Game of drones: can Ukraine pull ahead?

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Hello and welcome to the Intelligence from the Economist. In London, I'm Jason Palmer and in.

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When it comes to tax avoidance, there have long been a lot of dark goings on under the Caribbean sun. Our correspondent travels to the British Virgin Islands, lucky devil, to see how some reforms are at last making things a little less devilish.

And Spain is an incredibly diverse country, complicating the question of which language or languages can be used in official contexts. Now a change in the lower house has reignited old debates that could shift the balance of power. But first, In Ukraine, air raids and explosions have once again lit up the sky during the during a night of intense aerial warfare. In the skies over the capital, dozens of Russian missiles were brought down by air defenses, with burning wreckage falling to the streets. This has been a repeated scene in Kyiv, but now these aerial attacks have also landed deep inside Russia. In all, Russia says that six regions have been targeted by Ukrainian drones. A strike on the Pskov airport hundreds of miles from the battle lines set two military cargo planes on fire. Videos posted on social media show explosions and flaming debris raining down as the drone warfare rages on on both sides, Will Ukraine be able to keep up?

So what we're seeing in Russia in recent weeks is the result actually of several months of drone development in Ukraine.

Oli Carol is in Kyiv covering the invasion of Ukraine for the Economist.

Slowly, over the last year, Ukraine has been building up its capabilities. And we're still in what they described to me as an experimental phase, but we can see they're already having results.

So, Oli, you've been talking to your sources in the Ukrainian military. Tell me a bit more about their drone development.

Well, I've been speaking to several sources across the board. In particular the development team behind one of the more promising drones called the Moroc, which actually in Ukrainian means dark spirits. It's a sort of Slavic God of ignorance and error. And they've managed with this drone to create what they think is the sort of perfect spot of a heavy payload, a very fast speed and a distance. They can strike over several hundred kilometers. And most importantly, it's managed to get through very significant Russian electronic warfare and air defense assets. It's managed to get this far, mostly without government funding, relying on hard work and friendly benefactors. They tell me they are in the position they are in spite of rather than because of government support. And they're facing real problems scaling up.

So before we get into those problems, why is Ukraine focusing on drones?

Well, Russia entered this war with a very clear long range strike capability. That's to say they could lob missiles over to Ukraine without worrying about what Ukraine could lob back at it. And during the course of the war, they've added to this by obtaining Iranian kamikaze drones. Even back in September of last year, Ukraine's commander in chief, Valeri Zaluzhny, made a point of this, that Ukraine really had to develop a means to strike back at Russia. It hasn't been allowed to use the Western donated weapons in Russia itself because of Western fears of escalation. Vladimir Putin has managed so far to insulate the majority of Russians through propaganda. So the strikes we're seeing in Moscow, as was communicated to me, are intended to bring Russians closer to the reality of the war. Some of the strikes have a PR value. So it's the drone developers are trying to show to procurement bosses that their drone is able to fly to Moscow. But one of the main reasons that we're seeing the uptick right now rather than last year is because we have an ongoing counteroffensive. And much of the Ukrainian Effort at the moment is focused on degrading Russian logistics, degrading Russian weapons stores. And although this is sort of below the headline news, what people tell me this is the main focus of these long range drone strikes at the moment.

And are these new technologies proving successful at all?

Certainly Ukraine has developed algorithms that appear to work. We see almost on a daily basis drones getting through to Moscow. Every operation they do is always the result of meticulous planning and certainly the successful ones. That means they gather intelligence about radars, about Russian electronic warfare, and about other air defense assets. And they attack in waves designed to keep the Russian air defenses busy so that other things can slip through. What I'm told is about 35 to 40% of the drones are getting through to the general vicinity of a target now having success. Certainly at the moment, it's mostly on the psychological level rather than the real strategic level. But I am told it is playing a role, supporting the Ukrainian counteroffensive.

And yet despite these successes, you mentioned earlier that drone makers are finding it hard to scale up. Why is that?

Well, in the first instance, it's quite hard competing in the global market for the cheap components. Certainly there are various levels of components they can buy, whether Chinese or European, and electronics. But immediately just finding the aviation specialists to produce the level of drones that need to be produced to compete with Russia, that's the big problem. Another issue is that Ukraine's drone program doesn't actually have a single command or procurement structure. Everyone who is anyone in Ukraine is basically constructing drones, all these security agencies constructing drones, and they're also freelance developers in that mix. So it's almost. They're sort of organized like cells, they don't speak to each other. And that creates advantages in terms of security, but it also creates disadvantages in terms of duplication, efficiency and scaling up. Bureaucracy, corruption, vested interest. That's also a big, big issue. And some drone producers are complaining to me that some projects are being favored even though they have inferior technical characteristics. The Ministry of Digital Transformation, which is being headed by the very youthful, energetic Vice Prime Minister Mikhailo Fildorov, is doing a lot to remove these barriers and red tape. But still, it's a problem. Corruption is a long running Ukrainian story, and unfortunately here it's playing a big role.

And how does Ukraine's output compare with Russia's?

So throughout this war, Ukraine has been this horizontal tapestry of military units, governmental organizations and volunteers which have been getting together and throwing everything they can at an existential problem that works in a crisis. It doesn't necessarily work very well when you're trying to gear up mass production. And here is where the sort of Russian military complex, once it does get going, it's helped by blank checks and limited budgets working around the clock. And that's exactly what Russia is doing right now. Even accounting for Ukraine's gray economy, in peacetime, Russia was at least four times as big. And obviously as Ukraine is being pummeled from the east, west, north, to the south, that advantage is getting bigger. And certainly a senior Ukrainian intelligence source told me that they're worried that the Kremlin is now stockpiling drones and cruise missiles ahead of a renewed campaign on Ukrainian infrastructure this coming winter. We saw today Russia showing its teeth again Wednesday morning with a new renewed attack on the capital Kyiv. At the moment, they're sending dozens of drones over. Could they send hundreds? Could they send a thousand? The truth is Ukraine doesn't know.

And so what does Ukraine need to do to pull ahead in this arms race?

Ukrainian military admit to me themselves that any technological advantage they can gain, it's going to be temporary. That's the nature of the gain. Reverse engineering is only getting quicker. But they do think they can think of asymmetric ways to use and apply drones, including using artificial intelligence to improve their accuracy. And the government is investing heavily for Ukraine. They've put around $1 billion, which is a huge amount of money for Ukraine to pay for these new drones. It's a huge sum. Hard to tell if it's going to be enough. So the maths certainly still favors Russia in the long run, especially if there's going to be a change in Western support, perhaps a change in the American presidency. Ukraine has shown it can win when the numbers aren't in its favor. But it will need to get its house in order, and that means dealing with corruption if it is to continue the altogether extraordinary outcome that is its continued independence.

Oli, thank you very much for joining us.

Always a pleasure.

Foreign.

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For today's celebrity hotspot holiday destination, we are headed for the very remote islands of Bermuda, located in the Atlantic Ocean.

Bermuda, the Cayman Islands, the British Virgin Islands, all known for bright sun, white sands and the leisurely pace of life called being on island time.

In all honesty, the archipelago is also.

Known for being one of the world's biggest tax havens. Oh, and there's also island money.

There are more than 60 tax havens around the world, including Switzerland, Liechtenstein, Guernsey and a lot of tiny islands in the Caribbean.

From here they're called onshore accounts, but for lots of businesses elsewhere, they're offshore accounts that either permit some handy legal tax advantages or loopholes for something shadier. Global investigations like the Panama and Pandora Papers have revealed the scope of operations of all these front companies, shell companies, brass plate companies.

What the Panama Papers has done is really lift the lid in a massive way on the methods used by the rich and the powerful to conceal their wealth for the past four decades.

But there are at last some signs that the global efforts to curb tax dodging are paying off.

I went to the Caribbean to find out how the places that lots of people think of as archetypal tax havens have been handling years of tightening global rules.

Mark Johnson writes about international affairs for the Economist.

The British Virgin Islands. It only has about 30,000 people, but it's a big seller of brass plate firms, shell companies that mostly don't have staff or offices, which people create sometimes to hold assets or to move money around. And in some years, that business has Provided More than 2/3 of the government's revenues. There are lots of legitimate reasons to create a company in a place like the bvi. The problem is that they're also used by people up to very bad things. Not just tax evasion, but also money laundering and fraud. So, for example, lots of BVI companies were implicated in the bad stuff that was revealed by the Panama Papers leak a few years ago, if you remember that. And these days, the offshore business in the BVI looks some way past its glory days. So the total number of companies there has fallen about 20% over the last 10 years.

But big investigations like the Panama Papers suggest that that kind of dodgy business is only on the up. Why is the number of these brass plate companies going down?

Well, back in the 90s the Caribbean havens were quite wild west, but over the years it's been getting cleaner. So after 9 11, America started putting real muscle behind efforts to crack down on money laundering, on terrorist financing, and. And then came the global financial crisis. And that gave governments new reason to try to curb tax dodging too. So those two events have spawned all manner of forums, international agreements that over the years have dented how far these havens can provide tax advantages and how far they can provide shelter from foreign investigators. And indeed, there's only more rulemaking on the way.

How do you mean?

Well, there's two things coming up now in the Caribbean. The biggest financial centres like the British Virgin Islands are territories of Britain. They're self governing. But the Brits still, some say Britain is asking them by the end of this year to begin publishing publicly the names of all the people who own the companies they register so that journalists and NGOs control through these lists can spot skullduggery. And Britain itself already has this kind of database. It was one of the first big countries to set one up. But the havens are dragging their feet on this. They say that they already supply information behind the scenes to police, to tax man. They think making this info completely public is not necessary. And I think they feel like it's going to drag down their sales so long as there are other places like Delaware that don't have this requirement.

And you said there were two fronts on this fight now.

Yeah. So another area of rulemaking is these efforts to reduce legal tax avoidance by big companies. So for years, multinationals have used loopholes to declare profits in places that charge little or no tax instead of where their sales are actually made. A few years ago, about 130 countries signed a global tax deal that aimed to do something about that. One of the things they agreed is that big companies would have to pay at least 15% tax on their profits. The idea going for is that if companies book profits at a place that charges less than that, like a tax haven, the country where they have their main headquarters should be able to charge them more to make up for it. And those rules were agreed a few years ago. Now they're slowly limping into force.

But what about that point that it does scare away business? Aren't some of these tax haven economies fairly dependent on the money they make from these financial services?

The BVI where I went, two thirds of government revenues is funded by mostly the incorporation business and some other services that spin off from it. I think these new developments and all the stuff that's come before it in past years too, has made it a bit harder to be a place that just kind of dabbles in the offshore industry. I mean, you need a lot of scale and resources to keep up with the global rulemaking at the moment. So for islands in the Caribbean that just have a sideline in this, I think those places are going to find it a bit harder. And I think even among the bigger players, the offshore centres that do the most varied type of work, financial and corporate kinds of work, they're going to fare best. So the Caymans in the Caribbean is a big domicile for hedge funds. Bermuda's a home to lots of insurers. The BVI has found it a bit harder to move beyond what is effectively quite a basic kind of work of selling shell companies to a fairly general group of customers. Its business is not going to go to zero because there are many legitimate uses of these companies. And there is a world in which all of this makes it a bit easier for a place like the BVI to stand up and say, the work that's left here is good, solid, honest work that the world needs. But I think it's going to find it harder and harder to compete, no doubt, and I think it knows this. But the answers are not straightforward. I mean, it needs better schools, it needs looser immigration rules so it can get more foreigners to start new businesses, and it needs less red tape to find more varied ways to make sure it can keep bringing in the cash.

And what about the goal of all of the legislation that you've been talking about? Do you get the sense that it's working, that we're beating tax avoidance in a, in a general global sense.

I think among small time and medium sized crooks in rich countries who are committing tax crimes, I think their progress is being made, a lot of it through more information sharing that's going on behind the scenes on big corporate profit shifting. The data suggests there's not been much change in the last few years. We have to wait and see what difference these new rules make, or indeed if they enter force at all. And then on sort of grand larceny from developing countries, on sanctions busting, which is other things that this shell business allows. I progress there is much less clear. I mean, it's important to note that a lot of bad stuff gets enabled by offshore centres in boring, chilly places such as Britain or the Netherlands or America. Those places are in some ways more resistant to global rulemaking than little islands which know at the end of the day that Their whole economies could grind to a halt if they don't succeed, implicating regulators in the rest of the world.

Mark, thanks very much for your time.

Thank you.

Earlier this month, Francina Amengol, the just elected president of the lower house of Spain's parliament, read a verse in Catalan as part of her first speech to the chamber. It was a poem from 1960 by Catalan poet Salvador Espriu about Spain's historical diversity. It was a bold stance. At the time, Francisco Franco's dictatorship forbade official use of any language but Castilian Spanish. But Ms. Amangol announced that from now on, Spain's lower house would allow the use of Catalan and Basque and Galician.

Toodos esocidio Macdesta session Constitutiva.

Speakers of those languages have said it's a powerful symbolic move, but not everyone has welcomed the announcement.

Francina Armigal's announcement was a big deal for Spain.

Lane Green is our Madrid bureau chief and writes Johnson, our column on language.

Language conflicts there really tend to stoke intense passions. They're a proxy for old conflicts between the center of the country and the nationalities at the country's edges, and to some extent also a conflict between left and right.

So what was Ms. Aman go trying to achieve by bringing up this sensitive debate?

Well, essentially, Spain's Socialist Party is trying to stay in power. Spain had a snap election on July 23, and the right wing opposition was expected to win the elections and get a majority. But in the end, actually neither the right nor the left wing bloc did score enough seats to gain a majority. So Ms. Armeghal, who is from the left wing bloc from the Socialist Party, needed the support of five regional separatist parties to be elected president of that lower house. And her Socialist Party, which is led by the incumbent Prime Minister Pedro Sanchez, also needs those groups support to stay in office himself. So to first get them to vote for Francine Armengal, the Socialists struck this deal with those regionalists, including two Catalan nationalist and separatist parties. And their price was this change of the language policy in the lower chamber of congress.

And so tell me a little bit more about the nuts and bolts of this agreement.

Well, the idea is that already in the Senate, which is meant to represent Spain's regions, you can use Spain's regional languages, but in the lower house you are only allowed to speak Castilian Spanish. And Mizoramigal agreed to change that language policy. It's worth noting that this is also in line with her own political views. She's the former president of the Balearic Islands, where varieties of Catalan are already spoken in, and she's an outspoken proponent of sort of federalism in Spain, which is to say more explicitly giving powers to Spain's regents, as opposed to the central government in Madrid.

And how do Spaniards feel about this change?

Language can be very polarizing in Spain. The sort of core of the country speaks Castilian Spanish, but on the edges of the map, you have languages like Catalan, Basque and Galician that are deeply linked to identity. And for some people, they're no more than that. Speaking Catalan is a sign of being Catalan, but for others, they are linked to those areas. Fight for a separatist policy, independence from Spain in effect. And of course, under Francisco Franco, who ruled Spain until he died in 1975, those languages could not even be used in any official capacity publicly. Lots of people who speak those languages therefore view this change in Congress, the very symbolic heart of power, as a big piece of symbolism, a sign that they can be proud of their heritage, not just in Barcelona or in Bilbao, but in Madrid and in the national government. But many on the right view this as really a huge problem. They say that Spanish is the language that unites everybody in the country. For example, the Hard Right Nationalist Vox Party, one of its top leaders, called this deal grotesque. For people like that, the problem is twofold. One is that it divides Spaniards against each other. And the other point they make is that this seems like a kind of bribe or reward for the separatist parties who hold the balance of power.

And Lane, what needs to be done next to put this promise into practice?

Well, there's one more hiccup here which we haven't mentioned, which is that as part of the deal with these nationalist parties, Pedro Sanchez has also requested official status for Catalan, Basque and Galician at the European Union level. This is a trickier request because the rules let each country make just one language official for EU purposes. And other countries might well balk at this precedent because they have their own regional minority languages, and there are already 24 official languages at the EU.

And so how easy is it to change these things in Madrid?

It's a very complicated situation. I should mention also that these nationalist parties have only voted for Mizzard Bengal as the head of the Congress. They still haven't promised their support to return Pedro Sanchez as Prime Minister. It's also not completely clear how this policy is going to work. Ms. Armangal says she's going to consult all of the parties on what to do next. The Senate already allows the use of the regional languages, but only in certain kinds of proceedings. The opposition on the center right, the conservative People's Party, seems open at least to the idea. The People's Party says it is waiting for details, but the devil will be in those details. All that said, this is a really important symbolic change. Language has in recent years become linked to separatism. The idea of allowing the languages to be spoken in Congress may be a way to sort of delink those. If Spanish, as well as Catalan and Basque and Galician all have some kind of status in the capital, that may be a way of recognizing that just because you're a proud member of those cultural nationalities doesn't mean that you want to break Spain up. To quote one newspaper columnist written on this topic, Javier Serkas, there's no better way to refute Catalan separatism than doing so in Catalan Lane.

Thank you so much for coming on the show.

Thank you, Rory.

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