Sunday, March 23, 2014

Crimea and punishment:
Putin’s error and its consequences

NEVER MIND the to & fro going on in councils of state of Brussels, Moscow and Washington, the objections of the United Nations Secretary-General (and what’s happening on the bleeding streets of what had been southernmost Ukraine). What may be the most important development in the theft of Crimea by the Russian Federation has taken place in the offices of National Geographic Magazine.

U.S. News & World Report, on Tuesday, reported that “National Geographic will show the peninsula as part of Russia after the Duma officially votes for annexation.” On Friday, engaging in his own March Madness, Russian president Vladimir Putin signed the order of annexation of Crimea, the first territorial expansion of Russia since World War II.

What Juan José Valdés, NatGeo’s geographer, told U.S. News was chilling in its embrace of what, world objections aside, has become something of a fait accompli. “We map de facto,” Valdés said. “In other words we map the world as it is, not as people would like it to be.”

Another, parallel conflict of cartography is developing: U.S. News reports that Rand McNally, the other major mapmaker, is holding out for the State Department’s designation, and Wikipedia and Google Maps are still undecided about which way to go.

But for now, the action that NATO Secretary General Anders Fogh Rasmussen on Wednesday called “the gravest threat to European security and stability since the end of the cold war” is a fact on the ground. The stability of Europe may hang in the balance. So too does the stability of Russia itself, in ways Putin has scarcely considered.

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In the short term, Putin has been hailed by the Russian people as something just short of a messiah, with his domestic opinion polls soaring (we’ll forget for now what it says about a country when it takes a warrantless invasion to get that country’s people feeling good again).

After the Crimean referendum, which saw 93 percent of voters supporting Putin’s move — an election result that would have been an embarrassment to any self-respecting despot — Russian forces have moved quickly to reinforce with military might what the referendum had apparently secured at the ballot.

William Saletan of Slate got Putin’s method of achieving “overwhelming victory” just about right: “First, you narrow the ballot to two choices: joining Russia or increasing Crimea’s autonomy from Ukraine. You exclude the status quo. Then you saturate Crimea with 21,000 Russian troops and put armed men outside polling stations.

“The effects are impressive.”

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THE WORLD waits for Putin’s next move, and the wait itself is troubling. Some believe that the Crimea incursion will be the end of it, that he’s achieved the ultimate prize by returning a region of what was Ukraine back to the Russian orbit.

But by gaining a dramatic expansion of the Russian map basically without firing a shot, there’s every reason to think Putin will keep going, that given the Crimean inch, he’ll go the extra mile and undertake a full invasion of all of Ukraine.

If that’s the logic of the ex-KGB man, Putin will discover that “дьявол кроется в деталях” — the devil is in the details. The Russian leader has tried to impose a generally militaristic solution on what, at the end of the day, is a social and economic dispute. And though he’s won in the short term, Putin faces challenges of economics and infrastructure, challenges neither he or the tender Russian economy are ready for.

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First, the money shots. The Wall Street Journal reported on how the crisis in Crimea may be an opportunity for Ukraine. “The loss of Crimea is a political body blow to the new government from Kiev, but it also relieves Ukraine of an annual $1 billion budgetary drain,” The Journal reported last week.

And Ukraine’s economic gain is already Russia’s loss. On Thursday, Fitch Ratings, the respected investment forecasting concern, revised its economic outlook for Russia downward, and did it in language that couldn’t be more downbeat.

“The current climate is negative for economic growth,” Fitch declared. “Russia was already experiencing a slowdown, with growth falling to 1.3% in 2013 and investment declining. Fitch has revised down its growth forecast to less than 1% in 2014 and 2% in 2015. These projections still rely on a mild upturn in investment, which is now less likely. Indeed, recession is possible, given the impact of higher interest rates, a weaker rouble and geopolitical uncertainty.”

This, of course, follows the block of economic sanctions imposed last week by the United States, including President Obama’s executive order to impose sanctions on key sectors of the Russian economy. That no doubt led Visa and MasterCard to cut operations with Bank Rossiya, the personal ATM for senior Russian officials, and a bank with millions of individual customers.

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ON SATURDAY, The New York Times reported that Russian finance minister Anton Siluanov said “[i]mposition of the sanctions is definitely a negative for the general perception of our country’s economy,” according to the Interfax news agency. He cited more costly borrowing and the continuing pressure on the stock markets, one of which has fallen 21 percent this year.

“Whatever the political consequences, economists say the uncertainty that now hangs over nearly every profitable enterprise in Russia is what poses the gravest threat to the country’s long-term prosperity, rather than any immediate consequence of the specific sanctions,” Siluanov said.

Oleg Ustenko, director of the Center for World Economies and International Relations, was interviewed by The Wall Street Journal on March 18. The Journal reports: “Even before the crisis, Mr. Ustenko said that many investors steered clear of Crimea because of infrastructure problems and high levels of criminal and ‘shadow economy’ activity. Now, it will now be out of the question for international, Ukrainian or Russian private investors to put new money into the region, he said.”

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And then there are the thorny matters of the dependency of Crimea on various parts of Ukraine’s infrastructure. Up to now, Putin’s ace in the hole — his presumed leverage over any actions taken against Russia by the European Union — has been the towering EU dependency on Russia’s oil and gas reserves.

It’s not inconsequential: the Netherlands gets 34 percent of its energy from Russia; Germany counts on 30 percent from Russia; Finland, 70 percent; France, 17 percent; Greece, 40 percent; Spain, 14 percent. The first-blush scenario suggests a European Union stopped literally in its tracks because of a presumed addiction to Russia’s energy exports.

But that’s a double-edged sword. If Russia cuts those exports, it faces the dilemma of being a supplier with no customers — an oil and gas giant with no one to sell oil and gas to in Europe, its captive audience.

Or maybe not so captive: Reuters reported Friday that German Chancellor Angela Merkel has “raised the possibility that U.S. shale gas could eventually be an option for European countries seeking to diversify.” President Obama will discuss this, among other issues, at the EU summit on Wednesday.

“Europe is, I think, 25% or so reliant on Russian gas,” British Prime Minister David Cameron told CNN. “But if you look at Gazprom's revenues, something like 50% of them come from Europe. So, you know, Russia needs Europe more than Europe needs Russia.”

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AND UKRAINE has vast leverage of its own: the electricity and water that Crimea needs and can’t produce on its own. The Journal’s March 16 story clearly outlines Crimea’s deficits:

“The dry, windswept peninsula has few of the resources to support the fabled resorts and ports for which it is valued. With no land bridge to Russia, it relies on Ukraine for about 25% of its gas, 70% of its water, and 90% of its electricity, all of which it imports over a small strip of land that connects it to the mainland.

“The uncertainties over supplies into Crimea as well as political instability will scare off tourists, 70% of whom were from Ukraine last year. Crimean infrastructure and hotels have languished from a lack of investment.”

Ironically, Putin is now locked into a situation where, by virtue of the infrastructure needs of the region Russia has taken by force, he’s almost compelled to follow through with attempting a complete takeover of Ukraine. That would be disastrous for Putin, Russia, and any hope of Russia being the world player Putin fiercely wants “Mother Russia” to be.

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An action taken by Ukraine just days ago will make that a lot more problematic. On Friday, Ukrainian Prime Minister Arseniy Yatsenyuk signed the political component of a trade pact with the European Union — a bold, in-the-Kremlin’s-face move that has true symbolic weight: it was the trade pact that ousted Ukrainian President Viktor Yanukovich refused to sign in November, breaking a pledge to the Ukrainian people.

That refusal to keep his word was exactly what got Yanukovich bounced out of office in the first place. With Yatsenyuk’s tie-up with the West, the stakes are a lot higher if Putin decides to go whole hog with an invasion of Ukraine proper.

Not so many years ago, Russia (or its predecessor, the Soviet Union) took no small pride in characterizing the United States as the world’s swaggering geopolitical cowboy, imposing its will around the globe. With the events of the last two weeks, Russia’s seems ready to take on that role — at a literal cost the Journal said “may amount to $4 billion in the first year alone.”

Which doesn’t seem to bother some decision-makers in the Kremlin. The Journal quoted a “senior official in the Russian government” saying that Putin’s Crimea exercise is “a once-in-a-lifetime opportunity, and no one will quarrel about the price tag.”

But that statement isn’t really insightful, or, frankly, even intelligent. Nobody in his right mind quarrels about the price tag for something before knowing what the final price is.

Image credits: Ukraine map: © 2014 National Geographic. Putin: Reuters. Crimean Simferopol rally: EPA. Fitch logo: © 2014 Fitch Ratings Inc. Bank Rossiya logo: © 2014 Bank Rossiya. Ukraine electric power production: MICEX Index trend line chart: Bloomberg.

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