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Victor Rud: SANCTIONS MUST BE SECONDARY - A rebuttal to Roger Altman's Feb. 10, 2015 article in the Wall Street Journal "Stopping Putin Without Firing a Shot"

13 Feb 2015 2:01 PM | Myroslaw Smorodsky (Administrator)

SANCTIONS MUST BE SECONDARY

Victor Rud: Rebuttal to Roger Altman's Feb. 10, 2015 article in the Wall Street Journal "Stopping Putin Without Firing a Shot" 
[WSJ article reprinted at bottom] 

 Mr. Altman argues that economic sanctions should trump military defensive assistance to Ukraine. ("Stopping Putin Without Firing A Shot", WSJ February 10, 2015.) While it’s encouraging that a prominent player in the US financial market generally understands the gravity of the matter, his argument is untenable.  Sanctions are an adjunct to military assistance, but cannot be in substitution for it.  Standing alone, they are a siren song for digression and compounding of the inevitable.

Preliminarily, Mr. Altman posits that providing defensive arms to Ukraine "might give Moscow a further basis for its historical aggrievement ." This unwittingly endorses a pivotal component of Putin’s long-standing dezinformatsia. Rafael Lemkin, author of the UN Genocide Convention, saw Russia as the apex predator state, the ultimate killer of nations.  How else did it bloat out to become the largest country in the world, occupying fully one third of Asia?  Kolyma, one of several a sub-regions of one of its regions (Siberia), is larger than France, Spain, Japan, Germany, Italy, United Kingdom, Greece, Sweden and North Korea, combined; and Kolyma was only one of several concentration camp regions.  It is Ukraine, the Baltic nations, Byelorus, the nations of the Caucasus and Central Asia that have a "historical aggrievement" against Russia for centuries of conquest, mass murder, slave ships, death marches, atrocities, war crimes, homicidal russification, recreational torture, assassinations, genocide of all stripes, plunder, predation, experimental executions, gang rape, stupefying terror, thought crime and forced starvation.  Russia’s "historical aggrievances" reverses that history, condemns the victim as the perpetrator and sanctifies the perpetrator as victim. The prime exemplar of virtual reality, a hologram floating on air.  

The springboard for the sanctions argument is that for Putin the consequences of Western sanctions are or can be made greater than the consequences of Ukraine existing as a democratic, sovereign state.  That assumption is wrong, and to the very opposite effect.  Ukraine is the largest country in Europe, and anchors one of Europe’s oldest democratic traditions.  More than seventy years before Philadelphia, Ukraine produced a constitution incorporating the very essentials of democratic governance that were later repeated in the US constitution.  Moscow’s conquest and rule over Ukraine was pivotal to the formation and viability of the Soviet Union.  The bookend is that Ukraine’s renewal of its independence in 1991 (stunningly, in opposition to Washington’s wishes), catalyzed the dissolution of the USSR.  Ukraine saved the West.  The existence of a free and democratic  Ukraine thus expands the prospects for liberty in Russia itself.  Putin would then become an unperson with greater alacrity than in the face of the "pressures" that sanctions presumably would cause.

Second, Western profit imperative fueled its embrace of the Russian economy and financial system.  The resulting dependency of Russia, Mr. Altman says in essence, allows for the very leverage of Western sanctions.  And what of the opposite dependency?  Western democracies will abandon their petty parochialisms in the interest of stronger, longer lasting and more consequential sanctions?  At the expense of their own economies and opinion polls?  Even with the modest sanctions thus far, we have seen the centrifugal forces at work and growing in Europe; and not only on the economic side, but the political as well. As of this writing, France’s delivery to Russia of its Mistral attack ships is evidently back on track.

Moreover, there is nothing in the historical experience of Western/Soviet/Russian relations that supports Mr. Altman’s argument. Historically, it was Western technology and capital, with the US in the lead, that laid the economic and financial bases for the Soviet Union, and thereafter periodically supplied it with a life support system of technology and other assistance. In the 1920’s and 30’s it was the American engineer who, after the Great Sun, was god in the Soviet Union.  Ford’s River Rouge Plant became the Gorki Auto Works, manufacturing cars for the NKVD.  U.S. Steel’s Fairless Plant became the Magnitagorsk Iron & Steel Works, and the TVA’s Appalachian Electrification Project became the Dnipro Hydroelectric Complex.  Calvin Coolidge said "the business of American is business," and sooner than later the business and financial lobby will hold sway.

Third, as to the efficacy of Western sanctions thus far, Mr. Altman asserts that the sanctions "are working" and recites their impact on the Russian economy.  The statistics may scroll impressively across a financial news screen.  But where is the nexus between the sanctions and their effect on the Russian invasion, occupation, annexation, atrocities and terror? We are offered none.  Is the point perhaps that without the sanctions already in effect the situation on the ground would have been even more egregious?  No, that is surmise, speculation and conjecture. The facts are that in the face of sanctions, the horrors not only continue but have accelerated.  How, exactly, will sanctions stop the Kremlin, and then compel Putin to--somehow--undergo an epiphany and go home?  The "somehow" is merely an assumption, a hope, that sanctions will lead to consequential pressure (whatever that means) on Putin.  If so, then what of the very same "pressure" if Putin simply puts on his shirt and puts his horse in reverse?  That pressure was 80% positive when he had it in drive.  

Fourth, what if sanctions don’t work?  Never mind defining what that means, at a certain point reality intrudes.  Then what?  At that point . . . finally . . .  provide Ukraine with defensive weapons?  Too late.

Fifth, although once in his article Mr. Altman  mentions  a Russian "pull back", as thus far implemented and as further articulated by Mr. Altman, sanctions address only the sustainability of aggression.  With such a limited formulation, sanctions sanction (read, accept) aggression up to date. The title, after all, of Mr. Altman’s piece is "Stopping Putin", not reversing his conquest.  If, as Mr. Altman writes, sanctions will lead to the epiphany that "further aggression isn’t sustainable," what about the aggression and atrocities up to date?  How, exactly, will sanctions reattach the body parts from Malaysia Flt. MH-17?  

We shuffle our feet, clear our throats, and with furrowed brow profess concern over renewed Russian treachery and aggression.  But after WWI, the US and Europe ignored Ukraine’s call for assistance as it was invaded by Russia, international treaties be damned.  Thereafter, on November 16, 1933, the US extended diplomatic recognition to the USSR, at the very time that Stalin was forcibly starving millions of Ukrainians death in order, as wrote Oxford’s Norman Davies, to forever inter any notion of statehood.  After WWII, survivors of that horror who had fled to the West were forcibly "repatriated" to the rodina and death.  With the dissolution of the USSR having been triggered by Ukrainian independence, Washington stripped Ukraine of virtually its entire weaponry, destroying it or turning it over to Ukraine’s historic persecutor.  Karl Marx had it right: "The ignorance, the laziness, the pusillanimity, the perpetual fickleness and the credulousness of Western governments enabled Russia to achieve successively every one of her aims."  If we don’t get it straight this time, if the West yet again condemns Ukraine to the coffin air of Lubyanka, then the West will ricochet back to the past, to M(utual)A(ssured)D(estruction) (remember that?), with all its implications.  This time, however, add ISIS, China and North Korea to the brew.
 
Victor Rud, Esq.

Chairman, Committee on International Affairs & Foreign Policy
Ukrainian American Bar Association.
 


OPINION
Stopping Putin Without Firing a Shot
There is a point at which a currency or banking collapse will prevent any major nation from functioning.

By ROGER C. ALTMAN
Feb. 10, 2015 7:12 p.m. ET

The intensified fighting in Ukraine has discouraged and angered the West. Many are concluding that neither economic sanctions nor diplomacy—including last Friday’s emergency visit to Moscow by Germany’s Angela Merkel and France’s François Hollande —can deter Russia’s advance there. So there is now a movement toward supplying defensive arms, such as antitank weapons, to Kiev. Even if this might give Moscow a further basis for its historical aggrievement and trigger a wider conflict.

But there is a better and more powerful strategy available. One which could halt the Ukrainian conflict and prevent further Russian adventurism in the Baltics or elsewhere. That is to recognize Russia’s deepening economic and financial crisis, tighten the financial sanctions further and then let the combination of sanctions and the global capital markets force Moscow to pull back.

These markets have turned sharply against Russia already, damaging its economic, financial and banking system—and the scale of that harm is just beginning to come into view. Many think that Mr. Putin can ignore these pressures indefinitely. I doubt it.

I doubt it because these financial markets are now the most powerful force on earth. Far stronger than any army or store of weapons—and capable of inducing changes that diplomacy or arms could never achieve. Remember the collapse of Mexico in 1994 and Thailand 1997. In this age, if the currency of a major nation collapses or its access to borrowing ends, it just can’t function.

Look at the damage in Russia over just the past three months. According to Bloomberg, the ruble has fallen 50% against the dollar over the past year. Private capital is fleeing the country at a $150 billion annual rate. Local interest rates have soared to 15%. Russian gross domestic product is now projected by the International Monetary Fund to fall 3% this year. The central bank has already infused $33 billion to keep the shaky banking sector afloat.

In addition, net new direct foreign investment has been zero for a year and new Western financing has evaporated. Oil prices have fallen more than 50%, and this has weakened Russia’s one strong industry and the state budget that depends on it. The oligarch and state-controlled corporate sector is wobbling under heavy, foreign-currency-denominated debt burdens. Standard & Poor’s downgraded Russia’s credit to junk status on Jan. 26.

Clearly, the current sanctions, which prevent Russia’s state-owned banks and corporations from borrowing in Europe or America, are working. Both explicitly, in forbidding such borrowing, and implicitly, in further turning the capital markets against Russia.

This was a profoundly weak country to begin with. Russia’s GDP equals that of Italy. Its population is small (140 million) and declining: More than 500,000 citizens have fled over the past three years, and life expectancy is falling. The level of corruption is staggering. Russia’s oil fields are mature and require capital and Western technology even to keep production flat. Neither of these inputs is available now. The liquid portion of Moscow’s foreign-exchange reserves, which the Peterson Institute has estimated at roughly $200 billion, is not large relative to the $33 billion that was spent in December to defend the ruble.

Many Russia experts note the deep and sad capacity of the Russian people for suffering. They point out that Mr. Putin’s popularity, boosted by the annexation of Crimea and the Ukraine conflict, is nearly 80%. They therefore conclude that he is not sensitive to economic and financial pressures.

But Russia is not North Korea. It is a full participant in global financial markets. Its currency is traded globally, as is its stock market, and its corporate sector borrows externally in large amounts. There is a point at which a currency or banking collapse will prevent any major nation from functioning.

That is why the U.S. and the EU should tighten the sanctions further before moving to supply arms. Russia has no method of countering sanctions, unlike its military-response potential. Preventing American and European investors from holding its sovereign debt is a logical next step. If it becomes necessary, barring Russian banks from the Swift system of international payments, for example, would be crippling. 

More broadly, the more Mr. Putin extends the fighting in eastern Ukraine, the more the financial markets will ratchet up their own pressure on Russia. This may squeeze Russia to the point where its entities cannot borrow abroad, all private capital is leaving, the banking system becomes insolvent and no one wants the currency. At that point foreign aggression isn’t sustainable. Not even for Mr. Putin.

Mr. Altman is the founder and executive chairman of Evercore, and was deputy U.S. Treasury secretary in the Clinton administration, 1993-94.

 

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