Just as the dollar is being pushed up by predictions that the United States may survive its current economic troubles and potentially lead a global recovery, recent developments have threatened to dispel America’s remaining economic mystique, which in large part is responsible for its apparent prosperity.
With its invasion of U.S. ally Georgia, Russia has boldly asserted its regional power and has shaken up global economic calculations. Although Russia’s move again showcases America’s murky strategic foresight, more important will be the U.S. response. If America overplays her hand, which I fear she might, the nation will be revealed to be a paper tiger and an economic has-been.
First a word about bungled statecraft — when I served as a member of the English Parliament, much of my tenure was during the Cold War. In the early 1980s, I was appointed as the liaison to Soviet Politburo member Mikhail Gorbachev on his first official visit to the West.
Options Are Few
It became apparent to me that Mr. Gorbachev would become the next Soviet leader and his intentions were, if not benevolent, at least not belligerent. My views were in the minority, but Prime Minister Thatcher, when I briefed her, was highly focused. Toward the end of Mr. Gorbachev’s visit, the “Iron” Lady announced: “I think I can do business with his man!”
This simple remark had global impact. It opened the diplomatic door for the Reagan-Gorbachev summit meetings that ended the Cold War. As much as Ms. Thatcher and Mr. Reagan were correct in their assessment of Mr. Gorbachev, the current President Bush was wrong in his estimation of Mr. Putin.
In retrospect, it seems absurd that Russia would have long tolerated a pro-Western Georgia at odds with its strategic and political interests. However, U.S. hubris (which also assumes that the world will perpetually extend credit to overstrapped Americans) convinced our leaders that an angry Russia would be kept at bay.
Now that Russia has destabilized its upstart neighbor to the south, threatened the viability of its fledgling democratic government and solidified Russia’s influence over the region’s valuable energy assets, the Bush administration has insisted that Georgia’s territorial integrity be preserved. Russia, however, has insisted that a return to the pre-invasion status quo is off the table. To enforce its will, U.S. options are few and unappealing.
With American forces already committed in Iraq and Afghanistan, a military response is out of the question. This leaves economic sanctions as the more likely alternative. In the past, the United States could spend the Russians into oblivion, as it did with Ronald Reagan’s SDI arms race in the 1980s.
However, due to Russia’s energy-related resurgence and the staggering indebtedness of the U.S., the days in which America can trade economic body blows with Russia are over.
If America were to try to limit Russian trade or otherwise restrict commerce, the Kremlin could launch countermeasures that would pull the rug out from under the entire U.S. economy.
First, by restricting the export of its oil or natural gas, Russia has the ability to throw the global energy markets into crisis, and to cause an upward price shock. For Americans and Europeans already struggling with crippling energy costs, such a development may be hard to endure.
Second, Russia is in possession of hundreds of billions of dollar reserves, which it can sell into the market at any time. Such a move could spark a global run on the dollar, which would crush the currency and send commodity prices into the stratosphere.
With its massive gold production and gold reserves, Russia is also positioned to take control of the global gold market. By buying gold (perhaps with its jettisoned dollars) and restricting production, Russia could send the price of gold soaring, thereby destabilizing paper currencies around the world.
Some critics may argue that Russia would never pursue such policies, as their own citizens would suffer equally. However, if the 20th century teaches us anything, it is that the Russian leadership is never reluctant to impose privations on its citizens, and the Russians themselves have an amazing capacity to endure hardship.
In contrast, the governments of Western Europe and the U.S. in particular are acutely dependent on public support. In the U.S., in fact, economic and geopolitical strategy is geared toward keeping American consumers living beyond their means. Any policy that asks for economic sacrifice from voters is dead. A battle of political will fought with economic tools is a war the U.S. cannot win.
The danger is that U.S. leaders believe their own propaganda and actually pursue such a confrontation. The U.S. economy’s biggest asset is the lingering effects of its prior economic pre-eminence. The failure of an economic confrontation with Russia will shatter this remaining prestige. With its weakness thus exposed, investors and creditors will pull up stakes in the U.S. and send our economy into a tailspin.
Our leaders need to recognize the current reality and devise a policy response commensurate with our true strength. In this regard, coalition building is vital. Greater strategic confrontations with Russia are looming, particularly with respect to Ukraine.
We cannot continue living in the past and sacrifice our future based on a distorted view of the present.