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Thank You, Mr. Putin

05/06/2014

Economics is all about the allocation of scarce resources, loosely described as land, labor, and capital.  If you are trying to defeat an opponent, it takes less labor and capital to let him escape defeated than to continue spending resources to simply pound him.  Giving your opponent a face-saving exit may not be as satisfying, but it is certainly a better allocation of resources.

On March 14th, I argued that Cold War II had begun, with the Russian annexation of Crimea, but the resulting chaos developing inside the Russian economy would cause the Russian leader to look for a face-saving exit, just like it did during the early 1980s,  Now, I suspect I underestimated Putin.  Instead, he  provided the U.S. with a face-saving exit from the whole Ukraine imbroglio.

If he had sent 50 thousand troops across the Ukrainian border and simply taken the country, it would have been quick and easy.  In fact, I predicted he would do that the following week.  After all, why shouldn’t he just take it?  A large portion of the nation, especially the eastern half, had a strong Russian heritage and even spoke the language.  Most of them would embrace and shelter the Russian invaders.  Besides, with the Ukraine actively aligning itself with the European Union, it would only be a matter of time before it also became a member of NATO, when all members would be obligated to defend the Ukraine against a Russian military invasion.  The window to take the Ukraine was closing for Putin.

But, the U.S. would surely be antagonized, and it ain’t smart to antagonize the U.S!

Putin knew we would be very unlikely to assert our military force in a relatively remote nation, especially where we have so few economic or military interests.  However, as insurance to keep our military on the sidelines, Putin choose to arm the Ukrainians of Russian heritage and to send undercover Special Forces to start fights.  He invaded the nation by feeding internal dissatisfaction.  By doing so, he provided a cover for the U.S. to merely bluster, saving economic resources for both sides.  Ukraine will return to the Russian orbit, but the U.S. will save face.

But, Putin doesn’t understand markets, and, sooner or later, Russia will pay a larger price than he ever expected from the inevitable sanctions, which is bad for everybody.

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