To Put Pressure on Putin, Make Life Hard for Rich Cosmopolitan Russians

The rising threat of war between Ukraine and Russia sent investors scurrying for relative safety on Monday, pushing stocks down sharply - the Moscow market fell 11.5 percent. Kacper Pempel/Reuters

To understand the ways in which the world has changed since the end of the Cold War in 1991, when the Soviet Union disintegrated, take a walk along London's Brompton Road on any summer afternoon.

Breeze past Harrods or any of the other fashionable stores and lend an ear. Listen to the young people with their shopping bags, hanging out on the street, chatting each other up. What do you hear?

Head on into the bar at Boulud's, just down the road in Knightsbridge, in the luxurious Mandarin Oriental Hotel. Listen again.

What you'll hear is the Russian language, spoken by the privileged elite of the new Russia--and their entitled offspring. You'll hear it second only to English.

They've been coming, the rich new Russians, to London, and Paris, and Verbier and Palm Beach in the winter and the Cote d'Azur in the summer, since the 1990s.

But it's a different crowd now. Most of the oligarchs of that era have either died or been dispersed. Today the new rich from Russia are, almost without exception, loyal to Vladimir Putin.

And that, in the wake of Putin's incursion into the Crimea, and the tense Cold War era stand off that is ensuing, is one of Moscow's vulnerabilities.

In the bad old days, the Russians didn't travel to the West and spend ostentatiously. They do now—and they like to, they like to a lot.

Nor in those days was Moscow home to financial markets that rise and fall, in part, on government decisions: like the decision to invade Ukraine, which caused the ruble and the Russian stock market to plunge on Monday.

Since President Vladimir Putin escalated the crisis in Ukraine there's been lots of hand wringing in the West that there is little the United States and Europe can do in response. Ukraine is in Russia's sphere of influence. It has no defense treaties with any other sovereign nation, let alone NATO, which clutched the Baltic countries (ex Soviet states all) to its bosom in 2004, but left Kiev on its own.

No one had any stomach for poking the bear right on its border.

But yesterday, in the interconnected world of finance, the Bear got poked—hard—when the Russian markets tumbled. The Russian central bank had to increase interest rates by a point and half to stop a run on the ruble.

The markets, by contrast, stabilized initially as they opened Tuesday when it appeared Putin had ordered some of his troops back to bases after conducting war games near the border with Ukraine. Anyone see a pattern here?

The creation of a relatively stable middle class is pretty much what Putin hangs his hat on. Economic turmoil—which the market reaction yesterday foreshadowed-- threatens that.

Even without the prospect of stiff European sanctions on Russia's natural gas, its primary export—Europe depends too heavily on it to stomach going without—the possibility of a broader military conflict in Ukraine plainly gives Russia's capitalists the shakes.

Few among Russia's financial elite -- even including Putin's crony capitalists -- are going to want any part of the turmoil a military push beyond Crimea would bring. Yet Putin pointedly refused to rule that out Tuesday, saying Russia would use "all options" to prevent "lawlessness" in eastern Ukraine.

The United States can make their pain more intense. Washington already bans a handful of Russian businessmen, suspected of ties to organized crime, from getting visas to the country. (The State Department does not name them publicly).

And the so called Magnitsky Act in 2012—named after a lawyer in Moscow who was killed after investigating tax fraud against a London-based investment firm called Hermitage capital—denied visas to, and the prohibited the use of the U.S. banking system by, Russian officials thought to be involved in the affairs the attorney, Sergei Magnitsky, was looking into.

That amounted to only 18 people. But even so, the Obama administration — which loves to prattle on about the use of "smart power" (has ever a group had a higher opinion of itself than this one?) – didn't much like the legislation, and eventually worked to narrow its impact.

The administration was still in the throes of its fervent desire to "reset" US-Russian relations, and didn't want to do anything to upset Moscow too much, particularly after it outsourced its policy on Syria to Putin last year.

This was the exercise of `dumb' power at its most egregious. But now, it's probably safe to assume, with 16,000 Russian troops sitting in Ukraine and Russian fighter jets buzzing the border, that the "reset" has been consigned to history's ash heap.

Barack Obama, presumably, has had the scales fall from his eyes, just as Jimmy Carter did when the Soviet Union invaded Afghanistan in 1979.

Washington has tools to make life much less comfortable—and commerce much more difficult-- for the businessmen closest to Putin, and their families. It now sounds as if Washington is going to use them. It should also work as hard as it can to get the United Kingdom and France to join them.

That will not be easy, given how much Russian money now pours through London and Paris. (The Daily Telegraph, London, reported yesterday that the U.K. was leaning against economic sanctions.)

If ever the Obama crowd needed to prove that it could get a few allies to help out with something uncomfortable, this would seem to be the moment. C'mon folks, show us how "smart" you really are: disrupt those summer days of shopping bliss in London for the young and the wealthy from Moscow, and their daddies will hear about it.

And then, so will Vladimir Putin.