Carl Bildt: Markets will cause Russia more pain than sanctions

Sweden's Foreign Minister calculates Russia has lost $150bn in recent months, he tells Alexander Lebedev

Global Outlook Carl Bildt is a former Prime Minister of Sweden and its current Foreign Minister. He’s perhaps better known to an international audience as a key mediator in the Balkan conflict, who co-chaired the Dayton peace conference and went on to become the United Nations’ special envoy in the Balkans.

Mr Bildt, 64, is therefore ideally placed to comment on the turmoil in Ukraine. As we meet, 42 people are certified dead and about the same number are missing, following the clashes and arson attack in the Odessa trade union building.

Is there any understanding in the West for Russia’s position? Or are Russia and its President forever destined to be painted as aggressive land-grabbers? (Since I met Mr Bildt, even Prince Charles has likened Vladimir Putin to Adolf Hitler over Ukraine.) And is it possible for even the briefest nods from the West in the direction of the Russians battling the vicious Ottomans and their Crimea outpost in the 17th century, and then defending Crimea from predatory rivals – the British, French and Germans?

Says Mr Bildt: “Things like comprehension, and understanding the plausibility of motives behind the action [whether they are there or not] do not change the essential fact: the occupation of the territory of a sovereign state is illegal under international law. The whole history of the world, and especially the history of Europe, consists almost entirely of wars. This constant has one and only one reason and motive: territorial conquest. The post-World War Two European order, enshrined in the Helsinki agreement, is based on a simple taboo: the strict prohibition on war as a means of territorial expansion.”

So, that’s a “no” then – there is little sympathy in the West for Russia. But there is no war as such – there was not a single shot fired by the Russians. Their troops in Crimea were there by agreement with the Ukrainians, and the troops’ movements were strictly limited. It was more like a party than any hostile takeover.

I suppose that’s beside the point now. Russia cannot step back, so is the West set on persisting with the course it seems to have set itself on, or is there any chance of compromise? Or am I being too confrontational?

Mr Bildt nods. “We are Europeans; we are used to confrontational questions. We have oppositions and we have a free media Russia does not have. The Western position will only consolidate; it will not diverge. When international law is broken, sanctions will follow.”

Says Mr Bildt: “Everything depends on the behaviour of the Kremlin. We Swedes are very familiar with the Russian economy: outside the energy sector we are among the largest investors there, through Volvo, Ikea, Tetra Pak and so on. Last summer, long before the current crisis, the Russian economy started showing signs of contraction. The share of raw materials in the GDP went over the figure for the early 1990s, which is a sign of regression. Growth fell below 1 per cent; the IMF reduced its calculations twice in one month; rating agencies also did some downgrading.

“Now, the value of the rouble is falling, access to the capital markets is virtually closed, and $70bn-$80bn of corporate debt still has to be serviced. However, even without sanctions, far worse punishment could be imposed by the free market. Businessmen tell me the same story: whatever the West does, it can’t create anywhere near as much harm and damage to the Russian economy as its own bureaucracy, in the form of administrative barriers, a messed-up tax system, and absence of rule of law.”

Recently, I say to Mr Bildt, he claimed that in the last few months Russia had lost $150bn. How did he calculate that? He quickly replies: “Capital flight of $60bn, plus restrictions, the higher price of new loans, interruption of direct investment, the worsening of the trading conditions – these all go towards forming a rough estimate.”

Then there’s the exposure of the Western companies with long-term investments in Russia. All in all, it works out at hundreds of billions invested in the country. Mr Bildt agrees. “Yes, that’s right. And to cut energy and raw material imports from Russia will be even more painful. But to preserve the crucial principles of international law, democracies must be prepared for big sacrifices.”

This could all be heading in a terrible direction, and all seems familiar. How do we prevent a recurrence of the First World War? After all, then, as now, no one expected or wanted the war. “I think the world is very different now. It is much harder, in a real democracy, to go for an all-out war [people in the UK might disagree]. It is not the same as the League of Nations. We will not let the war happen.”

But what does he think the West actually wants from Russia? He rattles off a list: “We need to restart the Geneva process. They simply need to say some right words, make some symbolic gestures. For instance, the Russian senate can withdraw its authorisation to use military force; they can pull the troops away from borders; they should start a dialogue with Europe and Kiev; make a declaration against separatism; and make a statement that changing current borders by force is not permissible.”

Nevertheless, I feel that some insurmountable barrier stands between East and West and it cannot be explained away merely by pointing to differences in their political systems. How did they come to be so far apart? “Yes, there is such a problem. We should try to sort it out with political and social contacts, work on enlightenment, and generous visa regimes. However, nothing in the current situation bears the promise of any of that. First, we should concentrate on solving the current crisis.”

One of the fallouts from Ukraine is that corruption is being discussed as an issue again, possibly in the context of sanctions. Yet it’s of foremost importance for all countries, big and small. Is it because Europeans are simply in love with dirty Russian money and ignore its origins most of the time? It’s not been easy to tackle until now, says Mr Bildt, because offshore havens have been deliberately opaque and secret. Penetrating them has been difficult. “We simply didn’t know enough about them. Now we know more.”

And another thing, he adds: “Central to our approach is the rule of law; we cannot start a case without real substance. If other countries haven’t launched a criminal case and asked us for legal help and assistance, without a court decision or at least a formal appeal from a sitting judge, we can do nothing.”

But this approach, I suggest, is hypocritical. Take, for instance, a Russian banker. He takes billions of the depositors’ money out of his bank in Moscow by giving fictitious credits to his own offshore companies. The banker openly launders his money in the world’s financial capitals. Aren’t the financial authorities in these overseas countries obliged by law to inquire of the Russian central bank whether this money is stolen or not? Does Mr Bildt know that in the last two decades the offshore accounts of the world accumulated $25trn of dirty money? “Interesting figures. I am certain the process will start in full seriousness. The fight with global corruption, fraud and money laundering will soon start in earnest. ‘Process is on’ – as one of your leaders used to say.”

We need an international financial police – some sort of financial Interpol – something I’ve been campaigning for, I say. Mr Bildt does not disagree.

Back to Ukraine. Can’t the West be more flexible? For example, Russia invites the world powers to a new Crimean conference – a Yalta Two, if you like – to afford Crimea a status like Hong Kong. It would have an open border and be an internationalised free trade zone, set for, say, 49 years – after which the population would be invited to choose, in a transparent referendum, whom the land belongs to and what status they prefer it to have. All this would be done in the general context of a multi-party financial plan for the economic reconstruction of Ukraine, in which Russia would be prepared to bear a substantial share of the financial burden. Is that achievable?

Says Mr Bildt: “There are stages in political developments when the large systems seem to be stuck on a one-track route. At the moment, we are at the stage of escalation and even the simplest signals for détente do not filter through. As for the future, I foresee the same set of logical obstacles – the law, sanctity of borders. Today, it sounds very utopian. Tomorrow, who knows?”

Alexander Lebedev is the financial backer of 'The Independent'