Peter Morici

The Crimea is lost. The challenge now is to avoid a wider conflict with a Russia bent on absorbing more territory and further extending its influence further into Eastern Europe.

To avoid an eventual choice between feeding Russia’s appetite for lost empire and a hot war, European and U.S. leaders must embrace expensive and politically tough economic and defense choices.

Save petroleum, aluminum and a few less significant products, the Russian economy is broadly uncompetitive in global markets. Oil and gas account for 75 percent of exports and 50 percent of Moscow’s revenues, and Russia depends on imports from the EU for technology and many consumer goods. It even buys ships to modernize its navy from France.

U.S. and European economic sanctions on Russian political and military leaders responsible for the Crimean invasion will make a statement but are unlikely to have any tangible impact on Vladimir Putin’s behavior. However, if the Europeans phase out purchases of Russia’s gas, it has few options to sell it elsewhere. Putin would be starved for cash to finance his military and spread benefits to political cronies.

Replacing Russia gas—which provides 30 percent of European supplies—won’t be cheap or pleasant. They must frack to develop shale gas, re-embrace nuclear power and accelerate solar and other alternatives.

For French shipbuilders, German equipment manufacturers and technology and consumer goods producers throughout Europe, cutting off Russia’s most important source of hard currency to buy what they make would be wrenching. Still, it would impose far more systemically destabilizing penalties on Russia.

More than Russian guns won the referendum in the Crimea for Putin. The sad state of the economy and political corruption in the Ukraine made the former Russian possession vulnerable to reacquisition.

To halt Russian expansion, the EU must do much more to assimilate the Ukraine and other former Soviet states into the western economy by building infrastructure and moving significantly more industry into these regions, buying a lot more of their exports, and imposing aggressive conditions for economic and political reforms in exchange for those benefits.

All of this would be provocative to Moscow and require rebuilding NATO forces, and moving those further east into Romania, the Baltic and aggressively courting cooperation with Belarus.


Peter Morici

Professor Peter Morici is a recognized expert on economic policy and international economics. He has lectured and offered executive programs at more than 100 institutions including Columbia University, the Harvard Business School and Oxford University.
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