Russia: Economic Vulnerabilities

There is a common perception that Russia’s move on Crimea shows its strength.  A closer examination suggests it is more complicated that it may seem.   Like the bully at the school yard, the aggressiveness conceals weaknesses.

Simply put, Russia felt threatened and for good reason.  The democratic coup in the Ukraine threatened a potentially strategic loss for Russia.  For months, it had been using both carrot and stick to pressure Ukraine, Moldova and Georgia from shifting more to the EU.  Reports indicate that Putin had drawn his own line on Ukraine and made it clear to the EU and US that Russia would not accept a Ukraine in unfriendly hands.

Yanukovych was brought to heel and at the last minute embarrassed and frustrated the EU (and by extension, the US) and struck a deal with Russia.   A democratic coup toppled Yanukovych, and there are reasons to suspect that Europe and/or the US may have helped facilitate the political uprising.  Among the first acts, the new government abolished Russian as the second official language.

There was a realistic fear (on the part of Russia) that the new government would move to retract the  2010 agreement that arguably was struck under duress, to renew and extend the Russia’s lease on the Sevastopol naval base.  The lease, first struck by Yeltsin was to expire in 2017.   Fisticuffs broke out in the Ukrainian parliament over the issue that eventually led to a 25-year extension of the lease.

The annexation of Crimea will make this issue moot, though at a cost.  Prior to the annexation, Putin claims the mantel of the status quo power and forces the US and Europe to be the revisionists.  Annexation puts the shoe on the other foot.  It is a less defendable position in legal and diplomatic terms.

Leaving aside potential Western military options, such as resuming the ballistic missile defense programs, moving NATO troops to Ukraine’s western border,  and even sending new weapons to Ukraine, there will likely be economic consequences.  

The consequences we have in mind are not sanctions by government, but punishment by impersonal market forces.  Ironically, despite some claims that the US military buildup under Reagan led to the bankruptcy of the Soviet Union, arguably more robust analysis would give a more decisive role to the collapse in oil prices in the mid-1980s (e.g., WTI fell below $10 a barrel).