Transcript: Why Russia was caught off guard

This is an audio transcript of the FT News Briefing podcast episode: ‘Why Russia was caught off guard’

Sonja Hutson
Good morning from the Financial Times. Today is Tuesday, March 26th, and this is your FT News Briefing.

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The UN Security Council is demanding a ceasefire in Gaza. And Russia’s security forces are in the spotlight after last week’s terrorist attack. Plus, infrastructure investment is hugely popular. Right now, it’s looking riskier. I’m Sonja Hutson and here’s the news you need to start your day.

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The United Nations passed a resolution yesterday calling for an immediate ceasefire in Gaza. The resolution made it through the UN Security Council after the US abstained from voting on it. It’s the first time since 2016 that the US has allowed a resolution criticising Israel to pass. And it led the Israeli government to cancel an upcoming trip to Washington. The resolution says that the ceasefire should last for at least two weeks, that’s when the holy month of Ramadan ends.

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The Islamist group Isis was quick to take responsibility for an attack on Friday at a concert hall in Moscow. Most western countries also pointed a finger at the group. But Russian President Vladimir Putin has insisted that Ukraine is somehow involved. Ukraine has forcefully denied this, and now the assault has raised serious questions about Russia’s security service. Joining me now is the FT’s Polina Ivanova, she covers Russia. Hi, Polina.

Polina Ivanova
Hi.

Sonja Hutson
So tell me a little bit about Moscow’s internal security service, the FSB. How does it operate inside Russia and what’s been on its plate in recent years?

Polina Ivanova
Well, the FSB is a successor of the Soviet-era KGB. It’s basically Russia’s FBI, plus everything else at the same time. So it does counter-intelligence, it controls Russia’s borders, it does anti-terrorism work. And, you know, for a long time, one of its main focuses, yeah, has been on the risk of Islamist terrorism. You know, Russia saw a lot of terrorist attacks related to the wars in the Caucasus, related to the Chechen wars in the 1990s and 2000s. However, since the start of Russia’s full-scale invasion of Ukraine, the agency has redirected its attentions in a big way to what it calls countering Ukrainian extremism. Often, what this means is targeting people who are expressing support for Ukraine or trying to protest the war. You know, so much effort is being directed at chasing down teenagers who hold up Tolstoy’s War and Peace, instead of the Islamic terror threat that used to be important for it.

Sonja Hutson
OK, so the FSB has really been focusing on Ukraine lately, and less so on terrorist groups like Isis. But why is Isis targeting Russia in the first place?

Polina Ivanova
I mean, Russia has always been a target for Isis. I think Isis named it as a key enemy state already in 2014 when the group was founded. But equally, the perpetrators are believed to be from Isis-K, which is Isis-Khorasan. It’s a sort of an Afghan branch of Isis that was organising this attack. So there are also other historical grievances that come up, even going back as far as the Afghan war that the Soviet Union fought in the 80s. But speaking to analysts and experts who monitor this group, who monitor Isis and who monitor Isis-K, its Afghan branch, a lot of them said that one of the reasons why Russia would be a target is that, you know, it’s not a special target necessarily. It’s that it’s an easier target because of these gaps at the FSB, because of the weakness of the security state. You know, Isis-K has tried to conduct attacks in Germany over the past few months, and those plans have been foiled. We’ve seen Afghan members of Isis-K arrested in Europe and planning attacks on Sweden, which also failed. And yet in Russia, they succeeded.

Sonja Hutson
What sort of position, then, does this assault leave Vladimir Putin in?

Polina Ivanova
It definitely undermines his image as a strongman leader who will protect the country in some way. You know, he came to power on the back of these terror attacks, this war in Chechnya in the 90s and in the early 2000s, and he was gonna bring order and stability. And this obviously lays bare the hollow promise of his security state. You know, this machine that swallows up so much of the Russian budget. And yet it was not able to prevent an attack that, you know, in Europe for the past few months, you’ve seen agencies being able to prevent these attacks. I mean, this is not gonna go down well.

Sonja Hutson
Polina Ivanova covers Russia for the FT. Thanks, Polina.

Polina Ivanova
Thank you.

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Sonja Hutson
Boeing CEO Dave Calhoun is stepping down. The American aircraft manufacturer has been in hot water since January. That’s when a door panel of one of its planes blew out mid-flight. That incident led to a lot of questions about the company’s safety standards and investigations by multiple US agencies. In response, Calhoun announced yesterday that he’ll leave at the end of the year. The board chair and the head of the commercial aeroplane division will also be stepping down.

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Infrastructure investment has grown into $1tn asset class, thanks to more than a decade of low interest rates and big shifts in the global economy. From toll roads to airports, lots of assets that used to be controlled by the government are now being run by private investment groups. But the sector’s explosive growth carries risks for both investors and the people who rely on these services. I’m joined now by the FT’s Antoine Gara. Hi, Antoine.

Antoine Gara
Hi. Good morning.

Sonja Hutson
So tell us a little bit about the early days of infrastructure investment. How did this get going?

Antoine Gara
Well, the asset class really got going in the 1980s and 1990s when governments like the UK, Australia and Canada began to privatise government-owned infrastructure, both to liberalise their economies and also to meet some budget shortfalls. It came to the US in the early 2000s, and it started to take off in the years leading up to the financial crisis. And you wound up having a lot of investment banks like Goldman Sachs and Credit Suisse and Morgan Stanley jump into the fray. And what happened was it became a very crowded market very quickly, where a lot of banks and firms were all bidding against each other for a limited number of opportunities. And given the prices people were paying, some of these assets wound up carrying way too much debt, and a few of them really had to be restructured through the whole financial crisis.

Sonja Hutson
All right. Well, when did things turn around and start getting better for infrastructure investment?

Antoine Gara
Well, what happened was a lot of the people who were inside the banks or adjacent to the banks, they wound up building their own firms. And it’s actually these firms that were sort of well-situated post-crisis for the era of low interest rates. And also institutional investors really wanting a less volatile asset class than private equity, which had a very tough run during the financial crisis. So they were very well positioned to sop up all of this money that was searching for investments that could earn yield, but also not be super high risk like a traditional leveraged buyout, which can kind of get washed out during recessions.

Sonja Hutson
OK, so a lot of these public infrastructure assets end up in the hands of private companies. What kind of impact has that had on the infrastructure itself?

Antoine Gara
Well, there are some negative cases. I know in the case of water utilities in the UK, that whole privatisation period was met with a very frenzied number of bidding wars. And a lot of people overpaid, it seems like, for UK water utilities like Thames Water. And when you overpay for an asset, that often means piling on way too much leverage. And as has been seen, is that with interest rates rising and the economy souring, and also some of the investors being too aggressive on how much debt they ploughed on to these businesses, and so in London with Thames Water, we’ve seen the utility really fall into significant financial hardship. And the users of that water utility have found that they’ve paid higher rates for service and the service has been degraded. So when the math pencils out incorrectly, it can really sometimes lead to really negative consequences.

Sonja Hutson
OK. Well, I’m wondering then when we’re looking ahead, what other uncertainties could this investment area face in the future?

Antoine Gara
I think the asset class really was developed in an era of very low interest rates, and you can probably earn very high returns, especially when your financing costs are so low. Now things have flipped. There’s more competition. Interest rates are higher, so it’s gonna make it harder for people to earn the kind of profits people saw maybe five or 10 years ago. In addition, you have a lot of geopolitical uncertainty that sort of makes the investment landscaping not as safe as it once was. On the other hand, a lot of the practitioners of infrastructure now say that the spending that people need to put out to develop modern digital infrastructure or reassure supply chains and bring production closer to home. These are like many, many trillion dollar spending needs. And so actually, they’re seeing some of the greatest investment opportunities that they’ve seen in their careers. So it’s a double-edged sword. And it’ll be interesting to see how it all plays out.

Sonja Hutson
Antoine Gara is the FT’s US private and institutional capital correspondent. Thanks, Antoine.

Antoine Gara
Thank you.

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Sonja Hutson
You can read more on all these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.