Barreling Toward a Negative Sum Game
The situation in Ukraine is moving very quickly. Russia will annex Crimea. My sense is that they want to move forward and take much of eastern Ukraine, which would land lock the rest of Ukraine and grant Russia significant portions of the arms and other heavy industry, the best agricultural land, the most important coal mines, and many of the most important roads, pipelines, other transport, and communication networks. All in the name of protecting ethnic Russians in the east, Russia will have taken possession of many of Ukraine’s important strategic and economic leverage points. There is no smoking gun on this just yet, but the Russian movements—both outward and stealthy—seem to be heading in that way.
Can Russia be stopped? Only if leaders in the United States and the European Union start thinking strategically. That strategic thinking should not be hip-shooting without data to support it, as some leaders have acted out recently. The West’s response should not be conciliatory either. This is not the time for weakness, but it is also not a time for short-term thinking. It is time for real strategic thinking at a high level and over the immediate, short term, and long term.
Part of the strategic thinking should be to see how we got to this point. Clearly, the Russian leadership sees the U.S. and the EU as non-threatening. Why else walk into a vital region and simply take it over?
Where did this sense of the West’s weakness come from? Some say this perception stems from the way we reacted to the events in Georgia in 2008. Some say it is from the way we have acted toward the Syrian crisis. Others say it is because of our negotiations with Iran or many other situations where threats and bluster far exceeded actions. My sense is that the Russians saw this weakness most clearly when the U.S. cut off aid to the Egyptian military. Soon after this cut-off, many in the Egyptian leadership flew off to Moscow. The Russian arms industry was awarded multi-billion dollar arms contracts by Egypt within a short period of time. Egypt is a strategically important state on the corner of Africa and it is a vital player within the Middle East. The United States has allowed the Russians to reenter the region in a powerful way. The Russians also saw weakness in other EU and U.S. strategies toward energy security and their financial systems. Putin kept seeing these strategic missteps and mishaps as the fifth dan judoaka that he is. Then he made his moves. Crimea was thrown to the Russian mat.
Much of the EU is deeply in debt. The EU economies are still reeling from the Great Recession. The United States is the largest debtor country on earth. It cannot seem to get its budget in order. The U.S. government was shut down for some time. Important U.S. government workers were put on furlough. The U.S. military is facing massive budget cuts at a time when just the opposite should be happening, and military budgets in the EU have also been dropping. The operations tempos in Iraq, Afghanistan, and other conflicts have worn out many in the U.S. military. EU member states’ militaries that were involved with these conflicts also seem worn down. Publics in both the EU and especially the U.S. are war-weary. Few people here seem to want a war. Putin sees this.
A military option in dealing with the new imperial aggression of Russia seems unlikely in the short run for budgetary as well as political reasons in both the EU and the U.S. Putin knows this. His advisors know this. They may be ruffians on the world stage, but they are not stupid.
A Solution in Gas
Some in the leadership of the U.S. and the EU have been calling for the United States to export more liquid natural gas to the EU to help them further diversify their sources away from Russia. The EU has been diversifying since the 2006 and especially since the 2009 gas crises in Ukraine, but this trend is hardly enough to allow them to get really tough with the Russians on sanctions, trade cut-offs, and other non-military measures. The Russians know that oil and gas pipelines are important strategic levers that can keep many in place as they reconstitute their empire. However, they also know this leverage cannot last forever, hence they are in something of a hurry. Many politicians on both sides of the Atlantic are against fracking for natural gas. Most of the newest and fastest growing sources of American natural gas have been from fracked unconventional gas. We have enough of it to help wear down the Russian energy leverage on Europe by exporting to Europe for many years to come. The EU could turn to other liquefied natural gas (LNG) exporters that will come online in the next few years. The EU could also start looking more seriously at producing their own shale gas.
However, there is one main sticking point for U.S. LNG exports to Europe. We do not have the export facilities up and running yet. Yes, that is a problem. It could take well over $150-200 billion in investments over the next 5 to 15 years to be able to export enough to the EU to even partially replace the current reliance on Russia. That is, if the environmental and natural gas lobbies allow this to happen. It seems very odd to me that we have this once-in-a-generation chance to increase the wealth, employment, and revenues to our governments, as well as help out our allies not only in the EU, but also in Japan and beyond, with natural gas exports. Yet we remain in strategic dysfunction. Putin sees this.
Moreover, there are restrictions on the export of oil from the United States that have been in place since the oil shocks of the 1970s. We are producing prodigious amounts of light, sweet crude by fracking shale fields. Again, we have significant political pushback on this. The United States still imports oil, but in decreasing amounts. Much of that oil is of heavier and sourer varieties, because most American refineries are set up for that type of crude. We end up, absurdly, mixing the great light, sweet crude from shale fields with the heavier, sourer crude in order to refine and export it. This is not only economically foolish. It is strategically foolish. But it is not as strategically foolish as stopping the XL pipeline. I testified to Congress on the energy security and strategic implications of the XL pipeline in 2011. The XL pipeline has been debated for over 2,000 days. One has to wonder why there is little debate on the pipelines that have been put in place over those 2,000 days. If the XL pipeline were operable now and we were strategically functional, our ability to help our allies in the EU with oil from Canada and the U.S. would be much greater. Putin surely understands this.
How Viable are Sanctions?
Can we use the financial weapon of sanctions? It is being tried, but both U.S. and European sanctions are so tiny that they elicit derision from Russian leaders.. Sanctions need to be nearly universal in scope, and they need to really bite to make a difference. The present sanctions are like a nibbling hermit crab just before it goes back into its shell. One way to get Russia to the diplomatic tables is to really nail them in the pocketbook via their stock market, fixed income assets, trade, and overseas investments in many countries—not just in the EU and the U.S. with nibbles. If Russian oligarchs are sanctioned in the U.S. and the EU, they can move their funds elsewhere. It is a globalized world. The EU and the U.S. are not the only places to invest or store money and other assets away for safekeeping. Yes, the Russians can sanction back. They likely will. Some U.S. and EU companies will be hurt. The question is how much financial pain the United States and Europe are willing to take. Putin is guessing not much. He may be right.
There are many more stealthy financial, informational, and diplomatic ways to get the Russians to the table. However, let’s get real. The Russians are in a triumphant mood. Their leadership seems to want to retake the old Soviet empire, the demise of which Putin has called the major geostrategic disaster of this generation. Putin wants a legacy. Piecing together what he thinks Russia should really be seems to be his main goal. It may end up to be his political tomb, however glorious it might seem now.
Russia is not a diversified economy. Almost all of its exports are oil, gas, and other minerals. The ruble is traded in tiny lots in comparison to the $5.7 trillion that is traded every day on foreign exchange markets. The euro and the dollar are overwhelmingly the most important currencies on world foreign exchange markets. Russia owns a small percentage of U.S. foreign debt. It does not have the financial clout it thinks it has. The United States and the European Union have far more collective wealth, income, and global geo-economic reach than Russia—if they care to use it. The EU and the U.S. are also both highly diversified economies. If the world gets tough with the Russian economy, Russia is in deep trouble. It is far more fragile than the economies of the EU and the U.S. It relies almost entirely on oil and gas exports for its export and government revenues. It is a petro-state, not a diversified industrial state.
Putin is playing off of our actual and perceived—albeit temporary—weaknesses. We seem to think that relative economic and military weakness of Russia will cause Putin to back down. We are assuming he will not bet more. My guess is his bets could get bigger and bigger the more tensions build, and Russia’s weaknesses are not really a major part of his advisers’ strategic thinking. He will push for more land, population, and resources for Russia. If this happens, the EU and the U.S. will push for more sanctions and other “costs” to be paid by the Russians for their behavior. Tensions will ratchet up as more is lost in financial and other terms by all sides. Then each side may get tougher and tougher.
This is the sort of environment where epic mistakes are made, and epic costs are borne by many.
I can see this situation barreling toward a very large negative sum game. Are we ready for that?
All opinions expressed are those of the author alone.
Dr. Paul Sullivan is a Professor of Economics at the National Defense University, Adjunct Professor of Security Studies at Georgetown University, and Adjunct Senior Fellow of Future Global Resource Threats at the Federation of American Scientists.