An economic way to nudge Putin out of the crisis in Ukraine

Editor’s Note: Ahead of Crimea’s secession vote on Sunday, Russia’s defense minister has announced new military operations near the Ukrainian border. But while Secretary of State John Kerry prepares to meet with Russian foreign minister Sergei Lavrov in London Friday, President Barack Obama Wednesday hosted the interim Ukrainian prime minister at the White House to air the possibility of a political solution for a more autonomous Crimea. “There’s another path available,” Mr. Obama said, and “we hope that President Putin is willing to seize that path.”

Meanwhile, the Senate Foreign Relations Committee Wednesday voted to expand Mr. Obama’s authority to impose sanctions on Russia. Those economic penalties would spare Russian banks and energy companies but ban visas and freeze assets for Russian officials deemed responsible for intervention in Ukraine.

Crippling sanctions are not the answer, argues George Lodge, professor emeritus at Harvard Business School.

So how to set Mr. Putin on that alternative path to avoid the need for sanctions? It’s about cajoling him into recognizing that Russia’s economy is dependent on the world around him – a world that frowns upon Russia’s human rights abuses.

Students of American history will recognize Lodge. Before joining the Harvard faculty, he had a distinguished career in the Navy and Washington under Presidents Dwight Eisenhower and John Kennedy, later running against the latter’s youngest brother, Teddy, in 1962 for Senate. Lodge lost — as had his father Henry Cabot Lodge Jr., to JFK in 1952. (Great grandfather Henry Cabot Lodge Sr. was the legendary isolationist senator who helped block the U.S. from joining the League of Nations.)

Lodge first appeared on Making Sen$e just before the 2012 elections arguing that “we don’t practice what we preach” when it comes to American ideology and the way we think about government.

Back to the crisis at hand, Lodge uses a fictitious phone conversation between Mr. Obama and Putin to illustrate how to slowly and cautiously tighten the screws around Putin.

Simone Pathe, Making Sen$e Editor

The scene is the Oval Office. The red telephone rings. President Barack Obama picks up the receiver.

“Is that you Vladimir? How’re you doing?”

“Hello, Barack. To be honest — not too well.”

“Well, you know, I told you the other day that what you are doing would have costs.”

“I got big problems. I’m pulling our troops out of Crimea, but we’re broke, Barack. Billions in foreign debt — those Olympics were expensive — and nobody wants to lend us money. We’re going to have to get a deferral or something. The Chinese won’t give an inch. Iran can’t help. Syria is in a hole. The IMF says forget it. We can’t even pay the interest. For some reason, investors are pulling out and no more are coming in.”

“Yeah. I saw in the papers that the value of the ruble has gone to historic lows. Not so good for what you have to import. Given our friendship over the years, Vladimir, I’d like to help, but what can I do?”

“I saw you provided those idiots in Kiev with a $1 billion loan guarantee. How about doing the same for us?”

“Interesting suggestion, Vladimir. Let me toss it around over here and I’ll get back to you.”

Two days later:

“Hello, Vladimir.”

“Yes, Barack?” (Eager anticipation is in the Russian’s voice.)

“We might be able to help, but of course, we want to see all your troops back home in Russia. Also, we have some concerns about human rights. Like the good looking TV anchor who the other day said you make her ‘feel sick.’”

“Barack,” the Russian interrupts. “Get serious. That’s nothing to how she’s going to feel after a few weeks in the Lubyanka. But really, this is no time to be worrying about human rights.”

“Vladimir, you don’t understand us very well. We’d like to see those Pussy Riot girls back on the stage. And the Ukrainians want to try your buddy Yanukovich for crimes against humanity — like murder of several hundred of his constituents. So we’d like to see him sent home to face justice.”

“Barack, I know you’re a cool cat, but really, you must be kidding.”

“Think it over, Vladimir, and give me a call tomorrow. By the way, you should know that my oil and gas people are after me to help them enter the European market in a big way.”

As this imaginary telephone conversation suggests, Russia’s economy is not strong enough to withstand the punishment that the United States and Europe can administer.

The decline in the value of the ruble means that Russian imports, such as essential machinery, automobiles, high-tech products and more, have become prohibitively expensive.

U.S. exports of oil and gas to Europe will reduce the ability of Russia’s own oil industry to earn foreign exchange. Oil and gas are essentially Russia’s only competitive exports. If those exports decline, Russia cannot earn the hard currency it needs to service its huge debt.

Seizing Russian assets abroad will cripple domestic production, causing unemployment. Foreign investment in Russia has already withered. Inflation is sure to follow with a low-value ruble chasing too few goods.

At the moment, Russian President Vladimir Putin seems to be dreaming of a long-gone imperial Russia. If the U.S. and the West stand firm with an economic strategy focused on his weaknesses, he is doomed to fail. As Putin realizes this, he could become increasingly dangerous, tempted to launch a devastating military assault. Nobody needs this.

The way out, as this conversation suggests, is for Mr. Obama and European leaders to nudge him towards reality: to tighten the screws slowly, carefully, and respectfully, hoping that Putin and those around him, especially the business community, will help him to understand his dependence on the rest of the world and undertake serious negotiations about Crimea and the rest of Ukraine.

There is no space here to discuss the substance of those negotiations, but here are two thoughts: Russia’s desire to control Crimea is understandable. Under the terms of a long-standing agreement with Ukraine, Sevastopol is an important naval base (somewhat similar to the Guantanamo arrangement between the U.S. and Cuba). And, while it could be argued that Russia’s human rights policies are none of our business, they do provide leverage in negotiations.