Replaying history is a difficult, and often pointless, exercise. I recently read an article by Tom Friedman arguing, among other things, that NATO’s expansion into the former Soviet states was a major mistake because it unnecessarily alarmed Russia. He sites George Kennan in the article saying pretty much the same thing. Tom Friedman is a smart man and George Kennan is clearly a genius, particularly with respect to Russia and the Soviet Union. But smart people and even geniuses are not always right. It is possible that Russia, absent NATO expansion might have evolved into a less aggressive state. Who knows? It seems, to me, that the more likely scenario would have been a Russia, under Putin, just as aggressive and malevolent, but with a larger menu of defenseless Eastern European states to turn into puppet states or to invade and annex. If Putin did not have NATO to use as a pretext to foment his toxic form of nationalism, he would have done what lots of other despotic rulers do and created some other false pretext for promoting his fantasy of reviving the Russian empire.
Category: Russian Invasion of Ukraine
Should the West Boycott Oil and Gas Exports from Russia?
I am inclined the think that the answer to this question is a resounding “Yes”!
But the issue is complicated, because oil, and natural gas to a lesser extent, are globally traded commodities. It is absolutely true that Russia depends on the revenues from oil and gas sales. If we could cut off these revenues, it would be tremendously helpful in forcing Putin to alter his course. But can we?
Unfortunately, oil is a, mostly, fungible commodity. If oil is not exported from Russia to western Europe, it can with relative ease be exported to other countries, notably China. Switching the direction of these exports is not costless for Russia. The pipelines for the export of oil are, presumably, full. In the short run, redirecting Russian exports of oil to China, and elsewhere, will require shipping it by sea using tankers, or moving it by rail.
In the grand scheme of things, while capacity constraints on redirecting Russian oil exports are not trivial, they are hardly insurmountable. The bottom line is that boycotting the purchase of Russian oil will probably not hurt Russia all that much. For the same reasons, the very same factors that make a boycott of Russian oil exports ineffective at hurting Russia make the impacts of such a boycott very small for the Western allies. Once the oil hits the international market it limits the effect of the boycott on world oil prices. My own take is that boycotting Russian oil exports is probably worth trying. At worst, it will have relatively little impact on world oil prices, but it will impose some costs on Russia in the effort to circumvent it.
To the extent that it does work by preventing Russia from exporting some oil, it will increase world oil prices somewhat and that will have negative impacts in the U.S., Europe and elsewhere. I will address what we should and shouldn’t do to offset those impacts below.
Natural gas, while traded globally, is harder to redirect in the short run. Russia has a pipeline to China, which is probably full, but they have just entered a deal to construct a new one. The good news is that will take some time to build. (Although nowhere near as much time as it would take in the U.S. or western Europe to construct.) Russia has some capability to liquify natural gas for export by sea, but this, too, is presumably operating at capacity and will take some time to expand. A boycott of natural gas exports from Russia would, therefore, impose real short-term costs on Russia. Precisely because it would be effective it would also dramatically increase the cost of natural gas in Europe and elsewhere. Europe has some capacity to import more Liquified Natural Gas (LNG) but much of that excess capacity is in Spain, which is not linked by pipeline to the rest of Europe. The U.S., unfortunately, is currently operating at capacity in terms of its ability to export LNG. Higher natural gas prices in Europe will redirect available LNG supplies to Europe but there will be pain in Europe as a result of those higher prices. On balance, in my view, the pain for Russia of losing this source of revenue will be worth the pain of higher prices in Europe.
What should the U.S. do to offset the pain of higher oil and gas prices? There are some good policy options. Drawing down oil from the Strategic Petroleum Reserve and encouraging other countries to do likewise is absolutely appropriate. That is what these strategic reserves are for. We should also be using whatever leverage we have with Saudi Arabia to increase its oil exports. This should probably not be that difficult since the Saudi’s have a short term economic incentive to take advantage of these high oil prices and a long-term objective of not driving markets away from oil. We may be able to increase oil and gas production in the U.S. by lightening up on efforts to restrict that production (to achieve climate goals), but I am not sure this is quantitatively significant.
What we should not do is attempt to shield consumers from the impact of higher prices by lowering taxes on oil and gas. To do otherwise would be to effectively subsidize oil and gas consumption, which would be totally counterproductive.
If you agree or disagree, or you would like to add something on this issue, please submit a comment below.
Putin’s Attack on Ukraine and U.S. Politics
Vladimir Putin’s unprovoked invasion of Ukraine deserves universal condemnation. In my view, any U.S. politician who defends Putin is unredeemable.
There are some legitimate policy issues surrounding what America’s response to Putin should be. The stakes are immense—the preservation of the post World War II world order, in which war to seize territory from another sovereign country was unacceptable. Given these stakes, it is difficult to imagine an economic or political sanction that is too severe.
Some would argue that these sanctions should have been imposed as Putin built up his forces to prepare for the invasion. I am not sure that that would have made a difference, but we will never know. The problem is that to be effective sanctions require coordination among our allies and I am not sure that we would have been able to get that coordination before an actual attack.
Others would argue that we should have been more aggressively arming Ukraine for years. I think that is unambiguously true and there is much bi-partisan blame that can be spread around regarding that issue.
Looking forward, I think that Putin has succeeded in making it clear that building up NATO and strengthening NATO’s forces in the former Soviet states is, and always has been, essential to maintaining peace in Europe. Putin’s claim that the expansion of NATO is a threat to Russia has been stripped of any credibility by his own actions in Georgia and Ukraine and by his rhetoric with respect to the Baltic nations of Latvia, Estonia, and Lithuania.
Putin appears to be following in the footsteps of Hitler by using the presence of ethnic Russians in these countries as a pretext for aggression, much as Hitler used the presence of ethnic Germans in Czechoslovakia as a pretext for invading that country at the beginning of World War II. Those who ask what national interest we have in Ukraine, might well have asked what national interest Britain, France and the U.S. had in Czechoslovakia in the 1930’s. If Hitler had been met with united resistance, the carnage of World War II might well have been avoided. Putting that aside, the United States and the UK were parties to the agreement between Russia and Ukraine in 1994, in which Ukraine surrendered its nuclear weapons to Russia in return for a guarantee of territorial integrity.
At this point, any treaties or international agreements that Russia enters into must be viewed as worthless pieces of paper, not unlike the one signed by Hitler and Neville Chamberlain at Munich.
Any trade agreements with Russia must be viewed as weapons of war meant to make the West dependent on Russia. Unfortunately, this should have been clear to Germany before they shut down their nuclear power sector and made themselves dependent on Russian natural gas. It must be remembered, however, that that dependence is a two way street. If Russian gas exports are included in the sanctions imposed on Russia, the long-term effects would be devastating for Russia. Roughly 70% of Russian gas exports go to Europe and unlike oil, it is very difficult, in the short term, to redirect those exports elsewhere. There will be some pain in terms of higher oil and gas prices if Russian gas supplies are embargoed but it is never painless to resist an aggressive bully like Putin, Hitler, or Stalin. The U.S. should do all that it can to limit the pain for Europe by drawing down oil from the Strategic Petroleum Reserve, facilitating exports of liquified natural gas to Europe, and enabling the U.S. oil and gas sectors to maximize their near term production.
What is important at this point is making sure that, whatever Putin had hoped to obtain by invading Ukraine, he experiences a far worse outcome for himself, for the oligarchs who support him, and for Russia. A united NATO with overwhelming forces stationed on his border is a start. A Russian energy sector denied outlets for Russia’s only valuable export is a start. Freezing his assets and those of the Russian oligarchs and their families is a start. Crippling Russian financial markets is a start. Denying Russia access to western technology is a start. Arming Ukraine with every lethal weapon possible to defend themselves is a start.