Could the crisis in Ukraine transform Russia?

Most of the commentary surrounding the extraordinary “euromaidan” demonstrations and fall of Ukraine’s government has focused on Russia’s influence on Ukraine, and in particular, the question of Russian intervention to support the now-deposed Yanukovich government. But we might find, in the final analysis, that Ukraine’s influence on Russia is far more profound. In the spring of 2013, the French export credit insurer Coface produced an intriguing risk index of “people power” movements. Such uprisings have become an epidemic in recent years. The most recent round of uprisings arguably began with the 2003 “Rose Revolution” that deposed the government of post-Soviet Georgia, followed by Ukraine’s 2004 “Orange Revolution”, a series of attempted “green revolutions” in Iran, and then, perhaps most unexpectedly, the “Arab Spring” that toppled the governments of Egypt and Tunisia in 2011. While very different in causes and results, these “people power” revolutions do have a few factors in common. Notably, they are the result of an increasingly educated middle-class taking to the streets, usually empowered by technology. The mobile phone (and particularly, the ability to broadcast text messages) played a large role in the Philippines, just as the photocopier had been crucial in Iran’s 1979 revolution and the fax machine played a role in the toppling of the USSR. In the Arab Spring, the Internet and even social media reportedly were crucial. These technologies, wielded by educated people, make it easier for popular movements to coordinate mass protest actions, and much harder for governments to control the flow of information (and the Blackberry-wielding London rioters are a further example). One implication of this analysis is that “people...

After Sochi, where is Russia headed?

Take a look at the graph below of the economic performance of the major oil-rich nations of the world over the past 30 years. The divergence is startling. In this case, “major” is defined as a population exceeding 3 million. “Oil-rich” means that oil exports account for more than 10% of economic output. And because the timeframe is 30 years, there are a number of countries that are too new to not appear in the chart. These new countries include Azerbaijan, Turkmenistan, Kazakhstan, Equatorial Guinea, and, topically, Russia. How will Russia do after Sochi? If we judge by the record of the past 30 years, there are two starkly opposed possibilities. One is the Norwegian option. Oil wealth was turned into capital investment, and capital investment was turned into greater output, year after year, until Norway was one of the world’s richest nations. Norway is not just a success compared to its oil-rich peers – and in cross-country skiing. Norway’s economic performance, measured in terms of absolute addition to income per person, is the best of any large (population 3m+) country on earth. The other possible route is the one taken by every other major oil-rich nation in the world aside from Norway, without exception (see graph). That is, over a 30 year period, of a negligible increase in wealth, or indeed – in the case of countries including Iran, Iraq, and Venezuela – the net destruction of wealth. How does this happen? There is no universally accepted explanation. Oil appears, in some cases, to fund civil wars, thus increasing the length or perhaps likelihood of violent conflict. Oil...

Ukraine crisis reveals Europe’s strengths

Things in Europe do not seem to be going so well these days. The Eurozone crisis is a recent memory. European politicians bicker over bailouts or make reckless threats. Unemployment is high. The Swiss are voting out the immigrants and in many European countries right-wing parties are on the rise. But the European model remains appealing. So appealing, in fact, that people in Ukraine are willing to risk their lives for it. Demonstrators in Kiev, picking a moment when the world’s eyes are on the region, have marched on their government, resulting in harrowing scenes of violence. Admittedly, there are many different factions involved in the protests now. But the starting point, about three months ago, was the Ukrainian government’s debate over a trade agreement with the EU. And the protests escalated dramatically when the government instead accepted a deal with Russia. Make no mistake: the violence is not just about trade agreements. Or rather, much of it is, but these are no ordinary trade agreements. As the intensity of the protesters’ commitment suggests, this is one of the most important struggles taking place in the world today. It is, in the phrase promoted by the European Union and taken up by numerous Ukrainian politicians, a “civilizational choice”. The trade agreement Ukraine signs will shape the country’s destiny. To see why this is so, take a look at the below graph. This shows the incomes of countries joining the EU compared to one of the EU’s richest members (Denmark). What is striking is that the rising lines of incomes in Eastern Europe are almost parallel – despite great differences...

The German Constitutional Court leads by example

The differences in interpretation of the recent German Constitutional Court ruling on the legality of “bailouts” by the ECB have been extraordinary. In part this is understandable: the court, in effect, ruled that bailouts via OMT are illegal under German law, but then nullified its own decision by – for the first time ever – referring the question “upstairs” to the European Court of Justice (ECJ). On the one side is the immediate reaction of some pundits (and financial markets) who appear to believe that this ruling removes a major obstacle to crisis recovery. In this view, since the ECJ would be unlikely to rule against OMT (as it is presumably less obsessed with issues of German constitutionality), the ruling effectively resolves the matter. On the other side are various degrees of panic. Some commentators have argued that until the ECJ actually rules one way or the other, an OMT bailout would be impossible. Perhaps the most extreme reaction comes from Wolfgang Munchau of the Financial Times, who initially argued that the Eurozone would break up, then argued that it would stay together, and now, on the basis of this ruling, has gone back to arguing that the Eurozone’s institutional problems are unfixable. On the face of it, this reaction is particularly odd. Whatever else one might think about the ruling, Germany’s Constitutional Court is leading by example. It is generally agreed that a lasting resolution to the Eurozone crisis will come when Eurozone economic institutions are created that stand above national governments – i.e., a banking union, fiscal union, and perhaps a common debt. In declaring that the...

Brinksmanship strategies and the US debt ceiling

Speaking of brinksmanship, the passage of a bill to raise the US debt ceiling with no strings attached makes much more sense when viewed through a strategic lens. The standard view is that partisanship has rendered Washington dysfunctional, that the differences between Republican and Democratic positions are so extreme that no agreements are possible, and the leaders of the Tea Party movement are simply irresponsible. Commentators holding this standard view tended to predict another bruising battle over the debt ceiling this month. They were wrong. Consider an alternate possibility: Tea Party legislators saw in the debt ceiling bills an opportunity to gain more leverage than they could hope to achieve by electoral means. When they said, “defaulting on debt would not be so bad,” they were not revealing their foolishness, but rather, seeking to make a credible threat. There is no point in engaging in a brinksmanship strategy unless one is willing to make a credible threat. There is no point in saying “we will force a default on the US debt unless you gut your healthcare law – but do not worry, we do not actually intend to default on the debt.” The power of brinksmanship comes from the perceived willingness to do the unthinkable. What appears to be madness in Washington then becomes, seen through this lens, a clever ploy. And then consider what happened in October from this perspective. The House Republicans said “we are going to default” and the markets did not move. Hence their brinkmanship strategy was exposed as lacking credibility. As a result, they had no leverage. And indeed, as one would expect,...