The Wrongologist

What’s
Wrong Today:

The US and
Europe banked on a successful regime-change in Kiev. But Kiev
has a very weak hand, and may not gain control of the dissident cities in
Eastern Ukraine. In fact, it could devolve into civil war.

This sets up a dilemma for President
Obama. He has made it clear that military
force against Russia’s past and possible future actions in Ukraine are not an
option. But he has also made it clear that the US will stand up for Ukraine.
This has led him to implement some sanctions
that have had impact, while threatening more if Russia continues its Ukraine
land grab.

It is also a
dilemma for President Putin.
Since the time of Catherine
the Great, Russia has looked to be a part of the West. Putin is acting like
Russia is willing to move away from the West and to pursue a very different
course. He seems unconcerned by Russia’s ejection
from the G-8. Moving away from the West toward the third world may be a risky substitute for an ambitious leader bent on making a legacy. 

His
takeover of Crimea and the earlier annexation of South Ossetia from Georgia
show that Putin is willing to remain estranged from the West in order to keep
the “Novy
Russia” dream alive. That may have worked well in the last century, but it is
unlikely to work as effectively today. Here’s why:

In the UK
Telegraph, Ambrose Bierce reports that The US has powerful financial tools
that were developed after 9/11. They are financial sanctions that we have yet
to fully implement against Russia. The strategy relies on the US dollar as the
world’s reserve currency, which gives it control over huge portions of the
global banking system. He quotes Juan Zarate, a US Treasury and White House
official who helped spearhead the development of this policy after 9/11:  

Bierce quotes
Mr. Zarate as saying that the US can go it alone with sanctions if necessary,
so that it may not matter whether the EU continues to drag its feet over Russian
sanctions.

The
stealth weapon is a “scarlet letter”, devised under Section 311 of
the US Patriot Act.
Once a bank is accused of money-laundering or supporting terrorist activities, it
becomes radioactive. This can be a death sentence, even if the bank has no
operations in the US, since most global banks will not knowingly defy US
regulators. They are more likely to sever dealings with the target bank.

This
arsenal was first deployed against Ukraine (of all places) in December, 2002.
Its banks were accused of laundering funds from Russia’s organized crime rings.
Kiev capitulated. Burma, North Cyprus, Belarus and Latvia were all forced to
comply with US requirements. The biggest test was Iran. Then-president Mahmoud
Ahmadinejad said of the US sanctions:

We know
that the sanctions regime brought Iran to the bargaining table, and the
framework for an agreement to stop development of their nuclear weapons program
emerged.  

Russia has
experience with the sanctions program. They saw what was possible when the two
countries were “partners” in the fight against Jihadist terrorism. The
Chinese gained experience in 2005, when the US hit Banco Delta Asia (BDA) in
Macao for serving as a conduit for North Korean commercial piracy. China pulled
the plug. BDA collapsed within two weeks. That experience also caused China to tip off
Washington when Mr. Putin proposed a joint Sino-Russian attack
on Fannie Mae and Freddie Mac bonds in 2008, aiming to precipitate a dollar
crash.

However, Russia
is a formidable enemy. It is the world’s biggest producer of energy with a
$2 trillion economy. It is also tightly linked to the German and East European
economies. New sanctions could start as part of a calibrated escalation,
issuing scarlet letters to the Russian banks that are helping Syria.

This could
graduate to sanctions on Russian defense firms, mineral exports and energy,
culminating in a squeeze on Gazprom should all else fail. From Robert
Kahn at the Council on Foreign Relations:

Russia has
$470 billion of foreign reserves, but they have fallen by at least $35 billion
since the Ukraine crisis began. Moscow cannot easily deploy its reserves in an
economic slump without causing its money supply to shrink, deepening a
recession that as the NY
Times reported yesterday, is almost certainly currently under way. Really harsh sanctions could cause an economic dilemma for Mr. Putin.

Compared
to the EU, the US does relatively little business with Russia. Trade between
the US and Russia amounted to just $40 billion last year, or about 1% of total
US trade. If Russian oil, gas, fertilizer,
plastics, chemicals and related trade shrinks, the US will feel
relatively little pain.

However, Bloomberg/Business
Week reports that if the US targets Russia, it could cause collateral damage for a handful of large US corporations. Boeing relies on titanium from Siberia and has invested
$7 billion in Russia since the early 1990s; the company plans to buy $18
billion of Russian titanium over the coming decades. Exxon Mobil also has
a deep partnership with Rosneft, Russia’s state-owned oil giant. So,
there could be some political fall-out ahead for the Obama administration.

Although
the Obama administration had success
with its sanctions levied against Iran, Russia a different animal. Iran was isolated,
and the crushing sanctions that went into effect in 2012 were a combination of
presidential executive orders, UN resolutions, and acts of Congress. Russia,
however, is the 8th largest economy in the world, and Europe is
dragging its feet on sanctions.

So,
dilemmas abound for both Mr. Putin and Mr. Obama.

Americans who
suggest that we have a duty to help Ukraine should think about our over-zealous
promises to other countries, and how they have undermined our duty to American
citizens. Through our lack of foresight, planning and accountability, we have
wasted our blood and treasure.

The
Chinese and Russians aren’t spilling their soldiers’ blood or wasting money
irresponsibly. So let’s not send our money and kids on what looks like another fool’s
errand, this time in Ukraine.

Hit ’em
with sanctions. Hit ‘em hard.