The Day After Russia Attacks
What War in Ukraine Would Look Like—and How America Should Respond
By all rights, Iceland -- a remote Arctic island inhabited by just 320,000 people -- should be a forgotten backwater. And for most of its history, it was. But in recent decades, the former Danish colony has begun to attract outsized attention from abroad. After its banks were fully privatized in 2003, foreign money poured into the financial sector, which grew to almost ten times the size of national GDP before bursting in a matter of days in October 2008. More lasting may be Iceland’s potential as a player in its Arctic backyard, where climate change is opening up new shipping routes and resource opportunities. As Iceland’s first political science professor, its finance minister from 1988 to 1991, and its president since 1996, Ólafur Ragnar Grímsson has studied and survived these shifts of fortune. He spoke with Foreign Affairs senior editor Stuart Reid outside Reykjavik in October.
As the Arctic opens up, is the region going to see increased geopolitical competition or a more peaceful path to shared development? For over half a century, the Arctic was perhaps the most militarized region in the world, with vast nuclear arsenals on land and in the ocean. So it was understandable that people came to climate change in the Arctic with this Cold War model of confrontation. However, among the people who have lived in the Arctic for hundreds and even thousands of years, there is a different culture. There’s a culture of cooperation, an awareness that you cannot survive in this tough environment unless you rely on others and others rely on you.
Somehow, Russia, the United States, Canada, and the five Nordic countries -- Finland, Sweden, Norway, Denmark, Iceland -- developed through the Arctic Council a way of discussing and deciding. It also helped that among the Arctic states, the majority had a strong Nordic tradition of cooperation based on the rule of law, democratic dialogue, and formal arrangements. In addition, the Russian leadership realized early on that even Russia, with all its power, would not be able to succeed in the Arctic unless it engaged others.
And this has proven to be so. The Russians have solved their disputes with Norway. They have taken the lead with America in concluding the two treaties that the Arctic Council has now approved. President Putin has for three years now come annually to Arctic conferences organized by the old Russian Geographical Society, making, in my book, very enlightened speeches. So now, when China, Japan, India, and other Asian countries, as well as the leading European powers, come to our territory, there’s already an established way of doing things. I believe -- or hope, at least -- that these newcomers will be sophisticated enough to respect what has already been established. The Arctic will not be the Wild West.
It is fascinating how people in other parts of the world are beginning to look at this Arctic model and ask themselves, “If nations that confronted each other for over half a century in the most dramatic military buildup the world has ever seen were able within a few years to move to constructive, legally based cooperation, why can’t we?” That is why some of us, including myself, have been bringing this Arctic experience to China, India, and Nepal in the Himalayas. I had a meeting with people from Bhutan just before you came.
What do you predict the Arctic will look like economically in, say, 20 years? Experience has told me to stop predicting the future of the Arctic. In the first years of this century, I got to know the late governor [Walter “Wally”] Hickel from Alaska, who was secretary of the interior in the Nixon administration and twice the governor of Alaska and was very active all throughout his life on Arctic issues. About eight years ago, he invited me to a conference in Anchorage, in Alaska, and there was this young Russian scholar who had just finished his master’s thesis at either Harvard or MIT on the Northern Sea Route. Everybody at this conference thought this young man was, in a nerdish way, wasting his time on something that might become relevant only in the middle of the twenty-first century. But we now know what has happened.
If anybody had told me eight years ago that Singapore would have a special division in its foreign ministry on Arctic issues, or that the Arctic Council, which in the first years of this century was still a rather weak talking shop, would accept the leading economies of Asia and Europe as partners, I’m not sure I would have accepted that.
Speaking of things that weren’t predicted, let’s talk about the financial crisis. When did you realize that Iceland’s financial sector was collapsing? It was a process of a number of days or a few weeks when it all came down. When the first bank was coming down, we didn’t realize the other banks would go down, as well. Gordon Brown went on global television and announced we were a bankrupt country, which was utter nonsense, an outrageous statement. I’d go so far as to call it financial terrorism. Everybody believed him. Nobody believed us. The British government put us together with al Qaeda and the Taliban [when it used antiterrorism legislation to freeze the assets of an Icelandic bank]. I mean, a founding member of NATO and a strong ally of Britain, a country without any armed forces whatsoever -- we would be the last country to be put on such a list. But this meant that all business connections for Icelandic companies were closed down all over the world. Gordon Brown would never have dared to wage financial war against France or Germany or any other bigger country. It was kind of a Falklands moment for him, and he hoped he would be popular like Thatcher became after the Falklands War.
When we tried to engage America, our long-standing ally, they said, “Sorry, guys, we are simply too preoccupied with other things.” We were left alone. With every Western door closed to us, we turned to the Chinese, which then led to currency swaps between the Central Bank of Iceland and the central bank of China.
How did Iceland let its banks get so big? That’s a question that will be debated for a long time. Remember, this is a nation that still reads the sagas from the thirteenth century. We have a long historical memory. But let me offer some preliminary reflections.
First of all, the prevailing ideology in the Western world from the ’80s onwards was that the more you deregulated, the more you privatized, the more freedom of maneuver you gave to the financial markets, the better we would all be off. All of us, not just in Iceland but also in western Europe and the United States, lost our historical memory that capitalism is a system of regular crisis. We somehow thought that we had found a formula where capitalism was no longer a system of crisis but had continuous success year after year after year.
Secondly, we were unfortunate to privatize our banks when the global financial market was overflowing with money. So they had very easy access to finance from the European banks, from the American banks, and others. They entered into the exuberant times.
Thirdly, in the late ’90s and the early part of this century, computers started to transform banking, so that the old methods of regulating and controlling were becoming outdated. There was a technological element to the financial crisis, because banking had become machine-based rather than people-based. In a matter of seconds, you could make deals that would take you weeks and months before.
I am often asked the question, “Why did you believe in the success of the banks?” Which I did. I mean, I supported them. I helped them expand. Voices of warning started to come in 2007, from some specialists and advisers, and I listened. But I then asked myself, “What are the rating agencies saying about the Icelandic banks?” I was minister of finance 20 years ago, so like almost every finance minister, I was subjected to the idea that the rating agencies were the golden judges of financial health. I made the mistake of believing what they were saying about the Icelandic banks, because they were giving all of them an extraordinarily clean bill of health -- Moody’s, Standard & Poor’s, Fitch, all of them. So I said to myself, wrongly, “Yeah, there are these people issuing warnings, but they aren’t the rating agencies.”
Then I looked at what the pillars of European and Western banking -- Deutsche Bank, Royal Bank of Scotland, etc. -- were doing. They were all engaging in extensive financial cooperation with the Icelandic banks and wanted to increase it. So I said to myself, mistakenly, that the rating agencies and all these established pillars of Western banking couldn’t be wrong.
We have examined our mistakes very thoroughly. I don’t know of any other country in the world that has executed examinations and judicial processes following such a crisis. We established a special commission headed by a Supreme Court judge, which issued a report in nine volumes examining not just the failure of the banks but also the failures of the business community, the government, the presidency, the media, the universities -- everybody. We established a special prosecutor’s office to look for law breaking, which became the largest legal office in our country and is now conducting cases against a number of the former bankers. We changed the leadership of the central bank and of the financial regulatory authority, and we executed a number of other legal changes and regulatory changes.
But did you ever wonder what a small country with an economy traditionally based on fishing and aluminum smelting was doing with a giant financial sector? You have to remember it was a very fast process. That was part of the problem. It was almost impossible for us to keep track of what the banks were doing in Sweden, Norway, Denmark, Britain and Germany, Austria, the Netherlands. We didn’t have the bureaucratic institutions and the financial supervisory authorities to keep track of all of that. And there was no pan-European surveillance mechanism to monitor all these different operations. None of our political institutions were capable of keeping track of all of that.
That was why I looked towards the rating agencies. I looked towards the big European banks when we started to have doubt, and I saw their almost unanimous conclusion that this was a healthy business. And on the other hand, the banks offered a new generation of Icelanders who had educated themselves in international business schools an opportunity to globalize their capabilities while being rooted in Iceland. For a small nation, it’s always a challenge not to lose your most capable people.
How is the recovery going? We recovered much better than anybody could have expected and predicted. There are still problems. People are still suffering. But unemployment is about five percent. Economic growth is one percent to two percent. Paradoxically, the tourism sector, the energy sector, the fishing sector, and the IT sector are doing much better than they were before.
That’s another aspect of the banking crisis that should also be relevant to America and the Western world. We didn’t realize until after the banks collapsed that they had in fact become high-tech companies, hiring mathematicians, programmers, and computer scientists who normally would go into high-tech or IT sectors. Many of our export-driven, high-tech companies in the four or five years before the banks collapsed could no longer hire the best technical people because the banks offered them higher salaries and bigger bonuses.
But when the banks collapsed, this pool of talent was suddenly on the market, and within six months, it had all been taken up by the high-tech and the IT companies. That sector has excelled in the last four years, more than in the four years prior to the crisis. I tell many of my American friends on Wall Street that one of the lessons of the Icelandic experience is that if you want your country to be competitive in the twenty-first-century economy, a big financial sector is fundamentally bad news.
WikiLeaks began in Iceland. What do you make of the organization? This is still a work in progress for me intellectually, because what I have witnessed in this country is that information technology and mobile phones have completely transformed our traditional political systems. After the banks collapsed, the shock to the nation led to almost a revolutionary situation in Iceland, one of the most peaceful and secure countries in the world. The police had to guard the parliament and the prime minister’s office day and night. The police had to guard the central bank, so the crowd would not go in and take it over. We then started to see demonstrations created by people nobody had heard of -- housewives, individuals who used Facebook, Twitter, and the Internet to mobilize.
In Iceland, young people sincerely believe that the information revolution is a similarly fundamental transformation of our Western societies as the class struggle was in the eighteenth and the nineteenth centuries. That is why the Pirate Party managed to get people into our parliament in the election this year. One of them, Birgitta Jónsdóttir, has led an effort to make Iceland a kind of safe haven for information. Just as there are locations where you can keep your money without being taxed, there is now a need for similar safe havens to protect your information from the authorities. I think one of the reasons why the founder of WikiLeaks and some of his partners stayed in Iceland is that they found people here who thought in this way.
Was this why in 2011 the Icelandic government kicked out FBI agents who were in the country investigating WikiLeaks? That was not because of WikiLeaks; it was because of a general principle that we are a sovereign nation. With all due respect, you don’t send the police forces of another nation -- whether it’s Norway, Denmark, or the United States -- to come and start operating within our territory.
Iceland is a tiny nation with no military. What’s the grand strategy for a country like that? There was never a grand plan to create an open political system without a military. It simply grew naturally out of our history. Remember that the parliament is older than the church in this country. We became a nation with one political system in the year 930 because we established the rule of law and a parliament that met once a year in Thingvellir.
We have demonstrated we can establish the republic, become independent, move from being among the poorest countries in Europe to one of the most affluent in the world, despite the financial crisis, based on an entirely peaceful, nonviolent, nonmilitary political system where the fundamental assumption is you trust other people. That’s why when you came here [to the presidential residence], we didn’t inspect you. There’s a gate out there, but it’s partly a joke because there’s no fence.
Then there was the Cold War, and strategically, Iceland became important. We had an American military base and became a founding member of NATO; we have no armed forces of our own, so our contribution was the American base. It lasted for more than half a century, until George Bush, Dick Cheney, and Donald Rumsfeld decided to close it down seven years ago.
So now, for more than half a decade, we have been a country without a single person bearing arms, with zero military presence. Contrary to traditional thinking, it is possible to have a successful state -- highly engaged in international diplomacy, with extensive relations with Russia, the United States, Canada, the Nordic countries, China, India, France, Germany, and others -- without any military element whatsoever. And the people who spearheaded that transformation were George Bush, Dick Cheney, and Donald Rumsfeld.
Progressive values seem to take hold first in the Nordic and Scandinavian countries, and then spread to the rest of Europe, and then to North America. Iceland, for example, allowed gay civil unions back in 1996. What explains this pattern? You’ve heard of the Nordic model. It’s a system where there is a highly competitive market economy but also an extensive network of social welfare institutions. It’s proof that socialized medicine and universal education are not, as they are called in America, some socialist conspiracy but an integral part of a successful market economy -- because you don’t find any business association in any of the Nordic countries wanting to change the nature of the Nordic social welfare state, health service, and education.
It started with education and health care and then extended to immigrants, to women, to gay people, and others. Creating legal barriers that would separate people on the basis of some strange notion was contrary to what we were about. The reason perhaps that this was easier was that the Nordic model proved so successful, and cooperation between the Nordic countries is so tight that a social reform that started in one Nordic country could spread very quickly to the others.
Iceland also seems to punch above its weight culturally. Was this an intentional plan? No, it’s not a conscious decision. Throughout the centuries, this was a nation that always respected those who could tell a story or create a poem. In recent decades, this literary tradition -- assuming that everybody can be a storyteller -- was transformed into the field of theater first, then music, and then filmmaking.
Perhaps in a naive, arrogant way, we assume that we can perform like the best in the biggest countries. It’s just a given. That’s why some people are very surprised when they come to Iceland and see Bjork in a restaurant or in the street. But no Icelander pays any attention to her, because it’s just normal. And if young kids that nobody had heard of, like Of Monsters and Men, suddenly have a hit on the American charts a year or so after they were founded, it’s good, but it’s not considered remarkable.
So there are distinct advantages to being a small island nation. Yes, but we have always looked to other countries, as well. Even in medieval times, the Icelandic chieftains and poets went to the courts of the Norwegian kings and traveled to Greenland, and they created this system of trade between Greenland, Iceland, and Europe 700 or 800 years ago. More than half a century ago, we created student loan funds that give every Icelandic student the right to go anywhere in the world they want and study whatever they decide to study, and they can get a long-term loan with a very low interest rate. This has meant that we have had this continuous stream of people who go for some years to different parts of the world, and 80 percent, 90 percent of them come back within five or ten years.
I had this fascinating conversation with Larry Summers when he was president of Harvard. He asked me how many Icelandic students are studying abroad. And I said at least 9,000 or 10,000. Then he asked how many come back. And I said that within ten years or so, definitely 80 percent, and in 15 years, maybe 85 percent. He made the calculation, multiplying by 1,000 to get the size of the American population. If every year, there were between nine and ten million American students studying in centers of excellence in different parts of the world, and every year, at least seven million or eight million of them came back into the United States, within a decade, 70 million people would come. He started talking about what an impact it would have on America. I’ve always thought it was an interesting analogy. Of course, it’s difficult to execute.
But if you are small and want to be successful and you have the cultural heritage that we have, there is no limit to what you can do. Maybe that was bad when we thought we could also excel in banking, but it’s good in the cultural area. Iceland is not an isolated small nation. It’s a small nation that has been outward-looking and sought experience, education, and influence from anywhere in the world. And it has heralded the notion that you should not be afraid to compare yourself with the best.
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