Beyond sanctions: An off-ramp for post-Putin Russia
If hostilities permanently end, we'll need a Marshall Plan to help Russia recover
In a previous post, I talked about the impact of the “big gun” financial sanctions — cutting Russian banks off from SWIFT, freezing the assets of the Russian central bank, and so on. Already, we are seeing the economic consequences manifest. The ruble is rubble, and the Central Bank of Russia has raised interest rates to an unprecedented 20% in order to prevent a total financial collapse. The Russian economy is being hit hard, and regular Russians are going to suffer en masse.
The real question is what this accomplishes. Years of sanctions and embargoes on Iran and Cuba have not brought down those regimes; hurting regular Russians seems just as likely to rally them around Putin as rise up and overthrow him. So far, antiwar sentiment in Russia is surprisingly high, but that could be due to guilt over Russia making an unprovoked attack on a country that historically has been very close to Russia; if this comes to be seen instead as a conflict between Russia and the West, Putin’s popular support might firm up.
What really needs to happen, in order to end this war, is for Russian leaders to depose Vladimir Putin. As Russia defense policy analyst Rob Lee explained in our interview yesterday, that is the optimal outcome, because it would mean that the West and post-Putin Russia could quickly go back to being friends.
So I want to think about how we could use economic tools to provide an off-ramp for a post-Putin Russia, in order to encourage a transition of power and a quick and happy ending to this whole horrible situation.
Cold War 2 and the renewables weapon
Right now, a lot of analysts in the U.S. are thinking about the exact opposite of an off-ramp — they’re contemplating a protracted Cold War type struggle against a Putinist Russia. In this scenario, Putin either gains control of part or all of Ukraine, and the boundaries of Europe once again harden into two mutually opposed blocs. Since both blocs would have thousands of nuclear weapons, war between the two would be a last resort; hence the goal would be to weaken the Russian bloc over time by undermining its economy. And since Russia is, in effect, a giant gas station, economically undermining it would basically mean dropping the prices of oil and gas.
And the best way to drop the price of oil and gas would be to wean the world off of those fuels as quickly as possible. As they say, the Stone Age didn’t end because we ran out of stone. If the world finds cheaper substitutes for oil and gas, then people just won’t need oil and gas — the price will drop, and Russia will be impoverished.
This is basically what brought down the USSR. Energy efficiency measures in rich countries and new oil discoveries in non-OPEC countries broke the back of the OPEC cartel and sent oil prices tumbling in 1986:
As former Soviet politician and economist Yegor Gaidar writes in his book Collapse of an Empire, this is really what brought down the USSR, which by that point had become a giant gas station.
So we could conceivably do this again, if we could bring down oil (and gas) prices dramatically and permanently. For gas, this means switching rapidly to solar and wind. But it also means building “clean firm” power to provide backup for solar and wind, at least until energy storage technology gets good enough that we don’t need backup. Thus, it’s good that Germany is thinking about reversing its decision to phase out nuclear power. In fact, all of Europe should be following France’s example and building more nuclear power alongside renewables, even though nuclear is very expensive.
As for oil, the single best way to permanently crash the oil price is to switch to electric vehicles, since transportation still represents the bulk of petroleum demand:
Remember that because of scaling effects, building a ton of electric vehicles quickly drives down the price, so we should just replace our fleet as fast as we can.
In other words, the thing that will bring down the Russian economy in the long term is the exact same thing that will fight climate change in the long term — shift from fossil fuels to renewables and electric vehicles. Because of this, some have suggested we use the conflict with Russia as a way to restart Biden’s stalled economic agenda:
So this all fits together quite nicely. We do the thing we ought to be doing anyway, and switch from oil and gas to renewables. In addition to saving the planet, this undermines Russia’s economy and subjects them to a USSR-style collapse. And because renewables are often cheaper than fossil fuels now, and will become even cheaper with greater adoption, we get a cheap energy boom in the bargain! Very neat and tidy, problem solved.
And if the current conflict does drag on into Cold War 2, this is exactly what we should do. There’s just one problem: This long-term strategy won’t be very helpful in ending the Ukraine war and saving the lives of countless Ukrainians and Russians.
A Marshall Plan for post-Putin Russia
The optimal end to this war is for Russian leadership — generals, spymasters, oligarchs, and politicians — to simply remove Vladimir Putin from power, form a new government, and withdraw Russian troops from Ukraine. The whole war can be blamed on Putin, and Russia and the West can quickly go back to having good relations.
The current sanctions give them a number of incentives to do this. The fall in the ruble, the crashing of the Russian economy, the cutoff of economic relations with the West, and sanctions against Putin-allied individuals all mean that the globetrotting comfy lifestyle Russian leaders have gotten used to over the past two decades is no longer available. If the war ends, these sanctions will presumably be reversed, and something like the old normal can be restored.
And this needs to be made explicit. EU leaders and Biden need to announce clearly and repeatedly that if Russian troops pull back from Ukraine, the sanctions will all be quickly dropped. The part about removing Putin from power shouldn’t be stated; it will be implicit, since Putin is unlikely to ever personally forge an enduring peace with Ukraine.
But in fact, the EU and U.S. need to promise Russia much more than this. The reason is that all the stuff I described in the last section — the long-term replacement of Russia’s economic lifeblood with renewable energy — is going to happen anyway, war or no war. The threat of climate change, and the rapid progress in solar, wind, and storage technology, mean that the world’s days of dependence on oil and gas are numbered. Russia is in big long-term trouble no matter what it does.
This gives the EU and U.S. an additional lever — the promise of a Marshall Plan to help the Russian economy retool. Dropping sanctions will restore Russian oil and gas revenue in the short term, but in the long term Russia needs things like infrastructure investment, FDI in manufacturing industries, trade agreements to facilitate European and American purchases of Russian-made goods, and so on. The EU and the U.S. can provide all this. We can make numerical guarantees and specify sectors — railroads, roads, aerospace, IT, whatever. (In fact, this is probably what we should have done in the 90s, instead of “shock therapy” privatization…but here I digress).
This is something Russia can’t really get anywhere else — even China, most likely (given that China would rather preserve Russia as a resource-exporting appendage and keep manufacturing to themselves). Manufacturing investment and integration with the EU has helped Poland grow richer than Russia in the last few years:
Russia’s best bet, in the long run when renewables replace oil and gas, is to be like Poland. The West can make this happen.
But we need to be very clear about the conditions under which we’ll do this sort of Marshall Plan for Russia. They need to not just pull their soldiers back from Ukraine, but implement some kind of guarantee of lasting peace — and to allow Ukraine to join the EU and NATO if it wishes. In other words, Russia needs to commit to a future in which Russia and Europe never again divide the region into two opposing hostile militarized camps. (Realistically, that will almost certainly involve the end of Putin’s rule.)
So while we should definitely accelerate the transition to renewables, we also need to focus on the short term — an end to the bloodshed and the risk of catastrophic escalation. That means explicitly providing Russia an economic off-ramp — one that ideally includes a lot more than just the end of sanctions.
What’s impressed me most about this crisis is the likemindedness of European people. Despite Russian/Belarussian/Hungarian leadership that is at odds with liberal values, citizens of those countries (especially younger ones) seem to be on the same page as their counterparts in Western Europe in protesting the war and espousing European unity. Really destroys arguments claiming fundamental differences between the former USSR sphere/rest of the continent that can’t be bridged.
Dream scenario is Putin pushed out by popular protests, Navalny as interim leader, free elections soon thereafter. Then a massive Marshall-esque aid effort, allowing Ukraine to join EU/NATO first, and Russia in the medium term. Not likely, but also not impossible I hope.
Russia has been ruled by its security services, who are often venal and self-serving, since the 17th century and the days of the Tsars. If we offer to pour money into CapEx, most of it will end up lining the dachas of whatever elites survive the current scramble / reshuffling / purges after Putin.
I wrote about why that is over on Quora a few years ago, but the reasoning hasn't changed: