Ifo Viewpoint No. 155: Why We Should Give Putin a Chance
Munich, 2 May 2014
The fact that the Soviet Union broke up without a civil war a quarter-century ago, that Russia subsequently found the path towards a market economy and that Eastern Europe was integrated into the European Union was a gift of history. The players involved in the Crimea crisis should not squander such a gift.
The annexation of Crimea was definitely a violation of international law. The peninsula was ceded to Ukraine by Russia in 1954 within the Soviet Union, and remained part of Ukraine after 1991 – a situation that was accepted by all parties. A redrawing of borders decided upon by only one party cannot be accepted in Europe.
However, it must be borne in mind that the present crisis was triggered by the West. The overtures made by NATO to Georgia, Moldova and Ukraine in recent years effectively threatened to encircle Russia's Black Sea Fleet in the only ice-free port at its disposal.
If U.S. President Barack Obama believes that Russia is just a regional power that will have to put up with this, he is wrong. Russia has protested as energetically as the U.S. did at the time of the Cuban missile crisis. Moscow used a referendum as its instrument in Crimea, but things could have been far uglier.
After killing millions of Russians in World War II and enjoying the good fortune of a peaceful reunification thanks also to Russia's support, it is the duty of Germany in particular to de-escalate the conflict with Russia. But some hardliners in Washington, Brussels and Moscow obviously have their own agenda. NATO can chafe at the bit once again, and the powers-that-be in the Kremlin are not the only ones to have noticed that international conflicts are an effective way of distracting attention away from domestic problems. It is good that the German federal government is trying to exercise a moderating influence, while exercising care not to endanger the solidarity of the West's alliance.
Were Russia to plan further annexations, we would have to react with sanctions. But we need to proceed carefully: No reasonable party can be in favour of the economic destabilization of Russia and a trade war.
Russia is already being weakened by capital flight. The country is far more heavily dependent on the West than vice-versa – despite the fact that some EU countries, Germany in particular, obtain one-third of their oil and natural gas from Russia. Roughly 60 per cent of Russia's exports are to the EU, while only 7 per cent of the EU's exports to third countries go to Russia. Russia's economic destabilization would radicalize the country and throw the world back into the Cold War era. The Ukrainian civil war that was avoided in 1991 would also return to the list of conceivable scenarios.
How can the cost of any further annexations be raised for Russia and the chances of finding a peaceful solution be strengthened, without doing any damage to Russia, Ukraine or the EU? The answer lies in the offer of a free trade agreement with Russia and the Ukraine as part of a new international agreement on Ukraine's future.
In 2010, Russian President Vladimir Putin proposed a free trade area stretching to Vladivostok from Lisbon. What happened? The EU worked on a free-trade agreement with Georgia, Moldova, Ukraine and Armenia instead. This only increased Moscow's nervousness, because it implicitly posed the threat of customs barriers for Russia.
Free trade with a country specialized in commodities, such as Russia, that complements the West's specialization in manufacturing, promises major trade gains that would be much greater than the benefits of trade between similar economies alone. EU politicians are currently negotiating a free-trade deal with the U.S., which would bring benefits to the countries involved. But the inclusion of Russia in a free-trade agreement could turn out to be a real gold mine for all parties. Free trade is no zero-sum game; everybody stands to gain. It enables the specialization and division of labor, which is the source of prosperity. Even countries with scant political affinities can engage in free trade and, by creating interdependencies, free trade also promotes peace.
Germany has no discernible Russia policy to date, although German Chancellor Angela Merkel is very familiar with the country. In the interest of preserving peace in Europe, it is high time for Berlin to actively pursue a strategy of convincing the EU bodies to forge good neighbourly relations with Russia, and with Ukraine and the other countries situated between the power blocs.
In the event of political stabilization, offering Russia free trade with the West would preserve peace, bring economic advantages to Europe and effectively push forward the policy of “change through rapprochement” first implemented successfully by Willy Brandt with East Germany.
Professor of Economics and Public Finance
President of the Ifo Institute
Published in German under the title “Frieden durch Freihandel”, Wirtschaftswoche, No. 16, 14 April 2014, p. 40 and under the title “Why We Should Give Putin a Chance”, The Wall Street Journal, 2 May 2014.