All too often, it seems that a lot of people in this country like to project our power around the globe in ways that are simply unrealistic. Further, I’m of the opinion that a measured, cautious approach to foreign policy is usually the best course of action. Of course, in the natural discourse of a democracy, both of these things tend to quickly get lost in that desire for short-term gains in the polls and the ability to appear commanding when engaging in a good old-fashioned sabre rattle.
It’s fairly easy to make this assertion now, as the Russian ruble is reeling after a massive crash on December 16. Combine that with tanking crude oil prices and it seems the entire Russian economy is in freefall. Crude oil passed below $60 a barrel this month, and the ruble, Russia’s currency, plummeted some 19% on Tuesday, prompting an emergency meeting by the central bank to hike interest rates from 10.5% to 17%. That puts the ruble off over 50% in total this year.
Which just might mean that the Obama administration’s approach to the Ukranian crisis this spring and throughout the summer was (gasp!) the optimal reaction to the situation all along.
A Lot of Criticism for All the Wrong Reasons
It’s sort of the duty of the opposition party to stick it to the President when something bad happens abroad. This spring and summer was one such case, as Republicans took to the airwaves to launch a series of withering attacks on President Obama for failing to project American strength abroad after Russia annexed the Crimean peninsula and supported a pro-Russian separatist insurgency in Eastern Ukraine.
“As the risk of further Russian aggression against Ukraine appears to be growing, it is outrageous that the Obama Administration still has not met the Ukrainian government’s request for modest military assistance,” said Senator John McCain in an early April statement.
"He's demonstrated repeatedly, I think, that he in fact can be pushed around, if you will, by Putin," Former Vice President and national shame Dick Cheney said about one month later during an appearance on Fox News Sunday. "[Putin is] taking advantage of this opportunity when he thinks we have a weak president to try to restore the old Soviet Union."
It was nothing new, really. Just your standard foot-stomping anger at any response to international politics that doesn’t treat the world stage like an elementary school playground. In fairness to the Republicans, it was an election year. Whether they seriously believed any of this or not, Republicans had an obligation to take shots at Obama for whatever reason they could find, and this was a pretty easy one to line up.
That said, with the development of the last few days, it’s starting to become clear that inaction was always the wisest course of action. Quibble if you must on whether Obama’s decision to pursue relatively weak sanctions was because he had actually anticipated these events, but the fact is that conditions today certainly appear to support the idea that an overreaction this spring would have been a potentially costly mistake.
Cheap Oil and Crashing Rubles Make Vladimir a Sad Dictator
Russia’s in serious trouble right about now. Very serious trouble.
That the Russian economy was teetering on the edge of disaster was fairly obvious to observers for years now. The nation’s wealth was almost entirely reliant on its fossil fuel reserves, selling natural gas to Western Europe and oil to, well, anyone who would buy it. It’s oil.
The nation relied on oil and gas for 68% of its total exports and 50% of its total government revenue, which is sort of mind-boggling. After all, heavy reliance on selling fossil fuels has one pretty drastic downside: the volatility of oil prices. Case in point, the halving of the price of a barrel of Brent Crude since the start of September, from about $110 then to just under $60.
Now, with rock-bottom prices on oil, and what appears to be a currency on the verge of a serious inflationary crisis, the Russian economy is collapsing. It’s projected to contract 4.5-4.7% next year if oil prices don’t rebound in a big way, representing a fairly disastrous collapse.
The Waiting is the Hardest Part, But Sometimes Also the Smartest
It’s not entirely clear at this point how this will all affect the political situation in Eastern Europe. A complete collapse of the Russian economy could actually lead to an even more dangerous Putin in the long run. If Russia becomes a nation with nothing to lose, it’s at least possible that it could ratchet up its aggression and further destabilize the region while desperately trying to protect what shreds of prosperity it has left.
However, for the time being, it appears that Putin is ready to pivot away from his posturing. Plunging oil prices mean Russia may not be able to afford any sort of protracted military mission in Eastern Europe. If half of government funds come from oil revenues, and oil prices have just been cut in half, that would mean Russia’s looking at a 25% drop in government revenue in the near future. Add to that government notes that aren’t likely to get a lot of interest until the ruble can stabilize at least a little, and we’re looking at a Russian government with pretty bleak prospects for conducting an expensive military action.
There have recently been signs that Russia is ready to start backpedaling hard on its stance in Ukraine. Secretary of State John Kerry stated just today that Russia has “made constructive moves” over the last few days after Eastern Ukraine got through a full night of a truce between the separatist insurgency and Ukrainian forces.
Obama Was Always Holding All the Cards, and Maybe He Knew It
So, allow me to construct an alternative narrative to that of the portrait of the weak-kneed, hand-wringing chief executive unwilling to pull the trigger on bold but necessary action:
Obama recognized that Russia was a country perched precariously atop the global oil market, heavily reliant on a single economic indicator over which it wielded little control. The nation would be crippled by even a modest decline in oil prices. Meanwhile, Obama saw that the sort of drastic sanctions on Russia’s energy exports that would carry real teeth would be problematic, hindering the economies of our biggest NATO allies while also potentially provoking Putin into a more drastic response that would only further destabilize the region.
So he carefully coordinated with our allies in Europe on an appropriate response, ultimately settling on toothless sanctions to save some face publicly without seriously disrupting the flow of natural gas from Russia that Western Europe depends on. He did this knowing that, even if things got worse, the United States still held two trump cards. First, the harder sanctions that would limit oil and gas exports would be utterly crippling for Russia, and that they might become possible should Putin’s aggression prove excessive. Second, that he could could open up the huge reserves of natural gas freed up by the North American shale rush, not to mention the free-flowing WTI crude oil, for export to Europe, seriously undercutting the markets Russia relies on. He took neither action, though, as he saw that they weren’t necessary or prudent.
So Obama watched and waited. He waited for the pending disaster that was the Russian economy to follow its natural course. He waited for that moment when Russia would be forced to limp home and lick its wounds, not by the United States but by the harsh reality of the global economy. He waited for all of our policy goals to come to fruition without having to take drastic action that might heighten tensions with Russia or place our allies in a tough spot. He waited because patience was always the wisest course of action, no matter how many senators angrily called him a wimp.
Now? Russia appears to be backpedaling in Ukraine; the economies of the Euro Zone are admittedly troubled but no more so than they were prior to this crisis; and the United States may be in as strong a position as it has been internationally since the 1990s.
Obviously, I’m not really close to the administration’s decision makers, I can’t say that this at all resembles the actual thought process from inside the White House in March. I don’t mean to imply that everything above is at all accurate, simply that there’s as much reason to buy into this particular version of events as there ever was to the one where all of our problems could be sourced to a lack of chest-thumping machismo by our Commander in Chief. The reality, as per usual, is probably somewhere in the middle.
Still, I do think it’s worth everyone taking a moment to remember just how wrapped up in taking swift, decisive action many of us were just nine months ago. In the long term, a slow-moving, measured approach to that crisis appears to have yielded the best result, while the sort of rapid reaction promoted by McCain or Cheney might have upset a balance that was clearly already in our favor.
And I hope that it’s something everyone keeps in mind for the next major crisis that crops up halfway around the world. Sometimes the strongest move is to do nothing.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer