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Vladimir Putin Encounters the Big Squeeze — Paul Rahe
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.
Let me just say that I am pleased that a prominent figure on the right is consistently sounding the alarm about China. I don’t think enough Conservative thinkers do this, as most seem to be more concerned about terrorism (the natural flora of international relations) rather than the infinitely more powerful nation-states that would sooner demand and enforce tributes upon other nations than engage in peaceful trade.
Anyway, I am skeptical of energy sanctions against Russia. It is so large a player in energy markets that sanctions upon Russian energy will simply raise the price of energy everywhere, allowing Russia to make up for more volume. This was not the case with Iran.
I agree with you entirely. Terrorism is an irritant. We need to swat it the way we swat flies. Misconduct by a nation state of significance is a much more serious matter.
The next move is up to Putin. He may cut off the gas. If he does, say I, more power to him. The Russians have to eat, and they pay for it with the proceeds from their petroleum exports. It is Spring — not the time of year when his leverage is the greatest.
Like.
This comment just came in via email from a Russian observer of events:
Here is what this observer said:
Paul,This is a good step. Unfortunately, Obama made it clear that this is the last step, and there will be no further sanctions for the annexation of Crimea. Our President did not demand the withdrawal of Russian troops from Crimea, and did not condemn the murders and other atrocities committed by them and the gangs, which they created there. He did not say that any extra day of Russian army staying in Crimea, which is part of Ukrainian territory, any crime committed by them or their puppets would be considered as an escalation of the conflict, which would call for additional sanctions.
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Conservatives and Progressives can agree.
Going back to topic, I don’t think Putin will cut off the gas. Western powers will simply punish those under their jurisdiction that buy energy from Russia. Russia can still sell at a higher price to the world’s rogue nations and China. That is not to say that I don’t think sanctions should be applied. They should be applied, but we shouldn’t have any high hopes about them.
I wish I could be so enthusiastic about these sanctions, but they don’t seem to go far enough to me. Nor am I confident that the US, or Europe, will have the spine to keep them up long term, and more importantly to extend them where it hurts. Putin will just decapitate those oligarchs which might threaten him, and replace them. For sanctions to work against Russia, they need to be all encompassing.
We need to prevent any US or European company from doing business in Russia, or exporting to Russia. We need to hit their energy exports, and the best way to do that would be to expand our energy production in the US and increase exports of nat gas to Europe. We need to help finance pipelines of nat gas that bypass Russia and go into Europe.
But, if there is a silver lining in all this, is that no one will ever have any doubts as to who Putin is, and what Russia’s intentions are. The second silver lining here is that, Ron Paul has finally come out as being as ridiculously out of line as I always thought he was. No more illusions.
I bet Ron Paul supporters have not lost their enthusiasm for the man one bit.
Should sanctions include banning the sale of Russian-made consumer goods?
It’s not simply a hypothetical question (“What Russian-made consumer goods?!”).
The government of Manitoba is considering banning Russian-made booze from (government-owned) liquor stores:
http://globalnews.ca/news/1219789/manitoba-considers-russian-booze-ban
(FYI: A large proportion of the voting public in the prairie provinces are of Ukrainian descent.)
No vodka? What next?
Dream on. Maybe under the next Administration.
I do have a hard time imagining a czar who used to be KGB relying so heavily on these oligarchs without attempting to gain leverage on them. Perhaps he wouldn’t risk angering them by spying on them and attempting some sort of blackmail. But perhaps he would.
“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”.
Of course, this could also mean that P will undertake another action before three months are out, to keep the momentum. Eastern Ukraine perhaps.
Our domestic supplies of excellent vodka are quite adequate and can be ramped up if necessary. The man at the liquor store told me.
Putin seems to have kept China in the loop on the Ukrainian situation; China has been very understanding. Of course, China has a rebellious province of its own. If the US can be kept busy with Ukraine and other Russian adventurism, plus Iran’s nuclear program (backed by the Russia and China; coincidence no doubt) plus all the Iranian and Chinese challenges in Latin America, and once the Obama defense cuts further gut the US military, and once Obamacare sucks any spare cash out of the economy, China can have its way with Taiwan. Maybe Putin thinks if they’re busy with that they’ll leave Siberia alone for a while.
In general I respect your opinion a great deal Prof. Rahe but here you are subscribing to and promoting a fundamental misconception of current Russian politics. To speak of “Russia’s moneyed elite” is to take a trip back in time to well over a decade ago, we might as well be speaking as if Yeltsin still held the reins.
Did Alexander Litvineko meet his end in bringing Putin to heel? Who is Mikhail Khodorkovsky other than a broken man? The age of the oligarchs influencing, let alone controlling Russia is long past. They have been crushed, this is the era of the siloviki. To imagine such will be moved by vague threats and what are likely to be transitory pinpricks is a leap of faith none should be willing to take.
This line of thinking makes a great deal of sense, but I worry that it is relevant in the medium-long term, whereas the threat to Ukraine is immediate and real.
Also, Putin is no friend of the oligarchs: he tried to get them under his control when we first came to power, and last year called upon Russians to repatriate their money, meaning bringing it back to his control. They are just an opposing power base that must be controlled.
Putin also has the mob behind him — young Russian men with few prospects who like nothing more than a good punch-up against anybody not like them. The turn to violence because they have nothing else to lose. The anti-Maidan protests in some of the cities in the east seems to have taken a much more randomly-violent nature since Yanukovych fled. Part of this may be attributed to Russian nationals coming into Ukraine to stir up trouble (which, as we used to say, is “no accident”). Putin wants to take advantage of the anarchy that he is creating.
We still need sanctions, stronger ones, at least as strong as those we had against Iran.
Or Estonia.
You’re confusing your “fascist neo-Nazis” Paul ;). That’s Latvia that is the reincarnation of the Third Reich, according to Pravda. Not Estonia.
I agree with the comments others made that the oligarchs aren’t in a position of power, they are in a subordinate position to Putin. But on the other hand they are the only people who…can…overthrow Putin. Not that they will, certainly not for sanctions as meager as these.
My biggest concerns are that the responses from the US and Europe will waver in intensity over time. A unified response would certainly be noticed by the Chinese. However, one thing you can always say about China: They are patient. They can wait
This is the first time that I recall disagreeing with you on all major points. 200 words does not allow much but in short:
1. Putin is not setting a precedent in the Crimea, he is defending a perceived national interest that dates back to Frederick the Great.
2. I believe you overstate Russian weakness. While the deficiencies you point to are valid, they have existed to various degrees for a looong time. Russians have also shown themselves to be the personification of tenacity when they feel their backs are to the wall. Ask Napoleon and Hitler.
3. I believe you overstate the strength of the west. Many if not most are actually bankrupt – E.G. USA with $17 trillion in on balance sheet debt, 200 Trillion in off balance sheet liabilities. Supported by $2.8ish Trillion in revenues and a 17 Trillion GDP. We are in better shape than many – and are extremely vulnerable in myriad ways.
4. I think you understate the danger. When nations screw things up to arrive at the brink, war is quite often what happens. You know this better than I.
5. There is nothing in the 21st century that reverses human nature.
How much of that resistance was “Russian tenacity” and how much was just… winter? And FDR’s lend lease in the case of WW2.
Mrs. Of England and my mother will be in Estonia at the end of May. I seriously hope your timeline is in error.
The Russian comfort with the starvation of other Russians (or, better, non-Russian ethnic minorities) also contributed significantly. I’m not sure how it applies here, though. Russian efficacy at repelling invasions has not historically implied much of a Russian ability to rule effectively in its hinterlands, still less to inspire respect in its neighbors.
As Jonah Goldberg famously pointed out, Stalin more or less invented the “right wing Nazi” slur, and Pravda has been willing to apply it to essentially all non-Russophile politicians.
The key to the strategy here, of course, is not only how it solves this immediate problem, but how it leaves us in position to address future problems. In game theory, how you play the current game dictates how you’ll play the next game. We’re in a bad position to fight the next game.
Let’s say that financial sanctions are the vehicle for punishing Russia’s belligerence. Great.
But if I’m China, seeing the Americans fight with finances instead of political or military power, then I’ve got to conclude that these methods simply won’t work against me. China has the financial leverage over us. Couple that with the fact that America is cutting back its military, and is rapidly neutering its diplomatic power … China has to feel that America is an empty threat. If China decides to take Taiwan, I’m sure they’ve calculated that Obama will do nothing except talk.
No matter what you thought of the Gulf Wars, the willingness of the US to act helped bring a relatively quiet stability in world diplomacy.
By exposing the current unwillingness of the US to act, Syria is having a ripple effect.
Only one minor disagreement. I do not believe that the remoteness and the inhospitability of Siberia are the critical factors in its non-development by Russians.
The lack of freedom and rule of law discourages an economic boom and associated migration as is seen in places like North Dakota and Western Canada.
Her’s the interesting thing about resource extraction. To paraphrase Thomas Friedman: productivity is much flatter than in other goods or services because there is an international market. Working in resource extraction should be a much more viable alternative for a Russian than for an American or Canadian. This is because the Russian’s alternative employment is likely in some local market with low prices/productivity. An American plumber in DC likely makes much more than a Russian plumber in Moscow. He may have insufficient incentive to become a North Dakota roughneck. The Russian plumber will likely see a substantial income increase as a Siberian roughneck. That is unless corruption etc. suppresses the productivity of the Siberian oil industry.
http://boudicabpi.wordpress.com/2014/03/15/rabbi-in-crimea-urges-jews-to-leave-ukraine-fears-neo-nazi-attacks/ Anyone else hear anything like this? I don’t find it hard to believe, and if true, another warning.
I do not disagree with your basic point. But, sometimes, financial levers are sufficient — as I think they will be in this case.
As for China, well, military might matters — especially if it put us in a position to interdict all imports by sea.
This is reassuring.
The silovki are now a part of that moneyed elite. They, too, have resources abroad. Putin’s Russia is not like Soviet Russia. It does not have eastern Europe to exploit, and it is not even remotely self-sufficient in economic terms. And the leverage it has cuts both ways. Seventy-five percent of its exports are petroleum-related. It cannot refuse to sell to the Europeans for any real length of time because it cannot do without the income generated thereby. What is being done is not a pinprick.
Hope you’re right, obviously. But I haven’t seen (nor has anyone else) any willingness to use that kind of force.
This is where a treaty like NATO makes a difference. We may have no legal requirement to defend the Ukraine, and that gives Obama his own “off-ramp.” But it would be different for a Poland or an Estonia with a NATO protection agreement.
Sometimes, it’s good to keep your options open. But other times, it’s better to have your hands tied, and to tell your opponent that if they do X, you’re legally required to respond with Y. The strategy only works, however, if your opponent knows your requirements beforehand. And for that, you can’t lead from behind – you have to get out front.
You know, much as I can’t stand the guy, I want Obama to be tough and agile. We need an effective president. I don’t want to win an election if it means we get trapped in a war. But I hate having to depend on a guy I don’t respect.