Russia: How should we fight back?

Russia’s attack on Ukraine has rightly outraged most of us. Leaving aside the history that brought us to this present conflict, Russia’s attack is totally unjustified. Our natural instincts are to help Ukraine resist its aggressor. As we watch the destruction of lives and property, it is natural to want to send in our boys or planes to help. Surely, we can stop this by using the might of our military and advanced weapons. Wars tend to look like that in the beginning. Vietnam, Afghanistan, Iraq (I still can’t sort out what Bush/Cheney thought was America’s interest in attacking Iraq) looked like slam dunks going in. The realities were invariably very different by the end. How should we help Ukraine?

The U.S. and Ukraine’s NATO neighbors have been supplying Ukraine with weapons but left them to fight on their own. This was my assessment a month ago: “Ukraine-Russia-NATO”  As much as it strains against our impulse to help, President Biden is absolutely correct in ruling out our joining the war. For most of us, war, and the incredible pain it inflicts on those directly involved, is fought elsewhere by others. It is far too easy to say “sure, lets go to war.” “Ukraine-how should we help?”

But wars can be fought economically as well as militarily. Much of the West (the designation seems relevant again) has joined together to impose severe economic sanctions on Russia. But the objectives of these sanctions are not clear. They are too late to deter Russia from its invasion of Ukraine, though perhaps they provide an example of the potential cost to China if it decides to invade Taiwan. Are they meant to pressure Russia to come to the negotiating table? But it takes two to tango–Zelensky must be there as well. I have heard no statement of what Russia must do for the sanctions to be lifted.

The sanctions seem designed to cripple the Russian economy. Sadly, the pain will fall mainly on the Russia people rather than its government. Considerable pain will also fall on those imposing the sanctions. “The war in Ukraine and globalization”

Supply chains and financial channels will be disrupted for many years. But like military wars, the collateral damage an economic war is hard to predict. China and Russia and maybe India and much of Africa are being driven together to establish new trading relationships and non-dollar payment channels that don’t seem to serve American interests. If they are not explicitly linked to accelerating a negotiated peace, what are the sanctions for?  I don’t necessarily believe that our military industrial complex deliberately promotes the perpetuation of war, but as an economist I can’t ignore the fact that they have an economic incentive to do so.  

Missing from all of this seems to be the skillful deployment of diplomacy. The first priority, of course, is to end the fighting in Ukraine. But any peace agreement must look beyond the immediate war to the conditions that will promote peace and prosperity for Ukraine, Russia, Europe, and the world well into the future. As is often the case Chas Freeman says it best: https://www.youtube.com/watch?v=0vxufUeqnuc

Time and the Clock

At last, there is an issue on which the whole country agrees (and can fight about at the same time). We all agree that we should stop having to move our clocks up or back twice a year. That is wonderful news. Now the (I assume relatively harmless) debate has begun whether we should freeze day light savings time or standard time.

In today’s electronic era most of our clocks adjust automatically to the crazy rules of our government. For the others, including my car clocks, they are an hour off for part of the year as I have given up adjusting them long ago. I just have to remember which they are stuck at. Out of the wonderful blue, it would seem, the U.S. Senate unanimously approved a bill to make daylight savings time permanent. Apparently, “they basically like the idea of more sun later in the day — regardless of how it means sunrises arrive very late in the winter, approaching 9 a.m. in some northern states.” https://www.washingtonpost.com/politics/2022/03/17/senate-time/

We no longer (if the House also passes the bill) need to get angry at the absurd statement that DST gives us more daylight and can laugh at the joke.

More from the above Washington Post article playing along with the joke:

“’I was pretty surprised we had the power to change time itself,’ Rep. Jan Schakowsky (D-Ill.) said while leading last week’s hearing, reflecting on a previous vote to change the start and end date of daylight saving.

“Some lawmakers talk as if they have the power to alter the sun itself.

“’Let’s give Americans something to celebrate: longer days and more sunshine,’ Sen. Tommy Tuberville (R-Ala.), a co-sponsor of Rubio’s bill, said in a speech March 7.

“’Americans want more sunshine and less depression,’ Sen. Patty Murray (D-Wash.) said Tuesday in a speech.

“In fact, the days will not be longer and the sun will shine the exact same amount of time. The difference is how to set clocks for when the sun will rise and when it will set.”

So on with the debate whether to permanently adopt DST or ST. May the best man (or woman) win.

The War in Ukraine and Globalization 

We will cripple the Russian economy by cutting off their access to world markets. They will have to buy Russian.

We will strengthen the American economy by cutting off our own access to world markets. Buy American!

Both sentiments are circulating in the U.S. at the same time. If you don’t see the contradiction, you should probably stop reading. Cutting Russia off from external markets will definitely make it poorer but it will also hurt its former trading partners.

Without specialization and trade, we would all (the 99% of us) be poorer than dirt. See my very elementary explanation: “Econ-101-Trade in Very Simple Terms” This is why reducing Russia’s access to trade beyond Russia’s borders (cross border trade) will punish Russia and make it poorer. But this is often not properly understood even by very smart people: “Tony Judt on trade”

Trade is win-win, meaning that both the seller and buyer are better off as a result of their trades (assuming that their transactions are voluntary). Obviously then, restricting trade is lose-lose. Both sellers and buys are worse off as a result of restricting trade. I note this fact in my discussion of restricting trade with Russia: “How to Stop Russia in Ukraine” However, the rest of the world will have to scramble to replace Russian oil, gas, Ukrainian wheat, etc, and will pay higher prices for the substitutes.

Countries that impose trade restrictions on themselves (e.g., via tariffs) are often indulging in a form of corruption by enriching (“protecting”) favored industries or firms by reducing the competition they face from abroad (so called cheap Chinese labor, etc.). But trade policies and decisions can be more complicated than that.

Trade creates interdependencies. If a truck strike, or bad weather, or a cow disease, prevents the yogurt you no longer produce yourself from reaching your market (the local Safeway), you will go without it for a while. If semiconductors produced in Taiwan can’t reach American auto manufacturers on time and in sufficient numbers, car production is slowed. In short, supply chains that generally lower the cost of producing whatever, thus benefiting consumers, also increase the risks of supply chain interruptions. Businesses must (and do) evaluate the cost-risk trade off seeking a reasonable (profit maximizing) balance.  

Some products, e.g., those related to our national defense, are sufficiently critical that the government forces producers to forgo the economic efficiencies of importing them in order to minimize the risks of supply interruptions, especially in war time. While this is often justified, the line between risk reduction for national defense and corruption to buy votes or benefit friends is sometimes fuzzy. But no one can believe that buying steel from Canada is a national security risk as Trump claimed and as I note here: “Econ-101- Trade Deficits”  Buy American policies are more often in the corruption rather than the national interest category.

There is also an interesting political dimension to trade currently in our faces. The dramatic growth in trade in goods and services (from $63 billion in 1950 to $17,249 billion in 2020 “Worldwide export volume in trade since 1950”), has produced a dramatic reduction in poverty around the world (from 76% of the global population in extreme poverty in 1820 to 10% in 2018 “Extreme poverty in brief”’). It has also created significant interdependence between countries. This has positive and potentially negative aspects. While depending on Russia, China, Mexico, etc. for many of the things we enjoy (and sometimes even need) creates economic incentives to retain peaceful relationships, it also (the other side of the same coin) creates vulnerabilities and thus economic weapons to punish bad behavior. If the trade didn’t exist in the first place, cutting it off couldn’t be used to punish Russia. While we can inflict economic pain on Russia for its war on Ukraine by cutting off its access to our goods and services, Russia can and is inflicting pain on those of us who invested in Russia and who depend on Russian oil and enjoy Russian caviar.  

The pain some in the West have inflected on themselves (and the rest of us) out of their anger at Putin by canceling our enjoyment of Russia’s rich culture, is beyond comprehension coming from so called adults. “Russian musicians, artists, athletes and other cultural figures are facing broad backlash as Russian President Vladimir Putin has continued to press his relentless and increasingly brutal invasion of Ukraine.” “Ukraine war-be careful canceling Russia”

Among the tragedies of the physical and human losses in Ukraine, and the disruption of the lives of millions of Ukrainian refugees, are the damage to trading relationships and the global order. See my commons in:  “Ukraine-Russia-Nato”  We failed to deal properly with Russia and its concerns the first time around after the USSR was dissolved. It will take a long time to repair the damage done to the international order by Russia’s attack on Ukraine. We need to do a better job next time around.  “Western sanctions on Russia are like none the world has seen” We also need to better address the costs to those who must seek out new jobs and skills as a result of new technology and greater labor productivity, to which trade contributes. “Our Social Safety Net”

Development with Dignity

Human dignity is the central focus of a fascinating new book written by Tom Palmer and Matt Warner Development with Dignity–Self-determination, Localization, and the end to Poverty.  They spotlight the treatment of every person with the dignity due all people as a critical factor in unleashing the innovation and entrepreneurship that has dramatically raised the standard of living to virtually the whole world over the last three hundred years after thousands of years of no progress. The book is rich with interesting examples.

Palmer and Warner argue that the top-down approach of most development agencies and aid projects of “teaching them how we do it in our developed countries,” often fails as a result of overlooking and/or ignoring the knowledge and ways of social organization found in the local communities aid is meant to uplift.  Such knowledge is important to understand where the problems are and what is working well in a community. Any improvements must start from there and be embraced by the people we want to help. The IMF calls this “ownership.” It must start with treating every individual with dignity.

A wonderful example of the importance of understanding and building from local knowledge and practices is provided by Jennifer Brick Martazashvili and Ilia Martazashvili in their recent book on common law property rights in the villages of Afghanistan: “Land, the State, and War –Property Institutions and Political Order in Afghanistan.”  They argue very convincingly that the common law traditions of many Afghan villages can provide satisfactory property rights until there is a central government that can be trusted and has sufficient administrative capacity to administer the registration of legal land titles.

Both books reflect an attitude toward individuals and the importance of their agency for prosperous, liberal societies. I am struck by the similarity of attitudes in the above approaches to development aid and our approaches to social welfare in the United States. Our Federal, State, and local governments provide a wide range of programs to assist the poor or temporarily unemployed.  The food stamp program, for example, epitomizes the attitude that people “on the dole” can’t be trusted to make their own decisions about how to use such assistance. I don’t want to ignore the fact that there are people we shouldn’t trust to make their own decisions (drug addicts, the emotionally unstable, etc.). But the view that government can make better decisions about how food aid should be used than the hungry who receive it is at the heart of the Palmer – Warner discussion about the importance of dignity.

Those of us who support Universal Basic Incomes (UBI) are on the side of those who believe that most people know better than government bureaucrats or even well-meaning social workers what their needs are–i.e., how best to spend their money. UBI payments are made to every person with no strings attached. Unlike current unemployment assistance and other safety net programs UBI would not diminish the financial incentive to work, though the incentives to work include more than just money. With a UBI any additional income from work is kept. The UBI is not reduced by work. See my: “Our Social Safety Net”

Pilot tests of the impact on recipients and on their incentives to work are being carried out in a number of countries and cities with generally very promising results. A two year pilot that was recently concluded in the Washington DC area is typical:

“Placing money into people’s hands without restrictions empowered them to address their needs, program administrators said, and removed the typical layers of bureaucracy and eligibility requirements that can frustrate recipients and hamper the effectiveness of aid efforts. The study’s quantitative and qualitative data showed that “participants often struck a thoughtful balance between addressing immediate survival concerns like paying rent and longer-term concerns like accumulation of debt,” analysts concluded. Recipients surveyed for the study, which was released Thursday, reported lower rates of mental health stressors and food insecurity than people with comparable incomes in the District and nationally.” “Guaranteed basic income-dc-poverty thrive”

When Universal Basic Incomes are combined with the replacement of income taxes (both individual and corporate) by a flat consumption tax, the result is a nicely progressive tax rate relative to income. See rough estimates here:  “Replacing Social Security with a Universal Basic Income” It also simplifies the process of financing the government expenditures that we want.

Trusting the choices of individuals about their own lives doesn’t mean that we (government or private institutions) shouldn’t offer information to help inform and guide their choices. But it does mean that we do not make those choices for them. We give them the dignity with which free societies can and have flourished.

How to stop Russia in Ukraine?

In violation of international law, Russia has invaded Ukraine and the world is rightly outraged. Countermeasures to stop the fighting and punish Russia’s aggression do not include sending NATO armies against Russia for the very good reasons that it would significantly increase the risk of a devastating nuclear war and because our experiences with such wars in the last half century are not encouraging. What countermeasures might we (and are we) use(ing)?

Our primary tools are to economically and culturally isolate Russia in order to damage their economic ability to continue waging their war and to hurt their pride. What might that include within the limits of our commitment to the rule of law?

Each of us as individuals, companies, and governments have the right to decide who we trade and deal with. Refusing to sell to or buy from Russia can have a powerful impact on the Russian economy. Examples of companies that have ended or restricted their sales to and/or operations in Russia include Ford, GM, Toyota, VW, Volvo, Nissan, Honda, Subaru, Harley Davidson, Apple, BP, Equinor, Shell, ExxonMobil, Visa, Mastercard, Google, and Netflix. And the list continues to grow by the hour.

“Ikea, the world’s largest furniture company, is closing its 17 stores in Russia. The company said the conflict is having a “huge human impact” and “resulting in serious disruptions to supply chain and trading conditions.” In addition to pausing its retail and manufacturing operations in Russia, it will suspend all trade with the country and its ally, Belarus.” “CNN: Companies pulling back from Russia”

Sports and entertainment organizations certainly have the right to determine their members and kicking Russian teams or performers out of competitions, etc. can usefully demonstrate disapproval of Russia’s behavior.

More problematic are the announcements by Boeing and Airbus that they have suspended support services to Russian airlines flying their planes. Airbus stated that “it has ‘suspended support services to Russian airlines, as well as the supply of spare parts to the country.’” These are problematic because they might be breaking provisions in contracts these companies have with Russian airlines.  However, such contracts often provide for suspension in the event of war or other unusual circumstances. Moreover, if Russia withdraws from Ukraine in the next few weeks and the more severe sanctions are withdrawn, these reservations may become mute.

While social media platforms and entertainment companies (Disney, DirectTV, and WarnerMedia) also have the right to cut off Russian users, I am not convinced that it is always wise to do so. In my view we should all be able to view the propaganda disseminated by, for example, RT.  While I am sure that WarnerMedia’s decision to “pause the release of ‘The Batman’ in Russia,” will be devastating for many Russians, they do have more challenging issues to worry about at the moment.

A rather different category of sanctions are those taken by and/or imposed on others by governments. For example, all Russian airline flights are now banned from EU, U.S., and Canadian airspace. As a result, or perhaps for other reasons, the Russian delegation to the World Telecommunication Standardization Assembly (WTSA-20) of the International Telecommunications Union now underway in Geneva didn’t come. This important meeting is held every four years to allocate spectrum and set other global telecom standards. By its absence Russia has lost all opportunities to nominate and elect chairmanships of any study groups and task forces for the next four years.

Most payments in dollars, Euros and most other currencies have been forbidden by the issuers of those currencies with specific exception. Russia has been blocked from using S.W.I.F.T. for sending payment instructions. The most important economic exception is that Russia may continue to sell oil and gas to Europe and to receive payment for them. Another is that Russia may continue to make debt service payments on Russian debt securities held abroad. The assets of all Russian banks outside of Russia, including its central bank, have been frozen. I am not sure how these two are reconciled. “BBC News”  

The approach of blocking economic activity by blocking payments for them is a bit similar in spirit to Anti Money Laundering (AML/CFT) restrictions, which attempt to stop illegal activities by stopping the use of the proceeds of “crimes” that haven’t been proven, rather than stopping the illegal activities themselves. The effectiveness of blocking payments in key currencies depends on how widely they are supported. A UN resolution condemning Russia’s invasion of Ukraine was supported by 141 members. Only 5 countries voted against (Russia, Belarus, Eritrea, North Korea, and Syria). China and India and 33 other members (including, surprisingly, Cuba) abstained. Germany completely reversed earlier policies and is sending serious weapons to Ukraine and is increasing its military expenditures above NATO recommended minimums. While the extent of support is impressive, the abstainers open sufficient holes to undermine the impact of financial sanctions. None the less, the dramatic shrinkage of trade and real economic interactions will be devastating. Russia will be flattened and isolated.

More recently some countries have seized the assets of private Russian citizens.

The Russian Oligarch Igor Sechin’s yacht was seized Thursday by French Authorities while docked for repairs in La Ciotat, near Marseille. On the same day “Germany seized the Russian billionaire Alisher Usmanov’s 512-foot mega yacht Dilbar, which is valued at $600m, which was moored in Hamburg.” “Russia sanctions superyacht seizures”. To my knowledge, neither of these Russians committed any crimes in France or Germany or anywhere else outside of Russia. The legal basis for these seizures, unless they are being held temporarily pending a court determination of whether crimes have been committee, is very questionable.  

Imposing harm on Russia and Russians of the types discussed above, will have costs to us as well. This by no means suggests that we should not use them. Properties and businesses abandoned in Russia and goods and services no longer sold there or purchased from there will impose costs on the western companies involved.  Western owners of Russian securities are likely to incur losses. Some Russian debt will default. But Russia’s aggression must be stopped, and future aggression strongly discouraged. Watching the Soviet tanks crush Hungarian and Czech demonstrators in 1968 without our military intervention to help them was very painful but was the right thing to do, just as our nonmilitary approach now is the right approach, as long as we apply sanctions lawfully.

Putin’s reckless war in Ukraine is destroying Russia. Let’s hope that the good and long-suffering people of Russia will not allow him to also destroy the whole world.

Ukraine: How should we help?

It is impossible not to admire the bravery of the people of Ukraine as they fight for their independence and freedom. Without help, Russian troops are almost certain to capture Kyiv and other key cities. The EU and many other countries have pulled together as never before to impose serious sanctions and provide military and humanitarian supplies. See: “Sanctions”  Putin’s failure to prepare the Russian people for a military attack on their fellow Russians and cousins in Ukraine is provoking protests in Russia against this war.  But these may not be enough to save Ukraine and it is tempting to think we should provide boots on the ground to insure a Russian defeat. President Biden is right to believe that this would be a grave mistake.

Military interventions always look more compelling at the start, while going through the front door. Sure, our army can squash whoever. Years later, as we leave or are pushed out the back door (Vietnam, Afghanistan, Iraq, Libya, etc.), they are revealed as foolish endeavors from the beginning. While Vietnam has prospered after our withdrawal and Iraq’s development is promising, they might well have reached these achievements sooner if we had stayed out. Why is this so? Why can’t we just take over countries under attack and make them better?

Generally, the countries we attack are engaged in civil wars (Vietnam, Afghanistan, Libya). Even Russia’s attack on Ukraine has elements of a civil war. We almost never understand the nuances of such battles nor have sufficient military and diplomatic officials who speak their languages and know their histories as they rotate in for two years then out. We can never be sure which side or sides we should support.

Putting aside that we don’t really have the resources to fully police the world, we have rarely achieved our objectives in the wars we have undertaken since WWII even if those objectives seemed reasonable at the outset. Iraq is an example where we did not have a good reason (or any reason at all except feeding our military industrial complex) to begin with. Part of the reason is that we have never invested in the training needed to be successful imperialists. We are bad at running other countries. You can read some of my firsthand experiences with just how bad we were at running Iraq in my book: “My travels to Baghdad”

If we send in the American Army to defend Ukraine against Russia, even if no escalation in fighting results (which is by no means certain), we will be forced to remain there for X number of years to keep the peace. Which factions would we support or favor? Why do we imagine that it would be different than our experiences in Afghanistan or Iraq? While it is emotionally hard not to walk through that front door with our troops, we must remember what the back door feels like, not to mention the X years in between. President Biden is right not to do so. “Reflections from the netherworld”

Most Americans are good hearted and want to help those in need. However, I am hard pressed to think of a time when we successfully did so with our Army.

Sanctions

About 5 days ago, on February 24, Russia illegally and without provocation and cause attacked the sovereign country of Ukraine. It is in everyone’s interest (with the exception of the military industrial complex) to end the fighting and establish a sustainable peace as quickly as possible. I explored options in my blog Saturday.  “Ukraine-Russia-NATO”  

Sanctions are being piled on as the main counter weapon of choice around the globe, along with supplying Ukraine with military equipment. But which sanctions of what activities (use of SWIFT, banning access of Russian airlines, banning any travel across Russian borders, banning trade in military products, banning all trade, etc.) should be imposed? If all or almost all countries joined together to shut down all trade, travel, and financial flows between Russia and the rest of the world until Russia ends this war and fully withdraws it troops, the impact on Russia (and hopefully to a lesser extent the rest of the world) would be devastating. While it is hard to predict whether the Russian people would primarily blame the U.S. and the West or Putin’s government for the hardships imposed—it is unlikely that Russia would withstand such isolation for long. Russia seems well on its way to such isolation.

While sanctions have historically not been a very effective tool for changing a country’s behavior, such total isolation, if it can be achieved, would almost certainly be more effective than the more limited sanctions normally imposed. “A new history of sanctions has unsettling lessons for today”  Putin will have to back down or escalate. Putin would indeed be boxed into a very difficult position and there is no knowing how he might react. It is hard to imagine Russian military escalation beyond Ukraine’s borders, but it is possible, especially in the ambiguous ways often favored by Moscow (e.g., cyber-attacks). If Putin is squeezed too hard, the risk of nuclear war could no longer be ignored. This is a dangerous period.  “Just short of nuclear–the latest financial sanctions will cripple Russia’s economy” Such comprehensive sanctions should be largely removed as soon as Russian troops are withdrawn from Ukraine territory.

But while it is foolish (i.e., contrary to American interests) to keep Russia as an enemy in the long run, and it was foolish to have made it one in the first place, the Kremlin should pay a price for its attack on Ukraine.

Sanctions impose a cost on their target but also on those imposing the sanctions. If, for example, Russia is denied access to western products, the sellers are also denied the sales. Moreover, for many if not most economic sanctions, the people of the sanctioned country tend to suffer more than the government that is the real target. For post conflict sanctions, thought should be given to the most effective ways to sanction Putin and his friends specifically with minimal damage to the Russian economy. The borders and trade should be reopened to all but a small list of Kremlin officials including Putin. Putin’s properties and other assets abroad should be frozen or confiscated to contribute to Russian reparations for damage now being inflicted on Ukraine. “Russia’s military attack on Ukraine will have consequences for Putin”

Yesterday (2/27.22 6:37 PM), Edward Luttwak tweeted: “Putin’s agreement to talks with Zelensky’s reps is an abject surrender: by now the Russians should have been in control in Kiev and across the Ukraine with Zelensky dead or exiled. Frantic to divert attention, Putin has placed Russia’s nuclear forces on high alert. Meaning: zero”

Let’s hope that he is correct.

Every action should be carefully measured against is costs and benefits both short term and long term. Another protracted cold war would be a costly mistake for everyone. All measures should ultimately contribute to peaceful and secure relations between all countries.  Greenwald–War propaganda about Ukraine

Ukraine–Russia–NATO

Russia has surprised most of us with an all-out attack on Ukraine. What should the U.S., NATO, and Ukraine do now? Each possible answer implies different possible consequences. We would be wise to understand them as well as possible. We should try to evaluate the probable long-term effects as well as the immediate ones.

The fact of the matter is that that we made serious errors since the disbanding of the Soviet Union (the expansion of NATO, establishing Aegis Ashore missiles in Romania and Poland, etc.) that began on Christmas 1991. The effect was that Russia walked away from NATO rather than becoming a member. While all of this is very regrettable, it is nonetheless history. We are where we are now because this history has inevitably influenced the present and thereafter the future of Russian relations with the rest of the world.

While Ukrainian resistance appears stronger than Putin expected, Russia may well take control of parts of Kyiv and other western Ukrainian cities within days or weeks. However, following earlier examples of Russian incursions and given the inadequate size of its forces, it is likely to quickly withdraw after flexing its now stronger muscles in negotiating an agreement with the U.S., NATO and Ukraine.

According to Edward Luttwak tweeting on the afternoon of Feb 24 “Air strikes can reach any target but Russian troops are much too few to achieve a coup de main, the single act that both starts and ends a war. Yes, they control airfields & some city centers. Beyond them individual soldiers & volunteers will start killing Russian soldiers w/o end. They had a missile strike plan viz Ukraine air force, very weak in any case. Russian troops too few to control the country beyond airfields, central Kiev, Odessa, etc., nothing for hostile W Ukraine. Ukrainian soldiers & volunteers will fire & kill Russians. Final result: the end of Putin.”

President Biden has wisely stated that the U.S. will not send troops into Ukraine, which is not a NATO member. While he has rightly condemned Russia’s illegal attack, and together with our European allies has significantly increased economic sanctions on Russian banks, businesses, and officials, though still with significant carveouts, he has correctly, in my judgement, concluded that the cost to our already overstretched budget to fight a war over Ukraine is not in America’s interests.  We care about many people and things in the world for which it is not justified to spend our financial and human resources rather than focusing them initially on our own domestic needs. Some among us may want to rule the world but we can’t afford it either financially or morally. Our military industrial complex, which profits from wars, probably disagrees.

Luttwak claims that “close[ing] the road and rail connections between Germany and Russia… would be the most powerful of all sanctions.” This could be done unilaterally by Poland or the Polish people. “Polish peace demonstrators [could] stop the unceasing traffic of trucks delivering Western European exports to Russia.  German cars, Dutch vegetables, French luxury exports.  That very powerful sanction does not require NATO or EU approval, just some people who care. ‘No bypass’”

More generally, sanctions have historically not been a very effective tool. “A new history of sanctions has unsettling lessons for today” Trade is win win. Both sides benefit. Thus, blocking trade is loss loss. Both sides suffer. Moreover, it is very difficult to design sanctions that hurt the target government more than its people. “Econ 101-How to help Afghans”

Ukraine is more important and relevant to European security than to ours (though one may argue that if Ukraine falls and the democracy in Europe suffers and crumbles, this affects the United States in the long run as well). In addition to financial and military aid to Ukraine, one or more European countries could, outside of the NATO context, send their troops to help defend the existing government of Ukraine.

It is very unlikely that Putin would escalate the fighting further, though it is not clear how rational Putin is these days and Russia has nuclear weapons. He was close to crazy to have launched the war now underway in Ukraine. Such European military intervention would likely save the Zelensky government and the negotiated peace (which should have been negotiated a month or two ago on the basis of Putin’s eight demands last December) would still need to mutually satisfy the interests of Russia, Europe and Ukraine.

If Ukraine receives no military help, it might still hold off the Russian army from toppling the Zelensky government. Russia might then be forced to be satisfied to hold the eastern, Russian dominated piece of the pie. The final settlement might take a bit longer in this case, but it might contain similar provisions. As Luttwak has argued above, a full Russian victory is unlikely and is expected not to last for long and would be a huge drain on Russian resources. Russia will surely pay a very high price for (presumably) gaining a government subservient to Moscow.

The longer run (five to ten or more years) consequence of one or another of the above scenarios is, of course, hard to predict but it should be taken into account. If the Zelensky government survives largely on the basis of its own efforts, it might be hoped that Zelensky’s far from complete efforts to clean up and reform his government will continue and be strengthened. A Russian victory (replacing Zelensky–dead or alive–with a Moscow puppet) would surely perpetuate and strengthen the corruption Ukraine has suffered for decades. Putin’s original eight demands would still have to be resolved and agreed in a mutually acceptable way. Doing so in January, of course, would have saved everyone a lot of lives and treasure, but discussions of these issues were hard to find in the American press.  

How this war is settled will also have consequences for American, EU, and Russian assessments of each other’s strengths and interests and thus how to deal with one another in the future. Will Russia revert to an enemy in which we keep our defense industry happy with another cold war or will we undo the NATO inflicted damage of the last twenty years that turned a potential friend to a costly enemy? China has decided to stay out of the fray neither supporting the US-Europe alliance nor the Russians which is a wise decision on their part.

The initial reactions in Russia have not favored Putin. The Russian population was not prepared to shift from seeing Ukraine as part of the family to an enemy that its sons and daughters were dying to overturn. A Russian defeat or even stalemate “victory” could be the end of Putin.  I am predisposed to believe in happy endings, which is perhaps why no one pays me for my forecasts.

We must never lose sight of the fact that Russia is more than Putin, Ukraine is more than Zelensky, and NATO is more than Secretary General Jens Stoltenberg. If I had said Biden (or Trump) you would have understood instantly. And among the population are many factions. The U.S. seems rarely to take such domestic realities into account when it decides to march into and take over countries.

In an email February 26, Chas Freeman said: “Regrettably, the place of Ukraine in Europe, which might have been decided through negotiations between Moscow and Washington in consultation with Kyiv, will now be decided through interactions by Russian dictation to Ukrainians without reference to either the United States or NATO.  Russia’s coercive diplomacy failed to elicit an offer to address its longstanding, oft-expressed concerns about the possibility that Ukraine might become part of an American sphere of influence on its border under circumstances in which the United States has officially designated Russia as an adversary.  So, Moscow made good on its ultimatum, and used force.  As it did so, it moved the goalposts.  Now Russia appears to seek the subordination of Ukraine to its domination rather than simply its denial to the United States. This is a tragedy that might have been avoided.  Now we are left to hope for a resurrection of diplomacy when there is no clear path to it.”

On February 25, Pavel K Baev stated that: “Now we know that Putin’s obsession with Ukraine — which constitutes a threat to his regime not because of hypothetic NATO missiles, but because of its choice for democracy and closer ties with Europe — prevailed over common political sense and strategic risk assessments.” “Implications of Russia’s invasion of Ukraine–Brookings Brief”

But the almost last word should go to Edward Luttwak who tweeted on Feb 26: “Having invaded with too few troops to pull off a fait accompli, with many Russian troops killed because of incautious tactics that presumed no real resistance, Putin has also closed the door to talks with Pres Zelensky: ‘I will not talk with drug addicts and neo-Nazis’. Sanctions.   Not too late to send large numbers of small arms and point & shoot anti-tank weapons to Ukraine via Poland or Slovakia. There are warehouses full of both (+ their ammo) across NATO because of the drastic reduction in force-levels. Ukrainians are resisting bravely and deserve help”

And the final word goes to Thomas Pickering (former US Ambassador to the Russian Federation and other places): “The end result must be respectful, fair, and balanced for the people of Russia and for all other parties. It will take wisdom, time, sacrifice, and persistence. To get there, the U.S. must lead, help to finance, and participate extensively in an international coalition — through the United Nations if possible, outside it if necessary — and listen to all like-minded states.” “Implications of Russia’s invasion of Ukraine–Brookings Brief”

Diplomacy

What does the press coverage of the Canadian trucker strike and Russia’s threatened attack on Ukraine have in common?  Matt Taibbi’s column on the “The Great International Convoy Fiasco” will tell you. For good measure, he added that “On February 4th, 2004, the Wall Street Journal published, ‘A Historian’s Take on Islam Steers U.S. in Terrorism Fight’, about the influence of a Princeton Scholar named Bernard Lewis on George W. Bush’s Iraq policy. The ‘Lewis Doctrine’ was simple. The good professor believed there was no point to asking, Why do they hate us?”

For many weeks the American press (I apologize for lumping our somewhat diverse collection of newspapers into one camp) have been shouting that Russia might invade Ukraine any day now. Volodymyr Zelensky, the President of Ukraine, says that that is nonsense and to please stop saying it. I am inclined to believe him over our newspapers.

Something similar is going on with the striking Canadian truck drivers. The message in both cases is that we need to be tough. Arrest them and remove their trucks that are blocking the border with the U.S. Beef up our troops in Europe and tell Putin all the nasty things we will do to him if Russian troops cross the border. The mindset that reacts in these ways is not in our national interest.

Why are the truckers striking and why is Putin demanding a rethink of European defense architecture? While Putin has told us explicitly what he wants, to my knowledge no meetings have occurred between the Canadian truckers and the Canadian government. We may or may not sympathize with some of the Trucker’s concerns, but the proper (dare I say adult) starting point is to sit down with them and understand what they want.  At least the Biden administration is talking with the Russians, but it would be healthier if more were said in the Press about these talks and the issues that Russia has raised, and less about the potential for, if not eminence of, war. Such discussion of the pros and cons of mutually acceptable options are out there, but you need to search for them.

The role of diplomacy (the first intergovernmental tool of civilized nations) is to understand the concerns and desires of the other side. That is the essential first step in seeking out areas of common ground that each side can live with. War is (or should be) a last resort.  I am sure that Lockheed Martin, Raytheon Technologies, General Dynamics, Northrop Grumman, etc. can figure out other uses for their manufacturing and technical capabilities. “National Defense”

Econ 101:  How to help Afghans?

The world is rightly looking for ways to help Afghans without helping the Taliban (until or unless the Taliban forms a government the world is willing to recognize). Washington Post: “How to help Afghans without aiding Taliban”  In this Post article Anthony Faiola states that “The biggest problem isn’t a lack of food. Rather, it’s the disappearance of what had been the lifeblood of the Afghan economy — Western cash.” This mischaracterizes the problems of Afghans thus confusing our understanding. In this note I attempt to clarify the “cash” aspect of Afghanistan’s problems.

But first there is no escaping the fact that the cut back of foreign aid is reducing the income (and the goods that income buys) available to Afghans. Mention is often made of the approximately 10 billion US dollars of the Afghan government’s funds frozen in deposits abroad. These funds cannot be used until a new Afghan government is recognized with the authority to claim them. But these funds are not part of the lost revenue to the Afghan government. They are the wealth–the previous income saved–of the government (whoever that will turn out to be). The savings that we accumulate from our incomes for retirement or whatever is our wealth not our current income (though it can be drawn on to augment current income).

In recent years (prior to the Taliban take over) the Afghan government’s operating expenditures were 16 to 18% of Afghanistan’s GDP while its domestic revenue was 12 to 14% of GDP. The balance of its financing plus all development expenditures were from donors. The hope is that squeezing the Taliban “government” financially will add to the incentives for them to quickly form an inclusive government meeting international norms of human rights. Unfortunately, it is not possible to shut off the flow of funds to the government without also starving the Afghan people.

While the Ghani government has been replaced (temporarily) by Taliban leaders, the institutions (ministries and agencies) of government remain, but with new management. Of the government’s operating expenditures roughly 80% was for wages and salaries. Thus, the government could more or less finance its wage and salary expenses from its own domestic revenue without donor support. Indeed, all salaries have been and continue to be paid in the central bank (Da Afghanistan Bank — DAB) and presumably in the other government ministries as well, albeit with delays. However, the real value of these incomes is being reduced because of increased inflation (an indirect form of taxation). DAB and other government agencies have largely stopped providing economic and financial data since the Taliban take over.  IMF First-Review-Under-the-Under-the-Extended-Credit-Facility

None the less, freezing Afghanistan’s deposits abroad (DAB’s foreign exchange reserves held abroad) has created monetary problems within Afghanistan because of the inability to import the cash (dollar banknotes) on which the economy depends. Afghanistan remains a largely cash economy. Most payments are made in cash. Though inflation has been low in recent years (generally 2-4%), inflation in earlier decades was relatively high and thus Afghans held and transacted in US dollars quite extensively. Around 70% of bank deposits are in dollars. The availability of USD banknotes for local payments is thus very important. These were mostly supplied by the New York Federal Reserve Bank from the dollar deposits that DAB maintains there (and now frozen).

Prior to the Taliban takeover, the normal operation of DAB’s monetary policy consisted of receiving US dollars from the government (largely from donor grants) and depositing the equivalent value of Afghani in the government’s accounts. The government disbursed these Afghani to its employees in wage and salary payments (generally by electronic deposits to employee bank accounts). Without offset, the resulting creation and injection of these Afghani would be inflationary. DAB drains (buys back) this excess base money by auctioning some of the dollars it received from the government (sufficient to stabilize the dollar exchange rate) and capital notes of DAB. The government’s deposits of dollars with DAB took the form of credits to DAB’s dollar account with the New York Fed. From these deposits DAB pays the Federal Reserve to fly USD banknotes to Kabul as needed for DAB’s dollar auctions.

In mid-April 2021, when the U.S. announced its intention to withdraw the rest of its military personnel by September, an increased outflow of dollars by Afghans wanting to protect their wealth put the Afghani exchange rate under pressure. Acting DAB Governor Ajmal Ahmady (his appointment was never approved by Parliament) increased dollar auctions to stabilize the exchange rate. “Afghan central bank drained dollar stockpile before Kabul fell” As the amount of dollars in its vaults ran down, it used USD banknotes that it held on behalf of banks (approximately $700 million USD). The delivery of additional cash from New York expected in July never arrived and DAB’s balances at the New York Fed are now frozen until a new government is recognized so that no more dollar cash can be purchased from the Federal Reserve by DAB.

As an aside, I was surprised during a 2009 visit to Zimbabwe—as part of an IMF team following Zimbabwe’s dramatic hyperinflation during which it dollarized—to learn that there was an active private market in dollar banknotes supplying Zimbabwe from South Africa:  “Hyperinflation in Zimbabwe”

In the days just before and after the American evacuation in August 2021 public demands to withdraw dollar cash intensified but DAB had largely used up the dollars in its vaults (both its own and those held for banks). In response, on August 14 DAB imposed limits on the amounts that could be withdrawn each day. This fed public concern that their banks were running out of dollar banknotes and triggered runs on the banks. DAB was even running low on Afghani banknotes, which might have replaced dollars. Without access to its deposits abroad DAB is unable to purchase additional dollar cash nor pay for printing additional Afghani. For a largely cash and heavily dollarized economy this drying up of cash liquidity is very disruptive and the basis of the statement that people can’t buy the food that might be available.

In addition to the cash shortage, Afghans are also lining up to withdraw their deposits out of concern for a possible bank failure. Aid cut offs and civil strife have damaged many firms resulting in arrears on their bank loan payments. This threatens to push bank illiquidity into insolvency. Even if DAB had USD and AFN cash to lend or sell to banks with fully performing loans, DAB is currently unable to buy or lend against these illiquid bank assets. Moreover, the Office of Foreign Assets Control (OFAC) of the U.S. Treasury has sanctioned payments to many Afghan entities and activities blocking many payments to and from abroad by Afghan banks and uncertainly about the application of the sanctions regime has made banks overly cautious about executing payments for their customers.

UN and other aid organizations have experience in other countries with delivering wages and other payments to targeted recipiences (teachers, healthcare workers and potentially even government employees) without the funds passing through the government’s hands. This approach is needed and is being developed for use in Afghanistan. OFAC sanctions are being modestly relaxed and UN and other aid agencies have begun funding the importation of dollar cash for humanitarian assistance projects. The use of digital mobile phone payments, such as M-Paisa and HesabPay, should be promoted and exploitation to the extent possible.  “Use of mobile phone payments” The United States needs to and has been gradually relaxing its payment restrictions to make this possible.

The Taliban leadership needs to take urgent steps to establish a new inclusive government that can and will be recognized internationally thus unfreezing Afghanistan’s (and DAB’s) deposits abroad and eliminating its cash shortage and restoring development assistance. In the meantime, in addition to the urgent need for humanitarian assistance that bypasses the Taliban, the New York Federal Reserve, or any other doners, should consider a loan to DAB to finance immediate shipments of dollar banknotes to Kabul. Da Afghanistan Bank Law adequately protects the central bank from government interference in its conduct of monetary policy and bank supervision. As a condition for restoring USD currency shipments to DAB, the Federal Reserve (and the UN) should obtain an agreement from the Taliban government to fully respect that law and appoint qualified people to its Supreme Council and Executive Board.

Until Afghanistan has a proper government, and its economic development can resume, Afghans, many of whom are very poor to begin with, will suffer unnecessarily depressed incomes. The lack of cash is adding a further, tragic, and quite unnecessary disruption to the lives of a long-suffering people. This can be and should be fixed urgently. Any such assistance will somewhat reduce the financial pressure on the Taliban, but a total financial squeeze on the government will fall on the people of Afghanistan as well.

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I worked in Afghanistan as a member of the IMF program and technical assistant teams from January 2002 until mid 2015. I am grateful to Syed Ishaq Alavi for his insights and comments on this article. Mr. Alavi was Advisor to the governor of DAB from 2010 to early 2013, Director General Monetary Policy Department of DAB from early 2013 to mid 2018, and advisor to the Executive Director of the International Monetary Fund for Afghanistan, Algeria, Ghana, Iran, Libya, Morocco, Pakistan, and Tunisia from June 2018 to August 2020. For the sake of their security, I am not naming those who helped me with this article who remain in Afghanistan.