POLITICS: PennAve

A new kind of Cold War

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Politics,Barack Obama,Russia,National Security,PennAve,Susan Crabtree,Vladimir Putin,Europe,Ukraine,Magazine

As the United States weighed its response to Russia's violation of Ukraine's sovereignty, the military option was off the table even before one Russian soldier stepped foot in Crimea, and with good reason: The real battle between world powers in the 21st century is based as much on economics as it is on military muscle.

If the United States and allies really want to punish Russia and discourage future land grabs, they must once again wage the long war, this time working to break Moscow's economic leverage over Europe by eroding its export-driven economy. So far, Europe's extensive trade and business ties with Russia are preventing the West from dealing Vladimir Putin a swift and powerful rebuke.

"Everybody is much more concerned about their own economic costs of sanctions rather than looking long-term about what will happen if we do not respond," said Jorge Benitez, a senior fellow and NATOSource director at the Atlantic Council.

Putin's incursion into Ukraine stirred tensions reminiscent of the Cold War. Editorial cartoons were filled with Images of angry bears marching across maps of Eastern Europe, swatting at countries as Uncle Sam looked helplessly on.

President Obama's initial response was anything but quick and decisive, and the economic interdependence between Russia and Europe left U.S. allies wary of any strong measures.

When Secretary of State John Kerry suggested booting Russia from the G-8 as punishment, European leaders immediately resisted. It seemed fitting that Germany's finance minister signaled his government's disagreement.

Unlike the United States, Germany, an economic powerhouse and one of Russia's biggest trading partners, has billions of dollars on the line and has balked at U.S.-led attempts to land an economic blow.

That left Obama leaning on German Chancellor Angela Merkel to help coax Putin onto a diplomatic "off-ramp" that would de-escalate the crisis.

The administration finally announced unilateral U.S. sanctions and visa restrictions against individuals responsible for "destabilizing Ukraine." In a symbolic move, the U.S. also sent fighter jets to boost NATO and reassure allies in the region.

Gary Schmitt, co-director of the Marilyn Ware Center for Security Studies at the American Enterprise Institute, said Germany would be playing a dangerous game if it continues to take a soft line.

"Germany has to be careful that it is not headed down the same road that [British Prime Minister Neville] Chamberlain did" in the late 1930s, he said. "We shouldn't be reacting to this as if it's a dispute about fisheries."

But it's not just Germany. A British document captured by a photographer's lens suggested that officials in London are also concerned about the economic costs of imposing sanctions on Russia.

American foreign policy experts take issue with London's foot-dragging. Britain, they say, is not dependent on Russian oil and gas and possesses the biggest financial center in Europe.

Russia's companies and its oligarchs depend on London's financial services industry and have gobbled up posh real estate holdings in Mayfair and Chelsea.

Russia's economy is struggling already, and Britain and other European countries, U.S. analysts argue, need to withstand a little economic pain if they want Putin to understand that his behavior will not be tolerated.

The sole united response from the West came in the form of billions of dollars in financial assistance to bolster Ukraine's fledgling government and restore financial stability there.

The Treasury Department announced $1 billion in loan guarantees to Kiev, with the European Union offering $15 billion in financial assistance over the next two years.

Dealing Russia an economic body blow could prove far more difficult.

“Europe has the power to sanction Russia — they just don't have the resolve right now,” said Benitez. “U.S. sanctions on their own will have minimal impact.”

The Obama administration is poised to limit its trade investments, freeze Russia's overseas assets and impose visa bans — moves that would disrupt the international interests of Russian oligarchs with close ties to Putin.

But Moscow has signaled it would hit back.

Russia’s Senate is threatening a bill that would freeze the assets of U.S. and European companies operating in Russia if the West imposes sanctions, and there's worry that Ukraine will end up turning over its $1 billion in U.S. loan guarantees to Russia to cover higher energy costs.

Ukraine is already billions of dollars in debt to Russia, and in the past Moscow has hiked natural gas prices on the country as a form of political retribution.

Any U.S.-organized international effort to put the squeeze on Moscow would require Germany's backing. And Germany and Russia know that an economic tit-for-tat would be painful for both sides.

The steady exchange of oil and gas from Russia's state-run Gazprom and cars from German automakers Mercedes-Benz and Volkswagen kept Germany an economic superpower while other European economies succumbed to the global financial crisis.

In the process, Germany, which plans to shut down its power plants by 2022, has become more reliant on Moscow for its energy, importing more natural gas from Russia than any other country in Europe.

With Russia facing stagflation, Putin is extremely sensitive about fallout over a new trade war. He told a Russian news service that political tensions in Ukraine should not be allowed to affect global trade.

"We see a certain political tension, but it should not affect our current economic cooperation," he said.

Fifty-seven percent of Russia's gas exports go to Western Europe, with Germany accounting for more than half of that total. Twenty-four percent goes to Eastern Europe, and 19 percent to Turkey, according to the U.S. government's Energy Information Administration.

But financial analysts think Moscow has the most to lose from drawn-out economic warfare with the West, which could pull Russia's economy into recession.

Russia imports most of its unprocessed whole foods from Europe. While China is Russia's biggest overseas market, buying 10 percent of its exports, Germany ranks second with 8 percent, according to 2013 figures from the Central Bank of Russia. Other major importers of Russian goods include Italy, France and the United States.

Russia's economy is heavily dependent on energy exports, with gas supplies running through Ukraine to Europe. But sanctions could spur European countries to seek other sources of energy.

Russia is looking to expand exports to China and other countries in Asia but is keenly aware that its big, established Western markets could never be replaced.

Some foreign policy experts argue that Russia's days of energy dominance are already over.

Robert Blackwill, a senior fellow at the Council on Foreign Relations, and Kennedy School of Government professor Meghan O'Sullivan argue that America's energy revolution, most notably in shale gas, is shaking up the global energy trade.

In 2013, the United States surpassed Russia as the world's leading energy producer, and by next year, it will overtake Saudi Arabia as the top producer of crude oil, they wrote in an article in Foreign Affairs, citing projections by the International Energy Agency.

The influx of North American gas to the market will not entirely free Europe from Russian influence because Moscow will remain the continent's largest energy supplier.

"But additional suppliers will give European customers leverage they can use to negotiate better terms with Russian producers, as they managed to do in 2010 and 2011," they wrote. "Putin's influence could diminish, creating new openings for his political opponents at home and making Moscow look weak abroad."

Republicans and some Democrats are crowing about the possibility of U.S. natural gas exports breaking Russia's chokehold on Central and Eastern Europe as the turmoil in Ukraine escalates.

But even they acknowledge that government red tape and restrictions on energy exports to nations that lack free-trade agreements with the United States, coupled with physical limitations on transporting the product, will prevent any quick Ukrainian and European access to U.S. natural gas exports.

"The U.S. Department of Energy's excruciatingly slow approval process amounts to a de facto ban on American natural gas exports that Vladimir Putin has happily exploited to finance his geopolitical goals," House Speaker John Boehner said.

Obama has repeatedly rejected efforts to cast the U.S.-Russia clash as a second Cold War, and he's right to the extent that it will likely prove to be a long-term test based strictly on economics rather than military resources.

But many lawmakers are outraged that even with a weak hand, Putin so far appears to be outplaying the United States and argue the administration must take bolder action soon. Obama, they say, is misreading Putin's latest land grab as an isolated incident.

Sen. John McCain, one of Obama's harshest foreign policy critics, accused Obama of mishandling the situation in Ukraine because he doesn't understand Putin's motivations as "an old KGB colonel bent on restoration of the Soviet Union."

"This president has never understood it," McCain said. "This president believes the Cold War is over. Vladimir Putin doesn't believe that the Cold War is over."

Zack Colman contributed to this report.

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