Mary Dejevsky: UK diplomacy, like the nation, must live within its means

The devaluation of sterling cannot avoid affecting foreign policy, too

The British Embassy in Moscow used to occupy an atmospheric 19th-century merchant's mansion on the Moscow River. That building, much coveted by the Soviet regime, is now being refurbished as the ambassador's residence, and the embassy has a new building elsewhere on the embankment.

In the planning stages, there was much to-ing and fro-ing about the site for the new building, as there was about its design. But my first reaction on seeing the finished article was disappointment. I had expected something more imposing from a building spoken of time and again as a flagship embassy for modern British diplomacy in the new Russia.

What I saw was an undistinguished pastiche that came nowhere near holding its own with the surrounding blocks. Status-wise, the long-gone Soviet leaders would have had nothing to worry about, even if they could still have seen it from the Kremlin – which, incidentally, they can't.

Anyway, that now eight-year-old embassy – and its shy new counterpart in Berlin, which hides between layers of walls – seem apt metaphors for the mismatch of ambition and execution that characterises the British diplomatic effort at the moment. We wish we still had the power and prestige to justify buildings like the elegant Lutyens mansion in Washington or the glorious 18th-century townhouse in Paris, just a stone's throw from the Elysee Palace. But we don't have the money for such grandeur any more.

Nor, which is arguably worse, do our elected representatives have the realism necessary to accept that we must cut our coat according to our cloth and apply some ingenuity to doing things differently. This refusal to draw hard conclusions comes through loud and clear from the annual Commons foreign affairs committee report on the Foreign Office, which has just been published.

The report devotes much space to what it called "finance-related issues" and the most dominant of these concerns the Government's 2007 decision to remove the cushion that protected the Foreign Office from major exchange-rate fluctuations. The timing, as the report notes, could hardly have been worse. There followed what amounted to a double-digit devaluation of sterling against the euro and the US dollar. And because so much FCO spending – on embassies, locally recruited staff and operating costs – is conducted in foreign currency, British diplomacy, which was never lavishly funded in recent years, has felt a disproportionate pinch.

The report furnishes graphic evidence of the impact of devalued budgets, not least in the Balkans, where teams seem to have been cut and repatriated at short notice, leaving foreign partners in the lurch. Other details verge on the tragic-comic, such as the FCO's flirtation with currency markets.

"In April 2008," the report says, "the FCO contracted a specialist foreign exchange trading company, HiFX Intelligent, to provide it with advice. HiFX made recommendations for derivative-based hedging strategies, which the FCO initially approved. However the Treasury has a stated policy of refusing any proposals to speculate, and it therefore rejected the FCO's proposed strategies."

In its conclusions, the Commons committee repeatedly regrets the lengths the FCO felt necessary to preserve its budget, and the knock-on effect of penury on British diplomacy. Other countries, it says, would "read messages into the cutbacks, both about the importance which the UK attributes to the relevant bilateral relationship and about the UK's capacity to support its global diplomatic work". It describes the cuts at overseas representations as posing "a serious reputational risk to the department and the UK", and concludes: "Any suggestion that the FCO should allocate its resources partly on the basis of exchange rate considerations is ludicrous.... Exchange rates should not drive UK foreign policy."

Now decline is never easy to manage and an argument can be made that Britain has managed it as well as anyone – at least until the hubris of the past few years that revives the "east of Suez" debate for another generation. But it is the notion that foreign policy can, and should, be protected from devaluation of the national currency that is "ludicrous", not the reverse.

Devaluation of the national currency is a conscious political decision, and it puts foreign policy, inevitably, in the front line. The adverse domestic effects are, at least initially, less obvious. To call for the protection of the Foreign Office is to perpetuate the illusion that Britain is more powerful, and can reach further, than its economic capacity actually allows. We are a medium-sized country, with a medium-sized economy that should content itself with medium-sized diplomacy. The sooner MPs and diplomats accept that, the more effective our foreign policy will be.

m.dejevsky@independent.co.uk