Worst. Revisionists. Ever.

To follow up on my Cyprus post from yesterday, the deal between Brussels and Nicosia looks like a geopolitical reversal of fortune for the Russian Federation.  As Max Fisher noted

Maybe Moscow thought this would tilt its client state toward the pro-Russia choice in that binary, but it appears to have be having the opposite effect....

Russia is not in the process of losing a client-state, exactly — the political and cultural ties are likely still too deep for something that drastic to happen that quickly — but Moscow certainly isn’t doing itself any favors. As [Felix] Salmon wrote today, “If this is how the game ends, it’s an unambiguous loss for Russia, and a win for the E.U.”

Moscow’s aggressive, all-or-nothing approach appears to have only pushed Cyprus further toward Europe. 

Now, far be it for me to question Russia's motiva--- oh, screw it, I'm totally going to question Russia's motivations here.  Because what happened in Cyprus is emblematic of an interesting trend since 2008 -- the great powers that analysts have lazily defined as "revisionist" don't seem all that interested in collecting allies. 

This is not the first time a weak Western ally has sought out either China or Russia as a way of avoiding onerous financial strictures.  Iceland begged Russia for financial assistance during the depths of the 2008 financial crisis.  At one point, the Icelandic President allegedly offered Russia the use of Keflavík Air Base.  This possibility caused some mild consternation in Foggy Bottom.  In the end, the Russians said they didn't need the base and proffered only a fraction of what Iceland wanted, leaving Reykjavik little choice but to cut a deal with the IMF. 

One can tell a similar story with Pakistan and China.  During the fall of 2008 Islamabad was facing a balance of payments crisis and sought out China as a benefactor.   In the end, China was unwilling to offer Pakistan enough money to substitute for IMF support, forcing the Pakistani government to take out an IMF loan. 

Both the Iceland and Pakistan outcomes were surprising enough in 2008 that I bothered to blog about them back then.  The interesting thing is that nothing much has changed.  Sure, through the Forum on China-Africa Cooperation, China has enhanced its role outside its region, but even FOCAC is more about commercial interests than geopolitical interests.  At the same time, China became estranged from one of its most loyal allies when Myanmar started embracing the United States.  It also alienated a lot of neighbors that might otherwise have been more willing to defer to Beijing.  And as I blogged earlier this year, China continues to be standoffish towards Pakistan despite the latter country's eagerness to ally itself with Beijing.  Ironically, the only countries that Russia and China have really stuck their neck out for in recent years have been the allies that have given them the most agita -- Syria for Moscow, and North Korea for Beijing.  [Gee, it's almost as if this phenomenon of small allies that are strategic deadweights is not unique to the United States or something!!--ed.  This is a blog post, so stop your subtweeting.]

To be sure, China and Russia have , on occasion, engaged in some revisionist efforts to change the status quo.  See: Russia's 2008 war with Georgia; China's border disputes with the rest of the Pacific Rim.  What's striking, however, is that neither Moscow nor Beijing seems terribly interested in collecting client states.  Hell, for all the rhetoric involving closer Sino-Russian cooperation, it seems as though the actual bilateral relationship amounts to little more than empty rhetoric and cooperation at the U.N. Security Council. 

Why is this?  I'm honestly not sure.  Back in 2008, I spitballed the following

For all their aspirations to great power status, both countries lack the policy expertise necessary to take on greater leadership roles.  This leads to profound risk aversion, which leads to inaction.  On the flip side, the U.S. is accustomed to talking to the countries in crisis, which both provides it with more information and allows Washington to act more quickly.

Four and a half years later, I don't think that's a sufficient explanation.  Spitballing now, I think there are three possible explanations. 

1)  Pure buckpassing.  Why should Moscow or Beijing spend their hard-earned cash on marginally useful client states?  Let the West exhaust itself with these aid packages. 

2)  Internal balancing.  Realists like to think that external balancing (forming alliances) and internal balancing (augmenting national capabilities) are substitutable strategies.  Maybe China and Russia prefer to focus on national capabilities rather than coalition-building.

3)  Outside their own neighborhood, neither Russia nor China is really revisionist.  As great powers, Moscow and Beijing will do what they gotta do in their near abroads.  Globally, however, they have neither the ambition nor the interest in altering the current system of "good enough" global governance.  After all, the current rules of the global game have benefited both of them pretty well over the past decade or so. 

You can guess which of these explanations I gravitate towards, but I'm hardly convinced. 

What do you think? 

Daniel W. Drezner

Four thoughts on the Cyprus deal

So, after reading up on the Cyprus deal from the Financial Times, the Economist, and Quartz, I think I have a pretty good idea of what happened. Tyler Cowen isn't happy with the deal, and I can see why, but I don't think that means the deal won't stabilize things for a spell. My four quick takes: 

1) I've been pretty insistent that the most surprising thing about the aftermath to the 2008 financial crisis is how much global policy norms haven't changed. By and large the major economies are still rhetorically and substantively committed to trade liberalization, foreign direct investment, and a constrained role for the state in the private sector. The one exception? Capital controls. The earth has moved here, and the fact that this deal will require fair amounts of financial repression and cross-border controls is just the latest sign of this fact. 

From a normative perspective, I can't say I'm too broken up about this. It's not that I'm a huge fan of capital controls or anything. In the various policy trilemmas or unholy trinities that Dani Rodrik and others talk about, however, it strikes me that unfettered capital mobility is the policy preference with the least upside. And Cyprus does seem to be the fifth iteration of the lesson that countries that live by large unregulated offshore finance will die by large unregulated offshore finance. 

2) If the FT's Peter Siegel and Joshua Chaffin are correct, then the political backlash in Cyprus from this deal won't be that great: 

In Nicosia, political leaders generally greeted the deal as painful but necessary.

The city streets were quiet and peaceful, with most businesses closed for a public holiday.

Even before the agreement was clinched, most Cypriots had come to grips with the fact that the offshore financial business sector that has powered the economy since the Turkish invasion in 1974 would be but a shell of its recent self.

And as the Economist explains, the current Cypriot reaction is based on the fact that the new deal is a damn sight better for them than the previous deal:

On March 16th Cyprus’s president, Nicos Anastasiades, desperate to protect Cyprus’s status as an offshore banking model for Russians, had decided to save the two biggest banks and thus to spread the pain thinly. He would have applied a hefty tax to all depositors: 9.9% for those too big to be covered by the EU-mandated €100,000 deposit guarantee, and 6.75% for the smaller depositors.

But after a week of brinkmanship—including protests by Cypriots, the extended closure of banks to avoid the outrush of money, a failed attempt by Cyprus to throw itself at Russia’s feet, an ultimatum by the European Central Bank and an eleventh-hour threat by Cyprus to leave the euro zone—a different decision was made: to apply the pain much more intensely, but on a smaller number of large depositors.

Which leads me to....

3) So much for Russia as a counterweight to the European Union. Cyprus tried to realign itself closer to Moscow, but it didn't take. Furthermore, the new deal really puts the screws on the large deposits of Russian investors that have parked their money in Nicosia. As Felix Salmon explains

In the Europe vs Russia poker game, the Europeans have played the most aggressive move they can, essentially forcing Russian depositors to contribute maximally to the bailout against their will. If this is how the game ends, it’s an unambiguous loss for Russia, and a win for the EU.

The Financial Times makes a similar point: 

One Moscow businessman blamed the harsher haircut on the Kremlin, which he accused of failing to protect Russia’s interests, “thereby allowing the Germans to bully Cyprus and thousands of Russian depositors”.

“As soon as the EU saw that Russia was not going to protect its citizens, the confiscation of Russian money in Cyprus was pushed by the EU. All that was necessary for Russia to do was to provide €2.5bn secured by Cyprus’s nationalised assets,” he said.

With Xi Jinping's visit to Moscow, there's been a lot of chatter about "rise of BRICS" and "Russia turns East" and "SCARY!! SCARY!!" Bear in mind, reading all of this, that Moscow couldn't budge the ostensibly enervated EU from its position on the EU member with the closest ties to Russia. 

[Can't Russia just mess with the Europeans on energy?--ed. Um... no. Sure, they could try to do that, but the long-run implications of that move for Russian exports ain't good. To paraphrase an old Woody Allen joke, Russia might find its economic relationship with the European Union to be totally frustrating and irrational and crazy and absurd... but Russia needs the eggs.]   

4) What I said about Cyrprus last week still seems to hold for this week. So I guess this means Cyprus now falls under the "good enough" global governance category, with the caveat that this involves eurozone officials, so "good enough" here is defined down to mean "managed not to wreck the rest of the global financial system."

Am I missing anything?