How Not To Punish Moscow

August 23, 2008

It appears that Russia will have its way with Georgia and that the west is powerless to do anything about it. In the absence of a willingness to exercise military options, what was intended as “muscular rhetoric” has been exposed as mere bluster and bluff. That has led to pressure to find other ways to punish Russia. In search of a lever, many politicians, from both the left and the right, turn to economics, suggesting that the West can make Russia pay by measures such as blocking its accession to the World Trade Organization, expelling it from the G8 and restricting its investment and trade flows with the West. This is a mistaken approach. The measures being discussed would be ineffectual at best and likely counterproductive. They will hurt us more than the Russians. Ultimately they risk leaving us with a Russia that is more, not less, difficult to deal with. The logic behind using the economic lever is that once Russian Prime Minister Vladimir Putin is made aware of the economic cost of his unacceptable behavior, he will be deterred in the future. The problem is that Putin—still fully in charge in Moscow in his new position—is not only aware of the potential costs of his actions, he is also willing to pay them if need be. Putin recognizes the importance of economic factors in today’s world, and he is committed to building Russia’s economic strength. But it is a means to an end—strategic security—that he will not sacrifice at any price.

For Putin, Georgia is ultimately about Russia’s security. So while we cannot impose a big enough economic cost on Russia to fundamentally change its behavior, we can hurt ourselves. Western interests would suffer if joint programs with the Russians in space and nuclear energy, for instance, were annulled. Cutting economic links with Russia would also mean lost opportunities. Thanks to its oil windfall, Russia is third only to China and Japan as a holder of Western government securities. Right now, we benefit to the extent that these massive funds, which are after all a transfer from our consumers to Russia’s state coffers, are being recycled back as loans to Western governments. We would be even better off if they were put to work here in the form of business investments—a prospect that would be unlikely if we were to try to penalize Russia by restricting its investments in the West.

Russia is in the midst of an internal debate about its economic future, and isolating Russia will push it in the wrong direction. There is a consensus that the country must move beyond oil and gas. But how? One side in the debate—which includes a group of bright Western-educated advisers to Putin—recognizes that it can do so only by moving up the ladder of industrial and postindustrial development, fully absorbing not only the latest Western technologies but also its management and organizational techniques and principles of corporate governance. The other side—the so-called statists led by men such as Sergey Chemezov, a former KGB colleague of Putin and now head of the state mega-corporation Russian Technologies—dreams of leapfrogging the West in technology and thereby dispensing with what it regards as alien institutions. In effect, it advocates a grand new Soviet-style experiment of going it alone. And based as it is on the revival of the once mighty defense-industrial complex, this model will necessarily lead to tighter control over resources and people and greater secrecy in all aspects of the economy. Cutting off Russia from the global economy will only strengthen advocates of the modified Soviet model.

Using economics as a weapon against Russia also poses risks to the global economic system itself, which is based on the assumption that greater mutual economic dependency promotes both prosperity and enhanced security. Nations sacrifice some of their sovereignty and independence for greater economic efficiency. The system works well when everyone plays the game on equal terms. But the outcome can be poor if an important player is half in, half out. Russia’s energy resources and its financial reserves make it a key player that needs to be kept fully within the system, not pushed out to the margin.

As difficult as the Russian case has been, it is not time to abandon the principle that economic integration helps mitigate the sources of conflict among nations. But the principle cannot work if it is applied in a simplistic way. Russia was, and remains, a special case. The legacy of its Stalinist past still permeates its domestic and foreign political and economic life. Especially because of the pre-eminence of security concerns, it will not respond immediately and predictably to what we might regard as clear and adequate economic incentives, both positive and negative. Russia’s oil and gas windfall has further complicated the standard calculations of the benefits of integration. It has allowed Russia to revive its economy without “becoming like us.”

We may have made a mistake in assuming too soon that Russia was reliably on the path to normalization. But the response to that mistake should not be to make another, even more serious one, by turning the world’s largest supplier of energy and one of the largest financiers of the U.S. deficit into a pariah and a committed opponent of an already somewhat wobbly international economic order.