Is Poland next?

A deformed perception of reality

President Putin’s troops are making slow progress in Ukraine but the lack of speed in no way detracts from what military minds see as a foregone conclusion: the physical destruction of a European nation.

In 2017, with a headline-dominating North Korea looking like the biggest threat to global stability, Ben Hodges, then Commanding General of US troops in Europe, told Karina’s Column: “Of course Russia, and its behaviour over the last three years [with invasions of Crimea and Ukraine] is the only nation that really possesses the ability, the capability, to destroy a European country or the United States with their nuclear weapons.”

“So in terms of an existential threat, that’s Russia,” he said, quickly adding a reassuring sentence: “Now it’s not likely, but that’s a part of it.”

Ukrainian bravery cannot stop, only delay, a war criminal with a superior arsenal and armed forces. Negotiations, unless Putin has changed his form, are but a cover for regrouping and keeping his opponents off balance.

We can only speculate at what the ultimate aim of the former KGB spy might be, but a devastated nation, living in fear of the Russian bear next door, is likely to be a satisfactory outcome. There is no need for an occupation, which would drain funds from state coffers. NATO becomes a de jure impossibility for Ukraine – as opposed to a de facto one, which had long been the case. The EU will not, and cannot take on, a country reduced to rubble with a desperate need for a Marshall Plan equivalent.

One of the outcomes of the war is that Russia, despite acquiring pariah status, has slotted back into the top echelon of nations. No more is China the only story.

As the West desperately tries to understand Putin’s motivations and where these will lead, one man who dealt with him as first a President and supporter, to then discover an implacable enemy, says the leaders in the West have never understood and will never understand that Putin has the “mentality of an exponent of organised crime,” Mafia boss rather than statesman.

Mikhail Khodorkovsky, the former owner of petrol company Yukos, worked in parallel with the Russian President until his forays into political opposition landed him in jail for a decade.

In a recent interview with Italian newspaper Corriere, the London-based exile dismissed Putin apologists’ theory that his fear of Ukraine joining NATO led to the invasion.

“He hates NATO but does not fear it. Rather, he is now taken with a messianic mission. He is possessed, and you can see that in his having placed a [17.5m high] statue of Vladimir the Great [Prince of Novgorod, Grand Prince of Kiev, and ruler of Kievan Rus' from 980 to 1015] in front of the Kremlin.”

Khodorkovsky has no doubt the aggression against Ukraine is the fruit of a “deformed” perception of reality. After over two decades in power, the Russian President is surrounded by advisers who through fear dare not tell him the truth.

Putin has already threatened the use of nuclear weapons against the West, turned Belarus into a vassal state, and sent troops to Kazakhstan to quell anti-government unrest in January – it is unclear whether they have all returned home. The Russian Ministry of Defence says they have. At the very least, President Kassym-Jomart Tokayev is entirely in his debt.

The West, anxious about a Third World War, has been very clear that unless a NATO nation is attacked, they will not fight. Only two weeks ago, Russia bombed a military facility in Ukraine close enough to Poland for those on the border to see the flashes.

What would NATO do if Putin bombed some of the exported arms from NATO countries building up on the Polish side of the border? That is one of the few ways into Ukraine and into the hands of its army. Would the West prevaricate, arguing that the attack was about the weapons, not the country? That would be a mistake.

Khodorkovsky is not alone in believing that the West’s military inaction is encouraging Putin. He envisages a scenario where the Russian President will conquer Ukraine - guerrilla warfare will continue - and as the Russian economy worsens, he will launch a war against Poland, a similar distraction to the wars he launched in 2008 and 2014, but more in line with his Vladimir the Great-like ambitions.

At least one Polish mother has already contacted her London-based sister for assistance in extracting her conscription-aged son from the country as quickly as possible.

Putin’s heart-breaking and unprovoked war on Ukraine has had the welcome effect of uniting the West – Sweden is likely to announce it will join NATO by the spring. But the effects on his own country - turning Russians into pariahs, devastating the domestic economy on the back of sanctions and a brain drain, eliminating the last vestiges of a free society – sets the scene for more wars.

Meanwhile, the prognosis for the West’s economy, already suffering from inflationary forces, is dire. Wheat prices at record highs are bound to stay there. There will be no new planting in Ukraine. Oil prices are 70% higher than twelve months ago. with Western leaders like Boris Johnson going cap in hand to unseemly leaders of oil producing states to beg for increased production or deals. Saudi Arabia’s Prince Mohammed bin Salman reportedly refuses to take President Joe Biden’s calls, with the latter having been critical of MBS’s human rights record. Autocracies have been strengthened by Russia’s actions.

The erosion of social cohesion and livelihood crises were two of the top five 10-year risks in the 2022 World Economic Forum Global Risk report. The effects of the invasion can but exacerbate these. Governments will need to tread carefully, and apply support, as a toxic cost of living increase feeds into society.

What might happen if Putin does take the war into Poland? We don’t know. But we do know what a previous invasion of Poland I 1939 led to.

Quantum Matters: The Good, the Bad and the Ugly of Quantum Cybersecurity

With a US inteligence report confirming that President Putin authorised a pro-Trump influence campaign in the latest election, China and the US in a stand-off, and the recklessness of ransomware groups tolerated, and at times abetted, by state actors, geographical risk is at its highest in a long time. See my latest column in The Quantum Daily on how we are skirting the edge. And what steps can be taken to mitigate risk.

An assassination in Sarajevo. The subsequent chain of events ultimately leads to a world war. An estimated 20 million people die.

A small US bank succumbs to a cyberattack. Amidst carefully placed misinformation campaigns, bank runs and riots, the repercussions start to drag down the financial system. The US blames Russia, calls on NATO under Article 5, where an attack on one is an attack on all, and step-by-step the world explodes into the Third World War.

What unifies these two scenarios is that we are living in an era reminiscent of pre-World War I: the seeds of conflict are sown, irrigated by mistrust, and one spark can start a wildfire.

Last month at their Geneva summit Joe Biden made clear to Vladimir Putin where the US red lines in cybersecurity lie. “Certain critical infrastructure should be off-limits to attack, period,” said the US President.  One of the 16 sectors mentioned was financial services. It is a given that the message was also aimed at China, Iran and other hostile states with a track record of cyberattacks.

The US government has been in contact with American banks this year to chivy them into increasing their cyber defences, while Federal Reserve Chairman Jerome Powell stated that cyberattacks are the biggest risk to the system. They can trigger a liquidity run and lead to solvency issues.

One of the most worrying possibilities is a supply chain attack. In a little-publicised paper published by the New York Federal Reserve, Cyber Risk and the US Financial System: A Pre-Mortem Analysis, the authors note that an attack on a significant service provider which connects small and medium sized banks has the potential to cause a systemic event. The concentration of banks using the few existing cloud providers, like AWS or Microsoft’s Azure, for instance, is a clear risk.

The authors also note that in a five-day cyber attack, nearly half of US financial institutions would run out of reserves by day five.

The top concern is not so much a provocation, as a misjudgement, ultimately leading to WWIII. Take the recent Colonial Pipeline attack by DarkSide. They planned to attack the business side, not the operational side, which is responsible for transmitting roughly 45% of East Coast fuel. They knew the latter would be perceived as an attack on infrastructure, bringing the might of the US intelligence services down on them for straying into the political arena.

“We are apolitical, we do not participate in geopolitics, do not need to tie us with a defined government and look for our other motives,” they swiftly posted on their Dark Web page, as they sought to excuse their error and distance themselves from suspicions of links to the Russian government.

There is no easy solution to the uncertainty of who is behind a cyber attack, nor to mishaps prevalent in a digital world.

But there is a clear need for key sectors to take a big step up in cybersecurity. Not least with China – which just celebrated the 100th anniversary of the Communist Party amid Taiwan fly-overs – on what looks ever more likely to be a collision course with the West.

Paradoxically, the quantum industry may be the answer to cybersecurity, while also being its biggest threat. The creation of quantum keys which are certifiably random – unlike the current RSA encryption and other standard ones – could provide hacker-free security. At least eleven global banks are exploring quantum safe protocols for security, ranging from JP Morgan to BNP Paribas and RBC of Canada, as reported here by The Quantum Daily (TQD). Around thirty-five quantum companies in countries ranging from Poland to Singapore are working on quantum cybersecurity products.

A handful of years down the line powerful quantum computers may be able to decrypt the data already being harvested by ransomware gangs and hostile nation states – yet another reason to experiment with current quantum cryptography.

Although information is hard to come by, China reportedly has quantum key distribution technology over fibre optic cable between Beijing and Shanghai. In essence, a quantum internet, providing hundreds of kilometres of totally secure communications.

The West is intent on catching up, with governments and companies spending large sums. Germany, for instance, announced in May a €2bn investment in quantum and related technologies, while a month later British start-up Arquit announced a link with defence company Northrop Grumman to explore its own end-to-end quantum encryption.  Meanwhile, the US Department of Energy last year unveiled a blueprint for a quantum internet.

The Cold War arms race mostly involved creating weapons of destruction, the so-called Mutually Assured Destruction (MAD) doctrine which, arguably, kept the peace over many decades. In the 21st century, the most important advance in keeping world peace will be security and protection: Mutually Assured Defence – not as MAD.

From Competitor to Collaborator

Dealing with the S in ESG 

Rare it is to hear business call for more government regulation. Yet this is the plea heard in private conversations with some of the largest financial companies in the UK, as they face undeliverable expectations to be at the forefront of solving rising inequality, racism and environmental disaster.

“The To-do list for corporates will continue to grow. We are having to deal with issues like racial injustice [because] governments aren’t,” says the CEO of a FTSE-100.

The financial crisis led to an upsurge in regulation, ranging from capital adequacy to conduct rules. Regulators like the Financial Conduct Authority in the UK and the Securities and Exchange Commission in the US became ever more powerful. An unwelcome outcome for financial institutions, but one they fully understood and accepted, even as their compliance departments doubled and tripled in size.

Meanwhile, the E in Environmental Social Governance (ESG) became a major risk and reward factor for companies – consider the plummeting market capitalisation of coal companies and the general proliferation of environmental ratings. In this area, the change makers are the institutional shareholders rather than the regulators or government.

Covid-19 allied to Black Lives Matter has swung the spotlight onto the ‘Social’ aspect, ranging from the safety of employees in the pandemic, to key workers without proper contracts, to the minimal numbers of BAME executives in the City and Wall Street.

The backdrop to this is changes to the decades-old emphasis on an ‘efficient’ international economy.  Its weaknesses – gig economy workers who live pay check to pay check and an international supply chain too dependent on political goodwill – are now fully exposed. The shareholder-first approach is being subsumed into a multi-stakeholder approach.

The increased complexity of the new corporate model means that firms look more like universities, balancing the interests of a wide range of interest groups with the constant threat of a hostile social media campaign.

What happened at the London School of Economics a few years ago is a salutary warning. The union highlighted the appalling employment conditions of the prestigious university’s outsourced cleaners. The support of students and academics gathered pace. A couple of years later, in 2018, the cleaners won the battle to be taken on as employees of the LSE.

Interestingly, hedge fund Chanos is shorting gig economy comp­anies such as ride-hailing app Uber and online food-delivery platform Grubhub. It is betting that there is going to be a greater political focus on low-wage, precarious workers.

Boards of directors would prefer to have clearer regulation on ‘Social’ issues, such as outsourced workers. For instance, gender pay gap reporting, while not exactly welcomed with open arms by business in 2017, is now a regular part of the corporate landscape for all medium and large firms, helping highlight the continual need for action on diversity and inclusion. 

FTSE100 financial companies continually review and upgrade how they treat their permanent employees. In fact, boards at several banks have appointed designated Non-Executive Directors responsible for workforce relations in line with the revised UK Governance Code. More mental health support and flexibility on working from home are other measures implemented on the back of Covid-19 – with a decent salary as a starting point. Yet these benefits do not touch the outsourced workers like cleaners and security guards.

And yet one prescient FTSE-100 board director believes the rules are already clear: “The Board is accountable for the supply chain.” Speaking at a recent Oliver Wyman Forum event, where top executives and senior policy makers share experiences, she noted that issues related to multi-stakeholder capitalism had moved from sub-committees to main board level.

That includes tax avoidance schemes, with the most newsworthy instituted by Big Tech, yet just as prevalent at other large, global companies. Minimising tax through the use of complex schemes leads to jaw-dropping anomalies. Over 50% of the subsidiaries of foreign multinational companies report no taxable profits in the UK, for instance.

Paul Polman, the former head of Unilever, is not alone in believing that companies should embrace having to pay their fair share of tax on the back of a crisis which has seen massive spending by governments to avoid a 1929-style depression. This must include unlisted capital, such as private equity and hedge funds.

Building a level playing field and a sustainable economy means governments imposing tax reform and coordinating with other jurisdictions. The verdict so far: nul points.

Yet there are a few possible indicators of change: an OECD global tax rules blueprint might prosper if Joe Biden wins the US presidential election; the morally dubious sight of private equity firms accessing government cash could explode in a social media campaign; visionary CEOs are beginning to consider that a company’s approach to tax should be part of the ESG metrics by which investors judge them. 

Ensuring the heightened role of technology makes for an inclusive economic recovery is one of the biggest challenges facing financial services. Deepening social inequality, with Covid-19 disproportionately affecting women, BAME and those from poorer socio-economic backgrounds, sits uncomfortably alongside the accelerating digital take-up benefitting a small pool of winners. Many financial services companies are looking to cut their real estate footprint due to the permanent shift to increased home working, presaging waves of redundancies for their outsourced frontline workers.

Economist Noreena Hertz, in her recently published book The Lonely Century, writes about the neoliberal  mindset which dominated for four decades, leading to societies of unparalleled loneliness and the rise of right wing populism: “40 years of seeing ourselves as competitors not collaborators, takers not givers, hustlers not helpers.”

The effects of the pandemic have made even the most fervent small government activists mutate into advocates of big spending to stave off mass unemployment and depression. If that reversal is possible, so is the probability of legislation for the hidden workforce and international tax coordination. 

The future will involve collaboration, consensus and communication between government and the corporate sector to an unparalleled degree.  Not an easy way forward, but the only one to solve our societal problems.