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Three weeks ago, in a Ricochet post, I suggested that Russia’s President is a clown, posturing in a manner apt to do his country and his own standing enormous harm. “Vladimir Putin,” I wrote, “wants to be remembered as the man who restored Russia to its proper place in the sun as a world power. There is only one problem with this ambition. Russia does not now have the means by which to pursue it, and it is not going to acquire the requisite means. Even if Putin succeeds in dismembering the Ukraine, he and his country will lose, and they will lose big.” Then, I explained,
To begin with, they will alienate all of their neighbors in Europe, and they will persuade not just Poland, Estonia, Latvia, Lithuania, the Czech Republic, Roumania, and Slovakia that Russia is a rogue power that must at all costs be weakened and contained. They will persuade the Germans, the Italians, the French, and the British that their neighbors to the East are right. And this means that NATO will be rejuvenated, and that the Europeans will once again look to us for leadership. That is one problem. There is another. The Russians do not have the economic base requisite for such an assertion of power. Russia is a banana republic with nuclear weapons. Economically, it is almost as dependent on resource extraction as Saudi Arabia, and the pertinent resource is slowly being depleted. In effect, Putin’s Russians are eating their seed-corn. They could have liberalized the Russian economy. They could have drawn closer and closer to the European Union with an eye to joining it eventually. They could have reinvested the profits from their sale of oil and gas in industry. They could have prepared for a future in which they will have little in the way of oil and gas to sell. Instead, they are wasting their resources on ships, planes, and soldiers that they do not need and cannot to good effect use. At the same time, Putin’s Russia is ignoring the only strategic threat it faces. The United States is not Russia’s enemy. It is not even a rival. We once had an interest in containing and dismembering the Soviet empire in eastern Europe and the Soviet Union itself. We have no interest in further reducing Russia’s extent; and, insofar as we see Russia as a potential trading partner, our interest lies in Russian economic development. The same can be said even more emphatically for Germany, France, Britain, and the other countries in Europe. There is, however, one country with an imperial past and a renewed craving for empire that has territorial ambitions which make of it a threat to Russia, and that country is China. Russia is suffering a demographic implosion. It will be difficult for it to hold what it has. It is, moreover, well nigh impossible to get Russians to move to Siberia. It is not a pleasant place in which to live. The majority of those who live there today are not Russian. Many of them are Chinese who have journeyed north in search of well-paid work; and China, which is just across the border from Siberia, is an economic juggernaut increasingly desperate for resources of the very sort that are found in abundance in Siberia. Vladimir Putin should think hard about the precedent he is setting in the Crimea. The day may come when China does to Russia in Siberia what he is trying to do right now to the Ukraine in the Crimea. Putin’s government piously states that its only concern is to protect the majority Russian population in the Crimea from the Tatars and the Ukrainians there. China, in time, will say the like about the Chinese in Siberia. And when that day comes, he will have alienated everyone of any significance who might otherwise have rallied to Russia’s defense. Our aim for the past seven decades has been to reorder the world in such a fashion as to make war counter-productive. The name of the game is commerce. The weapon we deploy is simple and powerful. Those who agree to leave their neighbors alone and to allow freedom of commerce can profit from a a world-wide economic system that will enrich everyone. Those who buck that system and opt for imperial ventures will be contained, weakened, and defeated. This is a lesson that France and Germany have taken to heart. But Vladimir Putin is simply too dumb to notice. He is a product of Russia’s attempt to imitate Charles V of Spain, Louis XIV and Napoleon Bonaparte of France, and Adolf Hitler of Germany in attempting to establish a universal monarchy in Europe and beyond. They failed, as did Joseph Stalin and his successors, and Putin, who has forgotten nothing that the Soviets taught and learned nothing from the failure of the old Soviet Union, will fail as well. In failing, moreover, this product of the old KGB will do his long-suffering compatriots a great deal of unnecessary harm.
I quote here at length what I had to say on 28 February because Putin and his associates, not to mention his compatriots, are about to have brought home to them the consequences of his folly. The United States and the European Union can perhaps afford to look the other way when some tin-pot dictator in Africa invades a neighbor. Neither can do so, however, when a supposedly civilized power on the European continent does the like. There is, in fact, an international order. It is not all pervasive and may never be, but its extent is considerable. We all profit from the commercial exchange and the relative peace that it makes possible. And when a player of some prominence breaks the rules, there have to be consequences . . . or that order will soon dissolve as others follow that player’s cue. Well, now it appears that there will be consequences.
Paul Gregory, who occupies an office on the first floor of the building here at the Hoover Institution, where I am cooling my heels this year, just posted a piece on the Forbes website that spells out what is happening. I will quote liberally from it. You should read and reflect on the whole thing.
The first reaction to the first round of U.S. and European sanctions against the Russian ruling elite was laughter. Declared one of those singled out: Whoever put these sanctions together is a “joker.” Indeed, the first set of U.S. sanctions was weak and the European sanctions weaker. This is no longer the case. The Western sanctions bite where they hurt. Moreover, the U.S. Treasury has sent Vladimir Putin a chilling warning: We know where your money is, and we can expose you for what you are.” The Treasury hinted at a “direct (financial) relationship” between Putin and the owner of a shadowy oil trading company chartered in Switzerland, who happens to be on the sanctions list.
President Obama announced today a second round of sanctions imposed on individuals in Putin’s inner circle, a Russian bank, and against key sectors of the Russian economy. Obama recognized that such sanctions will disrupt not only the Russian but also the global economy. However, these penalties are regrettably necessary if we want to live in a 21st century world that respects the sovereignty of nations, declared Obama.
Angela Merkel, earlier today, announced in a Bundestag speech that “the G8 is no more,” before leaving for meetings in Brussels to plan the response to Russia’s violations of international law. Notably, only the small extreme Left party (die Linke) opposed Merkel’s tough stance on Russia. It is expected that the Europeans will grant Ukraine association status in the EU tomorrow, much to Putin’s chagrin. They will also continue to push for international observers in what Putin claims is the extremist and neo-Nazi dominated Ukraine. The Obama administration’s sanctions list, leaked shortly after his speech by the UK’s well-connected Telegraph, coincides largely with that published by banned Russian blogger-opposition leader, Alexey Navalny, in today’s New York Times (How to Punish Putin). Navalny, a lawyer by training, has devoted his career to exposing corruption at the highest levels of the Putin regime. Navalny’s list, a Who’s Who of Putin’s inner circle, includes Putin’s suspected personal money launderers and bankers and Kremlin-favored oligarchs. Obama’s list spares, for the time being, the heads of Russia’s national oil and gas companies. According to reports from the Russian web, the U.S. Treasury goes so far as to note that one of those sanctioned, a founder of the shadowy Russian oil trading company, Gunvor, one Gennady Timchenko, “has a direct relationship to Vladimir Putin.”
The significance of what is being done should not be underestimated. The Russian dictatorship is a giant kleptocracy — it exists for the purpose of enriching the few at the expense of Russia’s multitudes — and Vladimir Putin is the world’s greatest kleptocrat. Gennady Timchenko, who holds Finnish citizenship and lives in Switzerland, is his bagman, and Putin himself is said to be the wealthiest man on the planet. Moreover, Putin is not the only kleptocrat being hit. As Paul Gregory observes,
The freezing of assets and visas of the inner circle cannot be spun as a “joke” even by Putin’s spin masters. Any bravado from those sanctioned will be whistling past the graveyard. Moreover, those spared, such as the heads of the national oil and gas companies, must wait for the axe to fall. The impact of these sanctions extends far beyond the inner circle. It sends shudders down the spines of all of Russia’s moneyed elite. Although Putin ordered Russians (presumably excluding his inner circle) to de-offshorize their wealth over a year ago, Russian assets remain conspicuously abroad, concealed behind layers of secrecy that the U.S. Treasury Department can easily penetrate. All Russian citizens with foreign bank accounts, estates, apartments, and children studying at elite Western universities will worry whether they are perhaps next. Among themselves they will whisper: What has this Putin guy got us into? Is there a way to get rid of him? Despite Putin’s order to keep money at home, Russia’s 2013 capital flight was $63 billion, which offset 70 percent of inflows of foreign direct investment (Crimean Crisis Will Exacerbate Capital Flight). Personal capital is fleeing en masse from a country desperate for capital and foreign technology. One of Russia’s most trusted financial experts, former finance minister Alexei Kudrin, estimates that Putin’s Ukrainian adventure will cost Russia $200 billion. If adjusted for the smaller size of the Russian economy, this figure would be the equivalent of a $2 trillion loss to the U.S. economy, more than the entire cost of the Great Recession.
Russia’s most notable weakness is the absence of a rule of law that protects private property from arbitrary seizure. All Russian officials and businessmen understand that their assets can be taken away at any time if they fall on the wrong side of a powerful official. They have no choice, therefore, but to hide their money in what were safe havens in the West. Whatever they have in Russia is of little or no lasting value. Their whole life depends on their hidden foreign assets. In threatening the inner circle with the loss of their foreign assets, the whole of Russia’s elite and even moneyed middle class with their Miami Beach apartment or children in Ivy League schools are threatened.
The Crimean adventure has temporarily raised Putin’s popularity among the Russian people. His incessant Big Lie campaign has boosted Russian national pride, but Putin’s mass propaganda campaign cannot sustain the hysterical level it has reached. According to Russia’s most respected pollster, mass mobilization propaganda can be effective at most three months before its subjects come back to earth. At that point, there will be a reverse effect: “People will feel, first, the unpleasant effects of the Crimean action and then, from the other side, start to ask why Russia is in political isolation and why the economic position of Russia is worsening.” (Lev Gudkov, head of Levada Center, Moscow).
Dictatorial regimes, like Putin’s KGB state, look rock solid. Visible opposition has been liquidated by harsh repression. Attending a demonstration can be punished by jail time. Opposition press has been muzzled. But the Putins of the world must be wary. They do not know where the fatal spark will come from. History shows that Putin-like regimes are usually toppled from within, a classic case being the overthrow of Nikita Khrushchev in October of 1964, notably for his harebrained schemes (such as placing missiles in Cuba and nonsensical economic reforms).
Legendary Russian dissident Vladimir Bukovsky describes Putin’s likely overthrow in the following terms: “Those around Putin are like a criminal band, a group that operates according to ‘the simple principle: the head of the band works for the band and the band for him.’” Bukovsky warns that if this principle is violated” – and the fallout from Crimea could lead some of the band members to conclude that – then the leader is in trouble, as are those around him who may decide that the world that allowed them to “steal for 14 years” and take the benefits is collapsing around them.
Their only option: Get rid of Mr. Putin. He, like Khrushchev, pursues dangerous harebrained schemes, which threaten us all.
In short, the big squeeze has begun, and it is already having an effect. Bloomberg reports that S&P has just lowered Russia’s credit-rating to BBB. When this is all over and the dust has settled, we may look back with a measure of satisfaction on Putin’s pathetic power play. After all, the Chinese are watching. Given the imperial ambitions they have recently displayed with regard to the South China Sea and their eagerness to bully their neighbors, they desperately want to know whether anything of moment happens to those who break the rules of the liberal, commercial world order. It is, I think, in everyone’s interest (theirs included) that we see to it that, after having sown the wind, Vladimir Putin reaps the whirlwind.