Arms’ reach: Russia flexes at Ukraine border

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Hello and welcome to the Intelligence on Economist Radio. I'm your host, Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. America's inflation numbers were predictably high yesterday. The calculation compares with a year ago when prices and economies were plunging. But how to set a sensible inflation target given all the growth and the uncertainty that's around? And flying cars are coming soon. I know, I know. They've been just around the corner for decades. But investment and prototypes are multiplying not for passenger cars, but for taxis. Talk about getting a lift. First up though. For weeks now, Russia has been amassing tanks, missiles and troops near its border with Ukraine. Russia's defense minister characterized the moves yesterday as part of a sudden check of combat readiness and said that the troops had proven their ability. But that combat readiness has caused concern in Ukraine and among its allies. Yesterday, the Secretary General of NATO, Jens Stoltenberg, met with the Ukrainian foreign minister.

Russia's considerable military buildup is unjustified, unexplained and deeply concerning.

And President Joe Biden phoned his Russian counterpart, Vladimir Putin. White House press Secretary Jen Psaki said he'd called for a summit on a range of issues, including the escalation with Ukraine.

The president voiced our concerns over the sudden Russian military buildup and increasing aggression on the border of Ukraine and calls on Russia to de escalate tensions.

Ukraine, which is not a member of NATO despite long seeking to be called for an increased Western presence.

We need measures which will deter Russia.

And which will contain its aggressive intentions. Direct confrontation so far seems unlikely, but the amassing Russian military is vastly different from the forces that invaded Ukraine in 2014. More advanced and more battle trained.

This is a really significant military buildup. NATO says it's probably the biggest Russian force that has massed on the border since 2014, the year that Russia invaded Eastern Ukraine and annexed Crimea.

Shashank Joshi is our defence editor.

The Russian defence minister said that Russia has put into place two Armies, which is a very large military unit, and three airborne units over the past three weeks. And he has described that as a response to NATO military activities that threaten Russia. But this is a really sizable force, probably something like 40,000 troops on the eastern border with Ukraine, 40,000 inside Crimea, according to the Ukrainian presidency. And if that was turned on Ukraine, it would be a very potent offensive force.

And is that the plan, do you think?

No one is entirely sure of what Russia intends. Certainly NATO, the U.S. army in Europe are on very high alert. They're very concerned about Russian intentions. These kind of big collection of forces can often be preludes to invasion. In this case, a lot of analysts think that an actual invasion is still unlikely. For one thing, the ground in eastern Ukraine is too wet for a full scale invasion, among other factors involved. And many people think that the Russian intention here is more about muscle flexing. You have a lot going on here, of course. You have Alexei Navalny, a key opposition politician in Russia who has been detained and is very unwell. You have a new American president and a Russian government that is eager to test him. And Russia has been investing a lot of resources into shoring up its armed forces. If you look at the period between 2005 and 2018, Russian annual military spending has probably doubled, approximately, and it now stands at somewhere in the region of around $180 billion in real. So that's a lot of cash.

And what does all that money buy?

Well, it's bought, unsurprisingly, lots of firepower. They've bought hundreds of new planes, helicopters, thousands of new drones. They've modernised lots of their kit as well. And they've invested in some very specific areas. I think the most interesting one is long range precision missiles that effectively can strike any point in Europe from well, well west of the Rhine.

And so all of this transformation then just comes down to stockpiling some very visible kit.

Well, hardware and weapons are part of it, but it isn't just that. It's the way they've organised their forces. It's a much more digital force. There's also big advances in what military types call readiness. That is how quickly you can move your forces. Russian forces used to be big, heavy, sprawling things, you know, moved in quite ponderous ways. Now the Russians could probably get 100,000 or so troops with heavy armour to a European hotspot in 30 days or so. NATO would struggle to get half of that in lighter forces in the same time. So we're looking at a much more fleet footed and agile force as well as one that has a lot more.

Firepower, but one that has the experience and the training to put all of that firepower and new techniques to use.

Yes, Western armed forces have been fighting for 20 years in Iraq and Afghanistan, but Russia has been fighting in even more relevant conflicts in Ukraine and Syria, and they have built up really significant skills in those places. So if you look at Ukraine, Russia has been practicing things like armoured warfare, artillery duels, how to use cyber attacks to feed targeting information to your guns. In Syria, over 60,000 Russian soldiers have served. Practically any senior Russian general now has experience on the Syrian battlefield. They've practiced things like precision strikes, you know, sending missiles across from the Caspian Sea to Syria. They've practised batting away drone swarms, attacking their bases, use of unmanned vehicles. So this is an army that isn't just a kind of army. That's nice on paper. It's actually built up a great deal of combat experience. It's been bloodied.

I mean, the picture you paint here is of an almost unstoppable kind of force now.

Well, it's not necessarily unstoppable. There are still weaknesses. They don't have a very good record. In shipbuilding, for example, there are delays to new tanks. The defence industry has a big shortage of personnel, a shortage of tools. Pay isn't that great. Still, you know, although conscripts are not having to forage for food like they were in the 1990s, there's still an issue of morale. And conscripts make up over half of all ground forces, which means in a war, their utility might be fairly limited. So it isn't a perfect force, but it is one that's still come a long, long way in the past 10 years.

And that coming a long, long way must strike some fear in the hearts of would be rivals of neighboring countries.

I think that's right. You know, since Russia's invasion of Ukraine in 2014, NATO has done a great deal to spend a lot more and to think a lot more about how it defends itself. It's put battle groups in Estonia and other Baltic countries, for instance. But, you know, two thirds of NATO countries are still not spending 2% of GDP on defence, which is the alliance's target. Their spending is still divided up amongst 30 countries. And a recent study by the International Institute for Strategic Studies, which is a think tank in London, said in a war with NATO, Russia would have conventional superiority for a limited period. In other words, if a war was a short one, Russia could probably prevail in a longer one. NATO could probably mobilise its superior economic resources, but precisely to try and put a ceiling on that, to try and cap any conflict. Russia has also been investing quite a lot in nuclear weapons and lots of different types of nuclear weapons launched in all kinds of crazy ways, including ones that can circle the earth indefinitely, radioactive torpedoes. And all of that is intended to say to NATO, if you escalate a conflict, if a conflict stretches on, don't think that this can't turn nuclear if necessary.

And what does all this mean for the situation in Ukraine right now, Ukraine not being a NATO country, where does that leave President Zelenskyy?

For President Zelenskyy, there's a real dilemma, as you say, Jason. He isn't a member of NATO. He doesn't enjoy the formal protections of the alliance. So he is trying to mobilise as much support as he can from the United States, from his European allies. He's getting lots of warm words, but of course, warm words don't repel Russian forces. And I think the dilemma he faces is that if he sends troops east, if he escalates the military situation in the Donbass, which is the part of eastern Ukraine that is being fought over by Russian backed rebels and the Ukrainian army, he may inadvertently give Vladimir Putin a pretext on which to invade eastern Ukraine. It may give Putin an opportunity to say we're going to come in and protect ethnic Russians. And he doesn't want to do that. So I think he's walking a very, very fine line watching these Russian forces mass on his border in growing numbers, making sure he can defend his country, but at the same time not doing anything that would provoke a war in which he would probably come off the worse. This is a Russian force that is much more potent, much more ready, much more capable than it was back in 2014 when Ukraine was first invaded.

Shashank, thank you very much for joining us.

Thank you, Jason.

There's plenty more analysis that cuts through the uncertainties of a recuperating world in the Economist. Get a great introductory deal on a subscription@Equality.com IntelligenceOffer the link is in the show notes. Even as the pandemic situation seems to be brightening in the rich world, uncertainty abounds about how to keep both people and economies healthy. America's vaccination program had been building up steam, but yesterday its drugs regulator announced a suspension of Johnson and Johnson's jab owing to concerns about rare blood clots. President Joe Biden tried to reassure the American public that there are plenty of vaccines to go Around, I made sure.

We have 600 million doses of the MRI, not of either Johnson and Johnson and or AstraZeneca. So there's enough vaccine that is basically.

100% unquestionable for every single solitary American.

A year into the pandemic, some data are emerging that indicate the economic effects of all this uncertainty and of vaccine successes so far. Yesterday's Consumer Price index for March, the cost of a representative sample of goods rose by 2.6%. Taking out the quicker moving contributions from food and energy prices went up by 1.6%. That might not sound like a lot, but it's the biggest one month increase in the index since a date that might ring a bell, November 2009.

Economists always pay close attention to inflation and rising prices, but March's figures are being particularly closely watched.

Henry Kerr is our economics editor.

That's for a few reasons. One is that March is exactly one year on from when the pandemic first started, which was dragging down prices. And so that affects the data. And the second thing is to do with politics and economics and the interaction between what's going on in Congress with stimulus and infrastructure spending and the American economy.

Okay, well, let's take those two factors in turn. What does it being a year on from when the pandemic really started to bite, have to, with this year's numbers.

Being particularly interesting, when you calculate inflation, you're looking at prices today and comparing them to prices a year ago. And what happened at the start of the pandemic was that prices fell. The economy completely fell off a cliff and prices went with it. So as that becomes the comparison you're making to a year ago, not February 2020, but March 2020, realized inflation is going to shoot up. And that's what's happened there. So the Consumer Price Index, which is one measure of American inflation, was at 2.6% in March, which a big step was before. It's quite sudden. And it's also a grabbing number because it's high by recent standards. We've been in the low inflation world and it's also quite clearly higher than the Fed's 2% target. The Fed doesn't look at the CPI, it looks at something else. But 2.6 is obviously well clear of that.

But as you say, if this is sort of a mathematical quirk of measuring a change on something that had clearly gone down, why are we paying such close attention to it?

There's a few things to say here. One is that it's not just the mathematical quirk, it's happening at a time when the economy is reopening rapidly, jobs are coming back rapid, and everyone's talking about very high economic growth. So the question is whether after inflation, because of the mathematical quirk, goes up a bit, whether it will come back down or whether it won't, whether it will just be temporary. And that's a sort of important debate. The other thing to note is that an important factor when you consider where inflation is going, is where people expect it to go, because inflation expectations are self fulfilling. And the other thing is that we're operating in a world now where the Fed has changed its mandate subtly. I mentioned the 2% inflation target. Well, last August it said, actually what we're going to do now is try to shoot for over 2% in order to make up for periods where it will be lower than 2%, like we've had during the pandemic. But there's a bit of a question mark there about exactly how far over 2% the Fed wants to go for exactly how long. And so there's all sorts of uncertainty in the air about inflation, which is feeding into a lot of attention for the inflation figures. And if you like, the mathematical quirk is sort of step one on this journey towards this possibly maybe higher inflation world or world in which the Fed has to think a bit harder about what it's doing.

So in a sense, the numbers that have just come out are more or less not only what the Fed might have expected, but once, I guess, yes, to a degree.

Although no one's quite sure what the average inflation targeting means for what comes over the next few years. Does it mean the Fed's looking for 2.3, 2.5 or higher? @ the moment, the Fed's putting a lot of effort into emphasizing that inflation's going to come back down once the mathematical quirk fades away. But what I would say about that is that it's not 100% clear that the economic models are going to be right. They've been quite wrong already during the pandemic on what would happen to unemployment. They were far too pessimistic. And so it's clear that there's a high amount of uncertainty around inflation at the moment. And the real question is whether inflation will go back down after the base effects are out. The Fed says yes, but not everyone agrees with.

That. And you said the other reason that this is drawing such attention is something more to do with politics than.

Economics. Yes. Well, that is because some critics of the big stimulus that has just been passed in America by President Joe Biden and the Democrats in Congress said it would overheat the economy in the second half of this year and beyond. And so we're entering a period before long where we're going to see whether that's true. And if that is true, it will come through in the inflation numbers. Now, no one's saying that the base effects, the comparison effects, are a sign of overheating, but people want to see whether or not the Biden stimulus is too much. And obviously it also affects how you view the infrastructure proposals that the administration is now putting forward. So that's the other relevant factor here. Inflation is increasingly seen as the ultimate constraint on what economic policymakers can do. And so the importance of the figures has gone.

Up. So if there's some uncertainty on the sort of year to year effect, the mathematical quirk and the effects of all of this stimulus going into America's economy, what's the prescription? How do you avoid getting too much inflation when there is all this uncertainty.

Around? I think what's happening at the moment is that you have a high uncertainty environment. You can't escape that. There's lots going on in the economy that we haven't done before, coming out of lockdowns and social distancing restrictions. We're not really familiar with that. Unprecedented levels of fiscal stimulus and a new way of looking at how monetary policy works. So what you should try and do if you're the Fed, in my view, would be to minimise the amount of uncertainty that's being introduced. And I think that the Fed hasn't been entirely clear about what average inflation targeting means. It's going to have to resolve that at some point because the closer it gets to raising interest rates and tightening monetary policy, it's going to have to confront exactly what it's looking for. And I think there are divisions within the Fed that have meant it's been fairly imprecise about its new regime. And there's a big division between what the Fed thinks is going to happen and what financial markets think is going to happen. So I think the most important thing is to tidy that up. But I don't think the wait and see approach is wrong. The problem in the 2000 and tens in the last economic cycle was that interest rates probably went up too soon as a result of inflation fears that turned out to be misplaced. You don't want to repeat that mistake. But certainly it's right to pay close attention to these figures as the levels of uncertainty are very.

High. Henry, thank you very much for your.

Time. Thank you.

Jason. From the Jetsons to Back to the Future 2 to Blade Runner, the flying car has long been presented as an inevitable outcome in a high tech.

Society. Where we're going, we don't need.

Roads. The thing is, many of those stories were set in a future that's now in our past. You might reasonably ask, come on, where's my flying car? It seems that in not too long you might be scanning the skies asking a different question. Where's my.

Taxi? The history of flying cars is almost as long as the history of aviation itself. The Curtiss autoplane of 1917 is sort of an awkward looking contraption with detachable wings that could turn into a car. In fact, it barely left the ground. But the idea was already.

There. Simon Wright is the Economist's industry.

Editor. Aviation has come a long way in the last hundred years, and if the money pouring into the sector is anything to go by, flying taxis will soon be taking.

Off. What do you mean by money pouring into the.

Sector? Well, over the last year and particularly in the last few months, investors have been putting money behind flying car companies. Lilium, a German company that's going to be making flying taxis, is going public via a reverse merger that values at about 3.3.

Billion. We promised the world a five seater jet today. We are delivering on that promise. It takes off and lands vertically. It's fully electric. This is the Lilium.

Jet. Archer and Joby, two American companies, have also announced they're going public. In fact, I think there's around 300 firms are working on these short range battery powered craft at the moment. And the reason they're doing so is that Morgan Stanley, for example, reckons that the market for aerial taxi journeys could be worth 674 billion by.

2040. And so this is pretty much what I would imagine here in terms of a flying taxi, something not entirely unlike a.

Helicopter. Yeah, you're exactly right. There was sort of a cross between a helicopter and a taxi, but with the worst things about those two things removed. They're short ranged, battery powered craft. They're specifically designed to be taxis, but they can fly four or five times faster than a cab. And above all the congestion, they can land on small patches of concrete. You don't need really much infrastructure, but unlike noisy helicopters, they don't face the restrictions that they do for flying over.

Cities. So the speed of the journey is one factor here, but so is the cost when it comes to taxis. How much is it going to cost me to get around on one of these.

Things? Joby so the initial cost of flying in its five seater will be about $4 per person per mile. But that could soon fall by 25% as economies of scale kick in. So a trip from Manhattan to JFK airport could then cost around $30 to $40 per passenger. In a taxi, you know, you can cram as many people in as you possibly can and split the cost where each person would have to pay that. But, you know, that sounds like it's not much more than a taxi and probably a lot more.

Fun. Well, exactly. I mean, I'm sold on the idea. How soon do you think we'll be able to hail one of these.

Things? Both Joby and Archer think they will have aircraft in commercial operation by around 2024. Archer promises a flying taxi network in both Los Angeles and Miami by that date. It could even be sooner in China and in Europe. Ehang, a Chinese firm, has already got certification from Chinese regulators. The issue is more one of regulation and certification. It seems like the tech is pretty much developed to the point where it's ready for deployment.

Now. Alongside the discussion about driverless cars is the notion of entirely driverless taxis. Will we see the same thing in the air, do you.

Think? Absolutely. In fact, it might even be a sort of a simpler task for flying robo taxis, because all they've really got to do is avoid knocking into each other, rather than the sort of myriad problems that developers of robo taxis are having on the ground, where there are many, many more hazards that could happen as early as 2028. As one industry insider said to me, we want to get people used to the idea of flying taxis before we really scare people by taking the pilot.

Away. Simon, thanks very much for joining.

Us. Thank you.

Jason. That's all for this episode of the Intelligence. If you like us, leave us a rating and a review and we'll see you back here.