It's been a busy week for Iran-watchers. The European Union is mulling a phased-in oil embargo, prompting Iranian officials to label the move as "an economic war" against Iran. Now Iran's Asia customers are trying to diversify away from Iranian oil. These expectations of future cutoffs, combined with pre-existing sanctions, are taking their toll on the Iranian economy in the form of dollar-hoarding and a free-falling national currency. Fareed Zakaria sums up the current state of play nicely:

[T]he real story on the ground is that Iran is weak and getting weaker. Sanctions have pushed the economy into a nose-dive. The political system is fractured and fragmenting. Abroad, its closest ally and the regime of which it is almost the sole supporter -- Syria -- is itself crumbling. The Persian Gulf monarchies have banded together against Iran and shored up their relations with Washington. Last week, Saudi Arabia closed its largest-ever purchase of U.S. weaponry.…

The Obama administration has put tremendous pressure on Iran on a variety of fronts -- far more pressure than the Bush administration was ever able to muster. This is, in part, because the pressure has been brought to bear, wherever possible, with other countries. The United States does not buy oil from Iran. But European nations, Japan and South Korea do, and if they go along with a new round of sanctions, Iran faces the real prospect of an economic freefall.

Iran's response to these moves has been a mixture of tough talk, empty gestures, backtracking on threats, and an acknowledgment of economic difficulties. It's therefore no wonder that the Washington Post reports, "U.S. officials are increasingly confident that economic and political pressure alone may succeed in curbing Iran's nuclear ambitions." Walter Russell Mead observes that, "public opinion in Iran does not seem to be rallying behind its unpopular government as the economic storm intensifies."

At the same time, however, Iran is trying to demonstrate that its uranium enrichment will continue unabated. Trita Parsi argues that overconfidence in the sanctions track will cause the Obama administration to rebuff any negotiated breakthrough on the nuclear issue. This leads to the obvious question: What's the endgame in Iran? Will sanctions "work"?

To get Clintonian, this depends on your definition of "work." One could argue that the current and projected actions taken by the EU and Pacific Rim might have been a wake-up call to Tehran that it's more isolated than it had previously thought. Iran is not merely facing the United States; it's facing a multilateral coalition that's growing stronger, not weaker. Unless potential benefactors like China take proactive steps to function as a "black knight," these sanctions really will cripple Iran's economy. The alienation of Iran's bazaari from the leadership in Tehran would ... let's say complicate the domestic situation in Iran.

That said, I'm skeptical that it will push the current regime toward making a substantive accommodation on its nuclear program. Based on how the leadership has treated domestic unrest, it seems clear that the top leadership is perfectly comfortable following The Dictator's Handbook approach to staying in power. More-powerful sanctions will therefore simply lead to more-powerful crackdowns. If Iranian elites view the nuclear program as the key to preventing outside attempts at forcible regime change, there's no way they'll compromise.

So would negotiation work? I'm skeptical here too. In part the problem is determining whether the Iranians are capable of negotiating in good faith. I don't mean that Tehran will act duplicitously; I mean whether the fractious regime can act in a coherent manner. Its behavior over the past week or two suggests otherwise. So does Zakaria:

The Obama administration seems to have concluded that the Iranian regime is not ready or able to make a strategic reconciliation with the West. The regime is too divided and Ayatollah Ali Khamenei, the ultimate authority, the Supreme Leader, is too ideologically rigid. So for now Washington wants to build pressure on Iran in the hopes that this will force the regime into serious negotiations at some point.

I suspect the Obama administration's hopes are more ambitious. They want the sanctions to be so crippling that Khamenei's ultimate authority comes under challenge, to the point where factional divisions open up space for a substantive change in the regime.

This might work, but I'd put the odds of this happening at less than 1 in 3. Still, this is the thing about instances in which economic sanctions are deployed. Even if their prospects don't look great, they're usually employed because the other options have even worse odds. For the next, say, six months, pursuing this course of action makes sense. It weakens Iran at a key moment in the Middle East, and it might lead to some positive developments down the road. That said, even if the sanctions work in crippling Iran's economy, they likely won't work at altering Iran's objectionable nuclear policies -- the expectations of future conflict are too great. At that point, the United States is going to need to consider whether it's prepared to pursue a longer-term containment strategy or alter course.

What do you think?

Hey, remember when about ten days ago I blogged that things were getting so bad in Europe that it was legitimate to bring up the 1930's?  What's happened since that seemingly hyperbolic warning? 

As Felix Salmon blogged earlier this week, the European banking system is headed towards a full-blown liquidity crisis.  Yields on Spanish and Italian debt are hovering around the 7% mark, which was the tipping point that forced Greece, Ireland and Portugal to seek assistance from the European Financial Stability Facility and the IMF.  Multiple European countries, including France, have had difficulty completing bond auctions this week.   

So it would seem that the European Central Bank needs to do something.  The New York Times, Wall Street Journal, and Financial Times all have lead stories today pointing out the enormous pressures that are being put on the European Central Bank this week.  We'll excerpt the non-gated NYT story to set things up: 

Only the fiercely conservative stewards of the European Central Bank have the firepower to intervene aggressively in the markets with essentially unlimited resources. But the bank itself, and its most important member state, Germany, have steadfastly resisted letting it take up the mantle of lender of last resort....

At issue is whether the bank has the will — or the legal foundation — to become a European version of the Federal Reserve in the United States, with a license to print money in whatever quantity it considers necessary to ensure the smooth functioning of markets and, if needed, to essentially bail out countries that are members of the euro zone.

Traditionally, and according to its charter, the European bank has viewed its role in much narrower terms, as a guardian of the value of the euro with a mission to prevent inflation. But as market unease has spread over the past two years, critics say the bank’s obsession with what they say is a phantom threat of inflation has stifled growth and helped bring the euro zone to the edge of a financial precipice.

With events threatening to spin out of control, the burden now rests on Mario Draghi, an inflation fighter in the president’s job at the bank barely two weeks who surprised many economists by immediately cutting interest rates a quarter point.

This morning, however, in his first speech as the head of the ECB, Draghi pivoted and redirected the pressure back at the politicial stewards of the EU:

National economic policies are equally responsible for restoring and maintaining financial stability. Solid public finances and structural reforms – which lay the basis for competitiveness, sustainable growth and job creation – are two of the essential elements.

But in the euro area there is a third essential element for financial stability and that must be rooted in a much more robust economic governance of the union going forward. In the first place now, it implies the urgent implementation of the European Council and Summit decisions. We are more than one and a half years after the summit that launched the EFSF as part of a financial support package amounting to 750 billion euros or one trillion dollars; we are four months after the summit that decided to make the full EFSF guarantee volume available; and we are four weeks after the summit that agreed on leveraging of the resources by a factor of up to four or five and that declared the EFSF would be fully operational and that all its tools will be used in an effective way to ensure financial stability in the euro area. Where is the implementation of these long-standing decisions?

The truly scary thing is that, given the state of the Italian and Spanish bond markets, even the full EFSF won't be enough to calm markets down. 

And so the pressure gets redirected back to Germany, as the most powerful actor in the ECB and EU.  As Matthias Matthijs and Mark Blyth explain in Foreign Affairs, however, Germany has not been reading its Charles Kindleberger:

In order to guarantee the strength of any international economic system, Kindleberger explained, a stabilizer -- only one stabilizer -- needs to provide five public goods: a market for distress goods (goods that cannot find a buyer), countercyclical long-term lending, stable exchange rates, macroeconomic policy coordination, and real lending of last resort during financial crises. The United States did not supply these things in the 1930s. Germany fails the test on all five items today.

First, rather than providing peripheral countries with a market for their distress goods, the Germans have been enthusiastically selling their manufactured goods to the periphery. According to Eurostat, Germany's trade surplus with the rest of the EU grew from 46.4 billion euro in 2000 to 126.5 billion in 2007. The evolution of Germany's bilateral trade surpluses with the Mediterranean countries is especially revealing. Between 2000 and 2007, Greece's annual trade deficit with Germany grew from 3 billion euro to 5.5 billion, Italy's doubled, from 9.6 billion to 19.6 billion, Spain's almost tripled, from 11 billion to 27.2 billion, and Portugal's quadrupled, from 1 billion to 4.2 billion. Between 2001 and 2009, moreover, Germany saw its final total consumption fall from 78.5 percent of GDP to 74.5 percent. Its gross savings rate increased from less than 19 percent of GDP to almost 26 percent over the same period.

Second, instead of countercyclical lending, German lending to the eurozone has been pro-cyclical. Indirectly (through buying bonds) and directly (by spreading its exchange rate through the euro), the country has basically given the periphery the money to buy its goods. During the economic boom of 2003-2008, Germany extended credit on a massive scale to the eurozone's Mediterranean countries. Frankfurt did quite well for itself. "European Financial Linkages," a recent IMF working paper, reveals that in 2008, Germany was one of the two biggest net creditors within the eurozone (after France). Its positive positions were exact mirrors of Portugal, Greece, Italy, and Spain's negative ones. Of course, as the financial crisis began to escalate in 2009, Germany abruptly closed its wallet. Now Europe's periphery needs long-term loans more than ever, but Germany's enthusiasm for extending credit seems to have collapsed.

And what about the third public good, stable exchange rates? By definition, the euro gives the countries that choose to join it a common external float, the credibility that comes with banking in a potential global reserve asset, and the credit rating of its strongest member. This is both true and where the problems begin. At the core of the eurozone lies a belief that, if countries adhere to a set of rules about how much debt, deficit, and inflation they can have, their economies will converge, and the same exchange rate will work for all members. This is true in theory, but only so long as countries obey the rules. And, despite being the author of many of those rules, Germany showed a singular lack of leadership and responsibility when it came to following them. When it broke the Stability and Growth Pact (SGP) in 2003, it sent the signal to the smaller countries that fiscal profligacy would go unpunished. The result was heightened public sector borrowing and increased public spending. Germany's enthusiastic lending to the periphery only exacerbated the problem.

Fourth, economic health requires the stabilizer to coordinate macroeconomic policy within the system. In this domain, Germany failed spectacularly, by insisting that the rest of the world follow its peculiar ordoliberal economic philosophy of export-oriented growth. By ignoring long-established ideas such as the Keynesian "paradox of thrift" or the "fallacy of composition," Germany is advocating a serious dose of austerity in the European periphery without even a hint of offsetting those negative economic effects with stimulus or inflationary policies at home. German growth, after all, was partially fueled by demand in Southern Europe (made possible by excess German savings). By the iron logic of the balance of payments, one country's exports are another country's imports and one country's capital inflows are another's capital outflows. So, the eurozone as a whole cannot become more like Germany. Germany could only be like Germany because the others countries were not. Insisting on ordoliberal convergence is guaranteed to produce economic instability, not stability.

Finally, Kindleberger would want Germany -- or, rather, the ECB, which is dominated by Germany -- to act as a lender of last resort by providing liquidity during the current crisis. Germany instead insisted on IMF conditionality for the bailout countries and on severe fiscal austerity measures in exchange for limited liquidity, thus failing Kindleberger's final test. The most obvious example is German obstinacy against letting the ECB play the role that the Federal Reserve played in the United States in 2008 and 2009. By lending heavily, the Fed was able to arrest the United States' slide into despair. Only a couple of days ago, Jens Weidmann, the president of Germany's powerful Bundesbank, flat-out rejected the idea of using the ECB as "lender of last resort" for governments, warning that such steps "would add to instability by violating European law." It is hard to see how yet one more violation of European code will add significantly to the already horrendous levels of instability, when brushing democracy aside is considered good for the euro.

It looks as if there's a plan in the works for the ECB to do a legal end-around by loaning money to the IMF and then having the Fund loan to the GIIPS economies.  If that happens, however, it won't be announced until next month.  And the way credit markets are playing out right now, I'm not sure the eurozone has that much time.

Now is usually the point in the post at which the instinct to provide some sweeping narrative about the state of the eurozone -- a la David Brooks -- is very compelling.  What's the point, however?  The eurozone is in contagion mode right now, which means it doesn't matter which countries were virtuous and which countries weren't during the last decade of binge borrowing.  They're all on the same sinking ship, and the Merkel Algorithm seems to be playing out again. 

Developing.... in a way that truly scares the living crap out of me. 

At 8:30 this morning U.S. Secretary of State Hillary Clinton will give  "a major address on the role of economics in our foreign policy."  This speech is the culmination of a series of Clinton speeches and papers over the past few months, including her July remarks in Hong Kong, her essay on America's Pacific Century in the pages of FP, and her remarks on global leadership earlier this week. 

Laura Rozen has been all over this initiative, and she previews the speech: 

A key precept in Clinton's effort is addressing a kind of cultural lag in the sprawling Washington bureaucracy. Lead policy makers may recognize the pivotal role that economics plays in global diplomacy--but in many ways, the diplomatic bureaucracy needs to catch up. Clinton's planned speech will be in large part a call to her own agency's ambassadors, diplomatic staff and analysts to shift their thinking.

And as Clinton lays out that vision in more detail, she will stress two main bulwarks. First, she will highlight the need to advance relations with the wider world as part of the effort to revive the American domestic economic order. And second, she will stress that State Department diplomats and foreign policy thinkers need to work harder to understand how market forces are driving first-order national security challenges in hot spots such as Afghanistan, Iraq and Iran.

Now, as I noted last week, my full disclosure here is that I've seen multiple draft versions of this speech and might have made a modest suggestion or two (because you, dear readers, know how gentle I am with the red pen).  Last week, I was pretty pessimistic about the effect of this kind of initiative: 

I fear that the State Department is fighting through hurricane-level winds on this front to make a difference. First, the trade deals just sent to Congress are the last ones we're going to see for a while. Doha is dead, the Trans-Pacific Partnership still hasn't materialized, and all of the momentum on trade policy is to move towards futile gestures closure. The dynamic, growing economy is not looking so dynamic, and those deep capital markets are getting extremely jittery.

And this week?  Oddly, I find myself more on the "glass half full" side, for a few reasons.  First, Congress finally cleared the decks on the three outstanding trade deals, so that looks a bit less embarrassing.  Second, there does appear to be genuine enthusiasm inside the administration for the Trans-Pacific Partnership, and a recognition that this would be a neat-o deliverable for the upcoming APEC summit in Honolulu.  Third, my own conversation with State Department officials suggest that they've got a decent read on which geographic regions should be the focus of which initiatives.  Fourth , dwindling resources doesn't mean no resources -- the U.S. still has some formidable foreign economic policy arrows in its quiver. 

The most important reason I'm more optimistic, however, is that the Secretary will be doing two things with this speech that speeches can actually accomplish.  A speech can act as a form of reassurance to other countries that the United States gets it -- economics is a vital component of foreign policy, and Washington is ready to play. 

A speech can also signal to the foreign policy bureaucracy that there's a shift in priorities, and they had better get on the train if they want to get promoted make a difference.  If foreign service officers see that a familiarity with economics is a key for advancement, then the United States will develop a diplomatic corps that doesn't run away screaming in terror seem distracted if the words "exchange rates" or "geographic indicators" are uttered. 

Watch the speech yourself -- it will be webcast at 8:30 AM -- and let me know what you think in the comments. 

Yesterday FP alum Laura Rozen detailed the State Department's push to have economic statecraft to the front and center of U.S. diplomacy:

[I]n many ways, Hillary Clinton's diplomatic portfolio is increasingly indistinguishable from many of the leading challenges in global economic policy. Trade issues obviously have a direct impact on America's efforts to emerge from the present economic downturn--from the battles over the national debt to the the need to stimulate job growth. But economic issues also shape other less-noted features of the American foreign-policy agenda, be it the effort to contain fallout from Europe's debt crisis, to the rise of major economic powers such as China, Brazil, Turkey and India—all of whom come bearing their own foreign policy ambitions....

So Hillary Clinton has been working hard to beef up the economic bench strength of the State Department, while also mounting a bid for State officials to play a more decisive role in determining U.S. global economics policy. Aides expect her to lay out what they are calling the "Clinton doctrine on economic statecraft" early this month, likely in a speech in New York. Timing and venue for the address are still being worked out, her aides say.

"This is coming from a sense that we are seeing the lines between national security and economic security blur as emerging powers are doing more to advance their economic power, and fitting their national security strategy is more about economic interest," the State Department adviser told the Envoy Friday....

"As we pursue recovery and growth, we are making economics a priority of our foreign policy," Clinton said at the International Institute for Strategic Studies-Shangri La conference in Hong Kong in July. "Because increasingly, economic progress depends on strong diplomatic ties and diplomatic progress depends on strong economic ties. And so the United States is working to harness all aspects of our relationships with other countries to support our mutual growth."

Full disclosure:  State Department officials have reached out to your humble blogger  in a sign of true desperation to talk about ways in which economics should be integrated into American foreign policy.  Don't panic -- I know that they're talking to smarter people than I as well.

Economic statecraft is only as useful as the economic power that fuels such statecraft -- namely, the attraction of  possessing a large, dynamic, growing economy for imports, deep capital markets, provisions for foreign assistance, and a model of economic development that looks attractive to others.  Now, getting Congress to vote on negotiated-long-ago trade deals is certainly a step in the right direction.  Talking about Russian entry into the WTO is also constructive. 

On the other hand.... I fear that the State Department is fighting through hurricane-level winds on this front to make a difference.  First, the trade deals just sent to Congress are the last ones we're going to see for a while.  Doha is dead, the Trans-Pacific Partnership still hasn't materialized, and all of the momentum on trade policy is to move towards futile gestures closure.  The dynamic, growing economy is not looking so dynamic, and those deep capital markets are getting extremely jittery. 

Finally, there's foreign aid -- which brings us to this New York Times front-pager by Steven Lee Myers: 

 America’s budget crisis at home is forcing the first significant cuts in overseas aid in nearly two decades, a retrenchment that officials and advocates say reflects the country’s diminishing ability to influence the world....

The financial crunch threatens to undermine a foreign policy described as “smart power” by President Obama and Secretary of State Hillary Rodham Clinton, one that emphasizes diplomacy and development as a complement to American military power. It also would begin to reverse the increase in foreign aid that President George W. Bush supported after the attacks of Sept. 11, 2001, as part of an effort to combat the roots of extremism and anti-American sentiment, especially in the most troubled countries.

Given the relatively small foreign aid budget — it accounts for 1 percent of federal spending over all — the effect of the cuts could be disproportional. (emphasis added)

It's striking to see Myers be that blunt in his assessment of the effects of these budget cuts.  Look, foreign aid is far from a panacea, but one has to think of these forms of economic statecraft as spending on preventing rather than curing ailments in American foreign policy.  As a general rule, the former is far cheaper than the latter.  The latter also tends to involve a much greater allocation of blood and treasure.  I know why foreign aid is the first item on the chopping block -- unlike military spending, it doesn't go to Congressional districts -- but let me go on record as saying this is a stupid own-goal by both Democrats and Republicans in Congress.  Even if one buys the need for fiscal austerity, there's a lot more waste in the Pentagon than the State Department. 

So American economic power looks set to wane, and the Amerian model of political economy seems broken.  On the one hand, this is not a strong foundation upon which to build a more effective economic statecraft.  On the other hand, this is precisely the moment during which policymakers need to think about how to be more efficient with America's still-impressive reservoirs of economic strength. 

Consider the comments below as a suggestion box -- what would you recommend the State Department do to improve upon American economic diplomacy? 

For those readers not keeping close tabs on the debt ceiling negotiations currently under way in Washington, here's how each participant views them:

Needless to say, this lose-lose bargaining deadlock has started to seriously exasperate Megan McArdle.  Today she asks a fair question:

I know I'm beating a dead horse at this point, but I continue to be mystified by what the base, the activists, and the politicians who are pushing the "no new revenue" stance hope to accomplish.  

Let's start by pointing out the obvious: the Democrats do not show any signs of caving.  They have offered what seem to be very attractive deals, and been turned down.  Think you're going to get a more attractive deal?  Every time another poll like this comes out, your bargaining position gets worse.  Moreover, in Washington, deals take time.  Even if Obama and the Democrats caved right now and gave the GOP massive entitlement cuts in exchange for raising the debt ceiling, the government would be hard-pressed to hammer out the details, draft them into legislative language, get the CBO to score the cuts so you know that they're real, and then whip the votes to get the damn thing passed.  Every day you wait makes it less, not more, likely that you can get any deal at all.

Maybe you think the deadline is artificial and Treasury is just exaggerating.  I have been very much less than impressed by the arguments I have seen to this effect, because most of the people making them seem to be under the impression that on August 2nd Treasury can just start playing accounting games, when August 2nd is in fact the date when Treasury says it will have exhausted all the accounting games that we've previously used to finesse the debt ceiling.  But even if it were true, so what?  How does extending the crisis another month get us any closer to a deal?  What's going to change?

There's been a lot of online debate about this question.  Business Insider's Joe Weisenthal thinks this is just a matter of re-election motives, but I don't think it's that simple.  As Nate Silver points out, "there is a larger ideological gap between House Republicans and Republican voters than there is between Republican voters and Democratic ones."  Furthermore, many of the House GOP freshmen were elected in swing districts, so it's not as if they're representing only ultraconservative portions of the country. 

I'd attribute the strategy of the House GOP caucus to two factors.  The first is rhetorical blowback.  It's simply impossible for elected representatives to say "we're not going to raise the debt ceiling, we're not going to raise the debt ceiling, we're not going to raise the debt ceiling..." and then actually raise the debt ceiling.  And they really can't agree to the Mitch McConnell plan of "raise the debt ceiling with no concessions and then blame Obama."  They can't agree to any "grand bargain" on austerity because any such bargain would have to include tax increases and there's that darn pledge not to. Politicians do occasionally go back on flat-out pledges not to do something.  The example of George H. W. Bush to current GOP House members is not a good one, however.  With blowback, it doesn't matter whether a member of Congress really and truly believes what they're saying or whether they can't reverse course without exposing their political backside.  They're just as screwed. 

The second factor is even simpler:  to date the current Tea Party strategy of "no retreat, no surrender" has worked like political gangbusters.  Recall that the conventional wisdom in Washington in early 2009 was that the GOP was going to have to be in the wilderness for a couple of election cycles before moderating their positions and winning at the polls again.  The exact opposite of that scenario has occurred (see Erick Erickson on precisely this point).  The Tea Party movement has been built on uncompromising hardline positions, and has led to significant electoral and political victories.  As Joshua Green explains, even the exception proves this rule for Tea Partiers:

In April, [Speaker Boehner] narrowly skirted a government shutdown and, after extracting $40 billion in concessions from the White House, appeared to have emerged intact. But these concessions turned out to be less than advertised, which left many members of his caucus feeling betrayed - and therefore less, not more, inclined to submit on the debt ceiling.

Unless and until the Tea Party wing of the GOP pays a political price for its positions, they have zero incentive to change their strategy. 

Am I missing anything? 

With all the doings in the Middle East, it's easy to miss developments elsewhere.  Let's take a look at Eastern Europe, shall we?  Like Belarus, in which the latest developments suggest a uniquely Belarusian path to misery. 

The Financial Times' Jan Cienski notes that Greece and Portugal aren't the only European countries looking for a bailout: 

Away from frantic negotiations over how to save Portugal and Greece, another peripheral European country is scrambling for a bail-out. But Belarus is looking not to the European Union or the International Monetary Fund but to a grouping of ex-Soviet republics led by Russia.

Vladimir Putin, Russia’s prime minister, flew to Minsk on Thursday to offer Belarus about $3bn in loans over three years from the Eurasian Economic Community, in return for undertaking economic reforms and privatising state companies – which could see Russia take controlling stakes in strategic assets such as oil refineries and pipelines.

“It will help to improve investor sentiment,” said Anastasiya Golovach, an analyst with Renaissance Capital. “But Belarus will definitely have to pay something for this and Beltransgaz [operator of the east-west pipeline shipping Russian natural gas to the EU] will be the price.”

Moscow is relishing Alexander Lukashenko’s discomfort, as the authoritarian leader of Belarus, who has long had a prickly relationship with Russia, endeavours to calm the growing panic surrounding the Belarusian economy.

Belarus has plunged into a balance of payments crisis, with the current account deficit soaring to 16 per cent of gross domestic product and currency reserves dwindling to a month of import cover. The central bank has introduced multiple exchange rates, seeing a collapse in the rouble’s black market rate....

The outlook is gloomy. “We are heading in the direction of Zimbabwe here,” said a foreign diplomat stationed in Minsk.

Note to the Belarusian government:  anytime your country is compared to Zimbabwe, you are in Very Big Trouble. 

As the article notes, Lukashenko has managed to box himself into a corner.  After flirting with the West for a time, a domestic crackdown that intensified in December of last year alienated Germany and the United States, leaving Russia as Lukashenko's only lifeline. 

Russia is, not surprisingly, exploiting the situation in a manner remarkably consistent with trends I wrote about in The Sanctions Paradox oh so many years ago.  As a scholar, it's always nice to see a model demonstrate its durability.  In this case, there's the added frisson of seeing Russia tell others to enact policies that Moscow steadfastly rejected about a decade ago in order to advance Russian interests.  And there's something oddly comforting about watching Belarus continue to make policy misstep after policy misstep -- it's the IR equivalent of rooting for the San Diego Clippers. 

The downsides are that it prolongs Belarusian misery -- and makes the Visegrad states  just a wee bit more jittery. 

Developing....

Last week Reuters' Emily Flitter filed quite the story, entitled "China flexed its muscles using U.S. Treasuries ," about China's financial power over the United States.  Here's the opening: 

Confidential diplomatic cables from the U.S. embassies in Beijing and Hong Kong lay bare China's growing influence as America's largest creditor.

As the U.S. Federal Reserve grappled with the aftershocks of financial crisis, the Chinese, like many others, suffered huge losses from their investments in American financial firms -- from Lehman Brothers to the Primary Reserve Fund, the money market fund that broke the buck.

The cables, obtained by WikiLeaks, show that escalating Chinese pressure prompted a procession of soothing visits from the U.S.Treasury Department. In one striking instance, a top Chinese money manager directly asked U.S. Treasury Secretary Timothy Geithner for a favor.

This story generated a lot of interest across the mediasphere.  FT Alphaville called it "Diplomacy by US Treasuries."  AFP reports that the "sensitive cables show just how much influence Beijing has and how keen Washington is to address its rival's concerns." 

As someone who's published on this question, you'd think I'd be very happy at the attention this issue is receiving.  And Flitter deserves kudos for going through the cables to find clear efforts by Chinese officials to use its financial muscle to get what it wanted from the United States. 

The thing is, the reportage is framed to suggest that China not only asked for concessions, but the United States granted them.  And Flitter's own story suggests that very little in the way of concessions actually happened. 

Here are the portions of Flitter's story that discusses U.S. responses to Chinese pressure: 

On Chinese requests to halt/restrict arms sales to Taiwan:  Flitter records no response.  These concerns were voiced in late 2008 and the arms sales went ahead in early 2010, so there doesn't appear to be much influence here.  AFP suggests that this pressure led the U.S. to not sell F-16's to Taiwan, but I don't think that option was ever in the cards. 

On Chinese demands that they be provided guarantees for Chinese re-entry into the U.S. repo market:

The U.S. government does not appear to have offered the Chinese a special setup guaranteeing U.S. banks. Instead, the cables show, American diplomats reassured the Chinese by pointing out that Washington had infused banks' balance sheets with $700 billion in fresh capital, effectively propping up the banking system.

On Chinese demands for providing explicit U.S. government guarantees of Fannie Mae and Freddie Mac debt: 

To defuse the situation, the Treasury Department sent Undersecretary for International Affairs David McCormick to Beijing for two days in October 2008. The gesture went over well.

"All of Undersecretary McCormick's counterparts appeared to appreciate his willingness to come to Beijing in the midst of a financial crisis," Piccuta wrote in a cable dated October 29, 2008. "Interlocutors stressed that unless leaders' concerns about the viability of banks and U.S. government-sponsored enterprises (GSEs) are assuaged, lower-level officials will be constrained from taking on greater counter-party risks."

The cables show McCormick trying to reassure the Chinese. "In each meeting, Undersecretary McCormick emphasized that even though the U.S. government did not explicitly guarantee GSE debt, it effectively did so by committing to inject up to $100 billion of equity in each institution to avoid insolvency and that this contractual commitment would remain for the life of these institutions," [Deputy Chief of Mission at the U.S. Embassy in Beijing Dan] Piccuta wrote.

On Chinese protests regarding Federal Reserve purchases of Treasuries and agencies in March 2009:  Flitter has no response, though the fact that the Fed went ahead with QE2 suggersts that Chinese pressure didn't deter the Federal Reserve.

On responses to Chinese requests that CIC be allowed to participate in bidding on Morgan Stanley's new equity issuance:

There's no record in the cable of how Geithner responded, but it was only a day later, on June 3, that CIC announced plans to purchase $1.2 billion in Morgan Stanley shares.

A spokesperson for the Fed said in the instance of the June 3 CIC investment, no application for an exemption was made to the Federal Reserve Board.

On the general dynamic of Chinese financial pressure:

The cables also indicate a high level of confidence among the Americans that China can't entirely stop buying U.S. debt, a sentiment shared by most economists who describe the dynamic as a form of mutually assured financial destruction. 

So, to sum up, the Chinese maybe got a small break on being able to particupate in the Morgan Stanley auction.  Beyond that, all of these efforts led to the dilomatiic equivalent of hand-holding and not much else.  And, hey, what do you know, that's pretty much consistent with what I wrote about this back in late 2009.  So, contrary to some deep-seated fears of mine, the Wikiliaks cables appears to buttress rather than contradict prior scholarship. 

Flitter deserves credit for making explicit what had only been inferred, but I'm worried that commentators are drawing the wrong lessons from her article.  The big reveal here is not that China tried to exercise its financial muscle.  The big reveal is that these efforts generated next to nothing in the way of U.S. concessions.  China's financial might does give it the ability to deter U.S. pressure -- but to China's growing frustration, it doesn't yield much else. 

According to Bloomberg, Brazilian Finance Minister Guido Mantega would like the real to stop appreciating and for the rest of the world to cooperate on currency matters:

Brazil's real dropped the most in two weeks after Finance Minister Guido Mantega raised taxes on foreign inflows for the second time this month to prevent appreciation and protect exports from what he called a global "currency war."

Brazil, Latin America’s largest economy, raised the so- called IOF tax on foreigners' investments in fixed-income securities to 6 percent from 4 percent. It also boosted the levy on money brought into the country to make margin deposits for transactions in the futures market to 6 percent from 0.38 percent…

"This currency war needs to be deactivated," Mantega told reporters. "We have to reach some kind of currency agreement.” …

Mantega cited the Plaza Accord of 1985, when governments agreed to intervene to devalue the U.S. dollar against the yen and the German deutsche mark, as the kind of agreement that might be required. International policy makers failed to narrow their differences on intervention in currency markets during the International Monetary Fund’s annual meeting this month.

Hey, you know, I bet the G-20 would be a decent forum for Mantega to foster this kind of cooperation. It's a good thing that there's a G-20 Finance Ministers meeting this weekend in Seoul. 

Wait, what's this Dow Jones story saying?

Brazilian Finance Minister Guido Mantega will not attend a meeting of Group of 20 member-country finance officials in South Korea this week, a Finance Ministry spokesman said Monday.

The spokesman said Mantega would remain in Brazil while the government studies possible introduction of foreign exchange policy measures to curb the strengthening of the country's currency, the real.

Brazil's government will be represented at the meeting by Finance Ministry International Affairs Secretary Marcos Galvao and Central Bank International Affairs Director Luiz Pereira.

Is this rank hypocrisy by Mantega? Not entirely. It's something worse -- a judgment by Brazil's policy principals that more will be accomplished by staying in Brasilia to stem the tide of inward capital flows than to go to Seoul to seek a multilateral solution to the current lack of macroeconomic policy coordination. 

There's plenty of blame to go around on this, but if Brazil thinks the G-20 is not going to accomplish much… then the G-20 is a dead forum walking. 

This week Japan has provoked the ire of the United States and Europe by unilaterally intervening in currency markets to depreciate the yen against other major currencies. Japanese Prime Minister Naoto Kan has responded to these criticisms by telling the US and EU to go suck a lemon stating that further "resolute actions" would be taken on this front. 

This comes on the heels of mounting U.S. frustration with China's "go-slow" policy on letting the yuan appreciate against the dollar. [What do you mean by "go slow"?--ed. Let's put it this way: the tortoise thinks that China is being pokey on this question.]

So, is this the beginning of beggar-thy-neighbor? Will other countries start intervening in foreign exchange markets to gain a competitive advantage for their export sectors? 

The New York Times' Hiroko Tabuchi thinks not, because Japan can't unilaterally devalue its currency like in the old days:

It is unlikely, though, that intervention by Japan alone will sway currency markets in the long term. The global volume of foreign exchange trading has grown rapidly in recent years, which prevents intervention by a single government from countering bigger market trends.

Other countries are unlikely to help Japan’s cause, because they need to keep their own currencies weaker to bolster exports. A weak currency makes a country’s exports more competitive and increases the value of overseas earnings.

Much of the yen’s weakening came from investors selling the currency on expectations that the Japanese government would be more active in keeping the yen in check. Japan did not disclose how much it had spent in currency transactions, but dealers put the initial amount at 300 billion to 500 billion yen ($3.5 billion to $5.8 billion).

But as Switzerland found this year, a single government’s efforts to weaken its currency can prove futile. Switzerland abandoned that effort, after its central bank had lost more than 14 billion Swiss francs ($14 billion) in foreign currency holdings in the first half of the year, after a fall in the euro’s value ate into the bank’s reserves.

The Swiss franc is also seen by investors as a relative haven and has also strengthened amid global financial unrest. This month, the franc hit a record high against the euro.

Hmmm.... maybe. Japan's economy is much larger than Switzerland, so I'm not sure the comparison holds up. The real problem, however, appears to be that countries perceived of as "safe havens" wind up with overvalued currencies. 

This little parable also makes me wonder whether we might see beggar-thy-neighbor policies in a different guise this time around. This is going to sound a little crazy, but here goes: rather than explicit exchange rate intervention, what if countries decided to play fast and loose with Basle III and other measures to strengthen financial integrity? 

This really does sound crazy -- it suggests that governments would be willing to tolerate a higher risk of domestic banking collapse in order to avoide being a "safe haven" status for capital. That said, think of how much Europe benefited from the depreciation of the euro due to the Greek crisis. Basle III, by taking so long for banks to meet standards allow those countries with more insolvent financial institutions **cough** Germany **cough** to take their own sweet time in having them meet new capital adequacy standards.  This would allow Germany to have the euro stay relatively cheap without abandoning its anti-inflationary zeal. 

Now, in all likelihood, not even the Germans would purposefully do this. This is crazy talk. What I'm suggesting, however, is that there is more than one way for a country to have its currency depreciate, and these policies are substitutable. Looking only at explicit exchange rate intervention might be just a bit too narrow. And if more countries find more ways of keeping their currency undervalued, well then, the days of beggar-thy-neighbor would have arrived.

Developing....

I think it's safe to say that Venezuela's economy has seen better days.  The government has been issuing something that looks an awful lot like food rationing cards.  Now the Financial Times' Benedict Mander reports that Venezuela's new currency controls are affecting its import sector in a really sensitive area: 

Unable to access enough dollars, local importers are feeling the pinch across a wide range of goods, from Scotch whisky, the nation’s favourite drink, to luxury foods and swanky cars....

Each month, whisky importers – some of the worst hit – say they can legally get only as much foreign currency as they would normally use in a day. Bars and restaurants fear the reaction when they run dry. “We’ve got enough boxes to last a few more weeks, but after that, I’m worried about what will happen,” said the manager of one bar.

The irony, of course, is that Venezuela is doing to itself what the United States has been trying to do to North Korea for years (and re-emphasized in the past few months) --  denying access to luxury goods for the elites. 

Let's call these kind of measures Mad Men sanctions, shall we?  Anything that embargoes sumptuous indulgences -- including alcohol, cigarettes, and Christina Hendricks -- counts as a Mad Men sanction.  The question is, whether self-imposed or externally imposed, do they make a difference? 

With respect to North Korea, I think the answer is pretty clearly no.  This is mildly surprising.  Even though I'm pretty skeptical about these kind of sanctions in general,  the DPRK is one of the few countries where Mad Men sanctions truly are "smart."  The North Korean elite leads a very segmented life, and making it harder to get Johnny Walker Blue affects very few average North Koreans.  That said, while the North Korean elite appears to be tottering just a little, it's not because they're going into Scotch withdrawal. 

Of course, there is a difference between an external actor imposing a Mad Men embargo and an internal actor screwing up the economy to the point that a petrostate needs to husband foreign exchange reserves.  For IR grad students out there, it's a good test:  is a regime hurt more from an externaly-created embargo or from an internally-created one? 

[And what about the IR effects of Christina Hendricks?--ed.  Definitely a question that begs for further research.  Dibs!!--ed.]

Developing....

Your humble blogger is back in the USA, and will be posting with gusto later today about everything he learned while in Europe. 

However, I can't resist commenting quickly on Goldman Sachs' settlement with the SEC.  Some financial bloggers are already describing it as a huge win for Goldman.  Ordinarily, I don't like this kind of frame:  settlements should be win-win, because both sides avoid litigation costs.  That said, this paragraph from Sewell Chan and Louise Story's New York Times write-up did catch me short: 

Though Goldman did not formally admit to the S.E.C.’s allegations, it agreed to a judicial order barring it from committing intentional fraud in the future under federal securities laws. 

Really?  Really?!  REALLY?! 

Goldman Sachs requires a judicial order  to not commit intentional fraud?  If that judicial order wasn't drawn up, fraud is part and parcel of Goldman Sachs' standard operating procedure?  Does this mean that, prior to this settlement, defrauding customers was part of its overall corporate strategy? 

I can just picture Goldman Sachs' prospectus to investors: 

Goldman Sachs has become the world's most profitable institutional investor through an integrated three-part strategy:

1.  Maximizing the profit opportunities from financial globalization;

2.  Optimizing the core research strengths of Goldman Sachs' legendary research arm;

3.  Scamming the living s**t out of investors stupid enough to think that we have ethics. 

Seriously, what the f**king f**k?  If this counts as a Goldman Sachs "concession," then they just pulled off the best piece of financial statecraft I've ever seen.  It's almost as bad as the old Number Six.

Am I missing anything? 

UPDATE:  Ah, this comment by A.S. does provide some useful context for this provision.  Still, writing it up as a Goldman Sachs concession  seems like poor reportage.

Last week Russia used some economic coercion to get a friendlier government in Kyrgyzstan.  This week, Russia uses some financial inducements to secure a strategic base in Ukraine, as Roman Olearchyk and Stefan Wagstyl report for the Financial Times. 

Russia on Wednesday agreed to slash gas prices to Ukraine by 30 per cent in exchange for far-reaching economic and political concessions, including a long extension of the Russian navy’s lease of a strategic Black Sea port....

Mr Yanukovich agreed to grant permission for Russia’s Black Sea Fleet to remain in Sevastopol for an additional 25-30 years – far beyond 2017 when the current lease expires.

Mr Medvedev said Russian gas giant Gazprom would grant Ukraine a 30 per cent discount on gas, bringing the price down by about $100 per 1,000 cubic meter from a current rate of just above $300. “Our Ukrainian partners will receive a discount on gas. These funds will turn into a real resource for [Ukraine’s] business and economic aims,” he said.

The deal also appeared to secure lucrative contracts for Russian companies to build two nuclear reactors in Ukraine, and preserve their roles as monopoly nuclear fuel suppliers.

So, Russia is finally getting its way in the near abroad, which is bad for the United States, right?  Well, not exactly.  No question, the new governments in Bishkek and Kiev are an improvement for Moscow compared to the ones installed by the color revolutions of the past decade.  On the other hand, the legality of the base deal remains murky under Ukrainian law. 

More importantly, these new governments are not acting in an unfriendly manner towards the United States.  Kyrgyzstan's interim president Roza Otunbayeva has told Western reporters that the U.S. lease on its airbase in Kyrgyz will be extended automatically.  Meanwhile, Ukrainian president Viktor Yanukovych gave Barack Obama his biggest deliverable at the Nuclear Safety Summit earlier this month when he pledged that his country would eliminate its stockpile of highly enriched uranium. 

The familiar language in talking about the near abroad is whether a government is a friend of Russia or a friend of America.  These governments are clearly more friendly to Russia than the previous ones, but there also appears to be no strategic loss for the United States.  Which appears to be a win-win for both countries. 

I see I was not the only blogger to point out the Paul Krugman = neoconservative argument -- see Ryan Avent's recent posts over at Free Exchange, which also challenge Krugman on the question of whether an appreciating yuan would actually reduce macroeconomic imbalances.  It's safe to say that the neocon meme got Krugman and his supporters a wee bit snippy. 

Krugman has posted a more substantive reply, however, and Avent has responded as well.  They are debating across a number of issues:  1)  whether the Chinese government can truly control China's consumption rate; 2) whether a revaluation would in fact lead to an improvement in U.S. exports/macroeconomic imbalances; and 3)  The best way to get China to alter its status quo policies. 

On the first two questions, I find myself siding with Avent on the first point (it's going to take a looong time for China's consumption rate to increase) and with Krugman on the second point (revaluation would still make a difference).  Scott Summer, Michael Pettis, and Tom Oatley have all also posted thoughtful responses/critiques of Krugman that are worth checking out.  

I want to focus on the third question, however -- what's the best way to pressure China into altering its position?  Krugman's proposal in his op-ed was Nixon redux -- slap on a 25% import surcharge and let slip the dogs of a trade war.  It was the unilateralist (and violation-of-WTO-trade-rules) aspect of Krugman's proposal that sparked the neocon snark on my part.  In my opinion, the U.S. should not act in a unilateral manner on the currency issue when other countries are also seriously put out with China's behavior.  I'm not saying it should be off the table, either -- but it's a policy of last resort rather than first resort.  Coordinated action to isolate China -- through the G-8, G-20, and other international bodies -- seems like the next step, rather than slapping on an import surcharge. 

Krugman elaborates -- a bit -- here: 

Here’s how the initial phases of a confrontation would play out – this is actually Fred Bergsten’s scenario, and I think he’s right. First, the United States declares that China is a currency manipulator, and demands that China stop its massive intervention. If China refuses, the United States imposes a countervailing duty on Chinese exports, say 25 percent. The EU quickly follows suit, arguing that if it doesn’t, China’s surplus will be diverted to Europe. I don’t know what Japan does.

Suppose that China then digs in its heels, and refuses to budge. From the US-EU point of view, that’s OK! The problem is China’s surplus, not the value of the renminbi per se – and countervailing duties will do much of the job of eliminating that surplus, even if China refuses to move the exchange rate.

And precisely because the United States can get what it wants whatever China does, the odds are that China would soon give in.

Look, I know that many economists have a visceral dislike for this kind of confrontational policy. But you have to bear in mind that the really outlandish actor here is China: never before in history has a nation followed this drastic a mercantilist policy. And for those who counsel patience, arguing that China can eventually be brought around: the acute damage from China’s currency policy is happening now, while the world is still in a liquidity trap. Getting China to rethink that policy years from now, when (one can hope) advanced economies have returned to more or less full employment, is worth very little. (emphasis added) 

Look, Krugman is blogging here -- I'm sure that he's thought about the political economy dimension a bit more that a single post suggests.  That said, Krugman is talking exactly like the most neocon of neoconservatives was before Iraq.  He evinces complete disregard for existing multilateral structures, makes casual assumptions about how allies will line up behind the United States and adversaries will simply fold, and underappreciates the policy externalities that would take place if his idea was implemented. 

On the multilateralism point:  as Simon Lester points out, a countervailing duty applied against all of China's imports across the board because of currency manipulation would be a flagrant violation of WTO rules.  So, question to Krugman (and Bergsten):  are you prepared to jettison the WTO to alter China's behavior?  Because that's exactly the policy choice you're setting up in your proposal.

This leads to the next problem -- Krugman/Bergsten's assumptions about how other countries would react.  First of all, I'm not sure at all that China will roll over.  I agree with Krugman that China's compellence power over the United States is limited.  The thing is, America's compellence power over China is also limited. It's the larger economy and the deficit country, so it does have some leverage.  What Krugman is suggesting is a huge demand, however -- one that would have wrenching effects on China's domestic political economy.  Expectations of future conflict between the two countries are quite high, and have escalated in the past two months.  Chinese nationalism is pretty robust at the moment, and nationalists are willing to make economic sacrifices rather than suffer a perceived blow to their country's prestige.  This is not a good recipe for concessions, even if China is hurt more than the United States by a trade war. 

Because that's what would happen -- Beijing would immediately respond with its own retaliatory tariffs on U.S. imports.  They would likely harass U.S. companies with significant amounts of FDI in China.  These moves would hurt China a little, but hurt the United States more.  Like Michael Pettis, I think the chance of a full-blown trade war at this point becomes pretty high. 

Krugman's assumption that Europe would automatically follow suit without prior consultation seems awfully casual.  As the New York Times reported today, there are a lot of European companies that are not thrilled with volatility in the value of the euro -- and what Krugman is proposing is guaranteed to increase volatility.  European authorities might  prioritize bolstering the EU's reputation as an actor that doesn't violate multilateral norms over the economic issues at stake (and if you think that materialist explanations always trump arguments about political prestige, well, then, the euro should never have been created in the first place).  I'm not sure how keen the Europeans will be about the unilateral move Krugman is suggesting.  It's far from guaranteed that the EU would even be able to speak with a single voice on the issue. 

Krugman's ignorance about how Japan would react (to be fair, Japan is not the easiest read right now), and his omission to mention how the rest of the G-20 or ASEAN would respond, suggests that he really hasn't thought this all the way through.  I'd like to see some contingency planning in case the rest of the world doesn't line up the way he thinks. 

Finally, there's no discussion -- none -- about what the political and economic effects would be during the period of uncertainty and/or  if China decided they weren't going to acquiesce.  Let's keep this within the economic realm and consider the following question:  what's the effect of political uncertainty on investment behavior?  Consumption levels?  I would posit that it would increase risk-averse behavior -- particularly if this kind of trade war roiled financial markets.  Wouldn't this simply exacerbate the liquidity trap concerns that Krugman has been fretting about? 

Note that much of the last paragraph was framed in the form of questions.  I'm not sure my answers are correct -- but I'm really not sure that Krugman's assertions/assumptions are correct. 

Blake Hounshell highlights a tidbit from Henry Paulson's new memoir that caught my attention as well.  According to Paulson, in the summer of 2008 Russia approached China to sell off their Fannie Mae and Freddie Mac debt.  This merited stories from Bloomberg and the Financial Times.  According to the FT:

Russia proposed to China that the two nations should sell Fannie Mae and Freddie Mac bonds in 2008 to force the US government to bail out the giant mortgage-finance companies, former US Treasury secretary Hank Paulson has claimed....

Mr Paulson said that he was told about the Russian plan when he was in Beijing for the Olympics in August 2008. Russia had gone to war with Georgia, a US ally, on August 8.

“Russian officials had made a top-level approach to the Chinese, suggesting that together they might sell big chunks of their GSE holdings to force the US to use its emergency authorities to prop up these companies,” he said.

Fannie and Freddie are known as GSEs or government sponsored enterprises.

“The Chinese had declined to go along with the disruptive scheme, but the report was deeply troubling,” he said. A senior Russian official told the Financial Times that he could not comment on the allegation.

The Russians deny the story in the Bloomberg story, but Ashby Monk points out the possible implications: 

Paulson’s report is pretty amazing. If true, it would appear that Russia was plotting economic warfare against the US during the summer of 2008; I don’t really know what else to call it. Their intention was to use their sovereign wealth to purposely weaken and damage the US economy. The fact that all this apparently occurred around the same time that Russia was engaged in a traditional war with Georgia, a US ally, lends some credibility to the idea.

This revelation–while unconfirmed–will not comfort those in the West that fear SWFs; it doesn’t help anybody if these funds are seen to be potential weapons of economic destruction…

Let's assume this is true for the sake of making life interesting.  There's still a few more pieces of data I'd like to have before drawing conclusions. 

Monk assumes that the Russians did this for geopoltical reasons. If memory serves, however, China and Russia were both concerned about protecting the value of their GSE debt.  Forcing the U.S. government to intervene would have helped protect their remaining holdings.  So this might have been an entirely commercial gambit. 

Second, this really isn't about sovereign wealth funds per se but about official holdings of U.S. debt and equities.  Some people think this is a real problem -- others don't.  Readers should provide their thoughts in the comments.

Third, the fact that the Russians thought the Chinese would go along with them on this says a lot about the delusions Russian leaders had during the Russian-Georgian conflict.  They really seem to have believed that China, other members of the Shanghai Cooperation Organization, and the rest of the Collective Security Treaty Organization  would be perfectly cool with Russia recognizing the independence of two secessionist states -- just because it would be an affront to the U.S.A.  Whoops.

This raises my provocative but closing point -- that the Russian-Georgian war might have been the best thing that could have happened for the bilateral relationship.  Despite all the doomsaying at the time, the conflict -- combined with Great Recession -- had a modest humbling effect on Russian ambitions.  The commodity bubble - which had fuelled Russia's economic growth and self-confidence for the past decade - popped in the summer of 2008.  The recognition of Abkhazia and South Ossetia abetted a capital outflow that had begun in reaction to the Russian government's heavy-handedness in picking winners and losers in the domestic economy.  These trends, if nothing else, likely highlighted the opportunity costs of continued bellicosity to Russian elites and Russian policymakers. 

At the same time, the invasion itself provided a moment of clarity to U.S. policymakers about the precise limits of their influence when dealing with balky republics in the Caucasus.  Even as a candidate, Obama articulated a "realist internationalist" position towards the Russian Federation.  This approach recognizes Russia's great power status and the utility of a great power concert in dealing with global trouble spots.  Rather than prioritizing human rights, democratization, or even economic interests in the bilateral relationship, this policy position prioritizes great power cooperation on matters of high politics, such as nuclear nonproliferation and the containment of rogue states that transgress global norms.

You can argue about the priorities, but on the whole I think this policy has worked.  The war allowed both sides to confront the costs of continuing down a very negative trajectory.  They both stepped away from the brink.

This is worth thinking about whem mulling over a different bilateral relationship that's had a bad few months.