Vladimir Putin, Prime Minister of the Russian Federation captured during the 'Opening Plenary of the World Economic Forum Annual Meeting 2009'. (World Economic Forum ch/Photo by Remy Steinegger)
Vladimir Putin, Prime Minister of the Russian Federation captured during the 'Opening Plenary of the World Economic Forum Annual Meeting 2009'. (World Economic Forum ch/Photo by Remy Steinegger)

This year marks the 70th anniversary of the Bretton Woods agreement, which created the "twin sisters" of 19th Street — the International Monetary Fund and the International Bank for Reconstruction and Development, aka the World Bank. Together with their parent, the United Nations, these institutions provided key international public goods: international financial stability and growth (IMF), global development (World Bank) and collective security (UN). The men and women "present at the creation" of these institutions believed they were contributing to an era of international relations.

Indeed they were.

But seven decades after the founding of the UN system, the architecture is under stress. In a sense, the architecture of the Bretton Woods system must be "completed" or renovated to ensure that the IMF can effectively assist its members to deal with the realities of the 21st century, in which private capital flows dominate the limited resources the public sector can mobilize. And the Fund must once again be viewed as credible and legitimate. This will not be the case without governance reforms.

Europe holds the key to unlock these reforms. The Fund will not be viewed as legitimate as long as quotas ("shares" in the institution) reflect the global economy of the mid-20th century; not the economy of the early 21st century. Europe will have to yield representation to accommodate rapidly growing dynamic economies that demand a greater influence in the institution. It must trade-off short-term cost for longer-term benefits. In a sense, the choice is between greater control in an institution that is less effective, credible and legitimate, or less control over an institution that is more effective, credible and legitimate.

Meanwhile, the ideal of collective security, which had been rendered anachronistic in the era of nuclear stalemate, is under threat. Vladimir Putin is seemingly intent on slicing a bit of Ukraine here, a little there, confident in the knowledge that others are not prepared to confront him. His actions are a textbook example of brinkmanship: confront your opponent with an asymmetric choice between a small concession (the annexation of Crimea) or a much costlier alternative (the risk of armed confrontation).

When confronted with such a choice, rational individuals will, sensibly, choose the lessor of the two evils in order to avoid going over the "brink." But that concession merely emboldens the demander who proposes another asymmetric choice: eastern provinces with large Russian populations, or the risk of armed confrontation.

Absent some strategy to deal with the threat, the rational choice is, once again, to concede. The end result, however, is the destabilization of Ukraine and its transformation into a vassal state. This outcome is one that might have been rejected at the outset, even at the risk of war.

The secret to the success of brinkmanship is slicing your objectives into small pieces so that you confront your opponent with that unbalanced choice. It is a strategy that Putin is employing with remarkable skill.

The question is: how to stop him?

The goal, ideally, is to find a means to neutralize the brinkmanship. (Think back to the fiscal showdown between the US Congress and Administration over the debt ceiling and the trillion dollar coin, here.) Credible, graduated economic sanctions that impose a cost to further destabilization may be one approach — it is the approach that is being orchestrated by Washington. The key here is to provide an "exit ramp" in the implicit game of chicken; or, as a friend says, "don't play chicken on a bridge." Otherwise, there is a risk of triggering the very event (armed conflict) that both sides wish to prevent.

This underscores the importance of employing a series of escalating sanctions and exercising caution: acting rashly and prematurely imposing the full suite of possible sanctions could be counter-productive. Remember, in a game of brinkmanship with rational actors, neither side wants to go over the brink. As a result, a steady escalation of pressure, with the threat of more punitive sanctions if bad behaviour persists, allows the opponent to back away from the brink and provides for a possible de-escalation.

But is there a sanction (penalty) sufficiently robust to deter Putin from further gambits?

Frankly, I'm not sure. I suspect, however, there is such a threat given that international trade is invoiced in the U.S. dollar and that the clearing of transactions can be blocked through the banking system. The use of such sanctions could seriously disrupt payments and create chaos for Russian banks — an induced "Lehman moment."

The thing is, though, the effectiveness of sanctions is dependent on the willingness of Europe to support them. The use of such sanction would hurt European (and other) firms with investments in Russia. And Europe would have to assist in their implementation; already there are reports that Russian companies are seeking to denominate new contracts in euros to weaken the potential costs. Moreover, at least in the short term, Europe would bear the brunt of Russian economic retaliation, should gas shipments be blocked.

So, here, too, Europe has to balance the short-term costs and longer-term benefits: the choice of presenting an effective, credible barrier to Putin's aspirations against the potential longer-term consequences of ignoring Russian efforts to reassert itself in its neighbours

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.
  • James A. Haley is a senior fellow at CIGI and a Canada Institute global fellow at the Woodrow Wilson Center for International Scholars in Washington, DC.