The Bank of England and Ukraine: An Apocalyptic Warning

In the hot seat: Governor of the Bank of England Andrew Bailey gives evidence to the House of Commons' Treasury Select Committee on 16 May 2022. Image: PA Images / Alamy

What explains the Bank’s lack of preparation for the economic fallout of the war in Ukraine?

The Duke of Wellington famously said after Waterloo that ‘Nothing except a battle lost can be half so melancholy as a battle won’. For an intelligence service, the quotation could be altered to ‘Nothing except false intelligence can be half so disastrous as good intelligence ignored’.

Andrew Bailey, the governor of the Bank of England, told the Treasury Select Committee on 16 May that the global crisis in food prices was ‘apocalyptic’. He then went on to say: ‘Of course, we find, like others, that we cannot predict things like wars. As I think you were implying, that is not really in our power; I am not sure it is in anybody’s power, really’. The members of the Committee did not pick him up on this comment with the obvious question ‘But surely that is exactly why the UK government employs MI6 and GCHQ?’

We often think of intelligence in terms of foreign and defence policy, but it is worth remembering that the Joint Intelligence Committee (JIC)’s mandate includes assessing ‘international economic matters’. In fact, some of the greatest benefits to government can flow from the economic savings made by having pre-emptive intelligence of major events, whether wars, scientific advances, or the economic decisions of other countries.

In the case of the Ukraine war of 2022, UK and US intelligence reporting was correct and was broadly accepted as such by the White House and 10 Downing Street and by both the Pentagon and the UK Ministry of Defence. However, a question mark hangs over the response of those responsible for financial and monetary planning.

Gordon Corera, in a piece for the BBC, described how both UK agencies, working closely with their US counterparts, became aware in mid-2021 that ‘a full military invasion of [Ukraine]’ was being planned. He continued that, although this intelligence was met ‘with near-disbelief’ in some quarters, the JIC ‘issued its considered view that an invasion was now highly likely’. This was towards the end of 2021.

Although it is quite likely that the raw intelligence on Putin’s invasion plans would not have been shared with the Bank of England because of its sensitivity, it would have received the JIC Assessment. JIC Assessments rarely contain details which could identify sources or methods and are designed to be circulated to a wide range of government departments.

A primary reason for not acting on pre-emptive intelligence is a reluctance to face the implications of accepting that intelligence as true

In a previous Treasury Select Committee meeting with the Bank on 23 February, the day before Russia’s invasion of Ukraine, Andrew Bailey commented on the types of information the Bank uses. ‘We use market prices because the markets take [geopolitical events] on board. What we do not have is private information on what Mr Putin may do next’.

Ben Broadbent, the deputy governor, doubled down on this explanation by saying that ‘The market is full of professionals who are extreme experts on the energy market and who are paid to think about developments in that market and what future prices will be. No one could have done better than that market, and that market is miles off in terms of what future energy prices will be’. To paraphrase the deputy governor: ‘You cannot do better than the market but this time the market got it horribly wrong’.

There are various reasons why organisations fail to act on intelligence. Between the two World Wars, MI6 produced an excellent stream of naval intelligence on German submarine construction from one of its most successful-ever agents, TR/16, but the reporting was repeatedly ignored by a British government which was determined not to increase defence spending at a time of financial austerity.

In fact, a primary reason for not acting on pre-emptive intelligence is not ‘cognitive dissonance’, ‘inattentional blindness’ or any of the other pseudo-psychological explanations, but rather a reluctance to face the implications of accepting the intelligence as true.

One of the classic cases of this phenomenon was when the German High Command occasionally contemplated the possibility that the British had broken the Enigma encoding system. How on earth could Germany change its whole coding system in the midst of a world war? It was far easier to accept scientific advice that the Enigma machine was unbreakable and that the explanation for a steady stream of military failures was due to something else – maybe a highly placed spy or a run of bad luck (Hugh Sebag-Montefiori, Enigma: The Battle for the Code, pp. 162–165).

So, what explains the governor’s comments to both Treasury Select Committee meetings? It is possible that he felt that the Select Committee was not the place to mention intelligence. This would be slightly surprising given that British predictions of the Russian invasion were already in the public domain before the 23 February meeting, let alone 16 March. All he needed to do was to refer to the press reports and express a preference not to discuss intelligence matters in open session.

It appears that the Bank did not have adequate systems in place for modelling the consequences of the predicted invasion

It is also possible that Bank officials preferred to believe that the intelligence was wrong (as it had been over Iraq in 2003) rather than contemplate the economic mayhem that an invasion would entail. Or possibly they concluded that the Russians would overrun Ukraine in a matter of days and that the economic consequences would be limited. We do not yet know whether the JIC thought the invasion would be successful, or how protracted it was expected to be.

A third possibility is that the Bank read and believed the JIC Assessment but simply failed to act on it. This would demonstrate similarities to the Foreign, Commonwealth and Development Office (FCDO)’s failures over the Afghan withdrawal. As the Foreign Affairs Committee noted in its 24 May report, the UK had 18 months to prepare for the withdrawal from Afghanistan but ‘the FCDO failed to make the necessary preparations for withdrawal, in terms of laying the groundwork for an evacuation with third countries, considering and planning for which of the UK’s in-country partners should be prioritised for evacuation, and putting in place a robust timeline to evacuate the Embassy that could adapt to fast-changing scenarios’.

But the real explanation may be none of these three. Deep in the Select Committee transcripts of the 16 May meeting is an answer to a question from Julie Marson MP about scenario planning. Andrew Bailey replied that ‘Just as we have recruited Chris Whitty to help us on Covid, we have had a session with a number of experts in the world of foreign policy and in the gas and oil markets, and we are going to do more of that for the next round. We do that to help us, but I have to be honest with you: it is very hard to do the mapping from, “Let’s assume that this happens on the battlefield”, to what it means for economic variables in this country. It is a pretty hard thing to do. You can do the general direction, but it is very hard to do an exact mapping in that respect’.

In other words, the Bank experienced difficulties in interpreting how the consequences of the intelligence would affect the UK economy. But was ‘exact mapping’ necessary? The Bank had several weeks to model and simulate the consequences of Putin’s invasion of Ukraine based on what is already known of the importance of Russian energy exports for Europe and of Russian and Ukrainian wheat and sunflower oil for the developing world. The general consequences for global food and energy prices were pretty obvious, even if establishing exact figures for price inflation may have proved elusive.

So, it appears that the intelligence was not ignored, but that the Bank did not have adequate systems in place for modelling the consequences of the predicted invasion.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

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Tim Willasey-Wilsey CMG

Senior Associate Fellow

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