Halting Russia Begins With Economics

Russian President Vladimir Putin’s recent use of force in the Crimean Peninsula has pushed the West into a huddle to determine how best to show Russia that it will not tolerate this reckless land-grab.  Analysts around the world have noticed a warmer relationship emerging between the United States and Europe as policymakers from both regions ensure they are not alone in pushing for a punishment for Russia.  President Obama’s relations with Europe have been strained in recent years due to his “pivot” to Asia and the NSA spying scandals, however the most recent series of events expose one the main reasons close ties between Europe and the US are needed.

Putin convinced the now-ousted Ukrainian President Viktor Yanukovich to back out of an economic deal with the West in preference for one with Russia.  This crisis began with the economy and should be handled with the economy.  The US and the EU should begin looking into cooperative economic means to both bolster their own economies so as to look healthier relative to a corrupt Russian system and assist other Eastern European nations that might be affected by Russian intervention.  The West has three main ways of doing this: push for energy independence in Eastern Europe by developing long-term strategies to wane natural gas needs off Russia; continue with the development and passage of the Transatlantic Trade and Investment Partnership (TTIP); and join in unison to subject biting sanctions on the Russian economy.  If the West wants to put up a front to Russian aggression, it should be one of economic, rather than military, might.

The European Union imports upwards of 35% of its natural gas from Russia, a statistic that weighs heavily over the heads of European policymakers.  The situation is even more dire for countries in Eastern Europe (see figure 1 below).  With some countries importing 100% of their natural gas needs from Russia, any price change could send their respective economies into turbulence with the only way to quell such volatility coming from Mr. Putin.  Already, Russia has spiked the price of natural gas to Ukraine by 44%; other countries remain just as vulnerable to these fluctuations.

Data: Commission of European Communities

The United States is in an extraordinary position regarding its ability to assist with the natural gas needs of Eastern Europe.  The US produces more natural gas than any other country and its production has increased 20% between 2007 and 2011.  Unfortunately, there is only one port in the United States built to transform natural gas into the liquid form for transport; however, there are nine more specially fitted ports set for construction and even more should receive swift investment.  The ports would take a few more years before we see any significant changes in export levels but, if we want to change the exposure of Eastern European energy sources to Russian interference, then we must plan for the long-term.

Many Americans against developing natural gas ports might argue that domestic prices will increase as we enter the global gas market.  Natural gas producers can continue to offer competitive domestic prices by planning ahead with the expectation for increased exports in the next few years.  If the government wanted to assist, it could open new lands up to natural gas exploration.

To further bolster Western unification, the United States and the European Union should move forward with the TTIP.  This agreement would lift the US and EU GDPs by $124 billion and $165 billion, respectively.  This partnership creates would show those in Eastern Europe interested in close ties to Russia that the West offers standards of living and wealth unlike any other nation in the world.  The partnership would also make any collective sanctions all the more painful for Russian diplomats and oligarchs.

The TTIP would combine the two largest economies in the world in the name of democracy, business, and diplomatic cooperation.  The European Union and the United States already rely on each other militarily through NATO, making it only logical that the support should continue on the economic side of the relationship through the TTIP.

One of the most immediate issues that need to be addressed that of financial assistance for Ukraine and Eastern Europe.  Over the past few weeks, the United States, the International Monetary Fund, and other European nations have provided large financial aid packages to the Ukrainian government.  Both the House and the Senate passed a $1 billion aid bill that would provide loan guarantees as well as institute sanctions on a list of Russians closest to Putin.  The IMF has pledged upwards of $18 billion in a single aid package while also freeing up funds for another $9 billion to be provided over the next two years, including large contributions from the UK and Japan.  The West has been impressive in jumping to aid Ukraine, but unfortunately more must be done.  The packages from the US and the IMF would total $28 billion over the next two years, 20% short of the target the Ukrainian finance ministry believes would be needed to avoid default.

Elsewhere in Eastern Europe, the IMF should be looking to deliver aid in other forms of loan guarantees that would reduce pressure to form economic partnerships with Russia.  Until a substantive peace agreement has been negotiated, we should not underestimate the lengths Putin will go to in order to reestablish Russia’s power, therefore we must financially protect our most vulnerable allies in the east.

When Crimea fell into Russian hands on March 18th, the West was outraged at the most credible threat to world security since the end of the Cold War.  The precedent Russia set by performing this illegal land-grab under the guise of protecting ethnic Russians is extraordinarily dangerous.  If the West fails to protect its allies and show developing nations that it will not tolerate such activities, states could very easily begin aggressive behavior towards each other.  The ramifications resulting from the failure of the West to substantively answer Russia’s antagonism would be far-reaching and severely destabilizing.  It is for this reason that the West should produce a unified economic front to show the world that it stands with its principles of a free economy, self-governance, and international cooperation.