Sunday, 30 March 2014

Crimea River

As expected, with the tension in Crimea and the rather impotent threat of economic sanctions, some people on the left have used the opportunity to take issue with Russian ownership of UK business, complaining that profits made in the UK are sent overseas and are not being filtered into the British economy.

This is a foolish and absurd comment to make - it completely misunderstands the value of business and how financial exchanges are made. When a foreign investor looks to buy a UK business they pay less than the price at which they value it, and the seller sells for more than the price at which they value it. The buyer is buying a business that has been valued by the seller on the basis of future profits factored into the price. If Coventry Clive sells his tennis club to Moscow Mary he is exchanging his expected future profits for the buyer's price in the here and now. Moscow Mary on the other hand is buying the tennis club at a purchase price in the here and now in exchange for future profits henceforward to come.

So, far from any worry about her profits leaving the UK, when Moscow Mary buys the tennis club her forecasted profits are all contained in the purchase price which has just come into the UK. When her future profits leave the UK and go to Moscow they are future profits that have been paid for in the purchase price.

It is true that sometimes future profits will exceed the purchase price, but it is equally true that other times the purchase price ends up exceeding future profits. In fact, one might expect the latter to happen more than the former. If the buyer's offer was less than or equal to the seller's expected future profits then in many cases no sale would take place. Hence, in most cases the seller must value the expected future profits as being less than the buyer's offer - and every time this happens there is a net gain for the UK.

Finally, to criticise foreign ownership is often to be blind to other benefits. Take a Russian billionaire who buys a football club as a good case in point. The net gain for the UK is significant (and that's aside from the other ancillary benefits his wealth brings). In spending lots of money on players' wages he uses money that wouldn't have come into the UK economy to buy players whose tax from high earnings does come into the UK economy.

Don't listen to misguided politicians who complain about foreigners' profits going overseas - they are missing most of the picture.

What about the situation in Crimea?

Regarding the circumstances in Crimea, while I understand the fears about where Putin will go next, the actual situation in Crimea seems to me to be centred on a desired destiny that Westerners usually support - most notably self-determination and democracy. 

I can't see that mobilising troops, holding a referendum at gun point and claiming a democratic vote is something for which Putin would want to be thought responsible by his European associates. Thus, it seems to me that if he wanted to argue the case for democracy and self-determination for the Crimeans all he had to do was to push for a referendum under the rule of the Ukraine, observe that most Crimeans want to be Russian, and then push for that outcome. Given Ukraine's frosty reception from major EU countries, I can't think that he wouldn't have had a case, even perhaps being able to appeal through the conduit of international law. There are a few possible reasons why Putin didn't take that particular course of action:

1) He didn't think of it.

2) He did think of it but thought the Ukraine would be unwilling to offer the Crimeans a fair referendum without his intervention. 

3) He was feeling intense pressure from Russian people to stand up for fellow Russians in Crimea, so he took the more reactionary route.

4) He is starting of a series of aggressive military mobilisations under which he plans to annexe other small nations.

For me, 1 is highly unlikely; 2 and 3 are quite likely but if true then perhaps not really deserving of the Western reaction, and 4 is the biggie on which the European and American response hinges.

Let's discount 1. For me, 2 and 3 do not seem to me to be reasonable pretexts on which either Europe's elite or America can have too many complaints, particularly if you consider their military escapades in the past few decades supposedly for the cause of self-determination and democracy. Which leaves us with 4. Now I'm no fan of the Putin regime - but I can't help thinking that if Europe and America's present response has been because they fear it is number 4 then it seems to me to be an extreme response.

Whichever is the case, the Western understanding of local Crimea issues is bound to be both exaggerated and inadequate. People immersed in the immediacy of the troubles are going to have a broader and clearer perspective of their own troubles than those on the outside. Think of the difference between our perception of the Iraq conflict and those caught up in the Iraq quagmire. Imagine the difference between the UK perspective of the Syrian crisis and those actually afflicted by the tragedy. Or, if you want an example with the signs reversed, recall when the IRA were bombing on UK soil and remember the difference in reaction between the American government compared with the British government (and its citizens).

Just as the reality of the situation is felt much more intensely at home in those three examples above, it is bound to be the case that the Crimeans' push for self-determination regarding their own destiny and identity is much more meaningful to them than it is to us.

* Photos courtesy of Forbes and NY Post