Putin paying dearly for Ukraine - and looks willing to sacrifice much more

WASHINGTON —

Russian President Vladimir Putin has adopted a “go it alone” approach throughout the Ukraine crisis and regularly describes his country as “independent” and nonaligned. But Moscow is not as isolated as Putin makes out. The fact that he cannot see this reality—or chooses to ignore it - has produced a series of decisions that has seriously undermined Russia’s global role.

For the past two decades, Moscow has viewed its foray into global institutions as a major success. It has increasingly integrated into the global economy. Those achievements, however, now present Putin with a major dilemma.

In the aftermath of the Soviet Union’s collapse, Russia signed multiple treaties and joined numerous international organizations, including the Council of Europe, the G7 (which became the G8) and the World Trade Organization.

Whether Russia understood the underlying obligations that accompanied its memberships is unclear. The ink was not yet dry on Russia’s accession to the WTO, for example, when Putin demanded that member countries be allowed to introduce protectionist measures during times of global insecurity.

Yet the consensus in Russia was that membership bought Russia a vital seat at the table and increased its influence in world affairs. In addition, the United States and the European Union generally believed that it was better to have Russia inside - as opposed to outside - the international system of global governance even if Russia did not meet all the prerequisites for full membership.

The Ukrainian crisis has exposed the flaws of this thinking - especially for the West. For Putin, however, events in Ukraine have raised a larger question: Should Russia remain a part of the global system?

Russia’s ambivalent attitude toward global institutions reflects its history - a single autocratic leader has dominated the country’s public institutions for centuries. Indeed, since returning to power in 2012, Putin’s agenda has focused on reining in all other Russian political and civic institutions - the legislature, the judiciary, the media, higher education, nongovernmental organizations - and has faced little real opposition in the process. So it is not surprising that Putin entered the Ukrainian crisis with the firm belief that international institutions would not get in his way.

Putin’s fundamental misunderstanding of how the post-imperial, post-World War Two international system works has already created serious economic consequences in Russia. Under the recent European Union and U.S. economic sanctions, state-owned Russian banks and Russian companies now have limited access to the international banking system. Moscow is also barred from receiving new loans from the European Investment Bank and the European Bank for Reconstruction and Development, a loss of several billions of dollars annually.

Meanwhile, Gazprom, the state-controlled natural gas company, still awaits the verdict of the European Commission’s investigation of possible antimonopoly violations. Significant fines usually accompany such inquiries - as Google and Microsoft can attest. The Yukos expropriation bill, which covers Putin’s 2004 confiscation of Russia’s then largest privately held oil company, also finally came due in July. The Permanent Court of Arbitration at The Hague and the European Court of Human Rights ruled against the Russian state to the tune of $50 billion and
$2.6 billion, respectively.

Meanwhile, Russia’s new sanctions on agricultural imports and its consistent abuse of inspections to block fruit, vegetable and meat imports from the European Union, United States, Moldova and Ukraine seem to be ideal fodder for a claim to the WTO Dispute Settlement Body. Poland has already announced its intention to file a WTO complaint, and other countries appear likely to follow.

Russia’s ultimate bill for its Ukrainian adventure should not only be measured in money lost but also in terms of opportunities missed. Russia’s suspension from the G8 occurred on the eve of its presidency - just as Putin planned to lead the fight against tax evasion and offshore banking. Problems he battles against in Moscow.

Russia would have found a receptive audience among its fellow G8 members, whose nations also suffer from significant capital flight. Now Russia has to address the problem alone at a time when Russian capital flight, for the first six months of 2014 ($75 billion) exceeded the entire amount of 2013.

Russia may not think that it is bound by any alliances. But it turns out that institutions do matter - and Russia cannot easily retreat from the global economy. Indeed, virtually every retaliatory move proposed by Putin has backfired on Russia and left it in a far weaker financial position.

Putin, for example, proposed crippling deposit restrictions on MasterCard and Visa before he had an alternative Russian payment system in place. He thereby threatened the ability of Russians to accept—and make—credit card payments. Rumors also have circulated that Russia intends to ban European air carriers from flying over Siberia on Asia routes. These reports immediately sent Aeroflot shares tumbling since it receives upward of $300 million from the fees paid by foreign airlines.

The toll for the recently announced food bans remains uncertain. But there will likely be serious costs as well because Russia will lose both high-end food products from Europe and low-end agricultural products from Ukraine and Moldova. Some Russian commentators insist that alternative suppliers exist and that all logistical obstacles can be easily overcome. They also claim that the sanctions will benefit Russia’s domestic food producers and farm-equipment manufacturers. Though for certain products - particularly beef, fish, fruit and vegetables - Russian retailers need to quickly find new foreign partners to fill the gap.

Putin’s decree implementing these sanctions conspicuously included a clause calling on the Russian government to take appropriate measures to prevent a sudden increase in food prices. So Putin clearly anticipates some economic costs to these sanctions.

By consistently dismissing the role of institutions - both domestic and international - Putin has backed himself into a corner. His remaining options are either compromise on eastern Ukraine - and suffer the domestic political consequences - or doubling down and intervening directly in Donetsk and Luhansk. The former will rely on international bodies to smooth the process, while the latter will be in open defiance to a large part of the world community.

Putin seems to be leaning toward the second option. Yet that also means that he believes that Russian sovereignty can best be protected by its growing isolation.

Soviet dictator Joseph Stalin tried a similar approach in the 1930s, for he also pursued a policy that isolated the Soviet Union from the world economy. Before the Ukraine crisis, Putin at least seemed to acknowledge the role of globalization. His recent actions suggest a lack of sophistication about global markets and the extent to which Russia has been integrated into the post-World War Two global architecture. The price tag for this miscalculation will be considerable.

Putin is more popular according to Russian public opinion polls than he has ever been during his 14 years in office. He has achieved this success, however, by undermining the very institutions, both domestic and international, that facilitated his consolidation of power. He is more powerful - yet more exposed - than at any time during his presidency.

(c) Copyright Thomson Reuters 2014.

Author Infomation

William Pomeranz
William Pomeranz
William E Pomeranz is deputy director of the Kennan Institute at the Woodrow Wilson Center for Scholars.
  • 2

    Burning Bush

    The author forget to mention China, you know that country with 1.3 billion people and will soon have the largest economy on the planet.

    China just paid Russia $60 billion in advanced payment for oil, something they were not contractually obligated to do, but did so just to snub the EU and US.

    Under the recent European Union and U.S. economic sanctions, state-owned Russian banks and Russian companies now have limited access to the international banking system.

    Oh really, well the author forgot to mention Switzerland, you know that neutral country where a lot of international banking is done.

    Switzerland is NOT participating in sanctions on Russia.

    http://www.reuters.com/article/2014/04/02/us-ukraine-crisis-swiss-idUSBREA311IB20140402

    Russian retailers need to quickly find new foreign partners to fill the gap.

    No problem, Egypt and Turkey are eager to fill the gap left by European producers.

    https://news.yahoo.com/russia-boost-wheat-supplies-egypt-mulls-free-trade-144820576--sector.html

    http://www.dailysabah.com/money/2014/08/15/western-sanctions-on-russia-to-boost-turkeys-food-exports

    Oh and don't forget all of South America and India, both of which are still happy to do business with Russia.

    It's the EU and US that are isolated.

  • -3

    jerseyboy

    His recent actions suggest a lack of sophistication about global markets and the extent to which Russia has been integrated into the post-World War Two global architecture. The price tag for this miscalculation will be considerable.

    No one ever accused Putin of being the sharpest knife in the drawer -- just the one who perceives himself the one with the bigget gonads. His super macho image works well at home, but bullies ultimately pay a steep price in a globalized world.

    Putin is more popular according to Russian public opinion polls than he has ever been during his 14 years in office. He has achieved this success, however, by undermining the very institutions, both domestic and international, that facilitated his consolidation of power. He is more powerful - yet more exposed - than at any time during his presidency.

    Too bad Fox News isn't smart enough to understand this concept and instead just simply wants to bash Obama for not trying to out macho Putin.

  • 4

    FizzBit

    Should Russia remain a part of the global system?

    Should Russia remain a part of the petrodollar global system?

    There, fixed it for ya.

    William Pomeranz's fundamental misunderstanding is that Putin knows how the post-imperial, post-World War Two international system works has already created serious economic consequences in the EU.

    Again, fixed it. See below.

    Meanwhile, Russia's new sanctions on agricultural imports and its consistent abuse of inspections to block fruit, vegetable and meat imports from the European Union, United States, Moldova and Ukraine seem to be ideal fodder for a claim to the WTO Dispute Settlement Body. Poland has already announced its intention to file a WTO complaint, and other countries appear likely to follow

    Please. Do you even understand the big picture here William? These sanctions are in response to Barrack "four!" Obama's petty sanctions. Greece, Slovakia, The Czech Republic, Germany and Spain are all starting to back peddle on these sanctions. Who won that round of golf?

    Russian retailers need to quickly find new foreign partners to fill the gap.

    Russian retailers have found new foreign partners to fill the gap. Fixed.

    He is more powerful - yet more exposed - than at any time during his presidency.

    He is more powerful - and is beginning to expose Washington's desperate attempts to save the petrodollar. Fixed.

    The BS coming out of the MSM for the "idiocracy" is hilarious. Unfortunately, the US will stop at nothing to save the petrodollar as it would crumble their money printing, UST's, MIC game.

    Mike Whitney says it better:

    So the Obama administration is going to do whatever it thinks is necessary to stop further EU-Russia economic integration and to preserve the petrodollar system. That system originated in 1974 when President Richard Nixon persuaded OPEC members to denominate their oil exclusively in dollars, and to recycle their surplus oil proceeds into U.S. Treasuries. The arrangement turned out to be a huge windfall for the US, which rakes in more than $1 billion per day via the process. This, in turn, allows the US to over-consume and run hefty deficits. Other nations must stockpile dollars to purchase the energy that runs their machinery, heats their homes and fuels their vehicles. Meanwhile, the US can breezily exchange paper currency, which it can print at no-expense to itself, for valuable imported goods that cost dearly in terms of labor and materials. These dollars then go into purchasing oil or natural gas, the profits of which are then recycled back into USTs or other dollar-denominated assets such as U.S. stocks, bonds, real estate, or ETFs. This is the virtuous circle that keeps the US in the top spot.

    And finally, before you all start calling me names, I just want to say, all I want is for America (my country) to return to some semblance of logic, honesty and peace, and stop trying to control the world. Their actions now should be raising alarm bells for WW III because they really don't care about the Europeans. I'll leave you with these words spoken by State Department Victoria Nuland on the eve of the US coup in Kiev "fuk the EU!"

  • 5

    Asakaze

    Empty article, full of false assumptions. It is not Russia, its poor old Europe who "pays the price" for the Ukrainian mess. US forced the EU, its economic rival, to impose sanctions on Russia. Very dexterious for the US, very stupid for the EU, because Russians served them its own medicine. Result: huge losses (at least 10 billions) for European agricultural sector, big boost for Russian domestic producers. From chaotic post-Soviet economic reforms of 90s Russian farmers could not compete with large Western agrocompanies, but now its another story. In fact, Russian farmers now toast to Mr.Obama and the bunch of hapless EU leaders who gave Russia its best chance to right its food production sphere and re-conquer its food market. And do not forget South America, Mediterranian and Asian countries, more then willing to fill the place EU counties were stupid enough to leave. And it is not just food. Russia is a self-sufficient country, it can produce almost everything. And Mr.Putin is clever enough to understand that. Russia is not isolated, because China, India, Brasil, Turkey and a lot of other countries (apart from US and a dozen of its satellite countries) have no intentions to impose sanctions on Russia. Just wait when all of them switch from US dollars to roubles or other national currency in their trade, particularly in oil and gas. Then we`ll see who is really isolated.

  • 0

    turbotsat

    US forced the EU, its economic rival, to impose sanctions on Russia.

    Don't see how US can or did force EU into sanctions it doesn't want. EU doesn't want Russia to eat Ukraine.

  • -9

    bass4funk

    @jersey

    Too bad Fox News isn't smart enough to understand this concept and instead just simply wants to bash Obama for not trying to out macho Putin.

    I think you mean, FOX news understands that Putin is nothing but a punk that wants to bully his neighbors and that NOT everyone thinks he's a golden boy and not drinking the Kool aid like ohhhh....uhhh RT perhaps or ANY anti-US person.

  • -2

    jerseyboy

    I think you mean, FOX news understands that Putin is nothing but a punk that wants to bully his neighbors and that NOT everyone thinks he's a golden boy and not drinking the Kool aid like ohhhh....uhhh RT perhaps or ANY anti-US person.

    bass -- no I meant exactly what I said. You don't need to tax your brain cells to explain it for me. But, just for the record, wasn't it that darling of Fox, one G W Bush, who famoulsy said he could "read Putin's soul" or words to that effect, and that he and Putin would be friends, as would our two countries? Guess you'd rather forget that?

  • 1

    kaiyoukougakusei

    The author forget to mention China, you know that country with 1.3 billion people and will soon have the largest economy on the planet.

    Not if its real estate bubble pops.

Login to leave a comment

OR

More in Opinions

View all

View all