How Should the European Union Respond to Russia?
by Anders Aslund, Peterson Institute for International Economics
Op-ed in the European Voice. Reposted with permission.
March 3, 2014
© 2014 European Voice
On Thursday, February 27, Russian soldiers in unmarked uniforms ended a quarter of a century of post–Cold War peace by occupying Ukraine's Crimean peninsula without any declaration of war or public justification. The European Union might not be a military superpower, but it is an economic one, unlike Russia, whose leader has clearly underestimated his country's own economic weakness.
Russia's attack on Crimea was naked military aggression. Only on March 1 did President Vladimir Putin ask the Federation Council to rubber-stamp his right to invade Ukraine. He claimed that “Russia retains the right to protect its interests and the Russian-speaking population of those areas.” But none of their rights had been violated. The Russian troops took over the Crimean parliament and appointed the leader of a tiny pro-Russian party "prime minister" of Crimea as their stooge.
Apparently, Putin sees Ukraine's democratic breakthrough, spearheaded against authoritarian kleptocrats, as a direct threat to himself. Moreover, the Ukrainian democrats have declared that they prefer European integration to his protectionist and neo-imperialist Eurasian Union, effectively killing it. Finally, ordinary Russians would like to see their old holiday paradise incorporated into Russia: A draft law on annexation of Crimea has already been registered in the Russian State Duma.
The consequences of this Russian-Ukrainian war will be costly and unpredictable. Ukraine's military forces are no walkover. Neither side wants to start shooting. Already, though, Russia has turned its main neighbor into its main enemy.
The Kremlin has also transformed Russia into a pariah state, with which most international agreements appear meaningless. In invading Crimea, Russia has violated, among others, the UN Charter, the Helsinki Final Act, the Budapest Memorandum on Security Assurances for Ukraine of December 1994, the Russian-Ukrainian Friendship Treaty of 1997, and the Sevastopol Naval Base Agreement of 1997.
It has also refused to accept consultations with Ukraine, as required by the Budapest Memorandum.
The issue today is how the West, the European Union, and the United States will rein in Russia. The G-7 has already cancelled the G-8 summit planned for Sochi in June. The West needs to raise Russia's many violations of its commitments to the World Trade Organization. A country with such poor legal standards has no place in the Organization for Economic Cooperation and Development (OECD), and Russia's accession process can be stalled. The European Union can forget any free trade agreement with Russia until a new regime has arrived in Moscow.
The Kremlin's fundamental mistake is to have ignored its economic weakness and dependence on Europe. On Monday, March 3, the Russian RTS index plummeted 12 percent, while Gazprom fell by 17 percent, as it will lose its valuable Ukrainian market and perhaps also transit to Europe.
The ruble fell by 2.5 percent in early trading, and the central bank was forced to raise its policy rate from 5.5 percent to 7.0 percent to impede the run on the ruble. The Russian economy was set to stagnate, but now it is likely to contract.
With its great economic power, Europe can have a great impact just by applying existing rules more rigorously. By normal standards, many big Russian state companies, notably Gazprom, would be considered organized crime syndicates, and according to current legal standards, European financial institutions should not be allowed to deal with them. To a large extent, the United States has already done so.
Now that the European Union has imposed sanctions on Belarusian and Ukrainian authoritarian kleptocrats, why not go for the worst kleptocrats? The routines are in place, and this would hurt the Kremlin kleptocrats the most. Essentially this is just a matter of properly applying existing legislation on money laundering.
Almost half of Russia's exports go to Europe, and three-quarters of its total exports consist of oil and gas. A quarter of Russia's exports consist of gas exported to Europe, mostly at excessive prices in dubious contracts. The energy boom is over, and Europe can turn the tables on Russia after the cuts to gas supplies in 2006 and 2009. Europe can replace this gas with liquefied natural gas, gas from Norway, shale gas, and other energy sources. If the European Union were to sanction Russia's gas supply to Europe, Russia would lose $100 billion (€73 billion), or one-fifth of its export revenues, and the Russian economy would be in rampant crisis.
So, yes, Europe has many economic and legal levers at its disposal. The ultimate conclusion of this blatant Russian military aggression, though, must be that Europe should get serious about its defense, which has long been neglected. EU military spending needs to double within the next few years and the European Union needs a new military organization. The United States is no longer willing to help, and the Russian threat is real.