If you’ve been paying attention to any newspaper, television, or radio station, the past 72 hours probably seemed like something straight out of a fiction novel or film. Though the chances are still remote, a series of events has been set into motion that, due to the existence of several mutual defense treaties among various nations, could result in World War III if not diffused quickly.
Personally, I’m fairly optimistic it can be avoided as nobody wants a war, but given Russia’s behavior the past few years, I can’t say that with any certainty. You never know what relatively tiny thing – like the assassination of an Archduke – can turn entire civilizations against one another and change history forever, which is why treading so carefully when arms are raised is important.
It All Started Back In November with the Ukrainian People Wanting to Increase Economic Ties with Europe
Ukraine is a sovereign nation. It is recognized internationally as a sovereign nation. It is a member of the United Nations. Geographically, it has Russia on one side and Europe on the other. Though not perfect, over the past twenty years, Europe’s system of free market capitalism and political liberty has resulted in a breathtakingly large difference in standards of living between the two. Back in November, the government of Ukraine rejected an extensive accord agreement with the European Union in order to forge closer relations with Russia. This went against the wishes of a significant percentage of the 45 million people who lived in the country and saw the opportunity closer ties to Europe meant; to expand trade with places like The Netherlands, Denmark, France, Germany, Italy, and Switzerland, which put Russia to shame on practically every imaginable front. No small part of this was the fact that Russia had a history of using its oil and natural gas reserves to control Ukraine, shutting of the energy supply whenever the people wouldn’t comply with whatever Moscow wanted, so they, understandably, wanted to be free. It’s human nature. Nobody likes letting someone else manipulate them like that. Who wants to become more dependent on the nation that controls your light switches?
Russia’s decline should come as no surprise to any of you. When I wrote a post back in June of 2013 called Russia Is Sliding Into a Self-Reinforcing Cycle of Cultural Repression That Will Destroy the Nation that detailed some of the problems I was seeing in the country, I never expected things to fall apart this quickly. Here we are, not even nine months later, and Russia has become one of the most discussed geopolitical forces on the planet. In that time, the extent of the nation’s misery, political suppression, and mindset has become even clearer to the world, as has the desperation of its leaders who are doing everything they can to occupy the population with “enemies”, both domestic and foreign, as a distraction.
To put it bluntly, this is a country that is well past decline and is suffering outright necrosis. One recent study in a medical journal calculated that 1 out of 4 Russian men will die before they are 55 years old, mostly as a result of alcohol, a rate exponentially higher than countries such as the United Kingdom or France and a general indicator of discontentment. Economic conditions are so horrible that what would be considered middle class in Russia would be outright dirt poor in places like Canada, Australia, The United States, or Switzerland. To distract from the horrific failings, the government has criminalized basic human rights, handed out jail sentences for the vague crime of “blasphemy”, and expanded the concept of Treason. Freedom of assembly and protest has been severely curtailed and criticizing certain officials and political leaders can now be considered illegal defamation. Not content to stop at the suppression of religious and conscience rights, the Duma began turning its attention to individual characteristics, as well. In what isn’t a surprise to anyone who watched the Sochi Olympics, Putin’s regime all but criminalized being gay to the point there are popular groups of Neo Nazis with online video channels boasting 136,000+ subscribers that hunt down 15 year old boys on the Internet, lure them away from their family, and then record videos of them (NSFL) being given the choice to be raped by a fork or have an eye gouged out as punishment for their “sin”. This is not a place any rational human would want to live. It makes Detroit look like Shangri-La.
I mean, this is a country where the cultural priorities are so irrational that a majority of the population considers playing blackjack to be exponentially more immoral than divorcing your spouse. I cannot even get my head around that. I’m not a gambler. I rarely speculate. That’s no secret. But the idea that walking into a casino and sitting down to play a game of poker with friends is somehow evil, while tearing apart your family wouldn’t be a greater evil? It is completely illogical. If you enjoy the probability, are willing to accept the loss, and all parties involved are consenting, there is nothing moral or immoral about buying a lottery ticket as currently structured or participating in a fantasy football pool at the office.
Personally, I think it’s only a matter of time before Russia outlaws abortion to deal with its declining birth rate, and experiences a repeat of former Romanian dictator Nicolae Ceauşescu’s mistake. One of the great economic hypotheses that seems clearly evident by the data is that when you make abortion impossible, you have a lot more births in a certain sub-demographic: low income, poorly educated mothers who don’t want children. This leads to a predictable rise in violent crime 20-30 years after the ban goes into effect as these neglected children become socially undesirable adults. (On the flip side, in the United States, the reason for our crime rate collapsing to levels thought unthinkable only a few decades ago has now been traced, at least partially, to Roe v. Wade, a fact that I accept as a rationalist but that makes me extremely sad as someone who veers heavily pro-life, personally. It’s a mental model called the Donohue-Levitt Hypothesis and you can read about it in this PDF from The Quarterly Journal of Economics.)
I’m getting sidetracked now, but it’s all relevant in the bigger picture. Let’s get back to the main story.
The People of Ukraine Begin to Protest In Support of a Closer Relationship with Europe
Peaceful protests began to take hold across the country and within two weeks, 300,000 people were demonstrating in Kiev’s Independence Square. They took over city hall, and demanded the government listen to the citizens. In response, the Ukrainian politicians, who were essentially acting as stand-ins for Moscow, passed twelve draconian laws violating the fundamental human rights of every man, woman, and child in Ukraine. They made it a crime punishable by years in prison to protest the government; to setup any sort of stand, tent, or stage unless authorized by the government; to assemble with other people and criticize government officials. Even talking badly about government or officials on the Internet could be considered “slander” that would require a sentence of one year of forced labor. The list goes on and is horrifying.
Meanwhile, to try and bribe the Ukrainian people, Putin promised to buy $15 billion worth of government bonds to lower the cost of debt in the county, and slashed natural gas prices, making energy cheaper during the winter.
The Government Cracked Down On Its Own Citizens So The People of Ukraine Revolted
It didn’t work. The protests continued so the government turned its weapons on picketers and students, housewives and business owners. Innocent people were murdered in the street for doing what we take for granted. One of the protest leaders was kidnapped and tortured for eight days. (If you have the stomach for it, here are some of the news images of the citizens who were gunned down to put a human cost on how evil the government was behaving.)
This violence against the Ukrainian people by their leaders had the opposite effect of what the Russian-backed puppets wanted. The country went into outright revolt. Citizens seized government buildings. They overthrew the administration, Parliament repealed most (not all) of the anti-protest laws, and the Prime Minister escaped to Moscow, where he has since been spotted. The protest leaders announced plans to create a new government and hold elections, giving people control over their own destiny (and, presumably, to join Europe while lessening dependence on Russia). A warrant for the arrest of the former Prime Minister for the crimes he committed was issued.
During this time, a smaller group of pro-Russian forces seized some government buildings in Ukraine’s Crimea region from the new government. They sent requests for help back to Moscow. Putin went to the Duma, Russia’s version of Congress, and received authorization to use military force. Russian troops were mobilized. They invaded Ukraine, seized control of Crimea, and have all but declared war on the new government instituted by the people. It is unquestionably an act of war. It would be akin to Mexico deciding it didn’t like political unrest in Texas and sending its military to occupy Dallas or Houston.
The Pentagon Suspends Relations, Ambassadors Withdrawn, Economic Sanctions Threatened
Forty-eight hours ago the United Nations had an emergency session during which Ukraine’s ambassador pleaded with the world to intervene following the unprovoked act of foreign aggression. International news sources drew parallels to Hitler’s comparable moves in Czechoslovakia and Poland prior to World War II.
Within the past few hours, the United States Pentagon announced it has suspended “all military engagements with Russia, including bilateral meetings, military exercises and port visits”.
Other world powers have begun to cut ties, and, it appears, the very real threat of economic sanctions are on the horizon, which could devastate Russia’s already low standards of living as Russia’s main economic lifeblood comes from the fact it sells roughly 25% of the gas consumed in the entire European Union. Such a move would also harm Europe, which would be faced with escalating energy prices as the continent had to find alternatives to Putin’s energy reserves. Just a few hours ago, the British Prime Minister, David Cameron, announced the Crown is drawing up a series of economic penalties that will severely cost the Russian government and people for this invasion. Details have not been released, yet, but if the chatter and historical precedent is any indication, options on the table could include freezing bank accounts, assets, and stockholdings of Russian investors, banning business relationships with Russian companies, and forbidding Russian citizens from traveling within Europe or North America.
Russian investors panicked at the idea of facing such economic devastation, as well as international speculators who were betting against Russia in a global conflict, caused the liquidation of shares en masse. By the end of the trading day, the Micex index had collapsed just shy of 11%. In response, Russia’s central bank jacked up interest rates to try and attract capital. Meanwhile, Ukraine, the innocent victim in all of this, is running low on money, with foreign currency reserves at an estimated $17 billion, or enough to fund approximately sixty days’ worth of global imports. Without the bribe money that Russia had provided, it’s checks would start bouncing, leading to tremendous suffering for the Ukrainian people. To provide some real numbers, here is an excerpt from Britain’s The Guardian:
Some £34bn was wiped off the value of companies on the Moscow stock exchange on Monday and the central bank burned through an estimated £10bn of its reserves propping up its currency as investors took fright at the most serious standoff between Russia and Ukraine since the fall of the Soviet Union.
The bank was also forced to raise its main interest rate from 5.5% to 7% – the largest hike since financial crisis ruined Russia in 1998.
Personally, I wouldn’t want any money working in Russia even if the assets were incredibly cheap because there is a very real possibility of retaliation against sanctions. Were the conflict to escalate – and the State Department has said it has moved beyond the theoretical and the paperwork is being drawn up as I type this – I don’t think any American investor’s money would be safe within the borders of Russia or her allies. It doesn’t do a bit of good to buy a stock at 2x earnings if it’s taken from you without recourse or, perhaps more likely, you are unable to move your money outside of the country.
What Happens Next Depends on Russia and Putin
Ideally, Russia won’t do anything. It will call it a day, bring its troops back to Moscow, and leave the Ukraine alone. If the Russian government did something monumentally stupid, like invading another country in the surrounding area, it would likely trigger certain NATO agreements that would escalate to war overnight. In very short order, you’d have almost three dozen of the world’s most powerful countries fighting on opposite sides of one another as certain treaties triggered other treaties.
It would make no sense for Russia to do this, economically. The European Union is Russia’s largest trading partner. If the EU cuts it off, a bad situation in Russia gets much worse.
Here in the United States, our biggest concern is China. China is often seen as being buddy-buddy with Russia, but given the enormous cross-investments it and the United States have made over the past generation, it would be economically excruciating for our friends in the Far East to go to war with us. Last year, we sold $122 billion worth of stuff to China and bought $440.4 billion worth of stuff from them, resulting in a net transfer of wealth equal to $318.4 billion from U.S. citizens to Chinese citizens. Meanwhile, its imports and exports with Russia are almost a rounding error in comparison.
I hope it’s all much ado about nothing and we can go back to relatively non-important things like a 10 basis point movement in the unemployment figure or whether or not Justin Bieber is addicted to cough syrup. As trivial as it may sound, it’s a luxury for society to indulge in that kind of nonsense because it no longer has to worry about survival and safety. It also demonstrates the importance of so-called “cultural victories”, which are familiar to any of you who play the game Civilization. If the world went to war, I wouldn’t just be concerned about the United States, my thoughts would be with other nations that now have a role in my everyday experience.
Whatever happens, make no mistake about one thing: The only reason the world hasn’t declared war on Russia is because Russia has nuclear weapons. If this were 1914, there would be a very real possibility we’d all be drafting troops and shipping off to battle. Nobody wants to get into a fight with a counterparty that can guarantee mutually assured destruction.
I’ve given up trying to understand Russia’s motivations. The thinking is so twisted, so warped, and so primitive that it’s like the country was suspended in the last century and didn’t advance as the rest of the world moved forward. This is a government that refuses to recognize reality, and its economic failures are clear to everyone, yet it steadfastly sticks to the same failures. This is a country that, despite facing the worst economic growth rate in 14 years and still being far behind nearly everyone of its European customers, still insists everything is fine; that “Economic freedom, private property and competition, a modern market economy but not state capitalism should be the core of the new economic growth model”. It must be a magical world where restricting personal political freedoms, and a ban on capitalism proper, somehow leads to economic freedom, private property, and competition. I wish I could figure out how to work that kind of alchemy. The guy must have some pixie dust in his back pocket or something.
On the upshot, the /r/gaming forum is treating this like it is a game of Civ now that “everyone has renounced Russia”. If you play the game, you’ll get it immediately.