Long stories short
- Kwasi Kwarteng scrapped plans to lower the UK’s top rate of tax, ten days after announcing them (more below).
- Luiz Inácio Lula da Silva failed to win enough votes to defeat Jair Bolsonaro in the first round of Brazil’s election.
- A major Iranian university suspended classes after clashes between students and security forces as protests continued nationwide.
New world disorder
The Ukrainian flag was flying in Lyman within 24 hours of Putin’s annexation of Donetsk. This morning there are reports of the Russian front collapsing in parts of the south. Anyone who wants a rules-based international order will hope for similar news from Donetsk itself, Severodonetsk, Luhansk, Lysychansk, Mariupol and Kherson; for the end of Putinism and a long-delayed Russian reckoning with history.
But that is an extravagant hope. This war has upended what the first President Bush called the New World Order. World bodies that kept a place for Russia have been made to look ridiculous. Minor tyrants have been made to look respectable compared with Putin, and this disorder may take longer to fix than it takes Ukraine to win on the battlefield.
Putin’s supposed annexation of four regions of Ukraine on Friday has been condemned by the EU, US, UN and UK, but
- Russia is still a member of the UN Security Council;
- the International Atomic Energy Agency has not been able to guarantee nuclear safety at the Zaporizhzhia Nuclear Power Plant, occupied by Russian army;
- an OSCE monitoring mission deployed to eastern Ukraine in 2014 left the country the day after the invasion and has not been able to return; and
- the UN and the International Human Rights Commission have been unable to get access to the Olenivka prison camp where 52 Ukrainian POWs were killed in July.
“Key international institutions failed to prevent Russia’s war of aggression and conquest,” Ivo Daalder from Chicago Council says, adding Nato, which said it would not intervene directly, to the list. Ukraine’s Volodymyr Zelensky has since asked for fast-track Nato membership, and been politely declined.
Europe. The EU has not splintered but its solidarity in the face of Russia’s weaponisation of energy exports has been exposed as fragile.
- Germany has delayed committing to sanctions on Russia and military aid to Ukraine;
- Hungary has flatly rejected sanctions without so far being sanctioned itself in relation to the war;
- the EU has failed to impose a ban on tourist visas for Russians.
Eastern opportunities. The war in Ukraine has created openings for anti-democratic players. The role played by Saudi Arabia’s Crown Prince Mohammed bin Salman in the release last month of 10 foreign POWs brought him back to international politics four years after the murder of Jamal Khashoggi. Partial boycotts of Russian oil have brought a bonanza for state-operated Saudi Aramco, the world’s biggest oil exporter and most profitable company with profits of $280 billion in the year to September. Turkey’s President Erdogan, defined by his creeping autocracy before the war, is now a mediator between Kyiv and Moscow.
Shanghai surprise. Putin may have expected loyalty from the Soviet Union’s old underbelly, but Central Asia is turning away from Russia. Last month’s meeting of the Shanghai Cooperation Organisation was a disaster for the Kremlin: snubbed by Kazakhstan’s president on a stopover in Astana and by Uzbekistan’s prime minister at the airport in Samarkand, Putin was then lectured in private by China’s Xi Jinping and in public by India’s Narendra Modi on the unwisdom of his war.
Nuclear normalisation. Putin has dragged the threat of nuclear war from the closet marked “theory” into the everyday. Yesterday Lloyd Austin, the US defence secretary, said Putin’s threats to escalate may not be bluff. For the first time since the Cold War securocrats on both sides of the Atlantic are talking not only about whether he might go nuclear, but how. Options include
- a “demonstration shot” in the Black Sea;
- detonation of a “low-yield” weapon on a Ukrainian military target, killing thousands;
- use of a higher-yield weapon, three to six times bigger than the Hiroshima bomb, to destroy Kyiv and decapitate the regime; and
- nuclear strikes on Nato targets in Central Europe.
The second two are highly unlikely. The first two are plausible. The US Air Force’s escalation vortex model of potential nuclear conflict has 4 stages: space, cyber, conventional, nuclear. Russia has explored three so far. Space cooperation with the US and Europe has been suspended. It is accused of “increased malicious cyber activity” and it has been conducting a conventional war in Ukraine for seven months. Former US General David Petraeus says Biden’s list of options in the event of nuclear escalation will include using US forces to sink the entire Russian Black Sea fleet.
Daalder says the G7, EU, IMF and Nato should “drive a response increasing the cost on Russia of violating the rule of law to such an extent that its aggression is reversed”. But that is a more complex task than shipping armaments to the front, and given Putin’s rhetoric it has to be assumed that time is short.
Yes, they blinked. But this is still the end of an era
Starmer was right to open the Liverpool conference with the national anthem. Now he should make climate change a matter of national security.
CAPITAL ECONOMY, BUSINESS AND FINANCE
About that LDI
Exactly a week ago it became clear that Kwasi Kwarteng’s surprise announcement the previous Friday of a cut to the UK’s top rate of tax was not just politically tin-eared but economically disastrous. He had not consulted the Office for Budget Management (OBR), which worried investors from the start. Then, on 25 September, he told the BBC’s Laura Kuenssberg there was “more to come” in terms of unfunded tax cuts. That was a Sunday. The markets had a few non-trading hours to digest the remark, and pension funds started selling instead of buying long-term UK bonds as soon as business started on Monday morning. The general reason was a lack of faith in Kwarteng’s plans and the UK’s economic future. The more specific one was the requirement under rules governing so-called liability driven investments (LDI) for pension funds to provide banks with collateral as the yields on the long-term gilts rise.
We wrote about this last Thursday, and about Dawid Konotey-Ahulu’s role pioneering LDI in 2003. He got in touch to note that i) the point of LDI was not to bet on where markets were going but to match pension funds’ assets to their liabilities; ii) LDI did not originally involve leveraging funds’ assets to increase exposure to bond markets – but did by the end; and iii) the effect of Kwarteng’s announcement and subsequent doubling down was the market equivalent of “three category 4 hurricanes” last Monday, Tuesday and Wednesday, bringing a £1.5 trillion industry to within five hours of meltdown. Fund managers were being told “to sell everything for whatever they could get”. Asked if the OBR would have spotted the LDI risk, Konotey-Ahulu said no, but that “the storm surge in rates was the result of the surprise announcement” combined with the scale of the borrowing and the lack of general OBR oversight. “This was so far outside the norm, it drove rates further upwards in three days than they had moved down in the previous decade.” Taxpayers are potentially on the hook for an extra £65 billion as a result.
TECHNOLOGY AI, SCIENCE AND NEW THINGS
The placenta is the only organ the human body grows from scratch in adulthood. This temporary organ exists during pregnancy and is the source of a baby’s oxygen and nutrients during development – but the organ is difficult to study and recreate outside the womb. Researchers have now developed a ‘placenta-on-a-chip’ that mimics blood flow between mother and baby, in this case specifically to try and better understand placental malaria, which kills 200,000 newborns and 10,000 mothers every year as infected cells clog up placental blood vessels. The study, published in the journal Scientific Reports, cultured placental cells and umbilical cord cells on opposite sides of the microchip, and found the flow of glucose was blocked in the same way as would be expected in a real placenta. It’s not a perfect model – but it’s a step toward studying other placenta-relevant diseases.
The 100-year life health, education AND GOVERNMENT
Nurses and midwives across the UK will begin to be balloted this week on strike action over the government’s below-inflation pay awards. But the impact of low pay for the sector is already being felt. A survey by NHS Providers across trusts in England found 68 per cent of respondents reported a significant or severe impact from staff leaving for better pay in retail or hospitality. At the same time, 69 per cent reported the low pay levels were making it difficult to recruit for vacancies. The Nuffield Trust also report that a decade-high peak of 40,000 nurses had left active service in England – roughly one in nine of the workforce. A particular concern is 27 per cent of the NHS trusts claiming they are offering food banks for their staff with another 19 per cent planning on doing so. The strike action will aim to increase the pay awards offered by the government. For many, it’s too little, too late.
Our planet CLIMATE AND geopolitics
Cash and burn
A company that has received £6 billion in green energy subsidies in the UK is reportedly cutting down primary forests in Canada. Drax runs Britain’s biggest power station, where it burns wood pellets as a source of renewable energy. The company says it only uses waste wood and sawdust to produce the pellets, but the BBC’s investigative Panorama programme followed a truck from a Drax mill in Canada picking up whole logs from primary forest areas, which have never been logged before and store huge amounts of carbon. A Drax spokesperson said the company had not taken any material directly from the two sites investigated by the BBC and the forest was harvested for timber used in construction.
CULTURE soCIETY, IDENTITY AND BELONGING
How not to govern
The U-turn has been accomplished. It will give Liz Truss a breathing space at least until her speech to the UK’s Conservatives on Wednesday. But the economic cost could be at least £65 billion (see Capital, above) and the political cost only now starts to become clear. Her chancellor, Kwasi Kwarteng, says his decision to euthanise the rabbit he pulled from his hat in the Commons ten days ago – the 5p cut to the top rate of tax – was forced on him because it had become a distraction from his plans for growth. It was much worse than that. It came close to toppling the country’s pensions industry and was a political suicide pill. Last week’s market turmoil fed immediately into mortgage rate rises, mortgage product withdrawals, Labour poll leads north of 30 points and an organised rebellion among senior Tories staring at years in the political wilderness. Would Grant Shapps vote for the new tax plans? “No.” What did Michael Gove think of them? “Wrong.” The line Truss and Kwarteng agreed last night was that they had listened, but the ten days they spent with their fingers in their ears will cost them. The line they did not agree was who’s to blame, and only one of them has the power to sack the other.
The week ahead
3/10 – Chancellor Kwasi Kwarteng speaks at Conservative Party conference in Birmingham; Criminal Bar Association national meeting; King Charles and Queen Consort’s first joint public engagement after royal mourning period in Dunfermline, 4/10 – First preliminary hearing in Covid-19 inquiry; Health secretary Thérèse Coffey, home secretary Suella Braverman and foreign secretary James Cleverly speak at Tory conference; Chris Kaba inquest opens; National Black Police Association conference opens in Cheltenham, 5/10 – Prime minister Liz Truss speaks on closing day of Tory conference; Aslef and TSSA rail union workers to strike, 6/10 – UCU college staff, GWR rail workers, 999 operators and BT Openreach workers go on strike; hate crime in England and Wales 2021-22 statistics released, 7/10 – Office for Budget Responsibility delivers initial economic forecast to Kwasi Kwarteng; JD Wetherspoon results; Democratic Unionist Party annual conference begins in Belfast; England’s women’s football team play the United States at Wembley, 8/10 – Scottish National party annual conference begins in Aberdeen; 24 hours strike buy RMT union rail workers
3/10 – Nobel Prize in Physiology or Medicine announced in Stockholm; general election in Québec; Unification Day public holiday in Germany; Iraq National Day; Eurogroup Finance ministers meeting, 4/10 – Nasa and SpaceX launch fifth crewed mission to the International Space Station; OECD to publish inflation figures; court hearing for Nick Kyrgios, charged with assaulting ex-girlfriend; Jewish holiday Yom Kippur, 5/10 – World Medical Association general assembly begins in Berlin; Reserve Bank of New Zealand publishes rate-setting decision; German-Spanish summit between chancellor Olaf Scholz and Spanish prime minister Pedro Sánchez, 6/10 – Norwegian government presents 2023 budget; European Political Community meets in Prague; Elon Musk to be questioned under oath by Twitter’s lawyers ahead of trial; Nobel Literature prize announced, 7/10 – Nobel Peace prize winner announced, Moody’s ratings agency releases review of Ukrainian economy, 8/10 – Austrian presidential elections, 9/10 – Draconid meteor shower
Additional reporting by Giles Whittell, Jessica Winch and Phoebe Davis.
Photographs Getty Images
in the tortoise app today
The death of Molly Russell
14 year old Molly Russell viewed images of self harm and suicide on social media in the months before she died. A coroner has now concluded that the content was “unsafe” and it contributed to her death.