Monday, March 17, 2014

Crimea, Putin, and the End of Economic Unilateralism

The specter of American decline has loomed large in the imaginations of the talking heads in the media and in politicians who offer purported solutions to avoid calamity. We hear about unfair Chinese trade practices hollowing out American industry, the test scores of students in South Korea and Finland relative to our own, or the inevitable collapse of the dollar as its value strains under the weight of our perennial current account deficits.

While most of this has is genesis in hype and speculation, one fact cannot go unacknowledged: the economic hegemony of the United States, and the resulting ability of U.S. policymakers to wield near omnipotent power of foreign governments and institutions, is at an end. This new state of affairs is made painfully evident by the ease of which Vladimir Putin has walked into Crimea and conducted an effective annexation, despite clear objections from Washington, and Brussels to boot.

The reason Mr. Putin has (correctly) calculated that he can get away with this hitherto unthinkable maneuver is simple: He's got the economic muscle to back it up. While Russia's economy may have many critical structural weaknesses that preclude its workers from enjoying standards of living on par with those in Western Europe and North America, it does pull in hundreds of billions of dollars per annum in the form of natural gas and crude oil exports. As a result, Russia has accrued in the neighborhood of $500 billion in foreign exchange reserves, to which is adds every year by dint of its secular current account surplus. This war chest gives the Kremlin the confidence and ability to literally march to its own tune, secure in the knowledge that it can pay its bills regardless of ire it may cause on Capitol Hill. And with demand for fossil fuels ever increasing from developing economies, don't count on this windfall to dry up on any foreseeable time horizon.

The point of all this is not that the primacy of the United States is over, but rather that Washington must accustom itself to playing more of a "first among equals" role on the international political stage. The alternative is for future U.S. Presidents and policymakers to make bold proclamations and draw lines in the sand- lines over which our competitors will be increasingly non-hesitant to march.

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