All contracts are sacred but some contracts are more sacred than others

Farewell to liberalism 5.2.22

There’s a lot to examine in the farewell to liberalism, but as always a discussion like this should start with defining our terms. In this case, “liberalism” has nothing to do with the US domestic politics and the Democratic Party. All US politics is based on liberalism in the classical definition, the two parties just differ in what parts liberalism get priority. It’s not strictly true, but the US is generally considered the original liberal state. The revolutions of 1848 are the primary start of the liberal world order, and that history is fascinating enough that we’ll get to it later. We also need to consider and examine growing trends of illiberalism, both overt challenges to the west as well as covert challenges which are internal. Public discussion of liberalism and illiberalism generally glosses over important context in order to reduce the discussion to “democracy vs. autocracy”.

Fundamentally, liberalism is based on individual liberty, the consent of the governed and legal equality. All of the many offshoots that characterize a liberal order stem from these. For example, freedom of the press and speech are specific expressions of individual liberty. In almost all cases liberalism includes free markets. “Liberty” in many of the founding, philosophical documents actually refers to property rights rather than being unconstrained in political or personal behavior. More on all that later. For now, it’s important to note that liberalism is generally strict on the concepts of rule of law, private property and market economic principles. Which brings us to …

The issue of Russian hydrocarbons and Europe has become theater of the absurd.

First, we have the US and Europe implement significant sanctions against Russia which include the “freezing” of Russia’s currency reserves (~$300B). Unilateral sanctions like this are technically illegal under international law, but they are also the favorite tool of US foreign policy. Russia is the fourth country to have its reserves “frozen”, including Iran (some of which was returned), Venezuala and Afghanistan. In addition to freezing reserve assets, Russia was essentially isolated from the western financial world and a host of other sanctions were applied with the intent to crash the Russian economy. However, Russia had long term contracts to supply natural gas to Europe with payment in Euros.

Problematically for Russia, Euro payments can and will be confiscated under the sanctions regime, while being isolated from western financial institutions makes those Euros worthless to Russia. According to the EU, this is fine. Russia supplies the gas under contract and the EU “pays” before reclaiming the payment so that Russia does not get paid for its gas. Russia’s response was to establish the gas for Rubles regime where European buyers deposit Euros or dollars into Gazprombank (which is not fully sanctioned). Gazprombank then converts the foreign currency into Rubles on the domestic currency market and the contract is fulfilled.

Europe is quite upset with this arrangment and loudly declares that it’s a violation of the contract terms which specifically state the payment is in Euros. There is no acknowledgement that not actually paying for the gas is a violation of the contracts as well. Some contracts are more sacred than others.

Given the geopolitical tensions, one might have expected that Russia would shut off gas to at least parts of Europe. Afterall, the receiving nations have stolen Russian reserves and are supplying arms intended to kill Russian soldiers. Given the liberal west’s love of unilateral sanctions, we can expect that in a reversed situation Russia would have had its gas supply stopped on day one of the military operation regardless of the contracts. Is it possible to make the argument that on this particular economic issue Russia is the standard bearer for liberalism and the west is turning away from its founding principles?

It looks that way. And it’s worth recognizing that Putin is acting against the Russian public’s opinion, which generally thinks the gas should be turned off and let Europe rot. Why Putin has chosen this path is harder to divine. It may be his commitment to liberal principles; it may be that Russia’s making far more money from oil and gas sales than it did in the first quarter of 2021; or may be that he’s letting Europe cut off the gas so that EU politicians take the blame for the economic fallout.

Perhaps the details don’t matter. Between the unilateral sanctions regime which includes large scale seizing of property and the legal conflict over gas contracts it becomes hard to argue that the west is committed to liberal economic principles in any more than word. This situation is particularly telling because in general the west gives primacy to property rights and free markets in its actionable defition of liberalism.