Ukraine: Not to Go All Lenin on You, But: What Is To Be Done?

Russia has invaded Crimea-and hence has invaded Ukraine.  No Obamaesque circumlocutions about “uncontested arrivals” can gainsay that very basic fact.  The Russians have occupied a major Ukrainian air base in the peninsula, and have given an ultimatum to all Ukrainian military units to surrender their posts.

Yes.  All unopposed. So I guess that makes it OK.

But what to do about it?

First: a no brainer.  Eject Russia from the G8, and reschedule a meeting of the G7 somewhere far away from Sochi (as is scheduled for June).  But seeing as that it is the Obama administration and various EU factotums that will make the decision, no brainer is probably asking a wee bit too much.

Second: pressure FIFA to strip Russia of the 2018 World Cup.  Even though the thought of Putin blowing another $50 billion on a vanity project has some appeal.

@libertylynx suggests persuading the Saudis to turn on the taps to reduce oil prices, and hit Putin where it hurts.  (Though since Obama has seriously alienated the Saudis with his Syria policy and his dalliance with Iran, there is serious room to doubt whether the Saudis would be at all accommodating.)  Indeed, in 1986, the dramatic increase in oil production by the Saudis struck the USSR a mortal blow, and Putin’s Russia is almost as dependent on oil revenues as the Soviets.  (See Gaidar’s memoirs for a blow-by-blow account of how the collapse in oil prices gutted the USSR.  I’ve often wondered whether the Saudi action was directed against the USSR, rather than OPEC cheaters as was stated publicly, and done at the behest of the Reagan administration.)

There are some differences, though.  In ’86 KSA had about 7 million barrels of spare capacity, at a time when world consumption was on the order of 60 million barrels.  By producing to the max, the Saudis drove the price from around $23/bbl in December, 1985 to under $10/bbl in mid-1986, about a 60 percent drop.  Now Saudi spare capacity is  around 2 million bpd, when world output is around 90 million bpd.  A 2+ percent increase in Saudi output would result in at most a 20 percent price decline.  (Note that other producers would cut back, so that world output would go up by less than 2 percent even if the Saudis produced to their capacity.) Certainly enough to hit Putin hard, but not enough to create the existential crisis that the Soviets faced in the 80s.  But every little bit helps.

Insofar as gas is concerned, the Europeans could cushion the blow of sharply reducing consumption of Russian gas by increasing use of coal, which is in abundant supply in the US because the shale gas boom has displaced large quantities of coal in electricity generation.  But I doubt Europe has the stomach for that, and it could not get along without Russian gas altogether.

This leaves one last thing: crying havoc, and letting loose the accountants of war, a policy I advocated in August, 2008.  There is nothing that would make Putin and his coterie of thieves and thugs freak out more than putting their billions in loot stashed in the West at risk.

The fall of the Yanukovych regime provides a perfect cover for such an operation.  An aggressive search for the boodle of Yanukovych and his spawn would no doubt serendipitously uncover other illicit loot from the FSU: after all, a Hermitage Capital investigation traced connections between Yanukovych-linked companies and the fraud that the martyred Sergei Magnitsky uncovered.

This suggests a potentially fruitful asymmetric attack on Putin.  Loudly and publicly announce a thorough investigation of Yanukovych monies in the West.  Through back channels, tell Putin that unless he backs off-way off, like back to Rostov-on-Don off-that any dirty Russian money (and is there any other kind in Western banks-hell, even Putin pretty much agrees with this) that just so happens to be discovered during the investigation of Yanukovych will go to covering the US national debt.  Then go ahead and investigate anyways, and keep track of the moneys uncovered, for potential use at a later date.

Alas, even though this is a bloodless alternative (though it would drain the blood from Putin’s already pale, Botox-injected face), I seriously doubt Obama has the stomach for it.  In part because he knows Putin would lose his sh*t, and he doesn’t want to deal with that.

But here’s the thing.  There’s really not much reason to be intimated by Putin’s bluster–outside the FSU, anyways.  Russia has economic feet of clay.  Militarily it is a pretend power, fit to intimidate other decrepit post-Soviet militaries in smaller states on its borders, but sadly outmatched against a real power.  So call his bluff. Guarantee full employment for forensic accountants.

Then buy ear protection to guard against the shrieks emanating from points east and north, grab some popcorn, and sit back and enjoy the show.

About Craig Pirrong 230 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

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