Shadow Government

Putin, Ukraine, and Time Inconsistency

There is a misguided debate swirling around Ukraine's gradual descent into civil war. It concerns the ability of the West to inflict economic pain upon Vladimir Putin's Russia. Given the unwillingness of the NATO countries to use armed force in Ukraine and the superiority of Russia's official and unofficial troops, the potency of Western economic sanctions might seem to be the full measure of Ukraine's defense.

In support of sanctions' efficacy, the International Monetary Fund last week issued warnings about the looming damage to Russia's economy. As quoted in the Wall Street Journal, the IMF's top official in Russia

...said it was difficult to assess the economic implications of these sanctions but together with geopolitical risks they are clearly killing private, state and foreign investment in Russia. He said that Russia is already in recession...

...The fund now predicts that Russian economic growth could be 1% in 2015. Previously, the IMF had forecast Russia's gross domestic product to grow by 2.3% next year, which is still well below the annual oil-fuelled growth of 6% registered between 2000 and the global financial crisis in 2008.

While 1 percent growth would be a step back from better years, it is not exactly a disaster. It is the growth rate the IMF forecasted last month for France in 2014.

Sanctions skeptics, such as Anatole Kaletsky, ask, "Why did the U.S. and European sanctions against Russia (last) week trigger a rebound in the ruble and the Moscow stock market?" He argues that measures to date have been ineffectual. Further, the sanctions approach transforms an immoral act into an economic transaction with a finite price. Even if the West managed to impose more damaging measures, "For Russia, a weaker ruble and an economic recession are clearly a price worth paying for recapturing Crimea."

The problem with this whole debate is that the fear inspired by a weapon depends on both the damage that weapon might wreak and on the perceived likelihood that the weapon will be used. We can stipulate that a concerted effort by the G7 countries to inflict economic pain on their erstwhile G8 partner could take a serious toll. This would certainly involve moving beyond the more targeted sanctions that have been applied to date and on to measures that would affect broader swaths of the Russian economy.

Assuming the West has the capability, will it deploy the weapon? There are at least two serious obstacles. The one that has received the most attention is the coordination problem between the United States and Europe. Serious sanctions would hurt Europe and its industries significantly more than they would hurt the United States, given closer economic ties between the European Union and Russia. The Financial Times reports that German "business leaders, worried about the potential loss of Russian gas supplies and export markets, make no bones about opposing sanctions..." The upshot was that a meeting between President Obama and Chancellor Merkel led to warnings of broader sanctions if the May 25 elections in Ukraine were impeded.

The timing was an interesting contrast with that set out by Ukraine's interim prime minister, who on May 1 said Ukraine was facing its "most dangerous 10 days." He feared that "the secessionists will put on a bigger show of strength on May 9, the commemoration of the Soviet Union's victory over Nazi Germany. On May 11, pro-Russian separatists who have seized government buildings in about a dozen cities in the Donetsk and Lugansk regions, plan to hold a referendum on independence and later unification with Russia." Other defense analysts have argued that Russia's "window of opportunity" -- based on troop readiness -- runs until mid-May.

The timing bears all the features of the sort of strategic game analyzed by Finn Kydland and Edward Prescott (in Nobel Prize-winning work). They described situations of "time inconsistency," in which one side will make promises about actions it will take later (say, end-May). When later actually arrives, however, those actions are no longer optimal (hence the "inconsistency"). Kydland and Prescott were talking about things like capital taxation promises intended to lure investors, but the idea applies equally well to sanctions intended to deter Russian aggression.

This second, time-consistency obstacle may explain Russian behavior. Putin's reasoning might be as follows: Even if sanctions would be devastating to the Russian economy, they will never be imposed. If he manages to create enough turmoil in eastern Ukraine so that the May 25 elections appear "absurd" or are pre-empted by a vote on autonomy from Ukraine, then the world will look very different. With eastern Ukraine lost to Kiev, Putin could then begin a series of international dialogues in which the parties could agree to go no further and could step back from painful sanctions that neither side really wants.

Why would he believe this? It describes recent history pretty well. After Russia's war with Georgia in 2008, a short period of frosty relations ensued. But within months, the United States pressed for a "reset." After all, what good dwelling on bygones? Then, after the invasion of Crimea this year, there was fairly widespread acceptance among analysts that it was unlikely sanctions could dislodge the Russians from their new acquisitions. Discussions of sanctions turned instead to future red lines (as opposed to the old ones from the Budapest Memorandums of 1994, guaranteeing Ukraine's territorial integrity).

Each time, when the moment arrived to take harsh measures, those actions were deemed futile and new warnings were issued about the future. The economists Kydland and Prescott diagnosed this sort of problem and warned that astute players would disregard the empty warnings. The laureates did offer a fix, as it happens: The party that can never follow through would like to pre-commit. That is one interpretation for legislation introduced last week by Sen. Bob Corker (R-TN), the ranking minority member on the Senate Foreign Relations Committee. The proposal would remove some elements of presidential discretion and pre-commit to a stiff sanctions response, based on Russian actions. There are problems with such an approach -- it will not be tailored to the needs of the moment, nor will it allow for easy coordination with allies. But it would restore credibility in a way that could alleviate the time inconsistency problem.

In the present circumstance, the worst possible outcome would be one in which the West actually is committed this time, but fails to signal that effectively to Russia. Avoiding that miscommunication equilibrium should be a major goal of U.S. and European policy. Given recent history, Western credibility now matters far more than questions of how many points could be knocked off Russian GDP by full-spectrum economic sanctions.


Shadow Government

Team Obama’s Strategic Shortfall on Iran

Two events have converged, which signal the poor fit between President Barack Obama's positive narrative about Iran in the nuclear talks and Tehran's negative role as a sponsor of terrorism described by the State Department. Expert-level nuclear talks between Iran and the major powers in New York are underway from May 5-9, on the sidelines of the Preparatory Committee of the 2015 Non-Proliferation Treaty Review Conference, and there is the April 30 release of the Department of State Country Reports on Terrorism 2013.

The bureaucratic gap laid bare in these events points to a strategic shortfall in Obama's plan for how to deal with Iran.

In logic, a syllogism is a narrative of premises and a conclusion that must be true if the premises are correct. A reversal can also produce a syllogism with false premises and a conclusion that is true. Because it is possible to deduce a true conclusion from two false premises, Team Obama has to pay attention to the veracity of its premises.

The first narrative below illustrates the administration's logical fallacy, which seems to be based on a valid argument but irrespective of the facts. The second takes evidence from the U.N. (nuclear) and State Department (terrorism).

Illogic of Team Obama

Major Premise: Unlike states that eventually dashed for the bomb before outsiders could detect the breakout, Iran will refrain from breaking out because of its desire to receive sanctions relief. 

Minor Premise: Iran's terrorism sponsorship is irrelevant to its nuclear ambitions. 

Conclusion: Iran's nuclear program is peaceful, its state sponsorship of terrorism is not contrary to peaceful nuclear goals, and Tehran is likely to cut a deal to limit nuclear breakout capability permanently for full sanctions relief. 

Logic of Critics

Major Premise: States with nuclear programs that eventually developed the bomb denied intent to build it, e.g., India and Pakistan. And there is little evidence Tehran values partial sanctions relief over becoming a nuclear-capable state.

Minor Premise: States sponsoring terrorism deny the charge, e.g., Syria and Iran, despite evidence to the contrary. And terrorism and proliferation are twin pillars of Tehran's priority of religious ideology over its national interests.

Conclusion: Tehran is likely to embrace a deal that only temporarily limits its nuclear breakout capability for full and permanent sanctions relief, while continuing to sponsor terrorism.

Regarding Iran's nuclear file, there are six U.N. Security Council Resolutions. The granddaddy is Resolution 1696, from July 2006. It demands Iran suspend uranium enrichment and reprocessing, which Iran has yet to do. Resolution 1835, from September 2008, restates the demands of 1696. And Resolution 1929, from June 2010, calls on Iran to open up suspect nuclear-related military sites.

The International Atomic Energy Agency (IAEA) is unable to substantiate that Iran's nuclear program is free of military purposes because inspectors are unable to access all suspect sites. At Parchin, Iran may have constructed a large explosives containment vessel to conduct hydrodynamic experiments, "strong indicators of possible nuclear weapon development," according to the IAEA. Despite appeals by the IAEA to visit Parchin, Iran has remained adamant in its refusal to grant access to this site, having engaged in a massive cleansing effort already. Iran is following "best practices" of states with nuclear programs that produced a bomb -- hiding and denying intent to build until it is too late to stop them.

The evidence is overwhelming that Iran is a state sponsor of terrorism and follows the playbook of rogue regimes -- to hide involvement and deny the accusation. But Department of State Country Reports on Terrorism 2013, abounds with references to Tehran's sponsorship of terror.

Chapters two and six of the Reports include segments on the Middle East and North Africa and on foreign terrorist organizations, respectively; there are some 23 references to Iran's involvement in terrorism. And Iran continues to be listed as one of the state sponsors of terrorism in the third chapter.

In a State Department fact sheet accompanying the April 30 release, Iran and Syria are the only state sponsors highlighted: "Since 2012, the United States has also seen a resurgence of activity by Iran's Islamic Revolutionary Guard[s] Corps' Qods Force," the report claims, as well as "the Iranian Ministry of Intelligence and Security...and Tehran's ally Hizballah."

Designated as a state sponsor of terrorism in 1984, "Iran continued its terrorist-related activity, including support for Palestinian terrorist groups in Gaza, and for Hizballah." Tehran denies it is a state sponsor but provides no evidence to substantiate denial. Iran admits it is especially galling for Israel to be absent from the State Sponsors list and an Iranian dissident group, the Mujahedeen-e-Khalq (MEK), is not on the Foreign Terrorist Organizations list; yet Tehran remains listed as a sponsor of terrorism. To its credit, State said that if Iran did not want to be accused of sponsoring terrorism it "should stop supporting terrorism."

Team Obama needs to pay attention to facts of Iran's hiding and denying its quest for the bomb. A sponsor of terrorism that defies demands to demonstrate peaceful nuclear intent is not an ideal candidate with which to sign a contract. Disconnect between narratives about Tehran in the nuclear talks and its role as sponsor of terrorism is yet another sign of lack of strategic vision in the Obama administration.