This is different — why??

Vladimir Putin recently pointed out to President Obama that when Russia objected to Kosovo being detached from its ally Serbia, the U.S. went ahead anyway in supporting Kosovo’s independence, backed up by NATO troops. (To this day Russia does not recognize Kosovo as a sovereign nation.)

So why, he asked, is Crimea any different?

No doubt, the manner in which Russia rushed to disperse its troops, promote a referendum, and then annex Crimea was contrary to the spirit of the 1994 Budapest agreement and the Ukrainian constitution. A more ideal form of such change would have been for a new Ukrainian government to be elected in new national elections, and then for that government to have presided over a referendum in Crimea, and to have recognized its outcome. Yet that outcome was very likely to be the same.

After all, the people of Crimea never chose to be part of Ukraine; they were part of Russia for hundreds of years before Khrushchev transferred their territory to the Ukrainian SSR, a move that Vladimir Putin now claims was unconstitutional even then. Nor did they have a chance to choose the new government in Kiev that is so loudly lamenting what has happened; Crimea had supported the Party of Regions led by Viktor Yanukovich who was driven from office and deposed by revolutionary, not constitutional, means. It seems the desire to part of Russia was widespread and genuine.

So the real question to ask about Russia’s annexation of Crimea is not whether it was legal or not — lots of things happen that are of dubious legality, including the overthrow of Yanukovich  – that are eagerly embraced by Europe and the U.S. The real question is what does this action portend, what will be the consequences, and what is the importance of seeking to fight or reverse it?

Overall, I have to say “not much.” Crimea was strategically and historically of great significance to Russia; and its people seemed to desire to return to Russia (even if the 96% vote in favor is more reminiscent of Soviet election returns, there is no reason to think a majority of Crimea’s population opposes the change). It was also the case that Russia already had thousands of troops stationed within Crimea, so that an external invasion was not necessary to secure it, nor could it be readily defended.  The change was thus peaceful, if under military supervision.

Other regions of Ukraine are very different; even if the cities in the eastern part of the country are strongly pro-Russia, the population as a whole is Ukrainian even in the east.  And if Russia wanted to detach other portions of the country by force, it would have to stage a major military expedition, and probably deal with opposition and use violence.

Therefore, I do not think it likely that Putin’s move in Crimea means that tanks will soon be heading toward Kiev (as one anxious columnist stated).  What it does mean is that Russia thinks of itself as a great power and will defend its interests accordingly; something we should not ever have overlooked.  Putin has said he has no plans to invade or detach other parts of Ukraine, and for the moment I believe him.  The costs and risks at this point are too high; better to absorb Crimea and invest in making it look better, while the rest of Ukraine struggles.  Russia can exert other pressures on Ukraine through its economic and energy leverage for now.

Meanwhile, Russia can laugh at the measures the West has used to express its displeasure (indeed, Russia’s parliament passed a resolution asking for ALL of its members, not just a few, to be included on the list of persons to be sanctioned, as they all want the honor of sacrificing for the glory of restoring Crimea to Russia).  Yet Russia should be concerned that if it takes further actions to dismember Ukraine, truly serious economic sanctions could be imposed that would cause it real pain.

The truly crucial issue in all this is not Crimea, which is absorbing so much attention, but the stability and effectiveness of the new government in Kiev.  What we are seeing now is a major shift in the region; Crimea has reverted to Russia, but Ukraine seems to be moving much more strongly out of Russia’s orbit and closer to Europe.  But this shift is in its infancy, and cannot be sustained if the new government in Kiev falters.  Should economic stagnation or political deadlock and chaos follow, as happened after the Orange Revolution of 2004, the revolutionaries of today could be marginalized like their predecessors, and a pro-Russian regime return to power.

So rather than huffing and puffing against Russia, it is much more vital for the U.S. and Europe to turn their energies to giving political, economic, and technical support to the new government in Kiev. They need major economic injections to stabilize the economy and maintain the government; they need support for ensuring that national elections are prompt, clean, and beyond reproach; and could use technical advice on managing the budget and integrating their economy more effectively and more competitively with Europe, including managing their energy needs and building resilience against Russian pressure.

Let Russia keep Crimea; gaining a more democratic, economically stronger, and pro-Western Ukraine is a much greater prize. That also is what the majority of the people of Ukraine seem to desire; Europe should therefore focus on that goal as its top priority.

Hectoring Putin about the Crimea may make politicians feel good; and certainly if politicians believed that Russia had become just another large, peaceful country that would go along with whatever happened in the world, that foolishness should be abandoned. (I confess that I was shocked that politicians were so surprised that, after a revolution that upset Russian vital Russian interests in Ukraine, Russia would take action to protect those interests. Really?  You expected passive acceptance?  Then you really don’t know Russia).

The transformation of Ukraine into a stable, prosperous democracy will take time, and be much less visible in the daily headlines than grandstanding over Crimea.  yet it is far more important to the future of Ukraine, and Europe.  We have to hope that politicians can shift their focus and invest in what truly matters.

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And Ukraine moves closer to the edge?

Yesterday I was able to listen to the Prime Minister of Ukraine, Arseniy Yatsenyuk, at the Atlantic Council, right after he met with President Obama at the White House.

Yatsenyuk projected calm and confidence — quite a feat for someone with tens of thousands of Russian troops massing on his eastern border!

Most of what Yatsenyuk said was unexceptional: he expressed faith that the U.S. and Europe would help to enforce the 1994 Budapest agreement guaranteeing the sovereign territory of the Ukraine [although President Putin of Russia claims that the government that signed that agreement no longer exists so it is no longer valid]. He also expressed gratitude for the financial help that is now forthcoming from the West. And he continued to say that Ukraine does not want, and could not fight, a war against Russia, and so expects a peaceful resolution of all outstanding issues. He also affirmed the unity and resolve of the Ukraine, and his desire for good relations and partnerships with both Russia and Europe.

But what the Prime Minister said that worried me was the mantra that Ukraine’s leaders seem unable to leave behind: “Crimea is, has always been, and always will be an integral part of the Ukraine.”

Really? Historically, Russia would be more correct to say that Crimea has for much longer been an integral part of the Russian empire (and always will be?). But more importantly, it seems that without some plan to force Russia to relinquish Crimea and recognize an autonomy agreement, these are empty words.

What happens next? After the referendum, it is now clear that Europe and the US will impose sanctions on Russia, as even Germany — Russia’s closest friend in Europe for many years — has now declared that Russia’s actions, in occupying Crimea with troops and promoting a hasty referendum during that occupation, auger a dangerous return to 19th century politics and must be given a firm response.

There seem to be at least two ways to view, from the point of the West, what has happened in Crimea.  One way is to see this as a fait accompli, something Russia felt it had to do to show some resolve and retain its critical naval base at Sevastopol, and which it will never undo. From this perspective, the goal now is to figure how to de-escalate tensions and guarantee the security and independence of the rest of Ukraine. From that perspective, there is no point in insisting that Russia “give back” Crimea. Rather, there should be a mix of carrots and sticks to induce Russia to recognize the new government in Kiev, negotiate a legal fiction to smooth the change in Crimea’s status, and ensure that Ukraine can choose its own path even if that moves it closer to Europe. In this view, Russia has already badly hurt itself, as by annexing Crimea it has permanently chased Ukraine out of its sphere of influence, created anxiety in other CIS countries, and created downright shock and enmity in the EU and China.   Even without sanctions, this will damage investment in Russia and hurt its economy and foreign relationships. There is no need to do more to sanction or “punish” Putin; simply sit back and let him reap the costs of having shot himself in the foot by being so openly aggressive toward a neighbor who wishes him only good will.

The second school of thought — and the one that seems to dominate among specialists, diplomats, and heads of Western states — is that Russia has “gone too far.”  That by occupying Crimea, it has shown disregard for international conventions it has signed and for modern standards of civilized international behavior.  Instead, these are the actions of a “rogue state” and therefore Russia must be punished.  Initially, sanctions should target Russia’s leaders to induce them to pull back and negotiate jointly with the government in Kiev over the future of the Crimea, with any referendum at least being delayed until after Kiev has national elections and can set up a proper referendum with international observers and civilian control in place of today’s military occupation.  Then, if Russia does not agree to that, sanctions must be stepped up higher, even to Iran-style complete isolation from the international economic and banking systems, if Russia does not see the error of its ways and change course.  In this view, escalation of the conflict through sanctions is necessary and the only reasonable course.  This view is buttressed by belief that sanctions will be effective, because Russia’s businesses and banks are so dependent on their activities in the West that sanctions will force them to demand that Putin change his actions.  Moreover, imposing economic pain on Russia will eventually force Putin to yield because in the long run, his legitimacy depends on maintaining a stable or growing standard of living for Russians.

All of this assumes that Putin can be induced to trust the regime in Kiev and an autonomous Crimea to honor his military basing agreements as did prior Ukrainian regimes, and that “stepping back” from Crimea will not be more humiliating and politically costly to Putin than defying and coping with sanctions.

I would have to say that I doubt these assumptions can be sustained.  So far, Putin has paid no price for his detachment of South Ossetia and Abkhazia from Georgia, and his aggressive actions on Crimea have so far propelled him to the highest popularity ratings of his presidency.  In that respect, being aggressive on Crimea has done more for Putin than all the money poured into the Sochi Olympics, which mainly yielded disgust at the cost and corruption involved.  The record of sanctions in getting authoritarian regimes to change their ways has been dismal:  Sanctions against Iraq led only to corrupt dealings on the back of oil-for-food swaps and no real change in regime behavior.  Sanctions against Iran that have crippled its economy have led to virtually no change in that regime’s behavior either, although after some years it has begun to enter negotiations on its nuclear program it shows no sign of backing off on its support for terror groups or anti-Western dictators.

Moreover, Putin views the regime in Kiev as an illegitimate extremist movement that forced out an elected leader.  As we often hear, one man’s terrorist is another man’s freedom fighter.  The West may hail men like Yatsenyuk as courageous proponents of democracy in a long-stifled country; but Putin views the people who put Yatsenyuk in power, those who fought the police in the Maidan and the streets of the capital, as terrorists.

We will soon find out what the imposition of sanctions will do to Russia, for the referendum in Crimea will go ahead.  What if Western sanctions do indeed start to bite, and Putin feels something must be done to get those sanctions lifted? Will Putin simply walk away from Crimea? Or will he threaten to go even further, moving his military into still other parts of Ukraine if the West does not lift its sanctions?

Russia has promised to match the imposition of Western sanctions with a response of its own. Let us pray that response does not involve the over 200,000 troops now engaged in military exercises next door to Ukraine’s borders. Will Europe be putting persuasive pressure on a regime capable of changing course and backing down? Or will Europe be poking a wounded but still powerful and angry bear?

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Ukraine is getting ever more dangerous

On CNN last Sunday, Stephen Cohen suggested that we are only two steps away from another Cuban missile crisis. Is that possible, or hyperbole?

Revolutions create great risks because they create uncertainty and anxiety. The strength and policies of the new revolutionary regime are difficult to predict. This is unavoidable, because with crowds still active in the Maidan and making demands on the Parliament, the government in Kiev itself cannot be certain what it must do to remain in power.

Such uncertainty about what the revolutionary government may do (or can do) forces other actors to protect their interests. Yet the more vigorously they do so, the more anxiety and uncertainty they create in the minds of other actors and the vulnerable regime in Kiev. At some point major actors may decide there is no point talking to each other, as all they can rationally do is try to protect themselves by maximizing the support they have at home. That leads to distortion and misunderstanding among the actors, ever-higher uncertainty, and a cycle of more and more aggressive actions as each actor tries to maximize their gains under uncertainty. Differences give way to polarization; discussion gives way to move and counter-move; and at some point one move goes too far for other actors to accept. At that point threats mount, and if actors do not step back, the next move is to war. And throughout history, revolutions usually HAVE led to war.

Is that where things are headed in Ukraine? It needn’t be. President Obama and Chancellor Merkel could say something like the following to President Putin:

“Vladimir Vladimirovich, we know you couldn’t take the risk that the extreme nationalists who have taken power in Kiev would take control of Sevastopol — after all, where else can you put your Black Sea Fleet? And we know that Crimea has been part of Russia for almost all of its history; indeed Russia fought one horrific war for the peninsula in the 19th century and we realize you might be willing to do so again. It’s too bad about Yanukovich; that turned out to be a poor choice for you. But even you realize that he is not coming back. So let us work out some way for you to be secure in your control of Sevastopol. You could even have a referendum in Crimea; if you recognize the interim government in Kiev and consider the results of the new national elections in May as legitimate, we will consider a referendum in Crimea as legitimate. We know we supported self-determination in Kosovo, so we will accept self-determination in Crimea. That way you get to keep control of Crimea and the crucial base at Sevastopol; but you leave the government in Kiev alone and avoid any conflict with Ukrainian forces in Crimea. Everyone gets what they need and there is no need to escalate.”

Yet that is not what happened. The new nationalist government in Kiev, even if only briefly, demoted the Russian language and thus signaled its hostility to Russian influence. It also proclaimed Crimea an integral and permanent part of Ukraine. This was a direct challenge to Russia’s control of its crucial naval base that could not be tolerated. Russia acted to show who was really in charge of Crimea and Sevastopol, using armed force to secure its hold on the peninsula. With the fate of Crimea a fait accompli, waiting a referendum only to ratify it, the only question for the government in Kiev and the West is how to respond.

After aggressive statements by Western powers that they will not recognize a referendum in Crimea as legitimate, what choices does Russia have now? How can Russia ensure the referendum will be accepted? Only by making ever more clear how much force it will use to back its absorption of Crimea, or threatening to take even more of Ukraine if the “free choice” of Crimea is not respected. And how will the West respond when Russia flaunts its absorption of Crimea after a referendum that the West has already said it will not accept? With sanctions designed to make Russia “pay a price” for its actions?

What is the point of imposing sanctions for a fait accompli that Russia would not possibly surrender? At best, those sanctions will impose economic costs on both Russian and Western businesses. At worst, Russia may interpret those sanctions as unwarranted aggression (after all, Crimea has made a ‘free choice’, so what can sanctions be but Western aggression aiming to undo that choice?), and respond with aggressive measures of its own. It may even send troops into other regions of Ukraine. At that point, Ukrainian forces may fight to defend their country and ask for Western assistance. It is then a very short and straight path to war, possibly one involving the major powers.

We are already dangerously far down that road. We have gone from early talk of simply excluding Russia from the G-8 to current discussions of Iran-style sanctions designed to exclude Russia from the world economy. Such talk — much as President Obama deems it necessary to defend himself from pressure in Congress — is dangerous and irresponsible, without a clear plan for how Russia is expected to respond.

Russia is already taking great risks by promoting a referendum in Crimea. China — facing chronic rebellion in Tibet and Xinjiang — is horrified by the idea of provinces being able to choose their future without permission from the national government. China is therefore not likely to support Russia’s actions. Most of Ukraine will be further repelled by Russia’s moves, and like Georgia after Russia’s invasion in 2008, will likely draw closer to the West. Putin’s project of building a renewed imperial sphere of power incorporating Ukraine as a cornerstone is therefore likely already dead; which makes Russian control of Crimea all the more essential to Russia’s security. The border states of eastern Europe and the Baltics will be ever more wary of Russia and more fortified by NATO. In other words, Russia has already taken huge risks and isolated itself; but it had no choice as surrendering control of Crimea would have been the equivalent of scuttling its Black Sea Fleet.

So it is very questionable what more can be gained by trying to punish Russia for these actions by isolating it further. No doubt Russia can be made to feel some economic pain; but Putin and those closest to him will feel little pain and are more than willing to pay that price for actions they view as absolutely essential. The more pain the West tries to impose on Russia, the more Russia will want to find ways to push back — and it is dangerous to corner a wounded state, which is exactly what Russia will feel like after losing its ally Yanukovich to a nationalist uprising.

Far better to agree to what Russia views as its essential need — control of Crimea — in exchange for behavior that the West wants to see and that Russia can tolerate: Russian recognition of the new regime and national elections in Ukraine and restraint in acting in southern and eastern Ukraine.

What we have now is a situation where what Russia views as absolutely necessary and essential (control of Crimea) the West and the current Ukrainian regime view as absolutely unacceptable and intolerable. There is no way to negotiate on those premises without one side changing their view, and Russia will not do so. That leaves only further aggression as an option for the West, with no clear notion where that will lead.

A week ago, talk was of finding an “off-ramp” for Putin that would avoid war. Now the West needs an “off-ramp” for itself to avoid a spiral of threat and counter-threat, aggression and counter-aggression. Danger is mounting; it’s time to look for ways to de-escalate rather than escalate further.

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Back to the Future at Forbes?

Forbes has crowned Bill Gates as the world’s richest man (again), with a fortune of $76 billion. Like many wealthy and generous predecessors, Gates has already given a considerable portion of his money to charity, but clearly he has enough left to manage.

How rich is Gates? Let’s say you earned $100,000 a year, a rather good income. Let us also say you managed to save 100% of what you earned. At that rate, it would take you 760,000 years, or slightly more than ten times as long as Homo Sapiens Sapiens (modern man) has existed as a species, to accumulate Gates’ wealth.

Well, perhaps $100,000 is too modest a base to consider. Let us say you earn $1 million per year, and again manage to save all of it. Then it would only take you 76,000 years, or somewhat more than ten times as long as all of recorded history, to reach Gates’ bracket.

This is not to say that Gates doesn’t deserve his wealth.  I just wish to point out the huge gap that exists in our society between earnings based on control of capital, which generally enjoys exponential growth, and earnings based on wages.  There were periods in history when people earning wages did enjoy faster income growth than those whose earnings came from capital, but those days are now long gone.

There was an earlier period in which America also had business elites with enormous wealth.  In his day (c. 1914), John D. Rockefeller was even richer than Gates.  His fortune in 1914 is estimated at roughly $1 billion — in those days Rockefeller was known as the world’s only billionaire.  That year, average US wages in manufacturing were $2 per day, or about $500 per year.   Since today, average manufacturing wages in the US for union labor is just under $50,000 per year, Rockefeller was about one-third richer than Gates, in the level of his fortune compared to the average manufacturing wage level of his day.

So we are back to the period of the “Gilded Age,” before the great losses of the Depression, and the gains of middle-class workers in the half-century from 1940 to 1990, started to tip things a bit away from the very wealthy.

Of course, it must be said that the actual living standards — the health and longevity and access to consumer goods — of today’s middle class, and even more the poor, are far, far higher than those of their counterparts a century ago. Indoor plumbing, big-screen TV, and access to an automobile are almost universal aspects of American life. So much has improved, and most people would prefer to live today than a century earlier, or even several decades ago.

Still, in relative terms, we are almost back to where we were c. 1914.
Interesting how quickly a century of change can melt away.

Posted in The Global Economy | 3 Comments

Defusing the Crisis in Ukraine

Vladimir Putin is a hero in much of Russia. He is the man who brought order and prosperity, fought off terrorism, and restored Russian greatness after a humiliating period of Cold War hardship and defeat followed by democratic chaos which brought ruinous inflation and poverty to millions.

So he is not going to be intimidated by threats. What is vital for Putin to guard his legacy and complete his mission is simple: he cannot possibly accept a reduction in Russia’s strategic capabilities — so control of Sevastopol and its Black Sea port is essential. As the great protector of the Russian people, Putin also cannot allow himself to be seen as not caring or inactive when millions of Russian speakers and ethnic Russians worry about being marginalized or even physically threatened.

This means that opposing Putin on these two items is futile — threatening to punish him for these actions is counter-productive. So what is at risk? Putin has already said he will not annex the Crimea; he simply wants to ensure that they have a democratic choice of their future (although he is fairly confident they will choose to either join Russia or have an autonomous government that make its own deals with Russia for military bases).

The real risk now is that extremism on both sides will lead to a confrontation and then to hostilities that will justify further military incursions by Russia into eastern Ukraine. A further risk is that Russia will exert economic muscle, such as constraints on gas supplies and imposing tough terms on existing debt, that intimidate or undermine Ukraine’s new government.

Fortunately, these risks can quickly be reduced. The government in Kiev should do the following:
(1) Make clear that President Yanukovich surrendered his office when he left Ukraine. The fact is that the government of Yanukovich acted in a way that lost his government the allegiance of the people, armed forces, and political and business elites of Ukraine. Realizing this, Yanukovich departed, forcing the Ukrainian Parliament to create an interim government. Until elections are held, this interim government is the only legitimate leadership of Ukraine.
(2) Make clear at every opportunity that the interim government is committed to the protection of all Ukrainians. Invite civilian observers from Russia and the Council of Europe to monitor the safety of Russian-speaking citizens wherever they wish, and assure Russian-speaking Ukrainians that they will have full rights to use their language and culture in a free Ukraine.
(3) Set elections as early as possible for a new national government, with the promise that the new national government will THEN as soon as possible hold a referendum in Crimea for its people to determine its future status.
(4) Thank Russia for its help in maintaining order but say that Ukraine expects Russian troops in Crimea to return to their bases and return control of security to local police as soon as Russian and European observers ascertain that there is no threat to the safety of civilians in Crimea.

Meanwhile, America and Europe can do the following:
(1) Assure Russia that we share their goals of a having free Ukrainians determine their own future.
(2) Request that Russia join civilian fact-finding and safety missions to ascertain that Russian-speakers in Ukraine — including Crimea — are safe.
(3) Request that Russian forces in Ukraine stand down and return to their bases once those fact-finding missions have determined that Russian-speakers are safe (It may take some time to get there; be patient).
(4) Use their economic muscle — if you wish to look strong and yet avoid military confrontation, you must use other sources of strength, the famous “Soft power” that is supposed to be the West’s asset. But even soft power requires some real heft behind it. This does not mean treating this like a “bidding war” vs. Russia over Ukraine’s loyalty. Rather, it means offering Ukraine sufficient financial support for debt management, and to hold elections, so that Ukrainians have a free choice, without feeling the threat of economic disaster if they make certain choices. This looks to be underway, with the US offering short-term assistance and the IMF on the way to work out a longer-term financial package.
(5) Quietly make clear to Putin that IF Russia will not cooperate in the measures noted above, if Russia sends troops into other parts of Ukraine or refuses to accept civilian safety and monitoring missions, or interferes with planned elections, then there WILL be consequences for violating the agreements it has made in Budapest. These measures could include ending of visas to Europe and the US for leading Russian officials; investigation of bank accounts of Russian officials in the west; a reduction of gas purchases from Russia by Europe (Qatar would be happy to step in); excluding Russia from G-8 meetings and activities until the free sovereignty of Ukraine is restored. But these measures should be held in reserve rather than pushed forward now.

It is vital to remember BOTH Russia’s resolve and its weaknesses. Russia’s resolve is going to be strong to defend what it sees as vital interests and Putin’s own standing. Yet Russia has weaknesses too. The Russian government’s dependence on European gas sales to fund its budget is even greater than European dependence on Russian gas. Russian companies have investments and resources in Europe, as do Russian elites. A break in relations would be far more painful than it would have been a couple decades ago. And even for Russia’s military, a move into Eastern Ukraine would be difficult and risky, for even there the rural population is mostly Ukrainian speaking and would be hostile.

In sum, while Russia will be steadfast in doing what it must, it will be hesitant to do any more than it absolutely must. The fact that Putin has already publicly disavowed any intent to annex Crimea (much as he plans to control it and hopes it will vote to keep a special relationship with Russia), shows that he is not ready to cast aside all of his efforts in the last decade to develop a normal relationship with Europe.

In sum, I believe the current crisis can be calmed down. What is vital is to recognize the needs and concerns of all parties; focus on defending the safety and choices of Ukrainian citizens; and not to needlessly provoke Russia into going further than it wishes. At the same time, strength needs to be shown in offering substantial financial options to Ukraine, and reminding Putin of the value to Russia AND Ukraine of keeping good economic relations with Europe. With restraint and patience, the people of Ukraine should be able to move forward and shape their own future.

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The Revolution in the Ukraine

My recent posts have bounced back and forth between comments on political uprisings and concerns about weakness in the world economy.

The two are related–around the world we have seen aging populations and slowing economic growth in rich countries, leaving governments with fewer resources for social spending, while private wealth has blossomed among the plutocrats and kleptocrats, who both depend on world markets and privileged access to those markets.

Where kleptocrats have flourished, protests have spread.  When the  response to those protests has been clumsy and heavy handed the protests have spiraled upwards.  And where  governments have been unable to bring disciplined, overwhelming repression to bear — either because their own elites and armed forces would not support such actions or because they felt constrained by ties to foreign democratic regimes — the leaders eventually fled or were captured and their governments overturned.

The latest, most striking, and most dangerous such sequence has just unfolded in the Ukraine.  It is a classic example of a “central collapse” type of revolution — so classic, in fact, that I can claim to have written the script before the event.  Here are two paragraphs from Chapter 3 of my new book Revolutions: A Very Short Introduction, published last month by Oxford University Press:

“In cases of central collapse, the regime has already weakened greatly, usually far more than is evident.  The government may be nearly bankrupt; it has been losing legitimacy with business, administrative, and military elites for some time; and popular groups have been mounting local protests, strikes, or rural revolts in recent years.  Such revolutions may start with peasant revolts or uprisings in rural areas, with urban demonstrations, or with an elite challenge to state authority.  They may be precipitated by a short-term economic downturn or price spike, a military defeat, a manipulated election, or new and resented actions by the government.   Whatever the initial impetus, it is swiftly followed by a major demonstration in the capital city.

The government tries to disperse the demonstration, but encounters surprising difficulty in doing so; initial efforts by the government are followed by expanding demonstrations.  Police forces are unable to cope with the urban disorders, and the government faces a situation where the military has to be called in.  Yet the military refuses to act decisively to clear the streets; key units may stand aside while others may even defect and go over to the opposition.  The inaction of the military acts as a signal to the ruler, elites and the population that the regime is defenseless.  Crowds surge and take over the capital; similar mass demonstrations spread to other cities and the countryside.  All of this generally unfolds over a few weeks or at most a few months.  The ruler may then flee or be captured, while elites supported by crowds or the military take over government buildings and set up a provisional government.”

I have italicized a few phrases that particularly applied in the case of Ukraine, but the basic flow of events should by now be quite familiar!

So the obvious question is — what happens next?   The answer is conditional, for the outcome of revolutions is forged in the actions and reactions of revolutionary leaders, not in the original causes of the conflict.  Here, the actions of revolutionaries, counter-revolutionaries, and foreign actors combine to generate a range of possibilities.

In the Ukraine, the revolutionaries who took power in Kiev following the flight of President Yanukovich made serious errors.  They should have first assured all Ukrainians, especially the Russian-speaking residents of the south and east, that the new government would vigorously protect the rights and standing of Ukrainian citizens everywhere.  Second, they should have assured Russia that its military and naval base agreements would be respected, and that the new regime wished to negotiate economic and political agreements with BOTH the EU and Russia, to be a friend to both.  That would have at least taken away any provocations and provided an entry to beginning three-party (Ukraine, Russia, EU) talks to protect Ukrainian sovereignty.

Instead the new government in Kiev — with a large number of extremist Ukrainian nationalists from the west given prominent ministerial portfolios — struck down the law protecting the use of the Russian language as a second official language in the country.  They failed to take any actions to anticipate the inevitable actions of Russia to protect its crucial naval base at Sevastopol (Russia’s only warm-water naval outlet to the Mediterranean and Atlantic ocean).  Perhaps too stunned by the bankruptcy and theft they discovered when they finally uncovered the books in Ukraine’s treasury to take such actions,  they simply hoped that they could vigorously assert Ukrainian nationalism and wait for Europe or NATO to step in and guarantee their sovereignty.

Yet instead they reaped what was very likely in any event — an aggressive response by Russian President Vladimir Putin to secure Russia’s naval and military bases in the Crimea, by in effect taking control of the entire peninsula.  The new government in Kiev is now  also facing huge debts, a cut-off of gas supplies from Russia and increasing opposition from wary Russian-speakers throughout the country.

What history tells us will follow, given the  increasingly radical nationalist character of the revolutionary leaders in Kiev, is a financial crisis, more aggressive nationalism from the new regime, and more vigorous opposition from the eastern and southern regions, possibly supported by Russian promotion of efforts to overturn or break away from the new regime.  It is possible that the Ukrainian military will be mobilized to try to keep control of the eastern provinces (Crimea is a lost cause), and that civil war will break out.

Can anything be done to stop this sequence?  Yes, perhaps.  But it would require the nationalists in Kiev and the Europeans treating this event as a new chapter in the Cold War to draw back.  The government in Kiev would have to state that it recognizes the valid interests of Russia in maintaining its naval and military base agreements and operations in Ukraine, and the valid rights of all Ukrainians to choose their government.  The new regime would have to agree not only to new national elections as soon as possible to choose a new government, but to referendums on autonomy or secession for any regions that requested them.  The EU would have to agree to these elections, and try to win at least the right of international observers to oversee their free and fair  administration.

The EU would have to stop seeing events in terms of a “victory” or “loss” for themselves or Putin; rather the only goal should be to avert conflict by giving all Ukrainians a free choice over their future, including those that lean toward Russia.

So let us assume that these elections can be carried out, and that Crimea votes to join the Russian Federation and much of Eastern and Southern Ukraine vote for greater autonomy.   Would that be a victory for Putin?

Hardly.  What does Putin win by using force to pull the Ukraine (or as much of it as possible) more tightly into the Russian orbit?  First, it is almost certain that Russia will not be able to place a puppet ruler in power in Kiev. Resentment at Russia’s coercive actions will have only more angered and radicalized the population of the west and north, requiring any new Ukrainian government to be even more wary, or risk another uprising or an attempt by western Ukraine to break away. It is also unlikely that a new Ukrainian regime would commit itself to turn away from Europe and join Russia’s planned Eurasian trade pact. The damage done to Russia’s image as the beneficial “big brother” of Ukraine by Russia’s swift sending of tanks and troops into Crimea — so reminiscent of Soviet actions in Hungary and Czechoslovakia — will not easily be undone. Even if such actions win favor among the Russian-speaking population of Ukraine, they have repelled the Ukrainian nationalists even more.

Let us grant that Ukraine is crucial to Russia’s security interests, and that it would be valid and reasonable for a referendum to detach the Crimea and join it to Russia (claims of Crimea being an integral part of Ukraine are historically weak). Let us even grant that Putin’s actions to this point, if a bit overzealous, are a reasonable reflection of the strategic importance of Crimea to Russia and of the oversteps of the nationalist revolutionary regime in Kiev. What more can Putin do to advance Russian interests? If Russia acts even more boldly, sending troops into Ukraine proper, it will be taking over a bankrupt, divided, and radicalized country that will be under a constant threat of uprising against Russian domination and a huge financial drag on an already weakening Russian economy.

So the most likely alternative to a spiral into civil war (which is still possible) would be for Russia to limit its armed incursions to the Crimea, and to advocate for early elections and regional referendums. It would then hope to gain control of Crimea and see a new regime in Kiev that was at least not actively hostile to Russia, but seeking to continue the balancing between Europe and Russia that has characterized Ukraine since its independence.

Still, one of the main lessons of history regarding revolutions is that they shift the international balance of power by changing the character of regimes.  Together, the Ukrainian revolutions of 2004 and 2014 show that Russia will not be able to keep Ukraine bound to it like a Siamese twin forever.  Ukraine keeps making efforts to break free, and sooner or later will do so.  There is nothing that Russia can do to match the allure of moving closer to a free and prosperous region of 600 million Europeans with an economy of $16 trillion.  Some day, Ukraine will be fully part of Europe.

Perhaps shortly thereafter, Russia too will see the wisdom of fully joining the European family, rather than staying on the outside as a rival and courting confrontation.  For myself, as an admirer of both Russia’s contribution to European culture and Europe’s dedication to democracy, I hope that day comes sooner rather than later.

But in the meantime, it is urgent for all parties to cease thinking of Ukraine as a chess piece to be taken by Russia or by Europe. The only way to avert a further revolutionary spiral into greater violence is to put the interests of Ukrainians first, and do all that is possible to protect their safety. The sooner Russia is assured that its vital interests will not be threatened, and the sooner that elections to determine the future of Ukraine and its regions will be held, the sooner the threat of civil war will recede. On the other hand, absolute defenses of the total sovereignty of the Ukraine will likely provoke greater intrusions, polarization, and conflict.

It is well to remember that most of victims of the guillotine in the French Revolution were not aristocrats taken to the Place de Concorde in Paris, but rebels in the south and west of France who challenged the authority of the new revolutionary regime. A similar regional split and conflict could yet generate casualties that would make the number of martyrs in the Maidan in the last two months seem small. We must hope that leaders draw back from polarization, extremism, and inflaming of regional differences; the main lesson of history regarding revolutions is that these (not the Russians) are the forces that must be resisted.

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A New Bubble?

What are the signs of a bubble? After a 30% rise in the S&P last year, without any huge surge of economic growth in the US or Europe and slowdowns in China, Brazil, and other major economies, one might expect a breather. But the continued upward rise of the global markets seems to say that animal spirits are still very much alive.

How much is too much? After all, stock prices generally do NOT move together with GDP numbers. They instead respond to corporate profits, which often benefit from a downturn that allows corporations to cut costs drastically, then a modest recovery that allows them to hold or raise prices. So the pattern is often one of profits being squeezed by rising costs and competition when the economy is going strong, and profits doing very well on the back of weak recoveries following recessions.

Still, one has to ask whether there are any signs that the party is getting carried away. One sign is the wave of M&A activity; another is the huge price paid for acquisitions such as WhatsApp? When a tiny firm with no assets or profits, except its user base, can change hands for nearly 20 billion dollars, one has to ask if things are getting out of hand.

But for me, one of the simplest signs of a market that is in an inflationary bubble is the response to news. In January, after losing steam, the market responded to news that the US Economy had grown in Q4 by over 3% was taken as great news – the recovery is underway! And stocks resumed their upward trajectory. Of course, those who looked closely noted that much of that growth was in inventories, and that the employment numbers looked weak. No matter, GDP numbers are over 3%, let’s bid higher and higher.

This week, the revised GDP numbers for the US in Q4 were released. As expected, the revision was downward — but it was a bigger downward revision than expected, to 2.4%. No matter — a silver lining can always be found. The decline was due to government shutdown, and bad weather, and other things that are all in the past. So let’s expect 3%+ growth going forward anyway! And bid the marker higher and higher!

Now of course the optimists may be right — more growth may follow. But none of this growth is making much of a dent in employment or wages, so purchasing power is stagnating. At some point, cost-cutting will reach its limits, and corporate profit growth will then be less impressive than it has been. Besides, as long as the party is going strong, who wants to be the first to leave the room?

But a word to the cautious — when the market goes up because growth is strong, AND because growth is weak, it is going up on faith, not facts. That is a sign of a bubble, and the higher it goes, the deeper it will eventually fall.

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