Tag: Ukraine

Book Forum: The Ukraine Crisis and U.S.-Russian Relations

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.

On Sanctions and Negotiations

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.

Crimea after Two Years as Part of Russia: Time to Drop Sanctions

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.

The Failure of Sanctions on Russia

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

Ukraine: The World’s Second-Highest Inflation

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%.

Ukraine's Annual Inflation Rates

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.

Ukraine: The World’s Second-Highest Inflation

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). 

Putin Returns

In a piece published today over at Townhall, I talk about Vladimir Putin’s recent disappearance from the public eye, and why it wasn’t as big a deal as you might think.

The rumors surrounding his ten-day disappearance ranged from the sublime to the ridiculous. Kremlin spokesman Dmitry Peskov was kept busy, scotching speculation that the Russian leader was ill, quashing reports of a power struggle within the Kremlin, and refuting assertions that Putin had been absent to attend the birth of his new child.

When Putin finally reappeared on Monday, he waved away all questions about his absence, simply noting that “life would be boring without gossip.”  We’ll probably never know where Putin was for those ten days, though his pallor implied a minor illness. Given the consistent unwillingness of the Kremlin to divulge information about Putin’s personal life, the whole thing may have been nothing more than the flu.

But it’s worth asking why Putin’s disappearance caused such a media furor. Putin’s centrality to the Russian political system is so well-accepted that commentators and policymakers routinely treat Putin himself as sole representative of the Russian state, psychoanalyzing the man for insight into Russian foreign policy choices. His disappearance, therefore, implied the possibility of chaos in Russia.

Putin is certainly the key figure in Russian politics today, in terms of both personality and power. His ability to mediate between key factions inside the Russian state has allowed him to solidify power, and to govern far more effectively than his predecessor, Boris Yeltsin, ever did. He is still overwhelmingly popular. Yet Putin is not the only player in Russian politics. He has a number of close, senior advisors, many of whom could fill a central role in the system Putin built. His death or incapacitation would be a shock, but it wouldn’t necessarily result in major political changes.

Obviously, we can’t predict the future. After all, who could have predicted when Boris Yeltsin picked a young, unknown former intelligence operative as his presidential successor how successful Putin would be in reining in the corrupt excesses of the Russian state, or how effectively he would undermine Russian democratic reforms?

Yet it is unlikely that Putin’s departure from office, no matter when it occurs, will result in chaos and the collapse of the Russian government. It is even less plausible that his death would result in a pro-democracy or pro-Western protest movement like the one we saw in Ukraine.

Instead, as I argue in the article, it is probable that one of Putin’s close advisors would become his successor, taking over as Russia’s president, probably with a thin veneer of legitimacy in the form of largely uncontested elections. With a similar background and worldview, this successor would simply continue many of Putin’s policies. In short, Putin’s Russia – and its odious foreign policy – probably isn’t going anywhere, even if the man himself does. 

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