When I first published The New Cold War last February, many contested my title. But what once seemed eccentric now looks mainstream. Relations between the west and Russia have entered a period of extraordinary mistrust and mutual disdain. Indeed, after the conflict in Georgia, the description “cold war” risks looking like an understatement. Russia has shown that it is prepared to use military force against another country; the west has shown that it will not fight and will merely respond with a token protest. Some in the European Union, such as Nicolas Sarkozy, president of France, may see the Kremlin-dictated truce that stopped the fighting (though not the ethnic cleansing, which continues apace) as a triumph. From Russia’s point of view, the lesson of the Georgian adventure is simple: we got away with it.

News last week that a Russian nuclear bomber simulated an attack on a city in northern England, combined with the biggest military manoeuvres since the collapse of the Warsaw Pact and the dispatch of a Russian naval squadron to the Caribbean, raise two pressing questions: what is Russia up to and what should we do in response?

The easy but mistaken answer to the first question is that Russia is simply flexing its muscles in response to the west’s misguided meddling, such as its decision to expand Nato and set up a missile defence scheme in Russia’s backyard. Unlike in the 1990s, we now have to respect, and accept, Russia’s interests. A shopping list based on that thinking might include: sacrifice Georgia, cancel Nato expansion (or better still, dissolve the alliance), scrap missile defence, arm-twist the Baltic states and Ukraine into giving their Russian population special status, allow Russia to buy anything it wants in western Europe – and all will be well.

But supposing Russia’s aim is the re-creation of a “lite” version of the Soviet empire, based not on military might but on economic dominance and pipeline monopolies; and that it wants the “Finlandisation” of western Europe. That involves the use of money, above and below board, to cultivate friendly lobbies. One example is this week’s dramatic €4bn ($5.5bn, £3bn) Kremlin bail-out of Iceland. Another is the former German chancellor Gerhard Schröder chairing a Russian-German gas pipeline consortium. The “Schröderisation” of Europe is matched by divide-and-rule tactics. The result: most big countries of “old Europe” care more about ties with Russia than about their supposed allies in eastern Europe.

Attempts to isolate Russia in response would be wrong: keeping communication with the regime may help slow its paranoia and adventurism. It also sends a signal to the burgeoning Russian business class. The financial crisis has prompted some powerful figures such as Alexander Lebedev, the ex-KGB financier, to criticise openly the Kremlin’s bellicose rhetoric and repressive internal policies.

But we can also make it harder for Russia to do the things that endanger us. The overwhelming need is to rethink energy policy. At the moment, the push inside the EU is for greater liberalisation. That would be fine, if we were not dealing with highly politicised monopolists as our energy suppliers. If the European Commission can bring Microsoft to heel over its outrageous behaviour with Windows software, it can do the same with Gazprom: not just as a tool of Kremlin foreign policy, but also as a flagrant price-fixer and competition inhibitor (for example in its refusal to allow third-party access to its pipelines). Any EU company that operated like Gazprom would find itself in the dock within days.

Even more important is restricting the flow of dirty money (not only from Russia) into our banks and markets. Instead of being bean-counters without a conscience, accountants must be guardians of financial probity, with a demanding test for clients whose business model is based on rent-seeking and cronyism. Some of the energy trading companies with close Kremlin ties based in Europe are little more than conspiracies to loot from the Russian taxpayer, gaining oil and gas cheaply and selling it dearly.

The same goes for bankers. If they conceal the beneficial ownership of these phoney companies they are an accomplice to theft. Perhaps one of the benefits of the credit crunch will be a more sceptical response to financiers who maintain that their critics are Luddites. The west has done well to impede the crudest kind of money-laundering. It is no longer possible to turn up at an Austrian bank with a suitcase full of cash, open an account, and make some transfers. We should apply the same principle to asset-laundering: using western capital markets to sell shares and bonds in phoney companies.

These measures will not stop the regime in its tracks. But they will show its backers that their geopolitical ambitions come at a cost: provoke us enough and it will be bad for business. That lesson has not yet got through.

We need to hurry. It will not be too long before financial centres such as Dubai, Shanghai and Mumbai are competing so effectively with London that clients that we find too dodgy will go elsewhere. What our financial centres sell, above all, is respectability. We have priced it too cheaply in the past few years. It is time to be choosier, while we still have some left in stock.

First published in The Financial Times, October 8, 2008

The writer is author of ‘The New Cold War: How the Kremlin Menaces both Russia and the West’. A new edition has been published in Europe; soon to be available in North America.

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