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Back To The Cold War

At a dinner party in Brazil last week, another guest asked me what I thought about the Russian annexation of Crimea.

I responded by observing that this is the first time since 1945 that one recognized European state has forcibly taken land from another. This development fundamentally changes the geopolitical world around us - whether we want to accept that fact or not. The West, in my view, must either respond vigorously (even though it has not yet shown it is prepared to do so), or risk living with an aggressive, expansionist, heavily armed neighbor. History has shown that the first approach can end very well, and the second very badly.

Three or four of my companions, mostly Brazilian businessmen, nodded their assent. One, a factory manager who recently turned down a position in Siberia because of the distance from his elderly mother, loudly proclaimed that sanctions are unwarranted. Soon the conversation moved on to other topics.

The next day, Russian President Vladimir Putin celebrated his conquest by appearing at a Victory Day celebration (officially commemorating the Soviet defeat of Nazi Germany) in Sevastopol, the Crimean port that had housed Russia’s Black Sea fleet under a lease agreement with Ukraine until last month, when the tenant ousted the landlord.

On Sunday, the day after I returned to the States, Russian-backed militants in eastern Ukraine held a plebiscite in which they claimed an overwhelming mandate to seek something, though it is unclear exactly what. In the city of Donetsk, rebel leaders reportedly called yesterday for union with Russia. Putin’s government stopped short of endorsing the call but demanded that Kiev enter into negotiations with the militants.

The situation is reminiscent of Germany’s treatment of Czechoslovakia in the run-up to World War II. After British and French leaders acquiesced to his seizure of the largely German-speaking Sudetenland in 1938, Hitler sent his army into what remained of the neighboring state just a few months later. He declared the creation of a German “protectorate” of Bohemia and Moravia, while other parts of the country were seized by Hungary and Poland. The little that was left became the German-aligned Slovak State.

Putin has now absorbed Crimea, sent Russian special forces into eastern Ukraine and repeatedly massed his army on Ukraine’s borders, all to keep his neighbor, or as much of it as possible, in Russia’s political and economic orbit. All of this is in direct contravention of a 1997 agreement in which Russia, along with the United States and the United Kingdom, pledged to respect and protect Ukraine’s borders in exchange for the country’s handover of the nuclear arms that it inherited after the Soviet Union’s collapse.

In Crimea and again in eastern Ukraine, one of the first measures taken under Russian influence has been to shut down outside news outlets and replace them with Kremlin-backed mouthpieces. This mirrors developments in Russia itself, where Putin has consolidated state control over the media and the Internet, as well as the courts and virtually every other organ of government power.

Like the plant manager I met in Brazil, many Western business leaders want to proceed as though nothing has changed. Paper is not exactly a strategic industry, and a Western company’s investment in a Siberian mill that produces pulp for export to China is not obviously a matter of national security. But any investment, even a paper mill, in Putin’s Russia is a source of graft and power for officials who owe their positions to Putin, and thus helps strengthen his hold on power. Such investments also promise to become headaches for their Western owners should they ever need to rely on Russian courts or officials, neither of whom are constrained by the rule of law as we understand it.

Whether we choose to face it or not, the Cold War is back. Some might argue that it never truly left, just as some posit that the two World Wars were one prolonged conflict with a 21-year hiatus in the middle. I think this, too, is a fair observation, because even in the optimistic decade of the 1990s, Russia was a violent, corrupt, lawless society where insiders became oligarchs under the relatively benevolent, if sometimes inebriated, gaze of Putin’s predecessor, Boris Yeltsin. Just as the Great Depression helped pave the way for Hitler’s rise, Russia’s economic meltdown in 1998 set the stage for Putin to rise to power as the man who brought stability, and later restored a measure of economic and military muscle, for countrymen who still often yearn for a strongman.

Like it or not, the only options available to the West - and especially to a Europe that believed territorial aggression was a thing of the past - are to gear up for another prolonged confrontation with Moscow or to simply concede to Putin and his backers what they want and hope for what British Prime Minister Neville Chamberlain once called “peace in our time.”

Chamberlain described that state of affairs when he returned to London in 1938 from the Munich conference, in which he acquiesced to Hitler’s land grab in Czechoslovakia. “Peace in our time” became World War II in less than a year.

Nobody contemplates, and certainly nobody wants, an actual war with Russia - least of all the Russians, who have neither the economic nor military clout to match NATO. On the other hand, the Russians, at least as directed by Putin, know what they want and are inclined to take it if they believe they can get it at an acceptable price.

Leaders in Washington and Europe continue to behave as though this is still the Yeltsin era, when hope ran high that some combination of urging and incentives could bring Russia fully into the European fold. They continue to inflict minor economic sanctions (as Europe did yesterday) in the hope that a wrist-slap will make Putin recoil. Clearly, it won’t.

There are many powerful levers to be pulled, all of which are well known in NATO’s capitals. The Russians would be appalled to have NATO troops permanently based in neighboring countries such as Poland and the Baltic states. We could accelerate the deployment of missile defense systems and make defensive weapons (including short-range missile defenses such as the Patriot) available to protect Kiev and other key centers in western Ukraine. We could accelerate development of North American energy reserves, including the Keystone XL pipeline, along with natural gas export terminals that could help displace Russian supplies, on which much of Europe relies. We could remove Russian trade preferences. We could freeze U.S. and other Western energy companies’ investments in Russia and block transfers of advanced drilling technologies.

These sorts of steps, or even simply harsher economic sanctions, might actually raise the cost of territorial and political aggression to a level that Putin and his Kremlin colleagues are unwilling to pay. Most could be taken in Washington even if our European allies remain reluctant to confront Putin or compromise their own economies.

We thought we won the Cold War. If we did, it was only because we were willing to shoulder the costs and the risks of confronting Russian aggression and to forego economic opportunities in the meantime. Russia is no match for the West, either economically or militarily, but this only matters if the West is ready to draw and, more importantly, to enforce some red lines to constrain Putin’s aggression.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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