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Brexit disruption leaves nasty taste for fine wine trade

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Of all the pitfalls looming as the UK lurches towards its final parting from the EU, few are more baffling than the one unfolding in a draughty warehouse by the river Thames, east of London.

The site is run by Britain’s Liv-ex, a global wine trading group few Britons may have heard of, and stacked inside are row upon row of the world’s finest wines. Château Lafite. Petrus. Krug. Cristal. 

More tantalising still is the small wooden box that workers gingerly pull out to show the Financial Times one November afternoon. It contains six bottles of 2002 red wine from France.

“That’s worth as much as a house,” says Liv-ex’s managing director, James Miles, one of two former stockbrokers who founded the firm 20 years ago.

Grape pickers in Domaine de la Romanée-Conti’s vineyards in Burgundy, France © Ian Shaw/Alamy
Co-heir and co-manager of the estate of La Romanée-Conti, Aubert de Villaine, centre, his nephew Bertrand de Villaine, right, and chief of the cellars Bernard Noblet taste wine © Eric Feferberg/AFP

It is a matching set of the rarest wine made by Domaine de la Romanée-Conti, or DRC, as it is known to its connoisseur fans, and it is one of the most prized — and expensive — drops on the market. These six bottles are worth £118,000, or just under £20,000 each. For now. 

As the year-end deadline nears for the UK to finish its journey out of the bloc, Liv-ex is braced for a storm of red tape that it estimates will push its costs up from £5 a case of EU wine to as much as £75.

Most of this added expense is expected regardless of what emerges from the fraught UK-EU trade talks. It does not include the cost of the snaking lorry queues feared as businesses adjust to unfamiliar customs declarations and untested IT systems. 

Even if a deal can be reached in the coming days, Brexit friction looms for companies across Britain when the transition period freezing previous EU trading arrangements ends on December 31.

The wine sector faces woes of its own, however, including one bit of paperwork that industry leaders say is so cumbersome, impractical and “bonkers” it could scar the sector for ever: the VI-1 import certificate.

The VI-1 is a classic example of the bureaucratic drudgery that British businesses have avoided for much of the 47 years since the UK joined the European project. 

Two tree maps showing the value of the UK's wine and spirits markets in 2016

EU countries have long required wine shipped in from so-called third countries, or non-EU members, such as Australia, to be accompanied by the form, which typically includes a lab analysis of qualities such as alcoholic strength and acidity.

But the VI-1 was not needed for wine shipped inside the bloc, which was just as well for the UK, a nation of quaffers responsible for a large share of the world’s wine imports for centuries.

Its roughly 33m wine drinkers still rely on EU vineyards, which accounted for more than half the value of the $4.4bn worth of wine shipped into the UK last year.

That imported wine does not all go down British throats. Britain’s seafaring, mercantile past has also made it a global wine trading hub that ships EU bottles to Asia, the US and, in the case of a trader such as Liv-ex, back to the EU again. Mr Miles says he sells more wine to the French than he buys from them, an illustration of the international nature of the market his business sits at the heart of.

Area chart showing Volume consumption of alcohol per capita in UK in litres split by wine, spirits and beer

As a result, wine businesses on both sides of the English Channel were dismayed when London decided to adopt the EU’s VI-1 form after leaving the bloc, a move that threatens to give French and Italian growers a taste of the paperwork their outside rivals have endured for years.

But squeezing a pipette of wine from a vat of South Australian shiraz for a lab test is not like uncorking a bottle of aged fine wine produced in tiny quantities from a row of vines on a French hilltop.

Opening one of the six DRC bottles in the Liv-ex warehouse would send nearly £20,000 down the drain and devalue the rest of the set, says Mr Miles, who is already retooling his business to avoid the worst pain from the VI-1.

“We simply can’t abide by this rule,” he says, explaining his firm brings so much EU wine into the UK it would need to produce some 15,000 VI-1 forms a year, at a cost of about £6m, which would render the business “heavily lossmaking”.

“We are having to totally restructure our supply chain in a way that means we do as little business as we possibly can in the UK, which is a great shame,” he said.

He has registered a new commercial entity in Belgium and is studying ways to use an exemption that means the VI-1 is not needed for EU wine shipments of less than 100 litres, or about 130 bottles

Fine wine is stored in the Live-ex warehouse at Tilbury Docks, east of London © Charlie Bibby/FT
A Live-ex employee unwraps a bottle of Romanée-Conti wine from a case of six worth £118,000 © Charlie Bibby/FT

His conclusion so far: many of the lorries backing up to his warehouse each month would have to carry less than a quarter of their normal load. “That just shows how stupid and ludicrous the whole thing is,” he said.

Liv-ex is especially exposed to the VI-1 because the firm matches buyers with sellers in the secondary wine market. Many of the 10,000 cases of wine it handles each week have had multiple owners over many years, which means it would be very hard to track down a laboratory analysis completed at the time the wine was bottled, as well as the other details needed for a VI-1 form. 

But firms that buy fine wine directly from producers are also worried by the VI-1’s impact.

“It is potentially vast,” says Rebecca Palmer, a wine buyer at Corney & Barrow, a London merchant founded before the French revolution that imports fine EU wines, including DRC.

She fears a raft of complex, costly paperwork could make some fine wines dearer and scarcer in the UK, especially those produced and shipped in very small quantities.

“Not only is it onerous but from a cost point of view it all becomes prohibitive,” she says. “You’ve got to ask yourself the question if you are a producer: can I be bothered to supply the UK?”

Some EU producers are already bristling at the idea of sharing the extra costs with UK importers. As one told Ms Palmer: “We weren’t the ones who voted for Brexit.”

Sankey diagram showing sources of UK wine imports in 2019 in dollars

Speaking over Zoom, she says it is “absolutely heartbreaking” to think of uncorking a precious bottle of fine wine for a VI-1 lab analysis. 

“We are wondering if you could do it with one of these,” she says, waving a gadget with a long needle called a Coravin that restaurants use to pour wine without pulling the cork. 

Aubert de Villaine, the renowned face of Domaine de la Romanée-Conti, is also concerned by the VI-1 form.

“If we have to make an analysis of each wine we ship it will be expensive because it would be each time one bottle lost,” he told the FT. “So it would be very upsetting.”

He said the paperwork was among many unforeseen Brexit consequences and while he could not imagine it ending Burgundy exports to the UK, it was “a setback”. “We are going to be facing a situation that we didn’t expect at all.”

UK importers have spent months trying to keep their EU suppliers up to date with new trading rules that also loom for everything from the labels on a bottle to the wooden pallets used to transport wine cases: proof will be needed that they have been treated to meet global standards aimed at checking the spread of disease and pests.

One change a few weeks ago was a relief: the government suddenly pushed back the starting date for VI-1 forms for wine coming in from the EU by six months to July 1 2021.

Diagram showing product characteristics described on a VI-1 wine importation form

Precisely why this happened is a mystery. The UK Wine and Spirit Trade Association (WSTA) says it may have been because ministers had “completely failed” to alert EU member states to the new requirements, including which UK body would be responsible for administering the scheme.

The struggle for information is acute in places such as France’s Beaune, the cobble-stoned town of 21,000 people that is the capital of Burgundy’s wine production and trade.

“Nobody knows for sure what is going on,” says Pierre-Henry Gagey, president of Maison Louis Jadot, one of Burgundy’s largest wine producers. “It’s all rumour.”

He has no idea whether VI-1 forms might be needed only once, when a fine wine is bottled, or again 10 years later when it reaches its peak. A second lab analysis would be “enormously costly and actually stupid”, he says, because it would be so similar to the first. 

The UK agriculture ministry, Defra, said the government understood the wine industry’s importance and was working closely with it to minimise any disruption to wine coming in or going out of the UK after the transition period. “We do not foresee this having a major impact on our excellent UK wine producers,” a spokesman said.

Victoria Prentis, the farming minister, has said industry data suggest the VI-1 would add only about 10 pence to each bottle of EU wine, equal to “less than a 2 per cent increase on an average-priced wine”.

Trade group leaders say this is part of an “astonishingly ill-informed” view that overlooks what amounts to £70m in extra costs that UK wine drinkers will needlessly bear.

After Brexit, there will be more steps for UK merchants in buying wine from the EU

pre-Brexit

  1. Buyer identifies purchase opportunity

  2. Buyer and supplier negotiate and agree sale

  3. Buyer pays supplier

  4. Customs documents are filed by the supplier’s bonded warehouse in a centralised system

  5. Buyer or supplier arranges transport

  6. Buyer’s bonded warehouse notifies centralised system of the shipments’ arrival

  7. Buyer checks wines and negotiates if there are any discrepancies

Source: Live-ex

post-Brexit

  1. Buyer identifies purchase opportunity

  2. Supplier checks pallets comply with export packaging requirements

  3. Buyer and supplier negotiate and agree sale

  4. Buyer pays supplier

  5. Customs documents are filed by the supplier’s bonded warehouse in a centralised system

  6. Supplier or buyer appoints a freight forwarder

  7. Supplier issues a commercial invoice and an original VI-1 form

  8. Buyer or supplier arranges transport

  9. Supplier needs to become an exporter registered in the UK

  10. Supplier exports goods from Europe

  11. Buyer declares imports and creates UK customs documents

  12. Buyer’s bonded warehouse notifies centralised system of the shipments’ arrival

  13. Buyer checks wines and negotiates if there are any discrepancies

  14. Buyer labels all non-UK wines with importer label (from October 2022)

  15. Buyer pays all import taxes due (in the event of no EU-UK trade deal)

*Entries in bold denote new steps required

Still, some changes might be welcome news for parts of the UK wine industry.

The Accolade wine group is owned by the US private equity group, Carlyle, and headquartered in Australia, but it is also the largest supplier of wine by volume in the UK, where its Hardys and Echo Falls brands are top-sellers.

Each week, about 150 containers of mostly Australian wine are shipped in bulk to its sprawling site overlooking the Bristol Channel, one of the largest wine warehouses and distribution centres in Europe, with packaging lines that can churn out up to 1m bottles in a day.

Its Australian shipments mean it is no stranger to the VI-1 form, which from next year it will have to attach to wine it sells on to EU countries, and it has had to make intense Brexit preparations.

But it is optimistic that Brexit will free the UK to seal new trade deals with countries such as Australia that bring lower tariffs and more common regulations. 

“There’s definitely opportunity for us,” says Caroline Thompson-Hill, Accolade’s managing director for Europe, adding the potential benefits outweigh “a little bit of extra burden”.

Any new trade rules that make it harder to buy a bottle of French champagne might also be good news for the vineyards that have spread across slopes from Kent to Cornwall in the past 40 years.

The range and reputation of the UK’s domestic wine industry is thriving: its annual volume of exports is still relatively small but more than doubled last year.

A worker checks bottles of wine at Accolade’s warehouse in Bristol © Mark Passmore/APEX
Pallets of imported wine are stacked and stored by Accolade © Mark Passmore/APEX

Yet it accounts for less than 1 per cent of the UK market, says Miles Beale, chief executive of the WSTA.

He says lumbering the UK with EU rules like the VI-1 makes no economic sense. “It’s bonkers,” he said. “The UK government is choosing to roll over protectionist EU rules that will hobble a very successful sector — and for a product that is over 99 per cent imported, with more than half that amount coming from the EU. It’s madness.”

He suspects the UK’s economically important role as a global fine wine trading hub is widely misunderstood.

“We’re a tiny island in the northern hemisphere that got quite good at trading stuff,” he said, adding the UK is the world’s second biggest importer of wine by volume — after Germany — and by value — after the US.

That role is bolstered by factors such as the bonded warehouse system that developed in the UK more than 200 years ago and allows importers to avoid paying duty on goods brought in from abroad if they are then exported elsewhere.

Stream graph showing the increase in global wine consumption from 1864 to 2018 in litres

“That’s a big reason the UK wine industry is such a globally important, and profitable, sector,” says Anthony Hanson, an authority on Burgundy who spent 16 years as a senior wine consultant at Christie’s, the auctioneer.

Whatever the impact the VI-1 form may have on the UK wine industry and the 130,000 jobs it supports, ministers have shown little sign of backing away from it, leaving some businesses to fear the worst.

“It could be a nightmare,” says Patrick McGrath, managing director of Hatch Mansfield, a premium wine importer based in Berkshire.

He says it is one thing if a VI-1 form lasts the lifetime of a newly produced wine but it could be quite another for something like non-vintage champagnes that are disgorged, or briefly opened to remove sediment, continually through the year.

“Have you got to have a VI-1 form for every disgorgement? We don’t know this yet,” he says.

He also hopes a new trading landscape with non-EU countries will help his company. But as he points out, the wine trade’s problems underline the enormous complexity Brexit poses for industries throughout the UK, the EU and beyond.

“We have no concept of what it’s like for the car industry, the computer industry, the wood industry or soft fruits,” he says. “Presumably there is the equivalent of the VI-1 scenario in all of them.”



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Post-Brexit rules threaten N Ireland aerospace, minister warns

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Northern Ireland’s economy minister is pushing the UK government to ease the strains of post-Brexit rules that threaten the competitiveness of the region’s aerospace industry by forcing companies to pay tariffs on raw materials imported from Great Britain.

Diane Dodds outlined aerospace companies’ mounting concerns in a recent letter to Lord David Frost, the Cabinet minister in charge of post-Brexit trade arrangements, and urged him to “ensure that the competitive position of Northern Ireland businesses within the UK internal market was not damaged” by the imposition of tariffs.

Under the Northern Ireland protocol, which sets the terms for the region’s post-Brexit trade, raw materials moved by aerospace companies from Britain to Northern Ireland are defined as being “at risk” of being moved into the EU.

That means the importing company has to pay tariffs on the raw materials as soon as they enter Northern Ireland or Ireland, a cost that could run to £14m a year according to ADS, Britain’s trade body which represents most of the 90 aerospace companies that employ more than 10,000 people in Northern Ireland.

The actual tariffs are ultimately refundable, but ADS said administration costs could run to as much as £65m annually and argued that the raw materials should be tariff-exempt because they are highly specific and only ever likely to be used for aerospace, an industry whose products are generally exempt from tariffs under World Trade Organization rules.

Dodd’s intervention came as prime minister Boris Johnson told the BBC that he was still trying to remove what he termed the “ludicrous barriers” and “unnecessary protuberances” thrown up by the protocol.

Johnson’s repeated denials of the practical realities arising from the protocol since its October signing have caused significant frustration among EU member states and the European Commission, which has launched legal action to force the UK to fully implement the deal.

Neale Richmond, European affairs spokesman for Ireland’s Fine Gael party — a member of the ruling coalition — accused Johnson of deploying “needless verbiage” instead of focusing on making the protocol operational. “Worth remembering that what Boris Johnson calls ludicrous is what he himself negotiated & ratified, the post Brexit protocol isn’t a foreign construct,” he added on Twitter.

The commission declined to comment on Johnson’s latest remarks, but said it was continuing “technical level” talks with the UK over the protocol’s implementation. Germany’s Europe minister, Michael Roth, repeated on Tuesday that the EU wanted the UK to commit to a “binding timeline for the full implementation of the protocol”.

Northern Ireland’s aerospace industry wants the UK government to use the UK-EU Joint Committee, which oversees the implementation of the UK’s withdrawal agreement, to agree a tariff exemption that “recognises the tariff-free nature of international trade in aircraft components and enables them to compete on a level playing field”, said Kevin Craven, interim chief executive of ADS.

The current regime “risk(s) putting companies at a disadvantage against international competitors”, Craven said.

Northern Ireland has a long-established aerospace cluster spanning design to manufacturing, including aircraft seats for many of the world’s airlines. America’s Spirit AeroSystems, which took over Bombardier’s Northern Ireland operations last year, is one of the largest employers and makes the wings for the Airbus A220.

Several manufacturers told the Financial Times the issue was already affecting supply chains. One executive reported recently cancelling a contract with a longstanding raw material supplier based in Britain in favour of an EU alternative.

“Northern Ireland needs to get support from [the Republic] and London and I don’t see much effort in London to help the situation,” Conor McCarthy, founder of Dublin Aerospace, one of the Republic of Ireland’s largest aerospace companies, said.

“The deep engineering and manufacturing heritage in NI should be the attraction and the payback for the British government is to alleviate their economic burden there with two out of every three jobs being a government job of some description.”

The Department for the Economy in Northern Ireland said the minister had asked the UK government to consider how tariffs could damage the industry.

“The difficulties this sector has experienced around the world due to Covid-19 are well known. This is also a sector where components tend to move between manufacturing sites during the manufacturing process,” it added. 





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German ruling party backs Laschet as candidate to succeed Merkel as chancellor

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Armin Laschet has won the backing of Germany’s governing Christian Democratic Union in his bid to succeed Angela Merkel as chancellor, after a campaign that exposed deep rifts in the party five months before national elections.

Thirty-one of 46 members of the CDU’s executive committee backed Laschet in a secret vote, with his rival, Markus Söder, prime minister of Bavaria, receiving just nine, according to the party. There were six abstentions.

The result means Laschet is all but certain to be the centre-right’s candidate for chancellor in September’s Bundestag election, when Merkel will bow out after 16 years as Germany’s leader.

Söder, who is leader of the Christian Social Union, the CDU’s Bavarian sister party, had said he would accept a clear vote in favour of Laschet.

But the ballot revealed deep misgivings among senior Christian Democrats about Laschet’s suitability to run. The party executive had given its unanimous backing to his candidacy last week, but he garnered just 77.5 per cent of the vote, with 22.5 per cent going to Söder.

Laschet, 60, was elected CDU leader in January. But he has struggled in the polls, and many in the CDU/CSU bloc thought they had a better chance of winning the election with Söder as their candidate.

The chaos within the ruling party has also reflected its performance in the polls. The CDU surged to almost 40 per cent last year as voters rewarded it for Germany’s deft handling of the first wave of the coronavirus pandemic.

But its approval rating has slumped in 2021 as public anger mounted over the slow pace of Covid-19 vaccinations and the revelation that some MPs earned huge commissions on deals to procure face masks.

The CDU also faces a strong challenge from the opposition Greens, which some pollsters believed could take the chancellery in the election. The party chose Annalena Baerbock, a 40-year-old MP, as its candidate for chancellor, in a smooth process that marked a sharp contrast with the open power struggle in the CDU/CSU.

The son of a miner, Laschet studied law and edited a Catholic newspaper before being elected to the Bundestag in 1994. He served as a minister in the government of North Rhine-Westphalia, Germany’s most populous state, in the 1990s and became prime minister there in 2017.

Laschet is an ideological ally of Merkel and has said that if elected chancellor, he would continue her middle-of-the-road policies. He was long considered her natural successor.

But his popularity has suffered over the course of the pandemic, when he has come across as hesitant and erratic. By contrast, Söder, who earned a reputation as a decisive crisis manager, has seen his polling soar.

The poll ratings of Markus Söder, prime minister of Bavaria, had soared, but he said he would respect the CDU executive committee’s decision ahead of the vote © Reuters

Laschet was endorsed on Monday by some of the CDU’s most influential grandees, such as Wolfgang Schäuble, the former finance minister and Bundestag president, Volker Bouffier, prime minister of the western state of Hesse, and Ralph Brinkhaus, leader of the CDU/CSU parliamentary group.

But other members of the executive, such as Peter Altmaier, economy minister and a close Merkel ally, favoured Söder, a move that will badly dent Laschet’s authority.

The prime ministers of Saxony-Anhalt and Saarland also broke ranks with Laschet in recent days and threw their weight behind Söder, saying he enjoyed far more support among the party’s rank-and-file members. The powerful youth wing of the CDU, the Junge Union, also backed the Bavarian.

Söder garnered support among many CDU MPs who fear they will lose their seats in September if Laschet leads the campaign.

Some attendees of Monday’s meeting said the CDU/CSU parliamentary group and regional party bosses should be involved in any decision on who should run for chancellor.

But Laschet insisted that only the executive could decide and demanded a vote to resolve the issue. “We should decide today, as we planned to at the beginning,” he said, according to participants.

Söder made clear he would respect the CDU executive’s decision, telling reporters this week he had made the party a proposal “but only the CDU can decide if it wants to accept this offer”.



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After Afghanistan, China and Russia will test Biden

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“America is back” proclaimed Joe Biden, a few weeks ago. But in Afghanistan, America is out. The US president has just announced the withdrawal of all remaining American troops from the country. A 20-year war will end on the symbolic date of 9/11, 2021.

The watching world will wonder if a gap is emerging between White House rhetoric about re-engagement with the world, and a reality of continuing retreat. Biden insists that this is not the case. He argues that America has achieved its counter-terrorism aims in Afghanistan and now intends to “fight the battles for the next 20 years, not the last 20”.

But perception matters. The danger is that the pullout from Afghanistan will be seen outside America as a Vietnam-like failure that could eventually lead to the fall of Kabul to the Taliban, a replay of the fall of Saigon to North Vietnam in 1975.

Rival powers, in particular Russia and China, could now be emboldened to test the Biden administration’s resolve a little further. The obvious flashpoints are Ukraine and Taiwan. In recent weeks, the Kremlin has assembled more troops on its border with Ukraine than at any time since 2014 when Russia grabbed Crimea. Last week, China sent a record number of military jets into Taiwanese airspace. Both countries are combining military muscle-flexing with warlike rhetoric.

Biden himself has used confrontational language with Russia and China. He has called Vladimir Putin, Russia’s president, a killer and his administration has branded China’s actions in Xinjiang a genocide. The US also recently imposed sanctions on Russian and Chinese officials and has eased restrictions on American officials meeting their Taiwanese counterparts.

The strategic situation in Asia and Europe is similar in one key respect. The US has expressed strong support for both Taiwan and Ukraine, but neither country enjoys an explicit American security guarantee. The US relies on a policy of “strategic ambiguity” over Taiwan. The idea is that China should understand there is a strong chance that the US would fight to defend Taiwan, without a firm promise being made. In a similar way, the US has never spelt out what it would do if Russia launched a full-scale invasion of Ukraine.

Although Taiwan and Ukraine are separated by thousands of miles and involve different antagonists, the two stand-offs feel connected. Ivo Daalder, a former US ambassador to Nato, believes that: “Moscow and Beijing will look closely at how we react in one situation to set the stage for the other.” Daalder argues that “we need greater strategic clarity on what we would do if Russia moved militarily against Ukraine, or China on Taiwan”.

There are voices in the US calling for America to now make an explicit security guarantee to Taiwan, and for Nato to accelerate the process that would allow Ukraine to join its alliance. The hope is that these moves would deter Moscow and Beijing, and so reduce the risk of war starting by miscalculation. The argument against these policy changes is that China and Russia may interpret them as a threatening shift in the status quo — and feel compelled to respond. American allies in Asia and Europe may also feel that explicit security guarantees for Taiwan and Ukraine are too provocative. The joint statement issued by Biden and Yoshihide Suga, the Japanese prime minister, after a meeting last week, stressed the importance of peace in the Taiwan Strait, but remained vague about how Washington and Tokyo might respond if conflict broke out.

It would obviously be particularly difficult for the Biden administration to respond to simultaneous crises over Taiwan and Ukraine. Some western strategists are concerned that Moscow and Beijing may be co-ordinating their actions, to maximise the pressure on the Biden administration. They point to an increase in the frequency of high-level meetings between the Russian and Chinese governments. Beijing and Moscow also made statements, after a recent meeting between their foreign ministers, which signalled a deepening of their strategic relationship and a more open rejection of a western-led world order.

The internal situations in Russia and China may also be raising the dangers of conflict. Putin recently imprisoned Alexei Navalny, the most popular and dangerous opposition leader he has ever faced. Navalny is currently on hunger strike and may soon die, sparking further protests. The Kremlin knows that conflict over Ukraine boosted Putin’s popularity back in 2014. Another small war may look like a tempting option.

As the Chinese Communist party prepares to celebrate the centenary of its foundation later this year, President Xi Jinping may be looking for a triumph over Taiwan. American officials believe that Xi and his advisers have convinced themselves that the US is in deep and terminal decline. They fear that the Chinese leadership may believe the US would ultimately back down rather than fight over Taiwan.

But even the most confident and nationalistic officials in Beijing and Moscow will still be conscious of the risks of head-on confrontation over Taiwan and Ukraine. The likelihood is that Russia and China will continue to use “grey zone” tactics that stop just short of all-out conflict. As America discovered in Afghanistan, it is much easier to start a war than to control its outcome.

gideon.rachman@ft.com



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