Axis of Losers

Thoughts on Trump's weak hand in Beijing, Putin's looming date with destiny, why replace Starmer, private equity's next trick, and can Serbia join Europe's winning side

Here’s this week’s newsletter. Many thanks to those who have taken out a paid subscription. If you find these posts helpful, please do consider joining them. At the very least, do hit the like button and forward it to anyone you think might be interested. I look forward as always to your comments and feedback. And please do email me if you have questions or ideas for future posts!

• Trump-Xi Summit: Weak Hand

• Putin’s Future: Coiled Spring

• Replacing Starmer: What for?

• Private Equity: Marked to Fantasy

• Serbia’s EU Ambitions: Winning Side

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1. Weak Hand

Donald Trump could have been visiting Beijing next week from a position of strength. Instead, the president who made rebalancing the bilateral relationship and positioning the US to win the technological race the centrepiece of his strategy has spent much of his first 15 months back in office systematically throwing away America’s strongest cards:

• He launched a trade war against China, somehow forgetting that Beijing’s dominance of rare earth supply gave it a powerful weapon with which to retaliate (see How the West was Lost).

• He undermined NATO, threatened to invade an ally, and coerced the EU into a one-sided trade deal — fracturing the Western unity that any credible common response to China’s abusive trade practices would require.

• He dismantled USAID and stripped trade privileges from Africa, handing Beijing an easy win across the Global South.

• And above all, he launched a reckless war of choice against Iran that has plunged the global economy into turmoil, undermined trust in American power, and from which he has no obvious exit strategy — while allowing China to present itself as a beacon of stability.

Trump had hoped that by delaying the summit from its original March date, he would be able to meet Xi with his credibility enhanced by a swift victory in Iran. That hope has been dashed. Instead, the top item on the agenda will be to implore Xi to use his influence with Tehran to help end the war.

For the broader summit agenda, the level of bureaucratic preparation has reportedly been minimal, reflecting rock-bottom expectations. As Michael Froman, a former US Trade Representative and president of the Council for Foreign Relations, has noted, gone is any pretence of solving the major structural issues at the heart of the world’s most consequential bilateral relationship:

China’s mercantilist economic model, its designs on absorbing Taiwan, and its active support of U.S. adversaries such as Iran and Russia, not to mention any discussion of freedom of navigation through the South China Sea.

That leaves only modest objectives. Trump will hope to secure commitments to buy American soybeans, beef, and Boeing aircraft — wins he can package for domestic consumption ahead of the November midterms. Xi is likely to demand a high price: at minimum, an extension of the trade ceasefire when emergency tariffs expire, plus continued access to US chips. A bilateral Board of Trade may be announced as the headline deliverable.

Taiwan will also be on the table. Beijing is pressing Washington to declare its opposition to Taiwanese independence, which would be a hardening of the current US position of not supporting independence. But whatever Trump agrees, the credibility of the US security guarantee has already been severely eroded — the Iran war has run down weapons stocks and exposed the limits of American military power. Many analysts now doubt that Trump would — or could — come to Taiwan’s defence if China launched an invasion.

Yet even with expectations so low, the risk of escalation remains real. Ahead of the summit, the Trump administration imposed sanctions on Chinese banks and oil refiners trading with Iran; Beijing has ordered its firms to ignore them. China has also established new legal powers to restrict foreign companies operating on its territory — new retaliatory tools, held in reserve.

Besides, whatever the summit produces, China is already winning the contest that matters most. Its AI models are on a par with American ones but are open source, making them more likely to emerge as global standards. It is well ahead in robotics, with over two million industrial robots now deployed — nearly five times the US figure, accounting for 54 per cent of global deployments. Its dominance of clean energy, batteries, and EVs has helped it withstand the latest oil shock, and will only grow as the energy transition accelerates.

Xi is not without vulnerabilities. A prolonged global slowdown hurts Chinese exporters too. But Trump arrives in Beijing desperate to prove his mastery of the art of the deal — to a world that is increasingly inclined to view him as a loser.

A version of this analysis appears in my column for Kathimerini.

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2. Coiled Spring

If Trump is looking increasingly like a loser, spare a thought for his buddy, Vladimir Putin. We learned last week that the Russian president is now too scared for his personal security to leave his bunker or meet with the public. At the weekend, he had to dramatically scale back his Victory Day parade, the highlight of the Russian state’s calendar, for fear of attack by Ukrainian drones. In the end, it could only go ahead after Putin pleaded with Trump to intervene to persuade Volodymyr Zelensky to agree a ceasefire. Even that required Putin to agree to a 1,000 prisoner swap — a condition he now appears to be reneging on.

What has made Putin’s position look precarious is partly that the Ukraine war is clearly not going well for him. Kyiv’s mastery of drone warfare has effectively stalled the frontline and is imposing huge costs on the Russian army. At the same time, Ukraine’s new capabilities in long-range missiles and drones are enabling Zelensky to inflict what he calls long-range sanctions on Russia’s all-important oil industry — neutralising some of the impact of higher oil prices and visibly taking the war to Russia in ways that ordinary Russians can see.

But just as important is the impact the war is having on the Russian economy. After years of growth fuelled by the war, Russia’s economy contracted by 1.8 percent in the first two months of the year. Years of high interest rates — peaking at 21 per cent last year before falling to 14.5 per cent — have taken their toll on borrowers, with bad debts mounting at the banks. A fifth of Russian banks are currently reported to be loss-making. The pressures on businesses are being compounded by internet shutdowns, which are also fuelling public frustration.

That frustration is beginning to surface. At last month’s Moscow Economic Forum, a senior industrialist made the extraordinary remark that he could not remember a time since the 1990s when those in positions of power were “so actively” discrediting themselves — accusing “the people at the top” of completely losing touch with reality. Some of the dissent appears to be coming from oligarchs whom Putin is now demanding help to plug a budget deficit that exceeded $60 billion in the first quarter alone, surpassing the projected deficit for all of 2026.

The public mood was captured vividly in a viral Instagram video by a Monaco-based Russian influencer who rattled off a list of problems — flooding in Dagestan, oil pollution along the Black Sea coast, livestock culls in Siberia, internet blackouts, a squeeze on small businesses — that she said people were too scared to raise directly with Putin. “You know what the risk is?” she asked. “That people will stop being afraid, and they’re being squeezed into a coiled spring, and that one day that coiled spring will shoot out.” Putin was recently forced to respond publicly. A state-run pollster reported last week that his approval rating has fallen for the seventh consecutive week, to 65.6 per cent — its lowest level since the invasion of Ukraine in 2022.

Nor can it have escaped any Russian’s attention that the sheen of invincibility Putin cultivated during years of interventions around the world before 2022 has well and truly worn off. As Walter Russell Mead noted in the WSJ, even as he struggles in Ukraine, Putin has had to watch the decline of Russian influence across Europe and the post-Soviet space. Viktor Orbán’s defeat in Hungary has deprived Russia of its closest European ally; Hungarian investigators may now help Western colleagues trace flows of Russian dark money into European business and political circles. Armenia and Azerbaijan are actively cooperating with the West. Central Asian republics now have closer economic ties with China than with Russia, and are attracting investment from Turkey and the EU through pipeline routes that bypass Moscow entirely.

What is certain is that Putin is right to be paranoid. As Gary Kasparov reminds us, the great lesson of Russian history is that bad wars lead to revolutions: the failures of the Russo-Japanese War led to constitutional monarchy; the disaster of World War I brought down the Romanovs; retreat from Afghanistan and failure in the Cold War brought down the Soviet Union. Putin has nothing left to offer the Russian people except more war. Perhaps not even Trump can save him.

For a broader view of the current state of Russia and the world — taking in Trump and Xi as well as Putin — Fiona Hill’s recent conversation with Foreign Affairs is well worth an hour of your time. Her suggestion that the Iran war may be making the Gulf increasingly unsafe for Russian money, adding to oligarch anxieties about the domestic rule of law, is particularly thought-provoking.

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3. Replacing Starmer

While Trump and Putin are faltering, another world leader finds himself in more immediate danger. Sir Keir Starmer’s leadership is now being publicly questioned by a growing number of Labour MPs following the party’s disastrous local election results. There is talk of a stalking horse candidate coming forward as soon as tomorrow, though currently no sign of the 80 signatures needed to trigger a formal challenge.

The speculation ranges from Andy Burnham manoeuvring for a delayed contest that would allow him to find a way back to parliament, to Ed Miliband standing as standard bearer for the soft left. Anyone who has listened to David Runciman and Helen Thompson’s brilliant two-part Past, Present, Future podcast on Peter Mandelson and New Labour as a five-act history play will appreciate why that would be the most poetically pleasing outcome.

But the timing of a contest matters far less than what it is actually for. The danger is that a leadership race becomes a bidding war between candidates to offer the most extravagant spending promises, just as the 2022 Conservative contest between Liz Truss and Rishi Sunak descended into a Dutch auction of tax cuts, swiftly producing a bond market crisis when Truss tried to implement them (see Worst in Class). A new face is not a strategy.

What Labour urgently needs is a mandate for genuine change — and the most important change available is also the most obvious. A party searching for a new growth narrative, a new relationship with its traditional supporters, and a credible response to Reform should embrace rejoining the EU. Indeed, with separatist parties now running the devolved governments in Scotland, Northern Ireland and Wales, a commitment to Rejoin may be the only long-term answer to hold the country together, restoring the European framework for managing the relationships between the nations that Brexit so recklessly tore up.

I set out the case at length last week (see The Overwhelming Case for Rejoin), and it was encouraging to hear it discussed on Political Currency, the podcast hosted by Ed Balls and George Osborne. The fact that neither was yet persuaded that none of the halfway houses work suggests there is still some way to go to win the argument before Labour is ready to embrace its own — and Britain’s — salvation.

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4. Marked to Fantasy

A very different sort of loser has also been on my mind recently. I’ve written before about the unfolding drama in private credit — funds that provide loans to mainly junk-rated companies outside the banking system — and the risk it may pose to financial stability (see Canary in the Coalmine). But if private credit is in trouble, private equity must face even deeper problems. After all, debt holders should only take losses when the equity has been wiped out.

A case in point is the private equity-backed software company Medallia. Its lenders had been marking down its debts for months — as low as 60 cents in the dollar — as it became clear the company was struggling to service them. Last week, those debts were restructured, as a result of which private equity sponsor Thoma Bravo is set to lose $5 billion of the $6.4 billion it paid for the company in 2021.

Medallia is not an isolated case. The private equity industry is sitting on trillions of dollars of investments that critics argue are “marked to fantasy” — held in their books at valuations that bear no relation to what the market would actually pay. In a superb new book, The Asset Class, Guardian journalist Hettie O’Brien explains why this should worry us all.

O’Brien traces the industry’s origins back to the 1970s and in particular highlights its success over many years in stealthily — and unaccountably — seeping into every corner of our lives, above all colonising those parts of society that governments neglect but where citizens have no choice but to pay for their services: water, residential care, social housing, health services etc.

To keep these companies afloat, private equity has increasingly channelled money to them through private credit funds, which are in turn funded by private equity-owned insurance businesses using the retirement savings of their policyholders. Debt piled upon debt, these elaborate structures are evoking memories of 2008.

Yet the industry has a survival strategy. It seeks its salvation in ‘democratisation’ – convincing governments to allow it to open its funds to ordinary investors who would normally be barred from investing in anything so lacking in transparency. And it has the political muscle to get its way. After all, cash-strapped governments are desperate for capital from wherever they can get it. A quarter of Trump’s first-term cabinet had backgrounds in private equity; the industry was a major donor to his 2024 campaign. In America, savers can already direct part of their pension savings into private equity. In Britain, the government has instructed pension funds and insurers to do the same.

The risks to ordinary investors should hardly need spelling out. For years they have been denied exposure to large swathes of the economy by an industry that used debt — typically borrowed against the assets of the very companies being acquired — to take businesses off the public markets. Now, rather than sell them back at an appropriate valuation, the industry is holding on, hoping to offload them onto ordinary savers at inflated prices. Democratisation is not opening up opportunity. It is finding someone else to bear the loss.

My full review of The Asset Class can be found at the Literary Review.

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5. Winning Side

Finally, the EU is often cast as a loser, both economically and geopolitically, including occasionally in this newsletter. But recently, I have been growing more optimistic. Certainly, if one judges the EU by the number of countries seeking to join, it is hard to argue it is failing. Ukraine, Moldova, Montenegro, North Macedonia, Bosnia and Herzegovina, Serbia and Georgia are all candidate or potential candidate members. Iceland will hold a referendum on membership later this year. Some have even spoken seriously of Canada one day applying.

Indeed, Canada’s participation at last week’s meeting of the European Political Community in Yerevan — which brought together 49 European leaders — was striking in itself. Canadian Prime Minister Mark Carney, who has spoken of the need for middle powers to work together, expressed his confidence that the “international order will be rebuilt out of Europe.” Alongside the various coalitions of the willing that Europeans have assembled to address particular global challenges, it suggests that Europe is beginning to rise to the geopolitical moment and exercise its formidable convening power.

Nonetheless, the question of enlargement itself remains highly contentious. Perhaps because I have enjoyed some illuminating discussions with a number of Serbs on my recent travels, I was particularly struck by a recent Rest is Politics interview with Serbian president Aleksandar Vučić.

I have little doubt that Vučić is a deeply problematic authoritarian in the Orbán mould. But I have some sympathy with his insistence that the NATO-driven separation of Kosovo was a historical mistake. Every Serb I have met regards the forced redrawing of international borders as a deep injustice — and there is no question that the lingering resentment it engendered continues to hang over any lasting settlement in the Western Balkans.

More intriguing still is Vučić's proposal that the Western Balkans be offered a halfway house: access to the single market without full membership. The dilemma for the EU is a real one. Left outside, these countries will remain a playground for adversaries seeking to undermine European cohesion. Integrated into the economy, many of the region’s conflicts would lose their oxygen. I don’t have a settled view on whether Vučić is right — but I’d be interested to hear from readers who have thought harder about this than I have.