Vladimir Putin will get away with it again – sanctions would harm us more than them
Vladimir Putin is reputed to have once said that Russia no longer needs nukes; oil and gas make a far better weapon
By Jeremy Warner
8:17PM GMT 03 Mar 2014
"I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest."
This was said by Winston Churchill in the opening stages of the Second World War, yet it remains to this day a remark that should instruct all analysis of Russian foreign policy.
Russia’s effective annexation of Crimea shouldn’t have come as a surprise to anyone with their finger on the pulse of Vladimir Putin’s Russia, which is perhaps why the reaction of Western financial markets has so far been relatively muted for what is said to be the “worst crisis in Europe in the 21st century” – a bit of a tumble in stock markets, a firming up of commodity prices and some limited evidence of flight to safety.
Even the hit taken to the Russian stock market and the ruble is not yet as bad as occurred in similar circumstances when Russia moved into Georgia.
If this is what William Hague, the Foreign Secretary, says it is, with a new Cold War or worse looming, you’d expect a somewhat more panicked reaction. But actually all we’ve seen so far is a smallish precautionary adjustment.
This is not just because Russia’s military response to the Ukrainian crisis has by most accounts been under preparation for some time, and therefore been entirely predictable for those with the right intelligence, but also because it conforms entirely to character and recent precedent. Mr Putin basically knows that as things stand, the West cannot and will not do much about it. Ukraine is not a member of Nato, and indeed cannot apply to join as long as there is an ongoing dispute. By occupying Crimea, Mr Putin has stymied Ukraine’s drift westward.
Chatham House’s Keir Giles warned immediately after the Georgian invasion that Russia doesn’t play by the same rules as the West; it would happen again and again, he predicted, and he’s been proved right.
Mr Putin’s grand ambition is to reassemble as much of the former Soviet empire as he can get away with, together with much of its military might. In the process he’s more than happy to ride roughshod over international law and accepted modern standards of international co-operation. It is small wonder that parallels are already being drawn with Nazi Germany’s invasion of Sudetenland, exaggerated though they might seem. First Crimea, then Eastern Ukraine; who knows where Russia’s ambitions end? Even the streets of Mayfair may not be immune.
Jokes apart, Mr Putin got away with it when he seized Georgia’s Abkhazia and South Ossetia regions in 2008 and he calculates, almost certainly correctly, that he will get away with it again in Crimea. By the same token, President Barack Obama may have miscalculated badly in threatening some form of retaliation. This has succeeded only in further hardening already pretty much rock-solid Russian popular support for Mr Putin’s actions. What’s seen in the West as a disaster looks to Muscovites like a triumph. Mr Obama must now either go through with his threats, or, as he did with Syria, blink. Russia is banking on the US doing the latter, not just because it has form in such matters, but because it is quite hard to see what, in the way of meaningful sanctions, might be imposed.
Obtaining international consensus will be difficult to impossible. Already, Germany shows signs of breaking ranks, and that’s just over the threat to abandon the G8 summit in Sochi. If mere gestures can cause dissent, think what more potent, economic sanctions would do.
Some of the more fanciful suggestions can quickly be dismissed. For instance, even if Turkey could be prevailed upon to close the Dardanelles to Russian commercial and military shipping, it would be a breach of international treaties and is therefore a non-starter for those accusing Russia of something similar. Somehow or other, the moral high ground has to be retained.
Gaining international agreement for other forms of economic sanction would be equally difficult. Both in terms of trade and finance, Russia is now quite highly integrated with the West. For instance, nearly 10pc of Britain’s car exports are to Russia, and an even higher proportion of Germany’s. Move over China, Russia is, in fact, by far the largest and fastest growing of the UK’s emerging markets for exporters. This is one of the reasons why, up until now, David Cameron has been so keen to restore relations with Mr Putin’s Russia. It was meant to help rebalance the UK economy.
What is more, Germany, France and Italy obtain up to 30pc of their gas supplies from Russia, which in turn is even more highly dependent on Europe as a market for its exported oil and gas. Without these sources of income, Kremlin revenues would collapse. The economic pain imposed on both sides by Iranian-style sanctions would therefore be extreme.
Unlike Europe, however, Russia’s capacity for economic hardship is almost limitless, as has been repeatedly demonstrated throughout history. In any contest over pain thresholds, Russia would win hands down.
Alternatively, we could be more selective, and refuse rich Russians with obvious connections to the Kremlin their visas, or freeze their assets. Or we could ban transactions with Russian banks. In extremis, we could even confiscate Chelsea football club. You only have to take this line of argument to such a logical extreme to see how much of a non-starter it really is. Britain thrives on an “open economy” model. It would be shooting itself in the foot by sequestrating the Russians.
Besides, all long-term hope of taming the Russian bear relies ultimately on full integration into the global economy. To return to the trade and travel barriers of the Cold War would be a massive step backwards.
All this explains both why the West is largely impotent over Russian aggression, and why Western markets haven’t so far taken this emerging, geo-political threat more seriously.
Mr Putin is reputed to have once said that Russia no longer needs nukes; oil and gas make a far better weapon. America’s energy revolution has made this less true than it was, but the point still has a great deal of force in Europe. Abundant natural resources provide Mr Putin’s Russia with all the cover it needs to go waltzing around in its own backyard, doing more or less whatever it pleases.
As we all know, financial markets can be amoral places. I don’t mean this in the sense that they are filled with rogues and thieves, but only that concern for the rights and wrongs of any situation is not what drives them. Instead, capital allocation is determined only by clinical assessment of the supposed risks and rewards. At the moment, their calculation is that Mr Putin will not risk a sustained war with Ukraine by invading eastern Ukraine, and that when push comes to shove, the US will do very little about Russian occupation of Crimea.
I may well be eating my words in a few weeks – developing events have a nasty habit of doing that to you – but in all probability Mr Putin will get away with it again, and Crimea will come to be seen as just another bump in the road. In any case, this doesn’t yet look like the occasion for World War Three.
In the meantime, there are more potent threats to the health of financial markets – the growing Chinese slowdown, and the return of mass leverage to US equity markets, to name but two.
