Yesterday the New York Times reported that in early April Ukraine’s president, Petro Poroshenko, ordered his chief federal prosecutor to halt four anticorruption investigations involving Ukrainians connected to Paul Manafort, Donald Trump’s former campaign chairman and a central figure in Robert Mueller’s investigations here in the United States.
Perhaps not coincidentally, Ukraine announced on April 30 that it had received 210 Javelin antitank missiles, purchased from the United States to bolster its fight against Russian proxies in the Donbass region of Ukraine. Though the State Department initially approved the sale in December and Pentagon gave its blessing in March, Trump himself was reluctant to arm Ukraine given the potential effect on the U.S. relationship with Russia.
The burning question is whether anyone in the Trump administration suggested this course of action to Ukraine. Ukraine, of course, is free to pursue whatever policies it deems necessary to defend itself from encroachments by Russia. But to use arms sales to interfere with the Mueller investigation would represent obstruction of justice on a truly epic scale.
To be sure, Ukraine already had plenty of motivation to help the Trump administration. If Ukraine shuttered the investigations to curry Trump’s favor, it was only one of several efforts designed to garner American support. Concerned that Trump’s affection for Vladimir Putin would translate into anti-Ukraine policies, Ukraine has gone out of its way to butter up Trump since he took office. Ukraine has promised U.S. construction firms contracts for future infrastructure projects in Donbass, brokered a $80 million coal deal with the U.S., signed a $1 billion deal with GE Transportation for new locomotives, and hired former Republican National Committee chairman Haley Barbour to help Ukraine lobby the Trump administration.
But even if this has nothing to do with the Mueller investigation, the sale of Javelin missiles to Ukraine reflects both poor judgment on the part of the Trump administration and a longstanding neglect of the potential negative consequences of American arms sales.
Arming Ukraine makes little strategic sense. A couple hundred antitank missiles will not alter the military balance between Ukraine and Russia in Donbas in any meaningful way. Russia can quickly move additional forces and equipment to the region at will. The bigger danger is that arming Ukraine will in fact prompt Russia to do just that, thereby risking an intensification of the conflict and potentially leading to more casualties than the 10,000 already suffered. It is clear, in fact, that this is exactly how Russia sees things. In December after the State Department approved the sale, Russian Foreign Ministry spokesperson Maria Zakharova said, “The United States is, in fact, encouraging the resumption of large-scale bloodshed in Donbass, where the situation is already on the edge due to continuing shelling from the Kiev-controlled side…Washington, in fact, becomes an accomplice in the killing of people.”
Arming Ukraine also raises the political stakes and risks turning Ukraine into a test of the president’s foreign policy effectiveness, increasing the likelihood of the United States getting entangled more deeply in the conflict. It seems clear that encouraging greater U.S. involvement is a key element of Ukraine’s strategy. Major General Volodymyr Havrylov, Ukraine’s defense attaché to the U.S., told a reporter that the missiles were “a political symbol that allows others to understand that Ukrainian security is important to the U.S.” The risk of entanglement is not trivial given the presence of powerful advocates for doing more in the U.S. Congress. Senator Bob Corker, chairman of the Senate Foreign Relations Committee approved of the sale back in December, telling the press that “This decision was supported by Congress in legislation that became law three years ago and reflects our country’s longstanding commitment to Ukraine in the face of ongoing Russian aggression.”
More broadly, the dangers generated by U.S. arms sales go well beyond Ukraine. Ukraine is just one of many risky customers to whom the United States has sold advanced weapons over the past fifteen years. In pursuit of short-term foreign policy influence and economic gains, the United States has turned a blind eye to what happens after the deals are done. Among the list of questionable clients are countries like Saudi Arabia, which has used American weapons in its disastrous intervention in Yemen; Iraq, whose army managed to provide the Islamic State with three army divisions’ worth of American tanks, armored vehicles, and infantry weapons; and Nigeria, whose human rights record, internal conflicts, and overall state fragility call into serious question whether it will use its latest purchase of Super Tucano attack aircraft in a responsible manner.
Time will tell if the smoke surrounding the sale of Javelin missiles to Ukraine stems from collusion to obstruct the Mueller investigation or simply misguided foreign policy making. Either way, arming Ukraine reflects a reckless approach to the use of arms sales that the Trump administration seems all too eager to embrace.
Nearly three years ago, Ukraine’s Kremlin-backed president fled the country’s capital amidst massive anti-government protests. The series of events to follow would alter the geopolitical landscape of post-Soviet Eurasia, destabilize security within the wider region and pose a major challenge for U.S.-Russia relations.
Following an unrecognized referendum in eastern Ukraine, Russia proceeded in its annexation of the Crimean peninsula in a brazen act transgressing the notion of Westphalian sovereignty. The United States and the European Union responded by imposing sanctions on Russia, with debatable efficacy, while two ceasefire agreements have failed to end a protracted and bloody conflict on the ground.
Against this backdrop, the Trump administration has indicated a willingness to lift Russian sanctions in order to improve bilateral relations—a move which would be unpopular in Congress. Simultaneously, there is continued insistence from the United States and Europe that Russia must return control of the Crimea to Ukraine—a stipulation which Russia refuses to consider. Where do U.S.-Russia relations go from here?
Prior to looking into the policy options, an upcoming Book Forum presenting the recently released book Everyone Loses: The Ukraine Crisis and the Ruinous Contest for Post-Soviet Eurasia (Routledge, January 2017) will first examine how U.S.-Russian relations arrived at such a precarious point in the first place.
The book’s authors, Timothy J. Colton (Morris and Anna Feldberg Professor of Government and Russian Studies, Harvard University) and Samuel Charap (Senior Fellow for Russia and Eurasia, International Institute for Strategic Studies; Former Senior Advisor, U.S. Under Secretary of State for Arms Control and International Security), argue that a series of grave strategic miscalculations, resulting from years of zero-sum behavior on the parts of both Russia and the United States, have destabilized the post-Soviet Eurasian sphere to the detriment of the West, Russia and the countries caught in the midst. With regional and international security now deteriorated and all parties worse off, Colton and Charap conclude that all governments must commit to patient negotiation aimed at finding mutually acceptable alternatives, rather than policies aimed at securing one-sided advantages.
Please join us for what is sure to be an insightful and comprehensive foray into the roots of the Ukraine crisis during Cato’s Book Forum on March 10th, featuring co-author Samuel Charap with comments provided by Emma Ashford, Cato Institute Research Fellow. You are invited to register for the event here.
Rumors are flying in Washington that Donald Trump is seriously considering an executive order which would lift at least some of the current U.S. sanctions on Russia. As with everything else the new president has ordered this week, details are sparse. But if the executive order would indeed lift sanctions unilaterally, with no attempt at negotiation, Trump won't be sending a message of strength, but one of weakness.
I've never been a proponent of the U.S. sanctions regime. In fact, I've written extensively about the flaws of the sanctions regime on Russia, and even argued that they should be lifted before they calcify into a permanent impediment to improving relations with Russia. In Foreign Affairs last year, I argued that the sanctions have largely been a failure: they have been costly to U.S. and European business interests, and have not altered Putin's aggressive policies towards Ukraine.
Nor is there good reason to believe that the sanctions will induce policy change in future. The underlying logic behind sanctions is to cause enough economic pain to the target state that leaders are compelled to change their policies. But though the Russian economy is in a terrible state, most of that damage was caused by falling oil prices, not by sanctions. Vladimir Putin was even willing to hurt his own people further by initiating countersanctions against European agricultural products, a move which served to substantially increase food prices for ordinary Russian citizens.
These conclusions are unfortunately supported by a substantial body of academic literature, which overwhelmingly finds that sanctions are rarely successful on issues of 'high salience,' such as questions of war and peace. Sanctions may be a useful tool for signaling to other states that their behavior is unacceptable, but when linked to unrealistic goals, they place policy makers in a difficult situation. Lifting them may be seen as a sign of weakness, yet there is little to be gained from leaving them in place. The path of least resistance can therefore end in situations like the half-century Cuban Embargo.
All of this suggests that policymakers should be a lot more cautious about implementing sanctions in the first place, as it may place them in a difficult situation further down the road. Indeed, academic studies also suggest that sanctions are not so much an alternative to conflict as a first step on the road to war: they serve to raise the stakes, and make it harder for policymakers to back down.
The problem is particularly acute in this case. Though the impact of Russian disinformation on the outcome of the presidential election remains unclear, an investigation is ongoing into whether advisors to the Trump campaign had contacts with Moscow. Donald Trump’s willingness to seek a better relationship with Russia is a solid policy choice, but unilateral concessions of this sort will only serve to intensify the idea that he is somehow beholden to Moscow.
Ultimately, understanding the flaws of sanctions cannot explain how to resolve this dilemma. There is no good solution for today’s U.S.-Russian relations, just a series of poor choices. The best of these bad options is an open process of negotiation. Russian leaders may not be willing to abandon Crimea or make other high profile concessions in exchange for the lifting of sanctions. But the sanctions are causing some economic damage, enough that Russian leaders do want them lifted.
A process of negotiation which proposes to lift most of the sanctions in exchange for concessions in other policy areas – implementation of the Russian portions of the Minsk Agreement, Russian concessions on ending the Syrian civil war, or a variety of other issues – is a way for the Trump administration to end the sanctions regime without making a unilateral concession. For the man who wrote the Art of the Deal, this would surely be a better solution.
Two years ago Russia detached Crimea from Ukraine. Since then the Western allies have imposed economic sanctions, but to little effect. No one believes Crimea, Russian until six decades ago, is going back to Ukraine.
Yet the European Union called on other countries to join its ineffective boycott. However, most nations have avoided the controversy. They aren’t going to declare economic war on a faraway nation which has done nothing against them.
Although Washington, with less commerce at stake, remains among the most fervent advocates of sanctions, Europe is divided over the issue. Opposition has emerged to routine renewal in July of restrictions on Russia’s banking, energy, and military industries. Particularly skeptical of continued economic war are Cyprus, Greece, Hungary, and Italy.
Sanctions supporters insist that Russia more fully comply with the Minsk peace process and end support for the separatist campaign in Ukraine’s east. “Today Russia faces a choice between the continuation of economically damaging sanctions and fully meeting its obligations under Minsk,” contended Secretary of State John Kerry.
Yet the armed conflict has ebbed, political crisis fills Kiev and some Ukrainians aren’t sure they want the separatists back. Indeed, Oksana Syroyid, Deputy Speaker of Ukraine’s Rada, has blocked passage of a constitutional amendment providing autonomy for the Donbas region, explaining: “We need to stop thinking of how to counter Putin, or how to please all our partners.”
Brussels faces the unpleasant possibility of Russia fulfilling its responsibilities while Ukraine breaks the deal. “Both sides need to perform,” complained Germany Foreign Minister Frank-Walter Steinmeier.
Targeted sanctions against named individuals and concerns have a certain appeal. However, there is little evidence that they are more effective than broader measures.
The latter have hurt the Russian public without turning many of them against their government. Moreover, Western penalties have discouraged, even reversed, liberalization of the Russian economy, as businesses have grown even more dependent on government support.
The belief that imposing sanctions a little longer will force Moscow to capitulate reflects the triumph of hope over experience. Rather than reflexively continue sanctions, the Western states should rethink their policy toward Russia.
Vladimir Putin isn’t a nice guy, but that hardly sets him apart from other authoritarians. Geopolitically Ukraine matters far more to Moscow than to Europe or America. Russia always will spend and risk more to protect its perceived security interests next door.
And the West did much to challenge Moscow, including encourage a street revolt against a democratically elected president. That still didn’t justify Russia’s brutal actions to dismember its neighbor, but Putin acted predictably and rationally. He is neither Hitler nor Stalin reincarnated, but a traditional Tsar. Putin has never demonstrated a desire to swallow non-Russian peoples.
Thus, I argued in Forbes, “the allies should negotiate their way out of the sanctions box in which they are stuck. They could drop economic war, promise to stop expanding NATO along Russia’s border (most importantly, to Ukraine), reduce military support for Kiev, and encourage Ukraine to look both ways economically. Moscow could drop support for Ukrainian separatists, cooperate with restructuring Kiev’s unsustainable debts, accept Ukrainian economic ties with the EU, hold an internationally monitored status referendum in Crimea, and accept whatever outcomes emerge from the messy Ukrainian political system.”
Of course, Kiev is independent and free to decide its own future. But Ukrainians should choose their own course while fully aware that no one in the West is prepared to initiate all-out economic war, let along military conflict, with nuclear-armed Russia over Kiev’s status.
The U.S. and Europe shouldn’t allow the perfect to be the enemy of the good in policy toward Russia. At most economic sanctions act as a moral statement, but one better made through other means.
At the same time, there are many important issues in which the West would benefit from Russian assistance. After two years, it’s time to make a deal with Moscow.
On Friday, European Union envoys agreed to extend sanctions on Russia, continuing the restrictions placed on Russian businesses and citizens following Russia’s 2014 invasion of Crimea and aggression in Eastern Ukraine. The sanctions prevent some of Russia’s largest companies from raising capital in the West, restrict the export of technology and technical services for unconventional oil and gas drilling, and freeze the assets and travel of Russian elites.
Unfortunately, as I show in a study published in the January/February edition of Foreign Affairs, sanctions on Russia have been largely unsuccessful. The Russian economy is certainly hurting, but most of this damage was done by the extraordinary drop in oil prices over the last year:
The ruble’s exchange rate has tracked global oil prices more closely than any new sanctions, and many of the actions taken by the Russian government, including the slashing of the state budget, are similar to those it took when oil prices fell during the 2008 financial crisis.
And economic damage itself isn’t necessarily the best measure for sanctions success. Ultimately, sanctions are a tool of economic coercion and statecraft. If they do not cause a policy change, they are failing:
After the initial round of sanctions, the Kremlin’s aggression only grew: Russia formally absorbed Crimea and upped its financial and military support for pro-Russian rebels in eastern Ukraine (including those who most likely shot down the Malaysia Airlines flight).
The performance of modern targeted sanctions –which promise that damage will be narrowly focused on elites rather than the population in general – is also questionable in the Russian case, where the Kremlin has effectively redirected the economic burden of sanctions onto the population:
By restricting access to international financing during a recession, the sanctions have compounded the fall in oil prices, requiring Moscow to slash spending on health care, infrastructure, and government salaries, which has created economic hardship for ordinary Russians. The crash of the ruble, meanwhile, has not only destroyed savings but also increased the monthly payments of those who hold mortgages denominated in foreign currencies.
Perhaps worst of all, the sanctions are costing US and European companies billions of dollars in compliance costs, lost business and broken contracts:
The brunt is being borne by Europe, where the European Commission has estimated that the sanctions cut growth by 0.3 percent of GDP in 2015. According to the Austrian Institute of Economic Research, continuing the sanctions on Russia could cost over 90 billion euros in export revenue and more than two million jobs over the next few years. The sanctions are proving especially painful for countries with strong trade ties to Russia. Germany, Russia’s largest European partner, stands to lose almost 400,000 jobs.
Ultimately, as I argue in the article, the success of sanctions can be judged by a variety of standards. Yet by virtually all of them, they are failing. This is a blow for those – myself included – who seek restrained policy options to resolve the crisis in Ukraine. Yet given the costs to U.S. businesses, it’s probably time for policymakers to consider whether continuing sanctions on Russia is really the best option, or whether there are more effective diplomatic or economic policy tools we can use instead.
You can read the whole article, with more data and policy recommendations, over at Foreign Affairs.
I estimate the current annual implied inflation rate in Ukraine to be 92%. This is the world’s second-highest inflation rate, far lower than Venezuela’s 480% but slightly higher than Syria’s 75%.
I regularly estimate the annual inflation rates for Ukraine. To calculate those inflation rates, I use dynamic purchasing power parity (PPP) theory. I computed the 92% rate by using black-market exchange rate data that the Johns Hopkins-Cato Institute Troubled Currencies Project has collected over the past year.
A recent front-page feature article in the New York Times attests to the severity of Ukraine’s inflation problem. Danny Hakim’s reportage contains many anecdotes that are consistent with my inflation estimates based on PPP. For example, chocolate that used to cost 80 Ukrainian hryvnia per kilogram has dramatically increased to 203 Ukrainian hryvnia per kilogram over the past 17 months – a 154% increase. On an annualized basis, this amounts to an inflation rate of 93% – almost exactly the same number I obtained when applying the scientific PPP methodology.
As evidence of the Alice in Wonderland nature of Ukraine’s current state of affairs, President Petro Poroshenko penned an op-ed in the Wall Street Journal on June 11. The title of his unguarded, gushing piece perfectly reflects the sentiments contained in his article: We’re Making Steady Progress in Ukraine, Despite Putin.
The President failed to even allude to Ukraine’s inflation problem. He is apparently unaware of the harsh realities facing the citizens of his country. He is also apparently unaware that his finance minister, Natalie Jaresko, whom he praises to high heaven, was recently in Washington, D.C., where she used a new Ukrainian law as cover to threaten a sovereign debt default. The reportage on these threats appeared in London’s Financial Times on June 11, the same day the Wall Street Journal published President Poroshenko’s op-ed.
It is time for Ukraine to get real.
Venezuela has the dubious honor of registering the world’s highest inflation rate. According to my estimate, the annual implied inflation rate in Venezuela is 252%.
The only other country in which this rate is in triple digits is Ukraine, where the inflation rate is 111%. The only encouraging thing to say about Ukraine’s shocking figure is that it’s an improvement over my February 24th estimate of 272%—an estimate that attracted considerable attention because Matt O’Brien of the Washington Post understood my calculations and reported on them in the Post's “Wonk blog.”
As a bailout has started to take shape in Ukraine, the dreadful inflation picture has “improved.” Since February 24th, the hryvnia has strengthened on the black market from 33.78 per U.S. dollar to 26.1 per U.S. dollar. That’s almost a 30% appreciation (see the accompanying chart).
As night follows day, currency strength is followed by lower inflation. When inflation rates are elevated, standard economic theory and reliable empirical techniques allow us to produce accurate inflation estimates. With free market exchange-rate data (usually black-market data), the inflation rate can be calculated. The principle of purchasing power parity (PPP), which links changes in exchange rates and changes in prices, allows for a reliable inflation estimate.
To calculate the inflation rate in Ukraine, all that is required is a rather straightforward application of a standard, time-tested economic theory (read: PPP). Using black-market exchange rate data that the Johns Hopkins-Cato Institute Troubled Currencies Project has collected over the past year, I estimate Ukraine’s current annual inflation rate to be 111%.
That rate is much higher than the "official" rate of 34.5%. Both the International Monetary Fund’s Extended Fund Facility for Ukraine (which has recently been approved) and Ukraine’s debt rescheduling negotiations (which have just commenced) are sitting on quicksand. Programs and negotiations based on a false premise are always treacherous affairs.