If it’s too good to be true…

The history of corporate fraud is a long and storied one- sadly.

When one examines its characteristics, it becomes clear that there are a number of patterns which repeat, time-after-time. That does not necessarily mean that they are easy to spot ex ante. After all, in an economic system built, essentially, upon trust, the deceitful and amoral are always likely to have an advantage, especially when others are induced to provide a semblance of propriety to mask reality.

While most frauds are now likely to be “intangible”, involving bits, bytes, manipulation, omission or concealment, that is not always the case- witness the eyebrow-raising, alleged fraud involving bags of worthless rocks submitted as “good delivery” of nickel stocks to LME warehouses. It is somewhat astonishing that the old-fashioned “bait and switch” approach still manages to evade supposedly sophisticated protocols and systems. We’re not sure whether steel toe-capped boots quite count. A comparable example would be the Bre-X “salting of deposits” fraud, which came to light in 1997.

However, the alleged LME fraud is essentially unsophisticated, and basic in every sense of the term, albeit momentarily effective.

More prevalent are those frauds that use “the greater fool” approach, or outright manipulation of reality- reality being something that a great number of investors seemingly struggle to engage with.

The late Bernie Madoff was able to get away with what amounted to a latter-day Ponzi scheme by convincing investors (aided by his acquired “inner-circle” access, influence and reputation) that he had somehow found a method to produce smooth investment returns over a long period of time. There remain lingering suspicion that not all of his “investors” were unaware of what was happening, but hoped that what one might term “subsequent fools” would continue to show up for long enough for them to realize a return of their own invested principal, plus the “yield”.

More commonly, frauds involve manipulating supposed checks and balances to distort reality, with Parmalat and Wirecard falling into this category in using weaknesses in accounting and auditing practices to create assets and/or businesses that did not exist. In the case of the former, it was billions in bank deposits; in the latter (amongst other things) bank deposits and supposed arm’s length businesses. In each case, the deception was successful for years, until someone finally pressed the point sufficiently in seeking an explanation of apparent anomalies.

Fraudsters may also use the complexities and quirks of accounting conventions to conceal malfeasance, with a view to enhancing rewards for the perpetrators- Enron being a classic example.

Sometimes, the location and nature of what amounted to fraudulent behaviour simply beggar belief- witness the “fake accounts” scandal at Wells Fargo.

Commercial frauds often rely upon the fact that investors and analysts simply do not have the expertise, inclination, time or access to delve in sufficient depth into data produced to uncover deception. The nature of the alleged fraud at failed “finance house” Greensill, appears to have been a fascinating example of the so-called “false invoice” scam, which tends to collapse quite quickly when someone finally notices that there is no actual receivable, or a supposed debtor denies the existence of an obligation.

Anyone who has underwritten credit for long enough is likely to have both the mental scars and the “war stories” from having to deal with such cases; and from wondering, with hindsight, whether something “obvious” was missed.

This leads to an understanding that sometimes one may be unable to explain why something does not seem right, yet know it is so. That may result in some missed opportunities, but also increase the probability of avoiding losses suffered by others. One can never take pleasure in such outcomes. Rather one is grateful that one was able to avoid them, or at least minimize exposure. After all, there is ultimately no upside in ignoring the sense that something simply “does not add up”.

The Awbury Team

So, what are we missing…?

While there is, somewhat ironically, no standard definition of “risk” (as it often depends on context, or the fears of a particular group), in reality the “risk” that one should truly fear is the one you don’t see as existing or as material.

Yes, there are sufficient megatons of nuclear weaponry available for use on this planet to exterminate any semblance of civilization; but we know that, even if many choose to ignore it because of the existential fear it causes. We can try to predict, manage and mitigate that risk occurring, but it is very clear that it exists.

The recent, and likely mutating, banking crisis in the US had, as its proximate cause, a risk- a rapid rise in US interest rates causing a loss in the immediately realizable value of “undoubted” US treasuries- that was hardly new, and should have been, frankly, obvious. However, it was blithely ignored, because much institutional memory of the fact that interest rates can and do rise rapidly had been lost since the Great Financial Crisis (GFC), and there were plenty of other things to worry about.

While seemingly unconnected, the rise of so-called “generative AI”, creates the risk of uncertain and unforeseeable consequences- hence the chorus of those seeking some form of moratorium, as implausible as that may be in terms of implementation. We know the risk exists, but we are not yet sure what to do about it; although there has to be the likelihood that generative AI’s output can and will (if it is not already) be used in the never-ending battle between banks (and other financial institutions) and scammers, cyber-hackers and fraudsters.

In the realm of (re)insurance, the risk landscape may appear somewhat more open and knowable. Yet, it would be a very foolish and naïve underwriter or risk manager who would believe that all material risks (and their scale) to which an entity is exposed are always both known and knowable. The COVID pandemic should have made that obvious.

Emerging Risks Committees or identification processes obviously have a value, but their mere existence can lead to complacency. The most sophisticated risk ranking models and probability analyses will not protect you from the fact that, no matter how smart and prepared you think you are, the world is a place of effectively infinite complexity, while at the same time, it is the obvious (with hindsight) which risk will most likely ruin you. For example, in the case of a property CAT reinsurer, if its “1-in- x years” loss estimates are too optimistic, or they ignore changing climate risks, ruin may follow.

If nothing else, the Russian Invasion of the Ukraine has demonstrated the futility of assuming that what you see as the risks are the same as what the other side sees, or that outcomes are linear and follow a predictable path.

All this means that combining a healthy dose of what we would term “skeptical paranoia”, with a proper understanding of how to ensure that, even if all your portfolio correlations “go to one”, failure will be avoided, remains an essential attribute of any enterprise that hopes to survive and prosper for a reasonable amount of time.

At Awbury, we accept that, being neither omniscient nor omnipotent, we will inevitably miss things. We just try to make d****d sure that what we miss will not destroy us.

The Awbury Team

The Games People Play…

Humanity has a seemingly innate capacity for play.

Some even consider business to be a form of sport; one which is really only a specialized form of, sometimes weaponized, play in which there are clear winners and losers.

To try to make sense of and understand potential future outcomes, simulating such possibilities, while nothing new, has become something of a growth industry in both commercial and policy terms.

Royal Dutch Shell is well-known for having built an in-house capability through so-called scenario planning, to make an attempt at understanding and forecasting what might happen over time to the industry and environment in which it operates, and the potential consequences for the company.

More recently, it was reported that, in the wake of continuing uncertainty over the longer-term viability of Credit Suisse, UBS had been “war-gaming” what it would, could and should do if it “got the call” from the Swiss National Bank (SNB) and FINMA to be part of a rescue of its long-standing rival. Given the recent and somewhat controversial and dramatic outcome of that saga, one wonders if what has now happened was within the parameters of UBS’s “gaming”, given that UBS management was itself subject to a number of constraints in achieving the outcome it did.

In reality, a war-game (a term which, by definition evokes an underlying conflict) is one form of a concept such as a Monte Carlo Simulation, or other stochastic models- a modelled attempt to predict possible outcomes based upon a given set of facts and assumptions.

As credit underwriters, this is intuitively and explicitly what we do.

However, a true war-game goes beyond a forecasting or predictive exercise, because it is interactive, such that there need to be at least two groups acting to overcome each other. They are nothing new, even if the tools available and scenarios have evolved.

At their core, war-games are an attempt to “get inside the mind of” a perceived adversary or adversaries, and, sometimes even those of supposed allies, or ostensibly neutral actors.

As with all decision-influencing or -making processes, there are inherent risks of bias, or cognitive framing, because one or more participants seeks or expects a particular outcome- a factor which, if not controlled for, can lead to unfortunate consequences. Consider the Russian invasion of the Ukraine. While we do not know for certain what, if any, planning process the Russian General Staff undertook prior to February 24th 2022, it seems obvious that nothing in its forecasts anticipated what actually happened, perhaps because it was not part of any scenario considered feasible.

Relevant and comprehensive data are also essential in order to conduct a war-game. In that, they are no different from the process of underwriting any credit risk.

Similarly, psychological factors need to be taken into account. One can readily see this in the near-failure of Credit Suisse, or in the cascading effect of individual decisions culminating in bank runs, as in the US. As underwriters, it is tempting simply to apply logic and probabilities to assessing potential outcomes; yet, as in classic war-games, it is how individuals, groups or hierarchies behave and interact that will ultimately determine outcomes in what amount to complex adaptive systems.

At Awbury, in underwriting the risks we are asked to accept, we always aim to employ as wide a range of tools as possible, bearing in mind the dictum: “There is no accounting for human nature”. In many ways, human behaviours are predictable; but assuming, as in a flawed war-game, that we can always predict the outcome in advance, given sufficient prior knowledge and the application of appropriate models, is simply foolish. As always, humility is needed. Even the best game players know that an element of Chance is always involved.

The Awbury Team

Dude, where’s my money…?

While the failure and placing into receivership of Silicon Value Bank has caught attention generally (being the second largest bank failure in US history in nominal terms after that of Washington Mutual in 2008), it reinforces a number of basic points, and re-emphasizes an important distinction between banks (in a fractional reserve banking system) and (re)insurance companies.

The proximate cause of SVB’s failure appears to have been a classic “bank run”, in which depositors (a figure of 25% or roughly USD 40BN of SVB’s deposit base has been mentioned) tried to withdraw their “cash” all at once- a level which very few banks could sustain or meet- hence the taking into receivership- because it became apparent that SVB’s stated capital levels, while “technically” accurate, masked a serious problem of valuation and immediate liquidity.

Respected financial commentators have set out the likely detail of what unfolded, so we shall not rehearse them here. However, a credit underwriters, we clearly have an interest in what happened, why it did, and what may happen next.

So, here are some preliminary observations:

• As one member of the Awbury Team was told by the former Treasurer of the then-Salomon Brothers in the wake of its brush with failure in the wake of the Treasury Market Scandal in 1991 (paraphrasing): “We only survived because our assets re-priced faster than our liabilities”. In other words, cash came in faster than it could go out. Once heard, never forgotten. To state the painfully obvious, if you do not have access to sufficient liquidity to meet your obligations as they fall due, you depend upon the confidence of your creditors- and, in the US, depositors above the FDIC-insured limit of USD 250,000- limit are unsecured creditors. A bank deposit is NOT cash, or, if uninsured, backed by the full faith and credit of the US Federal Government
• US GAAP accounting, and the distinction between how Available-for-Sale (AFS) and Held-to-Maturity securities are treated (marked-to-market vs. amortized cost) can (and did) mask lurking mismatches in a financial institution’s balance sheet and liquidity profile
• Beware of any regulated entity or entity category that lobbies for “constraints” to be relaxed because they “should not apply” to such an institution. SVB and its peers sought and gained the benefit of a more relaxed liquidity regime than applied to the largest US banks (the SIBSs or Systemically Important Banks). However, SVB had a balance sheet size of over USD 200BN when it failed. Not huge, but hardly insignificant
• Follow what management is doing in terms of its “skin-in-the-game”. It seems that a number of SVB’s senior executives were selling-out prior to the bank’s collapse
• Focus on the “outliers”. SVB was an outlier in terms of its deposit profile (over 90% uninsured), customer base (VCs, start-ups and “Silicon Valley”), and asset base- concentrated loan book, and duration mismatch, even though the credit quality (USTs and Agencies) was high. Credit risk is not the same as market or liquidity risk!
• Once a highly-leveraged, fractional reserve bank loses market/depositor confidence, the end is usually very nigh…. On Thursday 9^th March, SVB was open for business. On Friday 10^th it was gone
• One always has to look at second or third order as well as first order effects when an event occurs- i.e., who may be indirectly affected by SVB’s demise, beyond, say, disgruntled uninsured depositors. For example, entities which might have had undrawn borrowing or Letter of Credit facilities will now need to seek alternatives- rapidly- in an environment in which “risk off” is increasing
• Conversely, and importantly, it is practically impossible for a (re)insurance company to suffer a “run”. As long as they hold sufficient cash and short terms securities to meet expected claims, and manage duration on each side of the balance sheet, they should always have the ability to meet their obligations as they fall due. Policy-holders can cancel a policy, but they have no claim on a (re)insurer’s assets unless they have a valid claim.

Of course, the situation surrounding SVB’s demise is fast-moving and fluid, with financial contagion being the primary concern in the immediate future. The Awbury Team will be closely monitoring events as they unfold as part of our pro-active, iterative approach to risk managent.

The Awbury Team

Sometimes the Choices are Hard…

Similarly, capital is supposed to be allocated to where it can earn the best return.

This is often ignored.

In the (re)insurance industry, if that were truly the case, capital would not be allocated to those businesses which perennially disappoint, and which constitute what one might term “capacity fodder”.

“Follow-the-fortunes” may, supposedly, be tried and tested; yet it assumes that the “followers” are somehow all able consistently to allocate and re-allocate their capacity to exceptional business or product lines, with sustainable low loss ratios. Patently untrue.

It requires what one may term “disciplined bravery” to manage and allocate capital, and to adjust one’s assumptions (and so, allocations) as circumstances and risks change. It is far from frictionless!

All this means, or should mean, that (re)insurance executives regularly re-allocate capital, and so risk acceptance, as circumstances change.

This seems far from the case, as few firms appear to have the nerve to be so proactive. Of course, clients want to have certainty that they will be able to renew policies as they expire. Arbitrary decision-making serves no-one. However, if, as is all too often the case, providing capacity becomes, literally, a loss-leader, continuing to do on a basis that does not meet rational risk/return criteria is somewhat bizarre. Continuing to write business that does not and cannot generate an acceptable return in “soft” pricing environments may make sense for one renewal cycle to maintain goodwill and market presence. To do so for a protracted cycle of low, or negative, returns is simply irrational, no matter how many platitudes are expressed about “taking an holistic view”, or “being in line with market performance”. After all, as in so many other cases, few people are ever fired for being as equally wrong as everyone else- as long as they do not threaten ruin.

Making hard choices in order consistently to generate adequate returns is, to commit a tautology, hard! If it were psychologically easy, more would do it. Not doing so, hoping that all will eventually be well, is an abdication of responsibility. Too many (re)insurance markets still seem to be stuck in the mindset of “But this is what the market dictates”, or “But this is what we have to do to get/retain the business”.

That approach my seem the easy one, but the outcome may well be mediocrity, irrelevance, obsolescence.

One can be “capacity fodder”, or actually do what capital allocators do- make hard choices.

The Awbury Team

Something Wicked This Way Comes…

It is human nature to try to simplify: Cause -> Effect -> Solution. Engineers in particular are trained to focus on solvable problems.

“If only it weren’t for the people, the goddamned people,” said Finnerty, “always getting tangled up in the machinery. If it weren’t for them, earth would be an engineer’s paradise.”
― Kurt Vonnegut, Player Piano

If solving the blight of poverty were simple, it should and would have been solved by now. Yet people will insist on getting in the way…. Climate risk would be another excellent example.

In an influential paper which gave rise to the term (Dilemmas in a General Theory of Planning), the authors, Horst Rittel and Melvin Webber, posited 10 potential characteristics of a “wicked” problem:

1. There is no definitive formulation of a wicked problem.
2. Wicked problems have no stopping rule.
3. Solutions to wicked problems are not true or false, but good or bad.
4. There is no immediate and no ultimate test of a solution to a wicked problem.
5. Every solution to a wicked problem is a “one-shot” operation; because there is no opportunity to learn by trial and error, every attempt counts significantly.
6. Wicked problems do not have an exhaustively describable set of potential solutions, nor is there a well-described set of permissible operations that may be incorporated into the plan.
7. Every wicked problem is essentially unique.
8. Every wicked problem can be considered to be a symptom of another problem.
9. The existence of a discrepancy representing a wicked problem can be explained in numerous ways.
10. The planner has no right to be wrong.

As one can see, the over-arching theme is one of complexity, as well as the probability of recursiveness. Solving one problem may lead to another, and then feed back into the first, thus frustrating the intentions of the “problem solvers”. Of course, that does not mean that such problems should be ignored; rather that anyone expecting a quick, simple solution is being very naïve.

So, perhaps the lot of a credit underwriter is not such a bad one after all? We do not usually become enmeshed in logic loops, and we can always say “no”!

The Awbury Team

Everybody’s [not] doing it… or Blinded by the Light…

Some members of the Awbury Team have been around long enough in the world of credit underwriting to remember the failure of Barings as if it were yesterday, let alone the likes of Bre-X, Enron, Worldcom, Parmalat, Madoff and Wirecard; and have the “battle scars” to show for it.

It is axiomatic that sophisticated frauds are difficult to detect, because they usually involve co-opting or relying upon the often surprisingly trusting natures, or unadmitted ignorance, of supposedly expert and independent professionals paid to ensure that the risk of fraud occurring is at least minimized.

Of course, the brief catalogue of notorious examples above is ample evidence of the fact that fraud can go undetected for long periods of time until an error, or an unusually persistent individual, eventually discovers facts which lead to its discovery.

However, at least at the beginning of the relationship between (eventually fraudulent) debtor/investee and creditor/investor there is supposed to be a reasonable amount of due diligence undertaken, involving accountants, lawyers and other business experts appointed and supervised by experienced investors/lenders, who themselves “know the questions to ask”.

As the case of FTX is beginning to make clear, not only do standards appear to have slipped when it came to “cryptoland”, but there is a whiff of “circularity” and “herding”, in which Investor Y decided that FTX was a worthwhile investment because Investor X had already committed to invest several tens or even hundreds of millions of dollars in the “business”, and they were “known” to be well-resourced and diligent when it came to “due diligence”.

The problem with this approach is that it works quite well until it doesn’t, as it essentially delegates authority to another’s standard of care, persistence and thoroughness.

Of course, the world of (re)insurance often runs on the same approach. What is “following” a lead underwriter, or supporting a MGA if not that?

In itself, the approach is perfectly valid; but it does rely upon trust, and on checking that the “lead” has actually performed the level of due diligence that one would expect for the nature and quantum of the underlying risk, and that incentives are properly aligned to ensure that to the extent possible.

In the case of Awbury, as our Partners know, our whole approach to underwriting the risks we accept is premised upon ensuring that we can build a defensible thesis that a particular risk is acceptable upon a risk/reward basis, and that the underlying business or structure upon which it is based is sound and competently managed. Not only that, but they have complete transparency in terms of the basis upon which a particular decision or judgement was made, as well as knowing that incentives are aligned.

We cannot promise to detect every fraud, nor pretend that we are somehow infallible- that would be pure and inexcusable hubris. We will simply continue to strive to avoid risks that do not make sense to us ab initio, no matter what others may think. The history of finance teaches that, on occasion, there can arise a remarkable suspension of disbelief, in which individually rational human beings collectively delude themselves. The FTX saga is slowly providing salutary evidence of that.

The Awbury Team

Humility is a virtue…

As we approach the turn of the year, it is worth reflecting upon the fact that, if the last few years have taught us anything, especially in the world of risk management and credit underwriting, it is that belief in certainty is a vice and humility a virtue.

Four points to consider:

• While pandemics, in the wake of SARs and MERs, were a known risk, no-one forecast the COVID pandemic until it was already amongst us
  In the world’s (still) pre-eminent democracy, tens of millions of people profess (and are proud to do so) that somehow the 2020 Presidential Election was “stolen”
• Even though its illegal annexation of the Crimea in 2014 was a foretaste, few “experts” believed (until too late) that an autocratic, and itself ill-prepared, Russia would then ignite an aggressive war of conquest by invading the Ukraine in February 2022
• In little more than a year, concerns about the risk of deflation pivoted to fear and experience of levels of inflation not seen in 40+ years
• Each of these outcomes has had, and continues to have, wide-ranging consequences.

Amidst all this, underwriters have had rapidly to understand the course of events, assimilate their causation and interaction, and act upon their own assessment in terms of the resulting threats and opportunities presented.

It has been an object lesson in the fact that there are always limits to what can be forecast or anticipated; even if there are also patterns and boundaries- absent the end of the world.

The course of events has always been unpredictable, yet it is human nature to yearn for and be seduced by the idea of certainty. Forecasts are almost always wrong. The question is whether or not the magnitude of error matters- and this is where knowledge and experience, allied with adaptability and the intellectual humility to acknowledge and accept error underpin the ability to avoid ruin and minimize the downside.

The worst outcome can and does happen. It is all too easy to allow hope to corrupt dispassionate judgement. A measure of controlled paranoia is a useful attribute.

For example, we know that Xi Jinping, having been re-confirmed in a third term as the PRC’s paramount leader, now appears to be entirely unchallenged in terms of his exercise of power; yet we do not know whether that is actually a true statement, nor what the consequences are of either reality.

We also know that high inflation is damaging the welfare of large populations across the world; yet we do not know whether, and at what point, nor where, social cohesion may fracture and lead to large-scale insurrection against supposedly established authority.

One can perform detailed and elaborate analysis of an Obligor, and assign a probability to both default and risk of loss, vs. the available risk premium, knowing that in normal circumstances that is a reasonable approach, yet find that subsequent events override and make a mockery of expected outcomes. Asking: “But what if we are wrong?” is a valuable heuristic, and symbolizes the need for humility.

When former UK Prime Minister Harold Macmillan was asked what was the greatest challenge for a statesman, he replied: ‘Events, dear boy, events’.

That is always worth thinking about.

The Awbury Team

Is it over yet…?

We were seriously tempted to entitle this post with the opening phrase from The Doors’ legendary song (from 1967) The End, which starts “This is the end, beautiful friend…”

Not to put too fine a point on it but the end of the third quarter of 2022 must have made many (re)insurance executives, whether CEOs, CFOs, CIOs or CUOs wonder what else might possibly go wrong. Oh, perhaps the use of “tactical” nuclear weapons in the Ukraine.

In case anyone needs reminding, equity and bond markets had a horrible month, with the S&P down over 9% (and almost 24% year-to-date), while the ICE BofA 7-10 year Treasury TR Index was down a further 5% in September, and over 15% year-to-date. And don’t even mention the recent hallucinogenic carnage in the UK’s gilts market following a spectacular example of political incompetence and willful policy negligence.

Not only that, just in time for quarter end, Hurricane Ian barreled across Puerto Rico and Cuba, and then made a spectacular (in a very bad sense) landfall just short of Category 5 strength on the particularly densely built south west coast of Florida. While insured loss estimates remain subject to a high level of uncertainty, a range centered around USD 50BN does not, so far, seem unreasonable, with RMS having posted a “best estimate” level of USD 67BN. Not quite the worst ever single US CAT event (with 2005’s Hurricane Katrina still holding that record at an estimated USD 90BN in 2021 dollars) , and one that will likely hit at least some (re)insurers’ capital accounts as well as their P&Ls- just in time for the marking-to-market of their investment portfolios adding a heavy hit from the above-mentioned market losses.

So, we shall be watching with interest to see whether anyone of any scale in the industry has managed to escape relatively unscathed when quarterly results are announced over the coming weeks. Precedent would indicate that to be unlikely.

Not only that, but the CAT ILW, ILS and retro markets will also be waiting with bated breath to see exactly where the pain is transmitted, and whether another “collateral trap” ensues.

The irony of CAT bonds being seen as a useful risk “diversifier” until, suddenly, they are not, will not go unnoticed. Perhaps re-built risk diversification models will provide “comfort” that it “cannot” happen again?

Of course, it is easy to seem smug in hindsight. That is not the case at all.

Our underlying point is that (re)insurance is all about prudent risk selection and management. Severe risk shocks can occur on both sides of the balance sheet at the same time, no matter what Monte Carlo simulations may say about the probability. The whole point is never to put your balance sheet and capital in a position in which fear of pain becomes existential angst. Whether, on the liability side, hardening markets will be able to repair the damage through the 1-1-2023 renewal frenzy remains to be seen. Meanwhile, on the asset side the punishment beatings still seem likely to continue for some while, whether administered by the Fed (and its fellow travelers) in raising base level interest rates, or caused by market volatility, doubts about liquidity, the re-pricing of leverage, and the rising threat of recession (induced by the Fed and others).

At Awbury, our specialized business model is premised on taking de minimis liquidity, volatility or duration risk on the asset side of the balance sheet, so that we can focus on continuing to build a truly diversified liability portfolio in which, even if correlations “go to one”, which tends to happen at times of severe market stress, our capital base remains sound no matter the metric used.

The industry as a whole clearly has the financial capacity to absorb the (re)insurance losses from Hurricane Ian given its capital base; while on the asset side, readily available liquidity will matter more than marked-to-market capital accounts in the near term.

Never Mind the Weapons, Where’s My Ammo…?

These are serious issues, and at least part of the cause of the current levels of stubbornly higher inflation being experienced across the world.

However, recent events have emphasized the importance of supply chains in ways probably not seen since the end of the Vietnam war- in war fighting.

Most people are probably familiar with the phrase “an army marches on its stomach”, and also intuitively understand the need for combatants to have effective weapons systems to deploy. Yet, one other factor is becoming increasingly critical- the availability of munitions.

It is all very well having the most sophisticated and destructive weapons systems, but if they cannot be used that is a matter of serious concern.

The continuing war in the Ukraine simply reinforces the point.

The Russian forces now largely seem to have reverted to relying on what might be termed “Soviet military doctrine”- namely the use of massed artillery and rocket fire to breach defences, destroy enemy formations and infrastructure, and cow an opposing government or population into surrender.

While debate will continue as to the likely effectiveness of such a strategy in the face of Ukrainian resistance; recent successful counter-attacks; increasingly sophisticated counter-battery fire, as well as the targeting of ammunition dumps and command centres, it serves to underline the fact that one can have all the most sophisticated weaponry, and command and fire control systems ever dreamt of, but if you cannot actually fire your artillery, or launch rockets, they are no better than expensive “sitting targets”.

One reason for the Allies’ triumph in WW II was America being able to fulfil the role of the impregnable “arsenal of democracy”, with an extraordinary ability to produce and deliver military materiel, including munitions.

Now, Ukraine’s defences and ability to counter-attack depend upon its receiving timely supplies of not only weapons systems, but also munitions.

And that is where the problem may lie. Russia (with decreasing credibility) claims to have significant reserves of munitions (although likely of less-sophisticated forms); and still relies on quantity over quality and accuracy.

The Ukraine does not have its own capacity to replace the sophisticated munitions needed for the latest NATO-supplied weaponry; while the NATO military-industrial complex is, somewhat ironically, not really geared up to fight a protracted war against a relatively-sophisticated “conventional” enemy.

All of which means that NATO governments, procurement specialists and weapons manufacturers need to focus urgently on increasing capacity not only to re-supply stocks desperately needed by the Ukrainian forces, but also to re-build and increase their own supplies of munitions, from the basic to the sophisticated.

Further irony is added (as the Financial Times recently pointed out in a Military Briefing) by the fact that “a decades-long emphasis on lean manufacturing, financial efficiency and industrial consolidation… has worked against military planners keen to maintain costly weapons inventories”. The existing obsession with complex weapons systems (think the ludicrously expensive F-35) has simply emphasized that the war you think you are going to have to fight is usually not the one you end up having to; and that there need to be a reliable “supplier of last resort”.

Resiliency, capacity-building and the recognition of the need for the creation of structural redundancies is not just a matter for the manufacturers of consumer goods and capital equipment.

Wars are lost because of failures of logistics and re-supply, as the old adage: “For want of a nail, the kingdom was lost” attests.

The Awbury Team