March 5, 2014 | By

The Cost-Benefit of Responding to Russia

In the wake of the initial events in Ukraine last week, I wrote about some of the options and challenges if the West were to attempt to prop up the country. Now, after Russia’s move into Crimea and the danger that its military involvement could spread further, there is the question of how to deter a Russian invasion. 

Chicago Council President Ivo Daalder, former US ambassador to NATO, writes that Russian use of force “is a clear violation of international law and of Russia’s own commitments, and a grave threat to stability and security.” President Obama declared that Russia would suffer costs were it to proceed. 

But what costs, exactly? There has been some skepticism about the options that are open to the President. How do we differentiate among the different proposals that have been put on the menu? There are some general principles that can be used to rank the alternatives for a Western response. The ideal policy would prove very costly to Russia and minimally costly to the West. The former requirement is obvious—the policy can only dissuade Russia from misbehavior if it inflicts some real pain, given the importance of Ukraine in Russia’s foreign policy. As to the latter point, it goes directly to the credibility of the policy. If the threat is too painful to carry out or to maintain, Russia will not deem the prospect likely enough to factor into its calculations. The ease of adopting a policy is especially important since the United States would likely need to hold a coalition together—with allied countries of Europe. That task becomes more difficult the more painful the measures are to adopt. 

Consider, along these lines, a number of the prominent measures that have been discussed: 

Military action. This is not really on the table. It would be very costly (not just financially) to the countries of the West. There is no doubt that US forces could inflict serious pain on Russia in such a contest, but it is a war that Russia could not afford to lose. 

International Disapproval. Russia’s moves can be condemned at very little cost, but it is not clear that such condemnation inflicts much discomfort on Russia, either. It is important to reaffirm core principles—such as the importance of national sovereignty and territorial integrity—but this move should not be confused with deterrence. 

Kicking Russia out of the G8. This would result in some loss of prestige for Russia, particularly since it is soon suppose to host a meeting in Sochi. But this does not seem the sort of thing over which Russian President Vladimir Putin would lose much sleep. How costly would it be for the United States? The answer depends on how one assesses some of the foreign policy initiatives of recent years. The Obama administration has taken great pride in expanding the inclusiveness of global summitry. It is not clear to me that the broadening of participation has accomplished much. Beyond summitry, such a move would almost certainly be followed by a cessation of cooperation with Russia on issues such as Syria and Iran. Again, these are initiatives, trumpeted by the administration, that seem to have accomplished relatively little. The costliness of the policy to the United States depends on how one assesses these likely repercussions. 

Defense buildup and bolstering NATO border states. The Obama administration just released a budget that calls for reducing US military power. It had previously pulled back from missile defense in countries like Poland, a NATO member adjacent to Ukraine. These moves could be reversed. The downsizing had fiscal motivations; the missile defense stance was part of an effort to reach an arms-reduction accord with Russia. On the latter, one could particularly question the value of a treaty with Russia, given that Russia in 1994 had signed a treaty guaranteeing Ukraine’s borders. 

Banking and economic sanctions. Many commentators have noted that Russia is far more integrated in the global economy than it used to be. This, in turn leaves it more vulnerable to economic sanctions. There was evidence of this vulnerability in the sharp drops of the Russian stock market and the ruble when the potential for conflict increased. Experience with Iran and North Korea have shown that moves to cut a country off from the international financial system (by denying bank access) can be particularly effective. Thus, these measures could certainly catch Russia’s attention. The difficulty, as noted by Sen. Chris Murphy (D-CT), is that “(u)nilateral US sanctions against Russia are not going to have much an effect if Europe remains a haven for Russian banks and Russian oligarchs to stash and invest their money." Europe has far more extensive economic ties with Russia than the United States and would thus find tough sanctions more painful. 

Targeted sanctions. One relatively modern innovation in sanctions has been to target them at the figures within a target country deemed most culpable, rather than just inflicting pain on the target country as a whole. Such sanctions can involve the freezing of assets or bans on international travel. This variation on traditional sanctions is seen as both increasing the cost to target-country decision makers (who often have the power to insulate themselves from less-focused sanctions) and decreasing the cost to the countries applying the sanctions (who find it painful to see the costs fall on innocents in the target country, as in antebellum Iraq). As with any sanctions, though, the effectiveness hinges on the breadth of participation. Europe could still balk at the prospect of retaliation that imposes hefty costs. 

Exports of oil and gas. In the examples above, a principal means by which Russia might retaliate would be through its role as a principal supplier of gas to Europe and Ukraine. In the past, there was relatively little the United States could do to counteract this. That has changed, though, with recent energy developments. The United States has become a major gas producer. However, it maintains a range of restrictions on the export of oil and gas. The crisis in Ukraine has increased calls for loosening or lifting those restrictions. This is a policy that would impose costs on Russia—diminishing its economic power over European buyers—and benefit the United States. Such a policy could not be implemented immediately, but it could shift the balance of power over time. 

This list is not necessarily comprehensive, nor is this an exhaustive consideration of the knock-on consequences that each action might have. The fear of unknown potential repercussions can always serve as a justification for inaction. President Obama has promised that Russian actions will bring costs. President Putin seems to have judged that the United States is eager to avoid involvement. The credibility of the US threat may hinge on the costs and benefits of the measures the President selects.

About

Phil Levy is senior fellow on the global economy at The Chicago Council on Global Affairs. Previously he was associate professor of business administration at the University of Virginia’s Darden School of Business. He was formerly a resident scholar at the American Enterprise Institute and taught at Columbia University’s School of International and Public Affairs. From 2003 to 2006, he served first as senior economist for trade for President Bush’s Council of Economic Advisers and then as a member of Secretary of State Rice’s Policy Planning Staff, covering international economic matters. Before working in government, he was a faculty member of Yale University’s Department of Economics for nine years and spent one of those as academic director of Yale’s Center for the Study of Globalization.

His academic writings have appeared in such outlets as The American Economic ReviewEconomic Journal, and theJournal of International Economics. He is a regular contributor to Foreign Policy magazine’s online Shadow Government section and writes on topics including trade policy, economic relations with China, and the European economic crisis. Dr. Levy has testified before the House Committee on Foreign Affairs, the Joint Economic Committee, the House Committee on Ways and Mean, and the US-China Economic and Security Review Commission. He received his PhD in Economics from Stanford University in 1994 and his AB in Economics from the University of Michigan in Ann Arbor in 1988.

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