the growing sense, over several months, of a government adrift: dominated by aged men, beset by scandal and short of fresh ideas. Mr Singh afterwards said he hoped it be his last rejig before general elections due, at the latest, in mid-2014.
The most high-profile, and broadly welcome, change is the arrival of a new foreign minister, Salman Khurshid. He is only the third Muslim in the post in India’s history (though his own father, Khurshed Alam Khan, once served as a junior foreign minister, a reminder of the heavy role played by dynasty in Indian, especially Congress, politics). His elevation from his old job as law minister is mildly surprising, coming in the wake of allegations of corruption at an NGO for the disabled which is run by his wife. Evidently Congress’s leaders reckon the supposed scandal has already run its course.
He replaces an 81-year-old, S.M. Krishna, who had looked decrepit in recent years, and deferred to Mr Singh on policy. The government’s record on foreign affairs has been steady and is unlikely to change much now. Relations have improved with Pakistan in the past couple of years, and India’s role abroad is quietly expanding, for example in delivering aid to Afghanistan, bolstering relations with Myanmar and Bangladesh, and in strengthening trade relationships elsewhere in Asia. Mr Krishna is likely to be remembered best for the time he accidentally read out a speech of the Portuguese government, while attending the United Nations Security Council.
The two most important cabinet jobs—finance and home affairs—were left untouched. But one other notable development, to foreign eyes, is the return of Shashi Tharoor, once a prominent UN official, to a junior ministerial job. He had quit, two and a half years ago, over a corruption scandal related to Indian cricket. An articulate, pro-reform and Western-oriented figure, he has a job promoting better education and skills in India, but is likely, too, to help improve the government’s public communication. In addition Manish Tewari, a bright spokesman for the party, now gets a junior minister post.
In all, 22 ministers, 17 of them new, were sworn in by India’s newish president, Pranab Mukherjee, and watched closely by a pensive Sonia Gandhi, the Congress president. She and Mr Singh displayed a mix of ambitions with their changes. For a start they hoped to present a government that looks more youthful and energetic, by bringing in a host of relatively young ministers to junior posts (though, notably, not Rahul Gandhi, who is widely discussed as a future prime ministerial candidate for Congress). Yet the average age of the full cabinet ministers has shifted hardly at all: from nearly 65 years old, pre-shuffle, to just over 64 now.
Second, they displayed concerns about regional electoral matters. Six of the promoted ministers hailed from a hugely important southern state, Andhra Pradesh, which delivered more Congress MPs in the 2009 general election than any other single state. Congress’s fortunes have since slumped there, the result of a split party and a row with a local strongman. Demands by some for a breakaway state, Telangana, also flare regularly. Promoting Andhra figures to high posts may be one way to assure voters that a Congress government brings benefits to the state. That could be crucial: if Congress flops in the state, in 2014, its national electoral prospects are likely to be grim too.
Similarly a clutch of Congress figures from West Bengal were promoted, filling a regional gap created when a Bengali coalition ally, Mamata Banerjee, flounced out of government in September (in opposition to some limited economic reforms that had been announced that month). The more prominent they prove to be, the greater the likelihood of bitter confrontation with Ms Banerjee’s party, the Trinamool Congress.
Perhaps most important, however, was what did not occur. Mr Singh repeated that he had offered a post in government to Mr Gandhi, but again the young scion of the ruling Gandhi dynasty declined the responsibility. Various figures close to him have been promoted—notably Sachin Pilot becomes a junior minister for corporate affairs and Jyotiraditya Madhavrao Scindia takes on responsibility for power. But Mr Gandhi himself is likely, instead, to get some new party job.
The significance of this may only emerge in the coming months. At first glance it suggests Mr Gandhi is less likely to be promoted as the party’s next prime-ministerial candidate. His repeated ducking of offers to become a minister suggests that he lacks the appetite for high office. With no experience in government, whether at national or state level, he will look ill-prepared to lay a claim to be prime minister. His timid performances in parliament do not help either.
Like his mother, therefore, he may aspire to a more detached sort of political role: guiding the Congress party, and so influencing government from outside. This, in turn, hints at a further possibility. Mr Gandhi may have concluded that Congress’s electoral prospects in 2014 are dim, after two terms in national government and a general weariness over corruption. If the government is destined to grow more unpopular, he may reason it is smarter for him to remain modest now and keep his ambitions in check. He may even reckon that winning in 2014 would anyway bring a less-than-enticing prospect: a more limited electoral mandate, probably in a less cheery economic climate and with an inevitably fractious coalition to manage. Thus holding off from office for some years yet may be the more appealing course.

Regional elections in Spain
A Basque case
Regional elections are giving another headache to Spain’s prime minister
SPAIN’S prime minister, Mariano Rajoy, is a man with many problems. Germany’s chancellor, Angela Merkel, wants European funds intended to rescue Spain’s banks to be funnelled through government accounts, meaning that they will increase the country’s already mushrooming national debt still more. Next month he will face both a general strike and elections in Catalonia, where separatism is on the rise. And he must soon decide if Spain needs a politically damaging bail-out.
Mr Rajoy’s People’s Party (PP) won regional elections in Galicia (see map) on October 21st, but a poll in the Basque country on the same day added another headache to his list: the socialist-led government was ejected and the Basque Nationalist Party (PNV) came top, winning a third of votes. Worse, “constitutionalist” parties, meaning those happy with the Basque country’s status as part of Spain, won just a third of the seats in the regional parliament. Euskal Herria Bildu, a coalition of separatist groups, including the former political wing of ETA, a terrorist group which downed arms a year ago, apparently for good, took a quarter of the vote.
The wave of support for EH Bildu is proof of how much ETA’s bloodshed had damaged the cause of independence. When ETA was still active, Basque voters never backed a single separatist group in such numbers. EH Bildu is now the region’s second political force and a serious rival to the PNV, whose position on independence is ambiguous. Iñigo Urkullu, the party’s leader and the region’s future president, must now take a stand.
Will he follow Artur Mas, Catalonia’s president, and call a referendum? Not immediately. On local television, speaking in the Basque language, he backed the mushy concept of an independence “of the 21st-century kind”. Elsewhere he has argued for a new bilateral relationship with Spain, implying that a revised autonomy statute would do. His manifesto talked of “becoming less dependent every day until we achieve independence.” Wherever he comes down, both the PNV and EH Bildu demand an explicit right to self-determination that Spain’s constitution does not permit. If they do not get their way, tension will increase, warns Kepa Aulestia, a Basque commentator.
Mr Urkullu’s ambiguity contrasts with Mr Mas’s growing stridence. But opinion polls show Basques are less keen on independence. While 51% of Catalans would vote in favour, a majority of Basques show “little or no” interest in it. Mr Urkullu wants to leave the issue until 2015, which would let him see what happens in both Catalonia and Scotland, where a referendum on independence is due in 2014. EH Bildu will try to hurry him up. Much depends on where he turns for parliamentary support.
With luck, Mr Rajoy’s Basque problem may go away, but bad news elsewhere is piling up. The economy has shrunk for five quarters in a row. A deepening social-security hole will add 1% of GDP to this year’s budget deficit, so it may exceed the target of 6.3% set by the European Commission. Moreover, two painful decisions await. Next month Mr Rajoy may announce that Spain cannot afford to peg pensions to inflation. And then there is the bail-out. “When I make the decision,” Mr Rajoy said on October 19th, “I will say so.”