Thursday, April 3, 2014

How to prevent another Ukraine

Today all nations treat the people, businesses, and natural resources within their borders as if they were owned by the state.  Some resources, such as oil and minerals, actually are owned by many national governments.  But even in the US, where many natural resources are privately owned, the government controls all important aspects of these industries, very much along the lines described by Gunter Reimann in his 1939 book The Vampire Economy--doing business under fascism.  As a result, when international disputes arise governments employ innocent citizens and their businesses as war assets, even in the absence of a declaration of war.  The US Constitution prohibits "unreasonable seizers" in Amendment IV and deprivation of "property, without due process of law" in Amendment V.  Yet our government routinely prohibits domestic companies from engaging in normal business practices in order to punish other countries, even when Congress has not declared war.  No compensation is offered for lost business.

These actions never bring foreigners to heal, so to speak, but merely aggravate the issue in dispute.  For example, Russia has ridiculed the knee jerk American and Western European reaction to freeze some Russian bank accounts and deny certain Russians travel privileges to the West, following its occupation of Crimea.  I doubt that anyone really believed that that these economic penalties would work as advertised; it was all grandstanding in order to show that the West was "doing something".  On the contrary, these actions merely aggravated the situation.  Now Russia threatens to retaliate by cutting off its natural gas supplies to its Western European customers.  This threat has real teeth, as opposed to the American and Western European weak actions, for, as  German Minister for Economic Affairs and Energy Sigmar Gabriel said recently, there is “no reasonable alternative” to Russian gas imports.

We do not know if the crisis in Ukraine could have been avoided, but let us look at policies that could avert or at least ameliorate another such crisis.

Free Trade

The spark that ignited the Russian annexation of Crimea was the Ukrainian opposition's determination to spurn joining Russia's closed customs union and join that of the European Union instead.  The elected Ukrainian president, Victor Yanukovych, had hinted for months that he was negotiating an agreement with the EU. Then he did an about face and announced that he would join Russia's competing customs union.  The resulting fury of the majority of Ukrainians eventually led to Yanukovych's overthrow, the revolutionaries' determination to join the EU, and Russian seizure of Crimea.  Could all of this have been avoided? 

The European Union does promise free trade WITHIN ITS BORDERS, but it has erected high tariffs and quotas against non-EU goods.  The impact on Russia of Ukraine becoming a member of the EU would be similar to that on the US if Canada were to join the EU and drop out of NAFTA (ignoring for the moment all the problems with that supposedly-free trade agreement among the US, Canada, and Mexico).  Important trade with Canada would fall with all the disastrous consequences to both nations.  Unfortunately there is an additional and dangerous military side to Ukraine joining the EU--most EU members are also members of NATO.  Many former Warsaw Pact nations joined NATO shortly after joining the EU.  Undoubtedly, Russia concluded that Ukraine would follow suit, and Russia would have a NATO member in its backyard.  Doesn't anyone remember the Cuban Missile Crisis?  The US almost went to nuclear war with Russia to prevent Castro's Cuba from joining the Warsaw Pact and hosting Russian nuclear forces in our backyard.

It was the assumption that Ukraine would join one or the other customs union that brought on the crisis.  Eastern Ukraine and the Crimea are pro-Russian and the rest of Ukraine is pro-West.  Public opinion and loyalties in Ukraine are split and seem intractable.  Any action to join one or the other customs union was bound to trigger outrage by the other side.  But an American living in Ukraine, Roman Skaskiw, has written that the Ukrainian people need not be confronted with such a dangerous choice.  He argues that Ukraine should remain free of all economic entanglements and join no customs union.  It should unilaterally declare itself to be a free trade nation and accept foreign imports and foreign investment from whatever source.

The Unhampered Market Economy and the Rule of Law

Russia's response to Western economic sanctions against some of its key citizens has been to threaten the cutoff of vital natural gas supplies.  But what if Russian gas were not owned by the state and the state were not allowed to wield this economic weapon in the absence of a declaration of war?  Would Russia actually declare war?  I think not.  Even if the gas were state owned, as at present, a refusal to honor gas contracts should result in severe economic penalties being imposed on Russian companies for breach of contract.  Since the gas supplies are state owned, foreign customers might seek court approval to attach completely unrelated Russian national assets, such as ships and aircraft.  Just ask Argentines about the consequences of defaulting on their national debt.  Argentina's president always flies internationally on commercial aircraft and not Argentine military aircraft, because an Argentine Air Force jet would be attached by Argentina's creditors almost anywhere in the world.  Furthermore, in the future Russia should be forced to purchase a performance bond that it would surrender in the case of non-fulfillment of its gas contracts.  It should lose some customers regardless of offers to post performance bonds, its reputation having been destroyed.

But the Western European nations themselves have few alternatives to paying Russian blackmail, because they have interfered with the energy markets in their own countries to the extent that they have become completely dependent upon the energy production of capricious dictatorships like Russia.  Had Western Europe's energy companies been free to exploit domestic supplies, they would have rejoiced when one of their biggest competitors shoots itself in the foot by refusing to honor its contracts.  They would have been able to expand production and recapture Russia's Western European market incursions fairly rapidly.  If the US were a free market in energy, its companies would have been quick to sell natural gas to a strapped Europe; however, US law prevents this, another insult to economic and business common sense.

Western Europe and the US have been quick to freeze bank accounts and other Russian owned assets.  But what right do these countries have to force private companies to dishonor their contracts in the absence of a declaration of war?  The investment bankers of New York, London, and Frankfurt will suffer loss of business in the future, as Russian businessmen and businessmen of other nations feuding with the US and Europe take their business elsewhere.  We should never lose sight of Ludwig von Mises' explanation that it is the customer who directs the structure of the economy through his buying and refusal to buy.  So, in the end, it will be ordinary citizens on both sides who will suffer by the arbitrary actions of their governments to employ them and their businesses as weapons in this dispute.

Respecting the rule of law, property rights, and the sanctity of contracts would force disputing nations to resolve their differences peacefully.  A healthy respect for the rule of law and non-interference in economic affairs will prevent many crisis from ever occurring.  Had Ukraine declared itself to be a free trade nation, I am convinced that there would have been no riots, no revolution, and no Russian annexation of Crimea.

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