The Spies Were No Joke

Anna Chapman and Co. may have seemed silly, but they were actually carrying out Putin's master plan: re-creating the KGB.

For many, the arrest of 12 Russian spies in the United States was a signal that the drama of the Cold War had returned as farce. Much fun was had examining the activities of the "illegals" in the United States (they seemed to have accomplished little more than garnering invitations to think-tank lunches). But as innocuous as those details seem, the West would do well to pay attention to just how closely the methods and intentions of Russia's current intelligence agency, the SVR, replicate those of Soviet-era intelligence agencies.

Prime Minister Vladimir Putin, a KGB veteran, has concertedly molded the SVR in the image of its Soviet-era predecessor, most of all in its relentless focus on spying on the West. Indeed, the Russian spy ring wasn't an aberration, but a reflection of precisely the way that Putin wants his intelligence agencies to operate.

Before Putin took office, that wasn't the direction the Russian spy services were heading at all -- indeed, it was quite the opposite. When the Soviet Union collapsed in late 1991, the KGB was divided into several independent agencies, with the intention of preventing the emergence of another all-powerful security state. The KGB's former foreign intelligence directorate was transformed into a new espionage agency called the Foreign Intelligence Service, or SVR by its Russian initials.

Yevgeny Primakov, a well-known Arabist who spent years in the Middle East and had earned a reputation as one of the Soviet Union's leading experts on the region, was chosen to lead the now-independent bureau. After bringing in a fleet of new deputies -- all of whom were also primarily familiar with the Middle East -- Primakov's primary focus was on cleaning house. He wanted to distance the SVR from its KGB past as quickly as possible.

Primakov's first step was to open a press office; he also encouraged SVR officials to present themselves in the Russian media as the most Westernized, liberal representatives of the Russian secret services. The effort was aided by the fact that the SVR was located in a Moscow suburb, far from the other intelligence agency spinoffs. Primakov also insisted that the agency have nothing to do with Russian internal affairs so that it wouldn't be tainted by any potential future suppression of domestic dissidents.

Primakov retained some nefarious covert Soviet intelligence practices, such as the disinformation campaigns that were called "active measures." But he was keen to present the SVR as something more akin to a think tank or research institution. From 1993 through 1998, he had the bureau publish four open research reports on international issues, including the proliferation of chemical and nuclear weapons. It was an effort obviously inspired by the CIA; he even renamed the intelligence operatives "reviewers" or "analysts."

When Putin was elected president in 2000, he was intent on putting his own stamp on the SVR. By tapping Sergei Lebedev to become the new SVR chief, Putin indicated he was intent on going in a different direction. Unlike Primakov's circle, Lebedev had spent his entire intelligence career in the West, working (like Putin himself) for the KGB in East Germany and for the SVR in the United States. When Lebedev selected Vladimir Zavershinsky, another former Germany agent, as his first deputy, it was clear that the agency's attention had shifted westward and that its stance was more antagonistic than it had been before.

Almost immediately, three Western countries -- the United States, Britain, and Germany -- reported increased activity by SVR agents. On March 23, 2001, the U.S. State Department announced the expulsion of 50 Russian diplomats -- at the time, it was considered the most serious spy scandal between the United States and Russia since the end of the Cold War. Two days later, British Prime Minister Tony Blair warned Putin about an increase in Russian intelligence activity in Britain. Four days after that, Germany's counterintelligence service released a report concluding that Russia had increased the number of spies operating out of its diplomatic mission in the country.

Putin eased up after the 9/11 terrorist attacks, even directing the SVR to aid the United States during the invasion of Afghanistan. Russians provided extensive on-the-ground intelligence during the war, especially on Afghan topography and the country's network of caves. Putin also ordered the shutdown of a monitoring station at Lourdes, Cuba, that was presumably used to gather intelligence on the United States, and he allowed U.S. rendition flights to land and take off from a Russian airport.

But the Russian détente didn't last long. In April 2003, reporters from the San Francisco Chronicle discovered documents in the Baghdad office of the Mukhabarat, the Iraqi secret police under Saddam Hussein, indicating that at least five Iraqi agents had graduated from a two-week surveillance course in Moscow. When the journalists asked us to check the documents, our sources in the SVR confirmed that they were genuine.

It quickly became clear that the Russians were still intent on harboring an adversarial relationship with the West. In September 2007, Mike McConnell, then the U.S. director of national intelligence, told Congress that Chinese and Russian spies were stalking the United States with a fervor unseen since the espionage duels of the Cold War. In 2008, Germany's domestic counterintelligence service declared in its annual report that Russia and China were responsible for most of the intelligence-gathering activity in Germany. "Intelligence and security services are under orders to actively support Russian industry," the report said. In late 2007 Putin seemed to confirm the German allegation about the new trend in the SVR's activities when he openly insisted that "the intelligence services need more actively to stand up for the defense of the economic interests of our companies abroad."

If there is one consolation for the West, it's that while the SVR's obsession with the West is a holdover from Soviet times, so, evidently, are some of its techniques. The use of illegals, of the type rounded up in the United States, is an old KGB throwback that traces to the Stalin era. The Comintern -- an international network of Communist sympathizers -- had once provided an ideal recruiting ground for spies who could blend seamlessly into their home countries while serving Moscow. But when Stalin turned on the Comintern during the purges, the Soviet Union was increasingly forced to train local talent for far-off missions.

Ultimately, the use of illegals is as much a sign of desperation as of malicious intent. Perhaps the SVR is proud of upholding these traditions, but the U.S. intelligence services should be forgiven for not feeling envious.

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The Consumption Gap

They thought Asia would save the world economy. They were wrong.

Global rebalancing has not gone according to script. It was 10 years ago this summer when, as chief economist for the investment bank Morgan Stanley, I first argued that an unbalanced world was in need of major realignment. Back then, America was the New Economy that others could only dream of. Japan was about to enter its second lost decade. Developing Asia was reeling after a devastating crisis. And the lingering symptoms of Euro-sclerosis were painfully evident.

Sure, the United States had hit a bump in the road. The dot-com bubble had burst and the U.S. economy had entered a mild post-bubble recession. But that was widely shrugged off as a minor detail. There was a strong sense that the world was aspiring to be more like the United States -- harnessing new information technologies, boosting productivity, and taking bold business risks. Moreover, most thought other countries would swing America's way -- ushering in the powerful convergence of a new globalization.

If it came, I argued, that convergence would occur just in the nick of time. For there was an important chink in the armor in the Great American Dream of a decade ago -- a U.S. economy that was living well beyond its means. America's then record 4.5 percent current account deficit (as a share of GDP) was symptomatic of an unsustainable shortfall of saving. And it was mirrored by equally unsustainable saving surpluses in Asia (Japan, not China, back then) and Europe (mainly Germany).

The crux of my global rebalancing thesis in the summer of 2000 was the coming realignment in the mix of world saving. I felt that America would lead the way, taking its cue from downward pressures on the dollar and the risk of higher long-term interest rates. A shift in the mix of international saving flows would be the only effective way to neutralize these fears. The United States would need to boost saving, investment, and exports, whereas Europe and Asia would have to draw new sustenance from saving-fueled consumption. Presto -- unsustainable current account gaps would narrow and global rebalancing would commence.

If it were only that easy. The critics countered that I was early -- that imbalances were not at the turning point I surmised. Some went so far as to maintain that global saving disparities were symptomatic of a new and permanent symbiosis between the world's ultimate consumer, the United States, and vibrant new producers in developing Asia. For a while, this critique turned out to be more right than wrong. Steeped in denial, the world figured out a way to finesse its imbalances. But in doing so, it nearly plunged into the abyss.

The Great Crisis of 2008-2009 was a very visible manifestation of a reckless decade of increasingly unbalanced global growth. Excess consumption soared to new highs in the United States -- hitting a record 71 percent of GDP -- whereas the country's net domestic saving (the sum total of depreciation-adjusted saving of households, businesses, and the government sector) fell into negative territory in 2008 for the first time ever and plunged deeper into the red in 2009. As a result, an already gaping U.S. current account deficit widened further to 6 percent. At the same time, Asia remade itself in the aftermath of its own crisis of the late 1990s, as China became the new leader of pan-regional growth and also replaced Japan as the world's biggest saver.

The global economy is now paying an exceedingly steep price for having tipped the scales on already dangerous imbalances. Post-crisis aftershocks are likely to hobble demand growth in the major developed economies for years to come. The lost decade is no longer exclusively a Japan story. Thanks to a profusion of asset and debt bubbles, Japanese-like outcomes are now prevalent throughout the developed world. That's especially true of the United States and its culture of excess consumption. Overly indebted, saving-short, job-deficient, and, yes, bubble-dependent U.S. households are now facing a multi year retrenchment. And debt-ridden Europe must now come to grips with a fiscal consolidation that should restrain economic growth for many years.

Yet the hopes and dreams of a new global rebalancing are once again evident. This time, they are all about the seamless transition from the West to the East, spurred on by the powerful dynamism of a China-centric Asia. After all, goes the argument, Asia came through the Great Crisis relatively unscathed -- poised, as a result, to compensate for a lasting post-crisis stagnation in the major economies of the developed world.

Don't hold your breath. Having just returned from a three-year stint in Asia, I am full of optimism over this dynamic region. There is energy, focus, and determination that are all sorely missing in the West. But that doesn't mean Asia is prepared to take over where the United States and Europe have left off.

Yes, Asia has changed dramatically in the past decade. It helps to frame that transition in the context of two crises -- its own pan-regional conflagration of 1997-1998 and the global crisis of 2008-2009. Over this time span, the region has moved aggressively to insulate itself from global financial shocks -- specifically, taking its reservoir of foreign-exchange reserves from less than $1 trillion in the late 1990s to some $5 trillion in 2008. Tactically, the strategy was brilliant. It provided Asia with a new backstop financing facility -- in essence, a self-insurance fund that came in very handy in successfully cushioning the blows of an unprecedented global shock.

But developing Asia hasn't done enough. Most importantly, it has failed to wean itself from the export-led growth model that has long defined its economic character. It actually increased its dependence on external demand, boosting the export share of pan-regional GDP from 35 percent in 1997 to 45 percent by early 2007. That leaves the region in a very uncomfortable place in this post-crisis era -- more dependent on external demand than ever before. And, unfortunately, this dependence comes at precisely the time when the crisis-battered economies of the developed world are least equipped to deliver the external demand that export-led Asia needs as fuel for its growth machine.

As tempting as it is to herald the demise of the West and the ascendancy of the East in this post-crisis era, that verdict -- like my global rebalancing call of a decade ago -- is probably premature. Until, or unless, developing Asia is able to shift its reliance from exports and external demand to private consumption and internal demand, it is not in a position to take the baton of global leadership from the developed world.

In fact, Asia needs to guard against a new and worrisome complacency. It should not presume that its resilience during and after the Great Crisis has unlocked the key to a uniquely successful strain of economic growth. Post-crisis aftershocks -- coming first in the United States and now Europe -- are a wake-up call that any externally dependent economy needs to take very seriously. Asia cannot afford to bask in the warm glow of today's buoyancy -- a rebound that was due more to temporary policy stimulus than internal dynamics and that was funded largely from saving rather than being sparked by innovation.

Nowhere is this challenge more evident than in China. As the dominant economy in the East, China will make or break Asia's rebalancing gambit. With private consumption at only 36 percent of its GDP (literally half the 71 percent share consumption represents in the United States), China has the most to gain from a consumer-led transformation. If, however, it fails to make the necessary changes, it also has much to lose from a post-crisis stagnation in external demand from the developed world.

As I leave Asia, I am quite confident that China is about to embark on just such a powerful shift -- framing its upcoming 12th Five-Year Plan (2011-2016) around the pro-consumption policy initiatives of a well-funded social safety net, rural income support, and a services-led impetus to new sources of job creation. As such, I wouldn't be surprised to see the consumption share of the Chinese economy rise toward 45 percent over the next five years.

But that is a forecast of the future, always a problematic exercise. Meanwhile, as things stand today, the long-awaited global rebalancing is still nothing more than a dream. The West is down -- and most likely to be so for years to come. But until Asia draws greater support from its 3.5 billion consumers, there are no guarantees that the region will provide a new source of global growth to fill the void.

All this underscores a potential time warp for global rebalancing -- a painful and protracted pause in the global growth dynamic. At the same time, it points to risky and worrisome trade tensions between the West and the East, as the former takes actions to protect hard-pressed workers while the latter stays fixated on export-led growth as the antidote to poverty and a massive overhang of surplus labor.

The failure of the world to face up to its rebalancing imperatives of a decade ago only makes the challenges all the more urgent today. The Great Crisis shows what happens when imbalances are ignored and compounded. The biggest worry of all is that an unbalanced world may not get another chance.