Russians in the Crimea, Ukraine on the Brink

“Birth control, Ho Chi Minh, Richard Nixon back again
Moonshot, Woodstock, Watergate, punk rock

Begin, Reagan, Palestine, Terror on the airline
Ayatollah’s in Iran, Russians in Afghanistan

Wheel of Fortune, Sally Ride, heavy metal suicide
Foreign debts, homeless Vets, AIDS, Crack, Bernie Goetz

Hypodermics on the shores, China’s under martial law
Rock and Roller cola wars, I can’t take it anymore” – Billy Joel, We Didn’t Start the Fire

I wasn’t alive during the Cuban Missile Crisis of 1962, so my memories of it have come from history books, movies (like Thirteen Days), and the occasional chat with someone who does remember it. In the chess match of the Cold War, the Soviet Union was attempting to get a toe-hold in the western hemisphere, hoping to put short range nuclear missiles on the newly minted communist nation of Cuba. From the Soviet point of view, they were merely looking to counter U.S. expansionism (we had recently put our own missiles in Turkey, on Russia’s doorstep) and to protect an ally from invasion (we had already launched one failed attempt to overthrow the Castro regime – the Bay of Pigs invasion). Regardless of the justifications, President John F. Kennedy had no intention of letting the Soviets put missiles within 90 miles of Florida, so we put up a naval blockade around the island. Things got very tense, to say the least, and the Cold War very nearly went hot.

In the end, we struck a deal with the Soviets, the Kennedy-Khruschev pact. They agreed not to put nukes in Cuba; we agreed to dismantle our nuclear missiles in Turkey and Italy; and we agreed not to overthrow Castro.

It’s been a shade over 51 years since the Cuban missile crisis. The Soviet Union doesn’t exist anymore. Historians will debate whether they collapsed under the economic strain of the need to counter Reagan’s Strategic Defense Initiative (“Star Wars”) or the economic strain of a global collapse in oil prices in the mid 80s (perhaps we engineered this too, with capital flow reversal in the aftermath of Paul Volcker’s war on inflation). Regardless, the Soviet economic model was doomed to failure. They either had to take over the world and eliminate all economic competition, or collapse and disappear. As Reagan was not about to allow the former, the latter was the only option.

And yet, 51 years on, no Soviet Union to tussle with, we have still, to this day, honored our commitment not to overthrow the Castro regime. There are 11 million people living under an oppressive communist regime just off our coast – a regime that we could overthrow in about an hour and a half – and yet in the age of nation building and throwing around U.S. military prowess to expand democracy, we do not touch Cuba. We made a deal.

The Budapest Memorandum

After the late, great Ronald Reagan finally put his boot on the Soviet Bear’s neck, freeing a world from potential tyranny, it was left to presidents Bush (41) and Clinton to clean up the mess and put the world back together. The Soviet Union had splintered, and every state wanted its own autonomy from Moscow. Not just former Soviet Bloc nations like Poland and Hungary, but former Soviet States like Ukraine and Georgia wanted to be free.

Of course, it was trick to engineer such a breakup. The Soviets had quite a few nuclear weapons deployed in Warsaw Pact nations as well as Soviet states. Would all of those nations become nuclear powers – possibly turning weapons against each other to settle decades-old scores? Realizing this would be disastrous, we had to find a way to keep only one nuclear power – Russia – while the others surrendered their weapons. But, if I were Ukraine I would not want to surrender such power easily – it can be quite useful in defending oneself against a nuclear power on the doorstep (one with years of bad-blood, more on that in a moment). The solution? The Budapest Memorandum.

The Russians made a deal in 1994. They made a deal just like we did in 1962. They would stay out of Ukraine, and Ukraine would surrender all nuclear weapons back to Russia. This is a deal that Vladimir Putin has now broken by sending Russian troops into Crimea. I have no idea what manner of legal enforcement we even think possible in such a situation. I merely bring it up to point out that they made a deal.

The Bible says in Psalm 15:4 that a righteous man is a man “who swears to his own hurt and does not change.” It is a measure of character to abide by your commitments, especially when they become unprofitable for you and there is nobody who could enforce the oath.

Years of Bad Blood

There are a lot of tensions between Russia and Ukraine, and with good reason. Russians have been fighting to control Ukraine for centuries (and they weren’t alone). This culminated with the subjugation of Ukraine in the 1920s by the new Soviet Union. In 1932 and 1933, up to 7.5 million Ukrainians starved to death in the “Holodomor” – forced starvation. While Ukraine is often called “the breadbasket of Europe” with rich, dark soil, it did not get to keep its production from the Soviet collective farms.

Millions of Ukrainians starved to death to feed their Russian masters. Bad blood? Yep. In 1953 Khruschev tried to sooth some of the hurts and bequeathed Crimea to the Ukraine (which is part and parcel of the current conflagration).

While it’s hard to lay this next one at the feet of Russian oppression, Ukraine is also home to the Chernyobl nuclear plant and the devastation that it unleashed in 1986. (The radioactive damage was far and wide, with Belarus and Russia also taking some serious pain.) The end of the Soviet Union was coming soon enough, but the “tough luck” for Ukraine was still rolling.

Over the past decade or so the big issue has been the price of natural gas imported to Ukraine from Russia. Natural gas isn’t fungible like oil as transport is difficult. Europeans, who get their natural gas largely from Russia, pay much higher prices than we do in America (about 2.5 times). And Ukraine pays the highest price of any of the Europeans. I have a friend who was a missionary in Ukraine for some time and she said the story was always the same. They pay, and pay, and pay and Russia would demand they pay more or the gas would be cut off. It turns out that it gets cold in Ukraine, and one can hardly afford to let the heat get turned off.

Letting Go is Hard

In the antebellum American South, the slave owners had a low impression of their slaves. Perhaps needing to (a) still attend church on Sundays while (b) justifying their enslavement of human beings created in God’s image, they developed some deep-seated hatred for those they oppressed. This came out in full force after the slaves were freed. There was this inability to “let it go” and let the black Americans be Americans too.

This phenomenon isn’t just seen with slave-masters and their slaves, of course. I suppose we’ve all seen it in some aspect of our lives. A person comes into power (whether good or bad), misuses that power for their own aggrandizement, and then has no idea how to behave when the formerly subjugated people walk free. We are human after all.

There were quite a few former Soviet states to go free. And while Russian clearly wants to exert influence over all of them, it just seems that they are the most put-off by the notion of not having Ukraine under thumb anymore. (“How dare those uppity Ukrainians thumb their noses at us!”)

Economic Alignment, Natural Gas, and Repercussions

The current dust-up has to do with Ukraine’s move toward Europe with a potential trade deal with the EU. Putin was not happy about this, so he pressed president Yanukovich to scuttle the EU  deal and sign a deal with Russia instead. Protests erupted from the pro-Europe citizenry (there are also quite a few pro-Russian citizenry) and mayhem followed. Snipers shot rioters, rioters executed policemen – it was ugly.

Eventually the protestors took over the parliament building as Yanukovich fled. With the proverbial gun to the head, parliament impeached Yanukovich and set up a new leader. For the record, this doesn’t count. There’s a reason you cannot “confess” to a crime while being tortured. If Putin protests that the current Ukraine government is illegitimate, then he has a leg to stand on. (He still broke the 1994 deal though.)

Shortly thereafter, the largely pro-Russian Crimea stormed its own regional parliament building, ousting the leader, and instantiating a new leader under much the same circumstances as Ukraine proper. The new leader called for Russia to come restore order. This too is an illegitimate move by an illegitimate leader.

As it stands now, Russia is occupying Crimea and has scheduled a vote for 16 March on succession from Ukraine to join Russia. Budapest echoes in the background.

Turning the Tide

The U.S. political theater has been in high gear since the Ukraine crisis started. The old Cold Warriors are demanding that we “take action” – while at least acknowledging that we cannot take military action against Russia. Regardless, they have found plenty to beat up on president Obama about.

No military action? No worries – we’ll just call for economic sanctions. Easy for us to say. The tit-for-tat response from Russia will fall hard on the Europeans, not us. We won’t see our natural gas prices rise one bit, while Europe could be cut off (good thing spring is coming).

We also hear calls for ramping up our Liquefied Natural Gas (LNG) technology and shipping gas to Europe. I fully support such a move, as it would be an economic windfall for America and possibly bring more freedom to folks in Ukraine. Even still, the LNG shipments won’t get going for years now; hardly sufficient to help in the current crisis.

I actually think there is a simpler solution – King Dollar.

Marc Faber noted years ago that central bankers can only control the amount of liquidity in the market, they cannot control where it goes. Over the past few years the central banks, led by the Fed, have printed money like crazy. Much of this has flowed into “emerging markets” like Brazil, South Africa, Turkey … and even Russia. As the Fed started talking about “tapering” its massive bond purchasing program, the flow of capital started to reverse, fleeing those emerging markets and coming back to America.

Since the start of the year the Russian Ruble has fallen about 15% versus the dollar. In the day after the Russians first invaded Crimea, the Ruble collapsed and the Russian central bank was forced to intervene, raising rates and selling dollars to try and stabilize the currency. This corresponds to the one time in the crisis when Putin actually started to pull back from his aggression. I suggest that this holds the key.

What to throw out the Russians from Crimea? Janet Yellen should hold a press conference today indicating that the Fed will suspend the bond buying program and raise short term interest rates to 0.5%. The following dollar shock would send capital screaming out of Russia and their currency and banking sector would collapse. Forget about Putin getting out of Crimea – at that point he’d be fighting for his own political life at home.

It won’t happen, of course. A surge in the value of the dollar would place far too much strain on the wealthy banking sector that thrives on transfer of money from poor to rich that is facilitated by a steadily weakening dollar. That, and the U.S. housing market would get clobbered by the sudden increase of interest rates.

Still, I say “no guts no glory” – we hold all the leverage we need to push Putin to the brink and beyond. We simply have to endure a little pain ourselves. (Of course, when I say “we” I don’t really mean the common man – he’d be happy to have his paycheck go farther at the grocery store.)

Getting Close to Go Time

The Time is getting short in Ukraine. From the beginning this crisis has seemed to be more than a game of brinksmanship. Crimea is set to vote for succession in four days, and Putin can hardly climb down from that post while still saving face. Succession may well spark a revolt in Ukraine, either invading Crimea (and getting whacked by Russian forces there) or blowing up Russian pipelines that pass through Ukraine (and risking full-on invasion from Russia).

One hopes that cooler heads will prevail. One hopes that political leaders across the world are better at realpolitik that we simple bloggers, and that we can find a way to avoid a hot war. One hopes that the people of Ukraine could find peace, neither oppressed by the Russians nor their own political leaders. One hopes many things …

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