If the West is serious about curbing Vladimir Putin's plans to turn Crimea into a permanent Russian theme park, the answer lies not in dubious sanctions or asset freezes but in the global price of Russia's crucial major export – oil.
Mr. Putin has always been a lousy economic steward, more focused on advancing his goals of restoring Russia's superpower status, consolidating control over key sectors of the economy and rewarding friendly oligarchs, than actually broadening growth and incomes.
Soaring oil prices and insatiable European demand for Russian natural gas provided the financial underpinning for his ambitions. But oil and gas could also be his undoing, because he is nearly as dependent as Venezuela on high world energy prices to keep his grandiose plans from being undone by a plunging economy.
Reducing Moscow's take from oil revenues would ratchet up pressure on the Kremlin, without entailing the huge risks of sanctions, which would likely only make matters worse. This could be accomplished if Washington were to tap its huge strategic petroleum reserve and persuade Saudi Arabia and other oil-producing allies to go along with the increased output long enough to put a severe crimp in Russian state finances.
"The U.S. does have alternatives [to sanctions] that could impose grave costs on Russia," says prominent U.S. oil economist Philip Verleger. Simply put, the plan would require President Barack Obama to reach a deal with Congress to release a fixed amount of oil daily for a lengthy period – not for the usual reasons of a national shortage or emergency, but to dramatically reduce the world price.
Mr. Verleger calculates that if Washington were to put 500,000 barrels a day on the market for up to two years, it would slash world crude prices by $10 to $12 (U.S.) a barrel without putting a significant dent in its own reserves. The tactic would have the added benefit of reducing consumer costs in the U.S., Canada and Europe. As natural gas export prices tend to be linked to oil, these would fall too.
Russia, which ranks third among global oil producers and is easily the world's leading exporter of natural gas, would take a direct revenue hit of about 15 per cent – or about $370-billion.
The lost revenue would cut Russian GDP by as much as 4 per cent. "It's not a huge hit, but it would nick them," says Mr. Verleger, who has long argued that the U.S. strategic reserve is far larger than it needs to be at a time when U.S. domestic production is expanding rapidly.
Russia needs oil to be about $117 a barrel to balance its budget. But even after a jittery market drove commodity prices higher in response to the military incursion in Crimea, Brent crude peaked at about $112. It fell back to $109 after Mr. Putin insisted he has no desire for armed conflict or any permanent designs on the region.
When oil declines, the usual response from Saudi Arabia is to cut output, which, in turn, would drive prices back up. But the prospect of Russian pain might be enough to persuade the Saudis to keep the taps wide open. One reason is that the kingdom supports the Syrian insurgency, while the Kremlin is propping up the regime of Bashar Hafez al-Assad. Given that, the Saudis are unlikely to thumb their noses at any moves that deprive Mr. Putin of a significant chunk of his hard income.
This sure sounds like a better plan than the current huffing and puffing. The European Union talks about taking "targeted measures," but most member states are never going to sign on to any penalties that could endanger access to vital Russian energy exports or billions of dollars worth of investments across a broad swath of the Russian economy. The U.S. is in much the same boat.
But which European government is going to reject an alternative that would mean lower energy costs and a less ferocious Russian bear?