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Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman has a good piece out today highlighting the differing economic policy agendas of the BRIC group (Brazil, Russia, India and China).  In it he suggests CRIBS is a more appropriate moniker for the group as it is China and Russia leading the way for the four, with Brazil the least influential.

What is interesting is that these four very different countries are meeting next week, ostensibly to coordinate economic policy in order to increase their economic influence.  Events at the last G-20 summit suggests that behind the scenes ad-hoc coordination has been ongoing for some time (see my post on the G-20 for a review of those events).

Brazil, Russia, India and China, now collectively known as the BRICs, will hold a summit in Russia on June 16^th.  Besides the Goldman-Sachs invented moniker, these countries have very little in common except for the fact that they believe, to seemingly varying degrees of intensity, that they deserve greater influence in the conduct of world affairs than they currently have.  And given the enormity of US power, as hard-core realists, they know any increase in their power and influence will come at the expense of America’s.  

The BRICs are on different sides of the terms of trade trends.  Brazil and Russia benefit from higher commodity prices, while India and China prefer lower prices.   All, except Russia are in the World Trade Organization.  All but Brazil have nuclear weapons.  While India and Brazil are democracies, China surely is not.  While it may be premature to draw hard and fast conclusions about Russia, the direction does not look particularly promising.

Russia and China are permanent members of the United Nations Security Council.  With their veto power there, they arguably have achieved greater political influence than in the economic sphere.  Russian and Chinese influence is often sought in regional issues, like the Caucuses and North Korea.   For their part, Brazil and India have quite different foreign policies.  For Brazil, its immediate surroundings are considerably more peaceful than in Eastern and Central Europe, where the end of an empire has seen the birth of new states.  India’s foreign policy challenges are dominated by Pakistan.  Security Council membership remains in the realm of aspirations. 

Edward here. So, obviously China and Russia have the biggest political clout.  What about in economics? Marc is about to argue that the BRIC countries do not deserve the influence they are seeking. I do not agree. However, he does present a compelling argument.

CRIB
One of the most important reasons why the BRICs do not have the economic clout that they would like is frankly they don’t deserve it.  Goldman-Sachs had a story (and more) to sell with its BRICs concept, but those same letters spell a real word, CRIB.  The point is that the countries, outside of China, are not among the largest.  
According to Bloomberg data, at the end of last year, China was the fourth largest economy ($3.2 trillion), behind the US, Japan, and Germany.  This of course takes the Chinese data at face value, and given the often large gaps between energy production and reported GDP growth, as well as the amazing consistency of the pace of growth, many often cast a suspicious eye on Chinese data.

With a GDP of $1.3 trillion in 2008, Brazil was the 10^th largest economy, though it is roughly half the size of France, which is the 6^th largest economy.  Russia and India were neck-and-neck for 11^th and 12^th places with each having produced about $1.2 trillion of goods and services last year.  Spain’s economy is nearly 20% bigger than Russia’s and India’s, and it is the 8^th largest economy.  Together the BRICs account for a little more than 12% of the world’s GDP, and China alone accounts for half of that.

The BRICs are also small in terms of the depth of the capital markets.  Together, according to Bloomberg data, they account for a little more than 6% of the world equity capitalization (MSCI World Index).  What equities that are truly tradable are very limited and concentrated in a few names.  Often the markets lack the kind of transparency that many Western investors are familiar with, even given the financial crisis.  

There are various capital controls and the BRIC’s currencies are not freely convertible or tradable.    The banks have managed to partially circumvent the restrictions of the domestic (on-shore) market by creating a parallel off-shore market and non-deliverable forward contracts.   Rydex’s CurrencyTrust ETF that tracks the ruble (XRU) was launched at the end of last year and has drawn little interest.  It boasts a lowly $5 million market cap (assets under management).  

Girth Not Size
Political scientists often argue that one of the characteristics of power is that it is concordant. By that they essentially mean that by having one element of power, say economic prowess, one can achieve other elements of power, such as like cultural influence.  And yet during the Cold War, Russia’s claim to world power relied almost exclusively on one element—its military might.   Power is surely multi-dimensional, but one of the common characteristics of the BRICs are that their power is limited in breadth and depth.  

Each of the BRICs has amassed a large level of reserves.  Brazil has the least at about $205 billion, just below India’s $251 billion.  Russia has almost as much as both of them put together with almost $410 billion.  China dwarfs all of them, individually and collectively, with nearly $2 trillion in reserves.  Together they account for a third of the world’s currency reserves. 

Yet there is no reason to consider them as a unitary whole or that they will act in concert.  To the contrary, they each seem to embrace their reserves differently.  India seems to regard its reserves most traditionally; an insurance against future calamities.  Brazil is more willing to use reserves for domestic purposes and operates in the foreign exchange market daily.  Given that Russia defaulted a decade ago, it is little wonder that its large reserves, a third of GDP, are a sign of national pride.  The run-down in reserves during the last five months of 2008 was more politically embarrassing than threatening from an economic point of view.  

China’s massive reserves, more than a quarter of the world’s reserves, are as much a sign of its successes as its failures.  Reserves accumulate as a function of China’s large trade surplus.  Rather than increase the share of consumption in GDP, China’s own figures show that it has fallen.  China remains reliant on exports.   Reserves accumulate as the central bank absorbs some of the hot money coming into the country so as to neutralize its effect.  Reserves also accumulate as China manages its exchange rate.

IMF Bonds
The BRICs appear to be under-presented in the International Monetary Fund.  As we have seen they account for about 12% of the world economy and yet have a combined quota (vote) of 9.82%.   Yet the representation is not as straight-forward as that.  Consider that the US accounts for a quarter of the world’s economy and yet the US has a 16.77% weighted vote at the IMF.  

The April G20 meeting resolved to raise more funds for the IMF.  Some countries like Japan have lent the IMF money.  The BRICs want to provide their funds in the form of SDR (Special Drawing Right) bonds.  This dovetails nicely with their call to increase the use of the SDR.  

Some esteemed money managers are reading into this a grave signal.  According to Bloomberg reports, Mark Mobius, executive chairman of Templeton Asset Management, sees the desire for SDR bonds as a rebuke of US fiscal policy.  Mohamed El-Erian, CEO of PIMCO, sees the purchases as evidence of accelerating rebalancing of the world economy.

 
But, it does not seem that it is about us as in the US, but rather about these countries trying to bolster their own prestige and gravitas by contributing to the IMF.  It is a function of the wealth they have already attained (reserve accumulation), but says nothing about the challenges that lie ahead.  Moreover, the moves are largely symbolic.  The $10 billion worth of SDR bonds that Russia is going to procure is 2.5% of its reserves.  The $50 billion China will provide is about 2.5% of its reserves as well.  Russia is thus far the only BRIC to suggest it will purchase the SDR bonds with its Treasury holdings, which stood at about $138 billion at the end of March, according to US Treasury data.  It does not amount to noteworthy diversification of reserves.  Nor does it represent much of a diversification away from the dollar as the greenback accounts for 44% of an SDR-basket.  The contribution that Japan is committed to is greater than all the BRICs combined. Although noticeably quiet on the subject, India is expected to provide $10 billion to the IMF.

Still an SDR bond market is innovative insofar as one does not exist at the moment.  The IMF is expected to announce details later this month or next month.  Rather than have to sell US Treasuries there has been some suggestion that the interested countries, which are likely to extend beyond the BRICs, may swap the Treasuries for the SDR bonds, minimizing any market impact. A newly formed SDR bond market will lack the breadth and depth to truly compete with the US Treasury market, though it might have some novelty appeal.  The impact on the dollar will likely be marginal at best.   An SDR bond market does not mean the SDR is a viable alternative to the dollar or is any closer to being the supra-sovereign reserve asset that some imagine.

 
Marc Chandler
Global Head of Currency Strategy

I have two asides to this story that are unrelated to the main content. 

The first has to do with Brown Brothers Harriman whose research I frequently cite.  Visit their FX site here.  I suggest you bookmark it.  BBH is one of those smaller boutique not publicly traded companies on Wall Street (History here at Wikipedia).  How many BBHs are going bankrupt?  How many Lazards are feeding at the public trough asking for government handouts?  You know the answer – zero.  And it is no coincidence.  These private companies and partnerships like Greenhill have a much different corporate governance ethos than the likes of Citigroup or Bank of America.  Perhaps had Lehman, Goldman and Morgan Stanley remained partnerships, they would have been more prudent in their risk taking.

My second aside has to do with the term CRIBS.  I like the moniker.  But being the pop culture hound that I am, I couldn’t help but think of that MTV show called MTV Cribs where the likes of Shaquille O’Neal or Robbie Williams gives us a glimpse of how rich and successful they are.  When Peter Schiff was on the Daily Show recently, Jon Stewart sarcastically rebutted Schiff by suggesting his America-as-an-indebted-Banana-Republic meme would mean an end to culturally enriching shows like MTV Cribs.  I’ve attached the video below for your amusement.

And, for the record, despite my snarky remarks, I like the show Cribs.  Very entertaining.

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From Charlie Rose’s site: “Reaction to President Obama’s speech in Cairo with Mohamad Bazzi, Roger Cohen, David Ignatius and Robin Wright.”

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George H. W. Bush’s National Security Advisor talks with Charlie Rose and Carlos Pascual, Brookings Institute vice president and director of Foreign Policy. They opine on “the Obama Doctrine” as Barack Obama nears his 100-day mark in office.

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I don’t want to beat a dead horse here, but the Chinese have been making a lot of muscular moves diplomatically. While shifts in balance of power often take decades, it is increasingly apparent that China is making a strategic move in that direction right now.

We have been chronicling these moves here in a series of posts at Credit Writedowns:

• China’s Premier concern about U.S. Treasuries not good news (March 13)
• A few thoughts about China and their bluff on treasuries (March 14)
• China wants to get rid of the dollar (March 23)
• More thoughts on the switch from dollars as reserve currency (March 24)
• Is China avoiding using US dollars? (March 31)

It is hard not to get the impression from this lead-in to the G20 conference that China is making a strategic move of huge consequence here.

Let’s be clear: the U.S. has overspent. It is a debtor nation, dependent on the kindness of foreigners. Somehow it believes it can still lead the world and is trying to strong-arm the rest of the G-20 into believing that stimulus must be the order of the day when the Europeans clearly want regulation.

Yes, stimulus is important, but outside of the United States and the U.K., most see this depression as one caused by Anglo-American-style laissez-faire capitalism and the need now is for more regulation. French President Nicholas Sarkozy has threatened to walk out of part of the summit unless the U.S. abandons its calls for reflating the unbalanced old world order.

China on the other hand wants a new world order. The latest story leads me to believe that China is not bluffing. They are deadly serious about knocking the U.S. down a peg. This comes from the French daily Figaro:

Beijing wants to challenge U.S. leadership

A few days before the G20, China has mounted an offensive on the role of the dollar and the reform of the IMF.

Even if they like subtle strategic concepts, the Chinese also know that sometimes the best defense is offense. Tired of constantly being attacked on the yuan and trade policy, Beijing has mounted a frontal assault by attacking the power of the dollar a few days before the G20. The offensive comes in the form of a proposal to establish a new international reserve currency which could be organized around the “special drawing rights” of the IMF.

The Governor of the Central Bank of China, Zhou Xiaochuan, called twice in one week, for a necessary reform of the world monetary system, without which “fiscal and monetary measures are useless.” In just a few months, the change in posture is spectacular. “In November, the Chinese went to the G20 in Washington with a rather low profile, using passive cooperation, playing their role as one of many,” points out a Pekingese observer. And what’s more, all this despite a natural role as challenger to U.S. leadership.

Obama meeting Hu Jintao
The proposal, moreover, seems to have been long prepared and coordinated with a number of other countries, including Russia. That said, even if it is legitimate, Beijing is under no illusions about its feasibility in the short term. The monetary issue is not at the heart of the G20. Regardless, China has made it an item of interest. And the presidents Hu Jintao and Barack Obama are to speak at their first meeting tomorrow on the sidelines of the summit.

On the issue of reform for voting rights in the IMF, Beijing is once again strong enough. In a long article published in the Times of London Friday, the Vice-Premier Wang Qishan has clearly explained the situation. China wants more weight in the IMF, but has no desire to engage its huge reserves in the Fund as it has been invited to do. Again, officially, the discreet Chinese have still not confirmed their position. Beijing would require profound reforms before making any further efforts. Meanwhile, the contribution would continue to be “defined by the present allotment.” China will not become a bilateral creditor of the IMF. It will not be the “banker of the world” as some hoped.

These things don’t happen overnight, but we are certainly now witnessing the end of American hegemony.

Source
Pékin veut contester le leadership américain – Figaro

Related articles
Les ambitions de Nicolas Sarkozy pour le G20 – Le Monde
La France met la pression avant le G20 à Londres – Figaro

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This comes via the Financial Times (Hat tip CR):

China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.

“This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC.

Although Mr Zhou did not mention the US dollar, the essay gave a pointed critique of the current dollar-dominated monetary system.

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• Is China avoiding using US dollars?

If you have noticed, Pakistan is in a real state of crisis right now.  Given the fact that this country is both unstable and possesses nuclear weapons courtesy of A. Q. Khan, it stands to reason that everyone should be interested.  The fact that it has a border with Afghanistan only makes things that much more urgent.

In this video on Charlie Rose, Steve Coll of the “New Yorker” discusses Pakistan with Joe Klein, Hasain Haqqani, Director of the Center for International Relations and Professor at Boston University, and Imtiaz Ali.

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The foreign policy challenges facing the new Obama Administration have mounted significantly in recent days. On the back of civil unrest and trade sanctions in Mexico, a destabilizing power struggle in Pakistan, the latest news to hit in the last week comes from Russia.

Russia is going to re-arm.  Nuclear detente is at an end.

Russia said it would re-arm its military and boost its nuclear forces in response to the expansion of Nato to its western frontiers and the increased threat of international terrorism.

Dmitry Medvedev, Russian president, said on Tuesday: “The main task is to qualitatively improve the combat readiness of our forces, above all our strategic nuclear forces.”

Speaking at a rare meeting with military leaders in Moscow, Mr Medvedev said Nato was continuing to expand closer to Russia’s borders. Russia was also under threat from “local crises and international terrorism.”

Mr Medvedev was speaking less than a fortnight after Moscow and Washington pledged to try to improve relations, which sank to the worst low since the Cold War during the administration of former US president George W. Bush.

Russia perceives Nato’s eastern expansion, coupled with US plans to deploy a ballistic missile shields in eastern Europe, as a threat to its national security.

This situation has been building for quite some time. But, it is unclear what reaction the Obama Administration will have to this threat from Russia. I had written last summer in my post “The U.S response to Georgia is missile defense in Poland” that the Bush Administration’s policy in Eastern Europe was seen as a provocation and risked a negative response. Now, we have one. In addition, it is clear from the comments made here by Mr. Medvedev that Russia is intent on building its military capability. However, I am doubtful that they can both renew their nuclear arsenal and build powerful infantry (see the post, “Russia’s choice between a nuclear arsenal and a modernized infantry“).

While the situations in Afghanistan Pakistan, and Sri Lanka, Israel and Iran, North Korea and China, and in Mexico are all becoming problematic as the world economy plunges, the tensions with Russia will be the Obama Administration’s first test.

Obviously, Joe Biden was right. Obama will be tested.  Every so-called rogue state will be watching this  encounter. How Obama reacts here will set expectations about his foreign policy credibility in Washington and elsewhere for years to come.

Source
Russia to rearm over Nato expansion – FT.com

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• The Russian – Georgian War
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Marshall Auerback here.

Here is my take on Chinese Premier Wen’s recent statements. At the end of the day, too many people seem to be working on an old gold standard type of model in the sense that there are implied limits in terms of what the US can do as an issuer of a fiat currency. I have always seen this as relevant only to the extent that China insists on being paid back in another currency other than dollars. The irony is too wonderful here, for what China has become expert at is manipulating the Obama administration. Think from the Chinese perspective about the wonders of getting Secetary Clinton to grovel and thank them for buying our paper.

The Chinese, in recent closed door meetings of which I am aware, have openly (albeit implicitly) threatened U.S. government officials about their future willingness to purchase our agency debt. This is a grand bluff, for China would suffer the greatest loss of (paper) wealth were it to attack the value of our paper. It is proving an effective bluff. I never thought Geithner’s attack on China’s efforts to hold down the exchange rate on the yuan made any sense from a U.S. perspective, so I don’t waste my time bashing the administration on its 180 degree reversal of position on China “manipulating” the yuan. But we are being played successfully. China will conclude that they have leverage over us and will use it in future disputes that will be far more important.

In a pure operational sense, when China’s US securities mature, the Fed debits their securities account at the Fed and credits their bank account at the Fed. So in theory no fuss. Of course, the real world is a bit more complicated, even when a sovereign currency is assumed (i.e. fixed exchange rate, no fixed gold conversion).

The limit to trade deficits is then the willingness of foreign investors to net save in your currency.

If foreigners perceive your productivity capacity is not growing fast enough, or the money value of those products is not growing fast enough, the only reason they net save in your currency (by holding assets in your currency) is to speculate on asset bubbles or engage in financial engineering or store value in the perceived reserve currency of the world.

Remember, foreign trading partners can demand settlement from a country in a different currency. There is a first mover disadvantage to exporters trying to enforce this, but we have seen currency conventions change, so we know it does happen. And I am presuming this is the implied threat from China.

All 3 of the above (asset bubbles, financial engineering, reserve currency status), one would think, are eventually constrained by the first two items, physical productivity of the country and the money value of that output. We’ve seen in a world of serial asset bubbles, with no country yet willing or able to replace the US as hegemon, that “eventually” can take a long time. Not every hegemon, however, can hold on to its “exorbitant privilege” for so long…and there is only one hegemon, so not every country has this privilege.

Similarly, a fiscal deficit is constrained by the willingness of the domestic and foreign private sector to net save in the deficit country currency. The private income is created by the purchases of products or labor from the private sector, so there is still production.

This circles back to our discussions about confidence and policy sequencing. Keynes, who was a policy maker and an investor, clearly recognized this and it is part of why he spilled so much ink against the Treasury View of fiscal responsibility. He wanted to change conventional views of the suitable role of government intervention. It is currently Obama’s practical problem, as he does not seem to feel the need or ability to address the Treasury View. Instead, he has taken the tack that he will promise to reduce the deficit by the end of his term.

A lot of staunch Keynesians probably believe that Obama’s problem goes away once the fiscal stimulus hits the real economy. Practically, we know investors here and abroad are skeptical of how this all gets financed (a non-issue in our friend Warren Mosler’s model – government credits private sector as deficit spending proceed), and entrepreneurs and the wealthy are beginning to figure out the tax burden is being shifted on to them. So that might induce capital flight and tax evasion, which isn’t something readily accounted for in a classic financial balances approach.

Reality is more complicated than the model, and that must be dealt with by practical policy makers.

Related posts:

• China cuts holding of U.S. Treasury securities
• China is now America’s largest creditor
• Beijing starts a ‘Buy China’ policy
• More thoughts on the switch from dollars as reserve currency
• China wants to get rid of the dollar

Relying on the kindness of strangers is not a very good way to ensure one’s fate. However, this is certainly what the United States has been doing in running about a mountainous current account deficit. America’s largest creditor is now worried that the U.S. is not a good risk and has said so in public for what I believe is the first time.

Given the mounting U.S. government deficit, this cannot be good for the U.S. Treasury market. And indeed long-dated treasuries have already sold off (You should note that in December I saw Treasuries rising this year due to a very weak economy. Clearly, that is not happening).

Where is all this leading? Yves Smith has some good commentary on just this issue.

the idea of a US partial default is far from a loony line of conversation; we did it less than 40 years ago.

And in light of that history, why is Wen asking for assurances? None can be made. So what concession might he be looking to extract instead? Now that China’s trade surpluses have fallen sharply, it has no particular reason to buy Treasuries at anything like its recent volumes. 

As we said, this message is most likely to be posturing for domestic consumption, but China could also be putting stakes in the ground. Watch for the next move in this gambit.

The crux of the matter here is that the U.S. via the IMF basically forced the Asian economies to suffer considerably when it loaned them money back in the late 1990s during the Asian crisis. Many believe this was wrong-headed, including the former Australian Prime Minister Rudd, who has accused now-U.S. Treasury Secretary Tim Geithner of being blameworthy in this episode. As a result, the Asians have decided never to rely on the IMF or the kindness of strangers. This has developed into a policy of building massive U.S. dollar currency reserves as the U.S. dollar is the world’s reserve currency.

It is also responsible for the so-called excess savings that Asians have built in the past decade, which many Western bankers and politicians including Sir Alan Greenspan have deemed responsible for the credit bubble (see my take in “The Blame Asia Meme.”). Therefore, in a very real sense, one can see a boomeranging of policy errors from a decade ago having adverse effects today.

However, you look at it, this is a real problem.  The United States still needs foreign money to finance its deficit spending and economic stimulus.  However, to the degree that this economic policy leads to continued overspending by Americans, we are right back to the dynamic which created huge global imbalances in the first place.  And it does seem this is what the Obama Administration is advocating.  Witness Larry Summers’ comments in a recent interview with the Financial Times:

Barack Obama’s top economic adviser has urged world leaders to pump more public money into the economy in a co-ordinated effort to boost demand and lift the world out of recession.

In an interview with the Financial Times, Lawrence Summers said the urgent need for a short-term increase in spending by governments temporarily overrode the longer-term goal of tackling the global imbalances many economists believe caused the financial crisis.

The US administration had no choice but to take strong public action to “save the market system from its own excesses”, he said.

His comments, ahead of next month’s crunch G20 summit in London, make it clear that the US administration wants industrialised nations to share responsibility for engineering a global demand-led recovery and does not believe this burden should fall on China alone.

“The old global imbalances agenda was more demand in China, less demand in America. Nobody thinks that is the right agenda now,” said Mr Summers.

“There’s no place that should be reducing its contribution to global demand right now. It is really the universal demand agenda.”

While the US and other western nations should return to living within their means in the medium term, everyone should raise spending sharply now.

“The right macro-economic focus for the G20 is on global demand and the world needs more global demand,” said Mr Summers.

Is Summers asking American consumers to spend more or is he suggesting that the increased demand in the U.S. will come from government? Certainly boosting Chinese domestic demand is critical for the global economy. But, it is not clear to me that Summers’ ‘Universal Demand’ agenda is a departure from the global imbalances of the past decade. Moreover, it does seem clear that the U.S. is employing a diplomatic strategy on the economy that is meeting resistance abroad and risks torpedoing the upcoming G-20 meeting.

The China-Treasuries meme is a theme we should definitely watch going forward because it is important for the bond market, as a signal for U.S. foreign relations, and as a key pillar of the present global economic framework.

Source
Obama’s economic saviour savaged as Keating lets rip – Sydney Morning Herald
Summers backs state action – FT.com
China’s Wen Worries About Safety of Treasuries, Asks for Reassurance – Naked Capitalism
Government Bonds, U.S. Treasuries – Bloomberg.com
‘Difficult’ Americans hamper G20 efforts to secure a global deal – Times Online

Related posts:

• China is now America’s largest creditor
• Stephen Roach sees a W-shaped recovery for China
• Ahead of G-20, China blames west and west blames China for meltdown
• A few thoughts about China and their bluff on treasuries
• Another take on the treasuries bubble

After Europe emerged from the worst war in human history, its cities lay in ruins. Its economy was in tatters. It was in this environment that an Iron Curtain fell over Europe dividing it into east and west, separating Europeans from each other for four decades. Now, another twenty years later, we risk another great divide in Europe, the Ukrainian Prime Minister Yuliya Tymoshenko has warned.

Below is my translation of a German-language article in Austrian daily Der Standard. 

The Ukrainian Prime Minister Yuliya Timoshenko warned in a newspaper commentary of a new “Iron Curtain” in Europe and calls on the European Central Bank to support those countries not in the euro zone. The euro should not lead to an Iron Curtain, which puts non-Euro countries into a  higher risk class, which investors would no longer dare trust, Timoshenko wrote in Le Figaro.

Ukraine has asked the International Monetary Fund (IMF) for emergency aid to stabilize the economy. The country has been hit hard by the global crisis. The currency has lost more than 40 percent of its value since the autumn. The IMF, however, has delayed the transfer of the second loan tranche of a total of 16.4 billion U.S. dollars (13 billion euros) and called on the country to make its crisis management more urgent.

After the Fed also offered currency swaps to Brazil, Mexico and South Korea, Tymoshenko has  called for a similar scheme in Europe: “The ECB should also provide access to these tools to countries outside the monetary area.”

My view here is that Tymoshenko is going to be one of the last countries in the queue, so she had better demonstrate some seriousness about managing this crisis domestically or even the monies promised by the IMF will not be forthcoming.  The EU has its hands full with the Baltics and Central Europe, not to mention Club Med’s economic woes and Ireland and Austria’s banking crises.

Does this mean a new ‘Iron Curtain’ is forming?  I doubt it.  However, one should be very concerned here given the strategic importance of Ukraine as a transit route for gas.  Having them fall into the abyss is good for no one in Europe.

By the way, the term Iron Curtain comes from a famous 1946 speech by Winston Churchill:

From Stettin in the Baltic to Trieste in the Adriatic an “iron curtain” has descended across the Continent. Behind that line lie all the capitals of the ancient states of Central and Eastern Europe. Warsaw, Berlin, Prague, Vienna, Budapest, Belgrade, Bucharest and Sofia; all these famous cities and the populations around them lie in what I must call the Soviet sphere, and all are subject, in one form or another, not only to Soviet influence but to a very high and in some cases increasing measure of control from Moscow.

Sources
Timoschenko warnt vor einem neuen “Eisernen Vorhang” – Standard Austria
Iron Curtain – Wikipedia

Related posts:

• Russia cuts Europe off completely from its gas
• FT: Ukraine must pay Russia market prices for gas
• Russia: playing chicken with Ukraine over natural gas
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• EU planning 200 billion euro package for Eastern Europe

You heard the quotes (China slams U.S. profligacy).  Here’s the video. After some brief introductory remarks Chinese Premier Wen gets down to ripping into the United States.

If you want to get right to his most quotable remarks, they begin right about 6:00 in this long video. Definitely worth watching.

Related posts:

• Jim O’Neill on the Global Economy
• Chinese to start settling trade in Yuan
• US Senate passes Economic Patriot Act 74-25
• G-20: China is clearly looking for a new world order
• China’s Premier concern about U.S. Treasuries not good news

The Ukraine-Russia row over natural gas has escalated to a new high.  Now, state-owned Gazprom has completely cut off supplies to Europe through the Ukrainian transit route.  It still remains unclear what the ultimate aim of the Russians are in bringing the issue to this critical state.  Nevertheless, it is generally believed that Russia is making as much a political statement about NATO expansion, the disregard of Russia’s sphere of influence, and the dependency of the European Union on Russia for its energy needs.  One should expect a political response from the EU shortly.

Russian natural gas exports via Ukraine to western Europe were completely shut off on Wednesday, as Russia and Ukraine blamed each other for a deepening row that is threatening supplies across the continent.

”This morning, at 7:40am, the Russia side completely cut off all gas supplies coming into Ukraine – meaning supplies to Europe via Ukraine,” said Valentyn Zemlyansky, spokesperson for Naftogaz, the Ukrainian gas utility. “Let me reiterate, they cut off gas en route to Europe, because we have been solely consuming gas from our reserves since January 1. The Russian side took this drastic move without warning.”

But Gazprom, the Russian natural gas monopoly, said that Ukraine was the one that cut off the pipeline access for its exports to Europe. ”Today Ukraine has closed the last of four pipelines to Europe,” said Alexander Medvedev, Gazprom deputy chief executive. He told Reuters that Russian gas supplies towards Ukraine were currently running at 40 million cubic metres per day, but that Kiev was not exporting these volumes but keeping them for domestic needs. ”This gas is not exported and remains in Ukraine,” he said. Gazprom usually supplies around 300 mcm per day to Europe via Ukraine.

As some companies and schools in Bulgaria, one of the countries most dependent on Russian supplies, were shut, others tapped into stocks and alternative supplies to make up for the loss of Russian deliveries. Polish gas monopoly PGNiG said Russian gas deliveries to Poland via Ukraine were completely halted on Wednesday, and the same was true of supplies to the Czech republic. Russian gas flows to Austria stopped completely, oil and gas group OMV said, adding it was drawing on reserves, domestic production and other imports to guarantee gas supply to customers. Italy said it had begun tapping its stockpiles of natural gas after supplies of Russian gas to Italy reached new lows. Adriean Videanu, Romania’s economy minister, said all gas supplies to his country had been cut as of Wednesday morning, after falling 75 per cent on Tuesday.

Both Ukraine and Russia, however, have said they would begin negotiations on Thursday to try to reach a compromise on a new gas supply contract for Ukraine for 2009. Russia had cut off gas supplies to Ukraine on New Year’s day after neither could agree on such a price for a new contract.

Mirek Topolanek, the Czech prime minister who holds the EU’s rotating presidency, said that Thursday was a “key day for a decision on what is to be done next…it’s obviously unacceptable that EU member states suffer as a result of a contractual violation”.

Update: The European Union has now responded threatening escalation if supplies are not restored within 24 hours. Stay tuned.
Story: EU warns Russia and Ukraine to restore gas supplies or face escalation of dispute – Telegraph

And, for what it’s worth, I am sympathetic to the Russian stance here.

Sources
Russian gas supplies to Europe cut off – FT
Comment: Gazprom is not a market player, it’s a political weapon – Times Online
Gazprom brands Ukraine ‘a barbarian’ in gas row – Times Online
Europe begins to freeze as gas taps are turned off in energy war – Times Online

Related posts:

• Russia: playing chicken with Ukraine over natural gas
• FT: Ukraine must pay Russia market prices for gas
• Question of the day: Would we go to war for Georgia?
• The Russian – Georgian War
• Russia to re-arm: Obama’s first test

As an article in my links yesterday suggested, for many in the west, Russia’s behavior of late has lurched toward the unpredictable, volatile and aggressive.  After Russia’s moves against Georgia in South Ossetia, wariness in the west has increased, sometimes bordering on hostility.

I have generally taken a more pro-Russian view of events, seeing the reactions by Russia as predictable responses to a Super Power provoked by repeated slights.  That is neither here nor there as the latest controversy heats up, this time over natural gas.

At issue is the alleged lack of dependability by Ukraine as a transit route for gas from Russia to Western Europe.  Originally, this was a dispute over payments — or lack thereof.

Russia cut natural gas deliveries to Ukraine today after negotiations failed to resolve a dispute over unpaid bills and the price for supplies this year.

Gazprom, the Russian state-owned gas provider, lowered pressure at 7am GMT in pipelines to Ukraine which also carry in transit about 80% of Russian gas consumed by other countries in Europe.

Ukraine said yesterday that it had paid $1.5bn (£1bn) in debts for supplies in November and December but Gazprom said it had not received that money from RosUkrEnergo, an intermediary company. It is also demanding a further $600m in fines which Ukraine said it is not yet prepared to pay.

The last time exports were terminated – in January 2006 – there was an immediate impact elsewhere in Europe as Ukraine allegedly siphoned off gas meant for onward transit. But the Gazprom chief executive, Alexei Miller, said it would continue full shipments to the European Union, which gets about a quarter of its gas from the Russian company, most of it through pipelines that cross Ukraine.

The row is politically tinged because Moscow and Kiev have been at daggers drawn since 2004 when popular protests over a rigged election set Ukraine on a course to European integration.

Russia is implacably opposed to its neighbour joining Nato and accused Ukraine of sending military advisers to Georgia last August, when Russia and Georgia went to war over the breakaway republic of South Ossetia.

Edward here. You should notice a few things in those few paragraphs. Gazprom is controlled by the increasingly centralized Russian federal government. There is confusion as to whether this is a political or commercial dispute. Much of the problem revolves around Russia’s relationship — economic and political — with former parts of the Soviet Union and the larger former Soviet sphere of influence.

The quote below should tell you that this is as much a political dispute as it is economic.

Russian gas giant Gazprom says it can no longer depend on Ukraine as a transit route to the EU and is looking to develop alternatives.

In a BBC interview, the deputy chairman of Gazprom, Alexander Medvedev, said he hoped EU countries would back the move.

Gazprom cut off Ukraine’s gas supply on Thursday in a row over payment.

The firm has since accused Ukraine of stealing gas, however Ukraine’s state energy firm said Russia was not sending enough gas to ensure the EU supplies.

Ukraine’s state gas company, Naftogaz, denied illegally siphoning Russian gas, saying it was ensuring the export supply.

The crux of the matter is that this dispute pits Russia against an expanded European Union as the natural gas dispute is creating an economic problem in Bulgaria, Romania and Poland, members of the 27-nation European Union and former Eastern Bloc nations. As the EU and NATO have expanded eastward into the former Eastern Bloc, this has been seen negatively in Russia. The line obviously stops at Ukraine and Georgia for the Russians and they are demonstrating quite effectively that they will use all available means to reinforce this point.

How should the EU react? How should the U.S. react? Well, as to the economic hardship I mentioned, an article in the Spanish daily El Mundo brings the point home.

Three states of the European Union, Romania, Bulgaria and Poland, are already seriously affected by the conflict facing the gas to Russia and Ukraine, which have not yet reached an agreement on the price of fuel, which has meant that the Russian Gazprom had cut supplies to the neighboring country.

Brussels has said that “it would not interfere” in the dispute, but Gazprom has asked for mediation through its vice president, Alexander Medvedev, who seeks to punish Ukraine for obstructing the passage of gas to Europe. So far, no member country of the Union had been affected, but for 24 hours, the supply of natural gas to Romania has fallen 30%, Bulgaria by between 10% and 15% and Poland by around one 11%.

These three countries are already experiencing extreme economic dislocations due to the global recession (see links below). Can the European Union and the new Obama administration just stand by and watch this from the sidelines? Probably not.

One way or another, the issue of NATO and EU expansion is going to come to a head.

Sources
Russia and Georgia Clash Over Separatist Region – NY Times
Russia looks to re-route EU gas – BBC News
Russia cuts gas to Ukraine over unpaid bills – Guardian
Rumanía, Bulgaría y Polonia, afectadas por la disputa gasística entre Rusia y Ucrania – El Mundo
Naftogaz y Gazprom se acusan de la desaparición de millones de metros cúbicos de gas – El Mundo
Russian gas theories abound – BBC News
Romanian fear amid economic gloom – BBC News
Worries about Romania and Bulgaria: Stopping the rot – Economist

Related posts:

• Russia cuts Europe off completely from its gas
• FT: Ukraine must pay Russia market prices for gas
• Question of the day: Would we go to war for Georgia?
• The Russian – Georgian War
• Are NATO expansion plans smart?

I want to make a brief statement about analysis, prognostications and this global recession. When I began this site nine months ago, my focus was clearly on the downside scenario. 

The first four posts were entitled:

• The Economy Is Definitely In Recession
• Recession: How Long and How Deep?
• The US Economy 2008
• War in Iran: Is it inevitable?

You can’t pick a more dour set of post titles than that. Now, while I did believe policy makers were underestimating the threat of economic calamity, I must admit that I was optimistic about the potential outcomes. And I am still optimistic today that we can overcome the major hurdles we face. However, we must always prepare for the worst, even while we hope for the best. This is why I am still focused on the downside scenario — because I believe that complacency is still much too high regarding how quickly things could unravel.

In my third post on the US economy, I said the following about why I was worried about the present economic downturn (emphasis added):

The global economy, now supported in the main only by the overextended U.S. consumer, finds itself at stall speed, susceptible to any number of potential exogenous shocks. Ultimately, the economic malaise created by this confluence of events will take years to unwind. A positive outcome to this process is dependent wholly on liquidation of excess credit and consumption.

This process will be extremely painful in the short term, but will lead to a healthy economy long-term. Unfortunately, experience shows that these painful steps will only be taken as a last resort. Moreover, geopolitical events become volatile in a world of economic insecurity, leading to political upheaval and protectionism. Protectionism is a natural outgrowth of nationalist economic policy…

The “bad” scenario is playing out according to script because protectionism, trade wars, competitive devaluations, bailout packages, and export subsidies are all on suddenly on offer across the globe. All of these policies are designed to “protect” domestic producers and jobs. However, as they unfairly advantage domestic producers at the expense of consumers, they always invite a response from exporting nations. You can hear about it in China the U.S., Argentina, Brazil, Vietnam, Russia, Germany, India – the list is quite long.

But, I worry even more about political instability and social unrest. There are reports of burgeoning unrest in China. The Russians anticipate social unrest as the ruble loses value. And there are still more reports of strife between India and Pakistan. Below is a sample of articles in the news from just the past 12 hours:

• Guinea’s Ruling Military Junta Cancels All Mining Agreements
• Nigerian Military Says It Repelled an Attack on Pumping Station
• Baghdad Bomb Leaves at Least 18 Dead, Associated Press Reports
• Israeli Air Strikes Kill at Least 140 in Gaza Strip
• Bhutto’s Vision for Democratic Pakistan Crumbles
• Russia braced for unrest

We are living in a very unstable world already. The poor economy can only make matters worse. Is political upheaval and social unrest what we have to look forward to in 2009? Is this how the world MUST react to a severe recession? Again, my hope is this can be averted, but I have to point out the downside scenario here because it is very worrying. At a minimum, this is why I have gotten on board with the stimulus bandwagon despite my misgivings about government spending and the potential misallocation of resources.

So, as we head into 2009, I am hopeful that all of the ugly scenarios involving tariffs, competitive devaluations, export subsidies, riots, coup d’etats or the use of military force can be averted. My hope is that economic stimulus will be helpful in cushioning the downside scenarios and that we can start on an upward path by the end of 2009. While I hope I will continue to report events as they truly are.

In any event, because 2008 has been so dreadful, here’s to hoping for some upside in 2009.

Related articles
The Major Risks for 2009: Tariffs, Wars, Currency, etc. – Paul Kedrosky

Related posts:

• The Cold War redux
• World Economic Forum: Experts voice their views on the economy
• The bullish argument for the global economy
• Top ten economic wishes for 2009
• Is 2009 tracking a 1930 Great Depression scenario?

In a world of limited resources where oil prices have plummeted, Russia’s military is ever more stretched. Yesterday, I highlighted the implosion in the Russian economy, suggesting that many in Washington see Russia as a potential problem due to its aggressive foreign policy and its declining economic fortunes.

In response, a friend who I know from my foreign service days sent me an article from the BBC suggesting that this confluence of events has increased (the article was written in 2000) a nuclear bias in the Russian military — with obvious negative consequences for U.S.-Russian relations. The country simply cannot afford to have strong technological capabilities and provide for its large infantry that is serving on the front lines of Russia’s increasingly unstable borders. It is choosing the nuclear option.

President Putin has given the go-ahead for major military reform in what is being seen as a bid to assert his authority over the armed forces. But Russia is facing a financial crisis, as BBC News Online’s Stephen Mulvey explains.

The acrimony between Russia’s top generals is an unfortunate but inevitable result of the shortage of money in the country’s military budget.

The former superpower simply cannot afford to maintain a powerful nuclear arsenal and to modernise its infantry to fight effectively in local conflicts.

For Moscow, even a decision to divide expenditure equally between both priorities would involve painful compromises.

On the one hand, its nuclear arsenal is the backbone of its fast-declining military might, and the guarantee of its status as a world power.

On the other, the threat Russia faces from local conflicts is obvious. Thousands of its troops have died in the North Caucasus since 1994 – and according to Russian analysts many of these deaths could have been avoided if the army had been better equipped.

Nuclear bias

Russia’s Defence Minister since 1997, Marshal Igor Sergeyev, is a former commander of the country’s Strategic Missile Forces – and it is not surprising that he has spent the lion’s share of Russia’s limited procurement budget replacing ageing missiles with modern ones.

But this was not simply a case of loyalty to his own service.

Russia’s military doctrine has been steadily revised in recent years to put greater emphasis on nuclear deterrence, in recognition of the fact that the rest of the once-powerful Soviet armed forces have been wasting away.

If truth be told, the Strategic Missile Forces have been wasting away too – and the country’s present arsenal of 6,000 warheads will continue to shrink rapidly regardless of any further disarmament treaties, such as the proposed Start-3 pact, that may one day be agreed with the United States.

Eyeless in Chechnya

But Marshal Sergeyev’s new purchases mean that they now have at least some reliable, modern hardware.

Generals fighting the war in Chechnya, however, have a different perspective of spending priorities.

The respected Russian defence analyst, Pavel Felgenhauer, says the army entered the latest war in Chechnya without helicopters capable of flying at night or in fog, and without modern body armour or communication equipment.

“Today in Chechnya, federal troops often go into battle without body armour and wearing bandanas instead of steel helmets,” he says.

“This is not only because they are undisciplined, but because out-of-date army flak jackets and steel helmets only impede soldier’s movements, while offering almost no protection.”

Upper Volta with rockets

In March, he says, a company of almost 100 paratroopers was wiped out in the Chechen mountains, because fog made air support impossible.

In its dying days the Soviet Union was described as “Upper Volta with rockets”, and the phrase is partially true of Russia today.

The biggest difference is that Russia’s periphery is far more unstable than the Soviet Union’s ever was.

The current debate over spending priorities illustrates once again how tough it is to be a dirt-poor former superpower threatened by further disintegration.

Russia may have made many bad choices over the last few years, but choices like this one are hard to make.

These are many of the same choices that will face the American military in response to economic downturn in an unstable world. About two weeks ago, I attended a reception at Fort Myers military base for the launch of a new book “America’s Defense Meltdown” released by the Center for Defense Information that compiles the recommendations of a number of top U.S. military officers regarding the decline in U.S. military capabilities.

This book is a must read for anyone interested in geopolitics and its intersection with economics.  Don Vandergriff, one of the authors summarizes the themes in a link at the bottom of this article. The CDI says about the book:

• After decades of mismanagement by both Democrats and Republicans, our military forces have reached new lows in size, age and readiness to fight, while defense spending has reached historic highs.

• Thirteen highly qualified, independent-thinking critics – retired military officers, Pentagon insiders and civilian defense specialists – carefully describe the rot in each major facet of our defenses and, more importantly, propose solutions.

This is very much an issue as the global economy becomes fragile because the use of force becomes more inviting in a poor economic climate.

Sources
Analysis: Russia’s rocket row – BBC News
Commentary on President-elect Obama by Douglas MacGregor, Contributor to “America’s Defense Meltdown,” Featured in the Latest Edition of Defense News – CDI
America’s Defense Meltdown: Pentagon Reform for the New President and Congress – Don Vandergriff

Related posts:

• Russia to re-arm: Obama’s first test
• The U.S response to Georgia is missile defense in Poland
• McCain and his anti-Russia rhetoric
• Russia: playing chicken with Ukraine over natural gas
• Russia cuts Europe off completely from its gas

Russia is one country that we do not want to see fall on hard times. It has great geo-strategic power, but a weak economy, declining oil output and revenues and increasingly autocratic rule? Now it is being roiled by the global financial crisis as hot money is fleeing the country causing its currency to plummet and its stock market to swoon. Russia has used up a quarter of its massive foreign currency reserves to stabilize the situation — to no avail. Is Russia about to become a problem?

Russia’s central bank devalued the ruble for the second time in a week after policy makers spent $161 billion of reserves trying to defend the currency and oil revenue slumped.

The ruble fell as much as 1.3 percent to a four-year low of 37.5015 per euro after Bank Rossii widened the trading band against a basket of dollars and euros, the mechanism by which it manages the exchange rate.

Russia has drained 27 percent of its reserves, the world’s third-largest, trying to stem a 16 percent decline in the currency since August as the price of oil fell 69 percent, constricting economic growth. Standard & Poor’s cut its credit rating on Russia for the first time in nine years last week.

“It is possible we will see two to three more devaluations this week,” said Martin Blum, head of emerging-market currencies and fixed income strategy at UniCredit SpA in Vienna. “Russian policy makers are serious about continuing the one percent devaluations.”

Bank Rossii allowed the ruble to fall against a target exchange rate by 8.6 percent, from 7.7 percent last week and 3.7 percent a month ago. A spokesman confirmed the band was widened, declining to be identified because of bank policy.

The ruble dropped for the ninth time in ten days to 37.4384 per euro by 11:33 a.m. in Moscow, from 37.0146 on Dec. 12. Against the dollar, the currency fell 0.6 percent to 27.8384. Those movements left the ruble at 32.1631 versus the central bank’s basket, which is made up of about 55 percent dollars and the rest euros.

The currency has fallen 5.9 percent against the basket in six increases of the trading band since Nov. 11.

Bank Deposits

A one-time, 20 percent devaluation is needed, according to Moscow brokerage Troika Dialog. Goldman Sachs Group Inc. forecasts a decline of as much as 25 percent versus the basket.

Prime Minister Vladimir Putin’s pledge to avoid a “sharp” devaluation of the ruble and let the currency fall gradually has dissuaded citizens from storming banks to remove deposits as they did in 1998, when many lost life savings as the ruble plunged 71 percent versus the dollar and the government defaulted on $40 billion of debt.

Russians withdrew 6 percent from bank accounts in October, the most since Bank Rossii started collecting the data two years ago. Deposits in foreign currency, meanwhile, rose 11 percent.

When the credit crisis went into high gear in September, Russia became unfavored very quickly. The country was deemed too risky. The result has been a withdrawal of international funds. Russia has done its best to fight the trends, but it has been a losing battle. Combine the economic woes with an aggressive foreign policy and it looks like you have a problem.

This is certainly the view held by many in Washington. Much of Russia ills started as a result of the aggressive moves it took in Georgia this summer. Many had already began to view Russia as a poor place to invest money as a result of Vladimir Putin’s centralization of power, the effective nationalization of many oil projects and widespread corruption. But, the Georgia attack confirmed the worst fears for many.

As global recession takes hold, I would expect the situation in Russia to worsen. The question is what will be the political response inside Russia and what will be the foreign political response afterward.

Source
Russia Devalues 2nd Time in Week, Lets Ruble Fall Total 8.7% – Bloomberg

Related article
Putin Faces Rising Social Discontent as Russia Enters Recession – Bloomberg

Related posts:

• Russia, sovereign debt defaults, and fiat currency
• McCain and his anti-Russia rhetoric
• Russia to re-arm: Obama’s first test
• Chart of the day: Excess Reserves
• More thoughts on the switch from dollars as reserve currency

Barack Obama promises to make some dramatic changes in U.S. foreign policy after eight years of a neo-conservative agenda. The question really is what would those changes be. Below, David Ignatius outlines a reasonable argument that Obama will follow a cautious and step-wise approach (hat tip Chris).

We won’t see an immediate end to the embargo on Cuba or detente with Hugo Chavez in Venezuela or even an end to the War in Iraq. What we will see is his picking the right players first, his listening to their counsel and then proceeding cautiously on his change agenda. He will use his image abroad to advantage while moving in a steady and cautious manner.

This is a far cry from the Clinton Administration’s philosophy. If you recall, they came into office wanting to change everything and were rebuked by the voting public in the mid-term elections of 1994. Obama desperately wants to avoid this fate. Hence, those of you chomping at the bit for immediate changes to the course America is now on may find his path a bit slow.

In July 2007, when the possibility that Barack Obama might win the presidency was still just a gleam in the candidate’s eye, he met with former national security adviser Zbigniew Brzezinski to ask for some advice. But he wasn’t after the usual campaign position papers or sound bites. Obama was already thinking in bigger terms.

What can a new president accomplish in foreign policy in his first 12 months in office that he can’t achieve later? Obama wanted to know. How should a new president reorganize his national security team so that the structure fits the problems of the 21st century? Brzezinski came away deeply impressed, and he became an informal Obama adviser.

With Tuesday’s victory, Obama and his advisers get to think about these global questions full time. Conversations over the past few days with several members of the president-elect’s inner circle yielded some basic outlines of the new administration’s approach to foreign policy:

· Obama wants to pick his foreign policy roster first, and then turn to substance. “There was a tendency to try to do both personnel and policy simultaneously in the past, and it stumbled,” said one key adviser. Among the big questions are whether to ask Bob Gates to stay on as defense secretary or, if not, whether to appoint a prominent Republican, such as Sen. Richard Lugar or Sen. Chuck Hagel, as secretary of state. Either way, Obama wants a bipartisan team.

· As he builds his team, Obama wants to spend time listening to experts who can advise him on policies. The former law professor is being characteristically deliberative. He doesn’t want to make up his mind until he’s heard from all sides. That consensus-seeking style is likely to be a trademark of his administration.

· For national security adviser, Obama is likely to pick a pragmatist. “He wants to find out what works — what advances U.S. national interests. . . . If secret diplomacy is required to achieve your objectives, he would certainly accept that,” says Gregory B. Craig, a Washington lawyer who’s on the shortlist for a top position.

· During the transition, Obama won’t meddle in the Bush administration’s decisions — and he won’t allow other governments to end-run Bush. “He’s not going to do anything that gives the idea they don’t have to negotiate with this administration,” says the adviser. This insistence on “one president at a time” is especially important in the deadlocked negotiations with Iraq over a new status-of-forces agreement. Several Obama aides caution that the Iraqis shouldn’t drag their feet and hope for a better deal.

· Obama wants to make an early push on the Israeli-Palestinian peace process, despite political turmoil in Israel. He has learned from watching Presidents Clinton and Bush that you can’t wait until the eleventh hour to be an active mediator. Similarly, he wants to work quickly to build strategic relationships with Russia and China, and to reassure both countries that the United States doesn’t threaten them.

· On Iran, Obama wants to open the door to a process of engagement and dialogue, even though his advisers aren’t confident it will succeed. They think Iran may not yet have found the language of “yes,” but that’s no reason not to explore areas of possible common interest.

· On Iraq and Afghanistan, Obama will listen carefully to advice from Gen. David Petraeus, the Centcom commander, and other military leaders before making decisions. Petraeus will make his recommendations on Afghanistan in January, and the early indications are that he will recommend a strategy of “surge first, then negotiate” — that is, building up security in Afghan cities with additional U.S. troops before beginning talks with Taliban “reconcilables” about how to settle the conflict. That approach would fit well with Obama’s view on Afghanistan, one key adviser said.

· Finally, Obama’s advisers are thinking about how to use his youth, charisma and African American heritage to transform America’s ailing image abroad. Already, there are discussions about his travel schedule — and whether he should travel first to Asia before he goes to Europe for NATO’s 60th-anniversary celebration in April. “How do we take advantage of the momentum coming out of this victory?” asks one top aide.

“I think he’s going to change course, but that he will be cautious,” says Brzezinski. For now, those are the two channel markers for Obama foreign policy — change and caution. After the Bush years, both are likely to be welcome abroad.

Source
All Deliberate Speed – David Ignatius, Washington Post, A21

Related posts:

• The Obama Doctrine
• Hillary’s saber-rattling
• Hillary’s Hawkishness
• I probably can’t vote for McCain
• Is Obama really “Change we can believe in?”

While you have your eye firmly peeled on the financial mess splayed in front of you, other industries are busy setting themselves up to profit from close business ties to the Bush Administration before a new Sherriff comes to town.

The defense industry is first on that list.

Bloomberg reports that the Bush Administration had been looking to sign defense treaties with the U.K. and Australia that would benefit large defense contractors. However, Joe Biden, in his role as Chairman of the Senate Foreign Relations Committee blocked the deal.

These are very brazen attempts by industry to use connections to power for profit. Very sleazy.

U.S. Senator Joseph Biden, the Delaware Democrat running for vice president, told Secretary of State Condoleezza Rice that arms-trade treaties with the U.K. and Australia must wait until next year for approval.

Information supplied by the Bush administration to the Senate to support passage of the treaties is “insufficient to resolve Members’ concerns,” Biden, acting in his role as chairman of the Senate Foreign Relations Committee, told Rice in letter dated Sept. 17 and released today.

“While we support the objectives of these treaties and the Administration’s efforts to enhance cooperation with these important allies, we have reluctantly concluded that there are too many unresolved questions in connection with the treaties to achieve their approval this year,” the letter said.

The proposed treaties would allow U.S. contractors such as Lockheed Martin Corp., Northrop Grumman Corp. and Boeing Co. to export defense equipment and technologies to the two allies without first seeking licenses under the Arms Export Control Act. At a May 21 hearing, Biden’s committee had requested more details on how the State Department would implement and enforce the agreements.

“Delays and shifting approaches to implementation have made it impossible” to review the treaties during the current session of Congress, the letter said.

Source
Biden Tells Rice U.K., Australia Defense Treaties Must Wait – Bloomberg

Related posts:

• Insurance companies now feeding at the TARP trough
• Are US corporations feeding at the trough of low taxes?
• Bush Administration turns the TARP over to Obama
• Russia to re-arm: Obama’s first test
• Text of Emergency Economic Stabilization and “Stimulus” Act of 2008

Marshall Auerback here. The first post is about The Russian-Georgian conflict and how it reveals that U.S. domestic dysfunction has led directly to impotence in foreign policy.

Enjoy.

Russia vs. Georgia: U.S. domestic dysfunction exposes foreign policy impotence

By Marshall Auerback

“We were recently entertained by a naïve fable of the happy arrival at the “end of history,” of the overflowing triumph of an all-democratic bliss; the ultimate global arrangement had supposedly been attained. But we all see and sense that something very different is coming, something new, and perhaps quite stern. No, tranquility does not promise to descend on our planet, and will not be granted us so easily.”
– Alexander Solzhenitsyn, September 1993

At first glance, a flair-up in the Caucasus region seems to have little meaning for Americans. But just as the collapse of the subprime mortgage market ultimately came to symbolize the beginning of the end of an American credit system run amok, so too does the Russo-Georgian conflict illustrate the limits of American military power and its capacity to exert itself anywhere in the world unilaterally. Neither economic, nor military “unipolarity” seems to work any longer. We have, in the words of Boston University professor Andrew J. Bacevich, a “crisis of profligacy”, in which U.S. foreign policy parallels its domestic dysfunction, because of the refusal of Americans to recognize that they have to pay a significant price for economic abundance at home and geopolitical dominance abroad. In this world the Bush administration unveiled “a breathtakingly ambitious project of near global domination,” writes Bacevich. Preserving American abundance was the watchword, “yet that way of life, based for at least two generations on an ethic of self-gratification and excess, drastically reduced the resources available for such an all-encompassing imperial enterprise,” he writes. No wonder things have not gone well.

In much the same way as the original Bretton Woods monetary system externally constrained U.S. economic policy, so too did the Cold War limit American military aspirations. Between 1945 and 1973, the U.S. operated under a quasi-gold standard system, which mandated the prompt adjustment of international payments imbalances. Under this system, were the U.S. to persist in running deficits, it would eventually run out of gold. Economically, when Richard Nixon closed the gold window in 1973, Bretton Woods was replaced with a U.S. dollar reserve currency system, ushering in a period of “economic unipolarity” during which the U.S. could continue to print money, and accumulate increasingly large deficits. In the absence of any kind of external constraint, there were no longer any obligations otherwise imposed on America by a neutral system such as the gold standard. As France’s Charles de Gaulle memorably complained, the U.S. now had an unlimited overdraft facility, the hallmark of which were increasingly large current account deficits and relatively unconstrained economic policy-making, given the dollar’s pre-eminence as the sole reserve currency.

By the same token, a parallel phenomenon has been evident in the military/political sphere. From 1945 to 1989, a geopolitical chess game was played out between the United States and the Soviet Union, under the basic rules that were metaphorically called “Yalta”. The most important rule concerned a line that divided Europe into two zones of influence. It was memorably christened the “Iron Curtain” by Winston Churchill and ran from Stettin to Trieste. Under this game, the principal constraint was that, no matter how much turmoil was instigated in Europe by the pawns, there was to be no actual warfare between the United States and the Soviet Union. And at the end of each proxy conflict, the pieces were to be returned to where they were at the outset. The status quo between NATO and the Warsaw Pact prevailed. This rule was observed meticulously right up to the collapse of Communism in the Eastern bloc in 1989, which was most notably marked by the destruction of the Berlin wall.

Similarly, when the Cold War ended and Mikhail Gorbachev withdrew Russian forces from Eastern Europe, it opened up a period of unparalleled U.S. military adventurism, in spite of pledges made by Washington to Moscow, whereby the latter was promised that the U.S. would not take advantage of the implosion of the Soviet empire by expanding NATO into the vacuum. But this promise was broken almost immediately, first by the Clinton Administration, and then again by the Bush Administration, which in effect rewrote the Yalta rulebook.

The U.S. now saw itself as free to move about the global chessboard as it saw fit, and in particular to transfer former Soviet pawns to its sphere of influence. America viewed itself as the world’s last remaining superpower, or in Secretary of State Madeline Albright’s narcissistic phrase — “the world’s indispensable power.” Much like the triumphalist commentary about America’s economic model in the wake of the Asian financial crisis of 1997/98, pundits, such as Charles Krauthammer, also gushed over abstractions like “America’s unipolar moment,” while think tankers concocted geopolitical visions of American empires, New American Centuries, all made possible by a new era of unilateral coercive diplomacy, where move and countermove would be choreographed by quick and nearly bloodless precision military strikes, made possible by the U.S. monopoly of the “Revolution in Military Affairs.” The success of the first Gulf War gave further impetus to this illusion, just as the financial crisis of 1997/98 appeared to discredit any credible alternative to America’s economic model.

Full-spectrum dominance stood in relation to military affairs as the political scientist Francis Fukuyama’s well-known proclamation of “the end of history” stood in relation to ideology: Each claimed to have unlocked ultimate truths. According to Fukuyama, democratic capitalism represented the final stage in political economic evolution. According to the proponents of full-spectrum dominance, that concept represented the final stage in the evolution of modern warfare. During that period, the very purpose of the Department of Defense changed. Sustaining American global preeminence, rather than mere national security, became its explicit function. In the most comprehensive articulation of this new American way of war, the Joint Chiefs of Staff committed the armed services to achieving what they called “full-spectrum dominance” — unambiguous supremacy in all forms of warfare, to be achieved by tapping the potential of two “enablers” — “technological innovation and information superiority.”

The coming to power of George W. Bush and Vladimir Putin was more or less simultaneous. Bush decided to push the lone superpower tactics (the United States can move its pieces as it alone decides) much further than had Clinton.

First, Bush in 2001 withdrew from the 1972 U.S.-Soviet Anti-Ballistic Missile Treaty. Then he announced that the United States would not move to ratify two new treaties signed in the Clinton years: the 1996 Comprehensive Test Ban Treaty and the agreed changes in the SALT II nuclear disarmament treaty. Then Bush announced that the United States would move forward with its National Missile Defense system. And of course, Bush invaded Iraq in 2003.

At that time, the troops appeared unbeatable. And for a time, Russia’s weakness lulled America into thinking that the U.S. no longer operated under any kind of constraint, much as the ongoing and reflexive recycling of American debt by the Asian savings bloc (and later the GCC) back into Treasuries throughout most of this decade, seduced Washington’s monetary and fiscal policy makers into believing that deficits no longer mattered, as Vice President Cheney memorably remarked a few years ago. Writing in 2002, for example, Max Boot, a well-known commentator on military matters, attributed to the United States a level of martial excellence “that far surpasses the capabilities of such previous would-be hegemons as Rome, Britain, and Napoleonic France.” With U.S. forces enjoying “unparalleled strength in every facet of warfare,” allies, he wrote, had become an encumbrance: “We just don’t need anyone else’s help very much.”

Boot dubbed this the “doctrine of the big enchilada.” Within a year, after U.S. troops had occupied Baghdad, he went further: America’s Army even outclassed Germany’s Wehrmacht. The mastery displayed in knocking off Saddam Hussein, Boot gushed, made “fabled generals such as Erwin Rommel and Heinz Guderian seem positively incompetent by comparison.” As part of this engagement, the United States sought and obtained rights to military bases and overflight rights in the Central Asian republics that formerly were part of the Soviet Union.

In addition, the United States promoted the construction of pipelines for Central Asian and Caucasian oil and natural gas that would bypass Russia. And finally, the United States entered into an agreement with Poland and the Czech Republic to establish missile defense sites, ostensibly to guard against Iranian missiles. Russia, however, regarded them as aimed at her.

But much as the seeds of America’s current economic decline were planted during a period of apparent unbridled prosperity, so too did the country’s unconstrained militarism bring forth the seeds of imperial overstretch. Putin was not the first to observe this, but he began (subtly at first) to push back much more effectually than Yeltsin. As a prudent player, however, he moved first to strengthen his home base – restoring effective central authority and reinvigorating the Russian military. At this point, the tides in the world-economy changed, and Russia suddenly became a wealthy and powerful controller not only of oil production but of the natural gas so needed by western European countries.

Putin thereupon began to act externally. He entered into treaty relationships with China. He maintained close relations with Iran. He began to push the United States out of its Central Asian bases. And he took a very firm stand on the further extension of NATO to two key zones – Ukraine and Georgia.

The breakup of the Soviet Union had led to ethnic secessionist movements in many former republics, including Georgia. When Georgia in 1990 sought to end the autonomous status of its non-Georgian ethnic zones, they promptly proclaimed themselves independent states. They were recognized by no one but Russia guaranteed their de facto autonomy.

The immediate spurs to the current mini-war were twofold. In February, Kosovo formally transformed its de facto autonomy to de jure independence. Its move was supported by and recognized by the United States and many western European countries.

Russia warned at the time that the logic of this move applied equally to the de facto secessions in the former Soviet republics. In Georgia, Russia moved immediately, for the first time, to recognize South Ossetia de jure independence in direct response to that of Kosovo. And in April this year, the United States proposed at the NATO meeting that Georgia and Ukraine be welcomed into a so-called Membership Action Plan.

Germany, France, and the United Kingdom all opposed this action, saying it would provoke Russia. Georgia’s neoliberal and strongly pro-American president, Mikhail Saakashvili, was now desperate. He saw the reassertion of Georgian authority in South Ossetia (and Abkhazia) receding forever. So, he chose a moment of Russian inattention (Putin at the Olympics, Medvedev on vacation) to invade South Ossetia. Of course, the puny South Ossetia military collapsed completely. Saakashvili expected that he would be forcing the hand of the United States (and indeed of Germany and France as well). Instead, he got an immediate Russian military response, overwhelming the small Georgian army. What he got from George W. Bush was rhetoric. What, after all, could Bush do? In the words of Stratfor’s George Friedman:

The United States has been absorbed in its wars in Iraq and Afghanistan, as well as potential conflict with Iran and a destabilizing situation in Pakistan. It has no strategic ground forces in reserve and is in no position to intervene on the Russian periphery. This has opened a window of opportunity for the Russians to reassert their influence in the former Soviet sphere. Moscow did not have to concern itself with the potential response of the United States or Europe; hence, the invasion did not shift the balance of power. The balance of power had already shifted, and it was up to the Russians when to make this public. They did that Aug. 8, albeit with customary brutality.
-Stratfor, The Russo-Georgian War and the Balance of Power

Russia has demonstrated that it is willing to use force; that it is unwilling to let Georgia and Ukraine enter NATO without exacting a severe price; and that it views the United States as hypocritical, overextended, distracted, and cannot make good on its protective assurances to the likes of Georgia. This is a perfectly rational expectation. Neither the US, nor the EU will risk Armageddon for Georgia. After encouraging Saakashvili, with promises of NATO membership, the U.S. has been forced to leave him at the mercy of Putin, who appears bent on exacting revenge.

Two events, the crash of the subprime mortgage market and the Russo-Georgian conflict, then, display an interesting symmetry.

America’s political adventurism in Afghanistan and then Iraq was mirrored economically with the advent of the so called “Bretton Woods II system”. The latter proved mutually reinforcing to the former insofar as it enabled the U.S. to pursue a policy of guns AND butter (contrast this with the limitations faced by the Johnson Administration during the Vietnam War, when Bretton Woods I was operative). Even though it was said that no economy could live beyond its means in perpetuity, yet the U.S. appeared to be different. America’s current account deficit surged from 1.5% of GDP in 1995 to 6% in 2006. Yet hundreds of billions of dollars were spent in Iraq, seemingly without limit. This, despite the fact that at its peak, the U.S. was running an annualized deficit of $844 billion in the third quarter of 2006, and required $3.4 billion of capital inflows from abroad each business day in order to fund a massive shortfall of domestic saving. In the words of Morgan Stanley economist Stephen Roach:

At the root of the problem was America’s audacious shift from income- to asset-based saving. The U.S. consumer led the charge, with trend growth in real consumer demand hitting 3.5% per annum in real terms over the 14-year interval, 1994 to 2007 – the greatest buying binge over such a protracted period for any economy in modern history. Never mind a seemingly chronic shortfall of income generation, with real disposable personal income growth averaging just 3.2% over the same period. American consumers no longer felt they had to save the old-fashioned way – they drew down income based saving rates to zero for the first time since the Great Depression. And why not? After all, they had uncovered the alchemy of a new asset-based saving strategy – first out of equities in the latter half of the 1990s and then out of housing in the first half of the current decade…..

That enabled income-short American consumers not only to squander income-based saving but also to push consumption up to a record 72% of real GDP in 2007….And, of course, they went on a record debt binge to pull it off. Household sector indebtedness surged to 133% of disposable personal income by year-end 2007 – up over 40 percentage points from debt loads of 90% prevailing just a decade earlier. It was the height of folly. Yet the longer it lasted, the more it became deeply ingrained in the American psyche. And now it is finally over.
-Stephen Roach, Pitfalls in a Post-Bubble World (PDF)

The crash of the subprime mortgage market did not conclusively end this practice of debt bingeing; rather, it represented the final nail in the coffin that had been constructed for years.
Russia’s recent invasion of Georgia has much the same representative effect in terms of what it implies about America’s military limitations. Although this has become obvious to many since the onset of the Afghanistan and then Iraq wars, Georgia is the first time that the Bush administration has offered nothing except (in the words of Georgian President Saakashvili), “words, statements, moral support, humanitarian aid.”

The mixture of arrogance and ignorance which set the stage for the triumphal foreign policy of the 1990s and early part of this decade, then, has reached its definitive limits. Ironically, unconstrained economic and military policy has neither made Americans wealthier, nor safer. America’s subprime mortgage crisis in and of itself did not signal the end of the country’s economic system, but metastasized in such a way as to demonstrate conclusively the dangers (and corresponding limits) of a policy which hitherto relied on uneconomic vendor finance and debt bingeing. By the same token, Russia’s quick dispensing of Georgia has much the same symbolic effect in terms of signaling the limits of American’ military unilateralism, the notion that the U.S. could do anything it wanted, whereby “you are either with us or against us in our long global war on terrorism” — a war that knows no identifiable bounds, no rules, and no discernible end, but also a war for which Mr. Bush steadfastly refused to mobilize the necessary resources or call for the necessary sacrifices to pay for its inevitably skyrocketing bill. In this regard, his enablers in China and Japan are equally culpable.

When tested, then, America’s “unipolar moment” as global hyper-power yielded more glitter than gold. Much like the bankers and policy makers who professed the cost-free virtues of securitization and market fundamentalism, the generals and admirals who touted the wonders of full-spectrum dominance were also guilty of flagrant professional malpractice, if not outright fraud. To judge by the record of the past 20 years, U.S. forces win decisively only when the enemy obligingly fights on American terms — and Saddam’s demise has drastically reduced the likelihood of finding such accommodating adversaries in the future. As for loose ends, from Somalia to the Balkans, from Central Asia to the Persian Gulf, they have been endemic and impervious

Which raises another point: At the same time unlimited ambition became the rule in America’s relations with the external environment, a parallel unlimited ideology of triumphant capitalism and political cynicism at home encouraged the systematically looting of the economic base that was needed to support those unlimited ambitions. The looting mechanism is well known: The economy accelerated its mad rush down its path of massive deindustrialization. A corporate kleptocracy grew even bolder by, inter alia, (1) reaping short-term rewards while it transferred jobs and production facilities overseas, (2) by accelerating the excessive economic distortions caused by the out-of-control crony corporatism in the military – industrial – congressional complex, (3) by manipulating stock prices, (4) by financialising assets, (5) by instituting a slew of predatory lending practices and (5) by lobbying successfully for deregulating financial institutions thus enabling the creation of incomprehensible debt-bundling instruments, which enabled speculators to hide these shenanigans, prop up stock prices, and create the conditions for a meltdown.

In a sense, the excesses manifested themselves both economically and politically/militarily. And the end result is the same. As long as the economic model sustained its reputation for unlimited prosperity for all, as long as U.S. forces sustained their reputation for invincibility, it remained possible to pretend that the constitutional order and the American way of life were in good health. Point out that the emperor has no clothes and everything else unravels. This is what occurred when the Iraq war went sour and as the American credit crisis intensified. The ills afflicting our political system, including a deeply irresponsible Congress, broken national security institutions, and an imperial commander in chief not up to the job, and an economic system which effectively embraced socialism for the rich and capitalism for the poor, became all but impossible to ignore and political unsustainable. So, too, did the self-destructive elements inherent in the American way of life — especially an increasingly costly addiction to foreign oil, universally deplored and almost as universally indulged. More noteworthy still, the prospect of waging war on a global scale for decades, if not generations, became preposterous. The notion of Imperial Overstretch, once deemed a fanciful construct of ivory tower academics, has become very real.

The excesses of bubble capitalism manifested themselves in a culture of consumption and profiteering without production, which produced an explosion in private debt, horrendous trade deficits, and rampant speculation, and adverse currency flows. The feeding frenzy in the private sector of the economy has been mirror imaged in the public sector through the reckless fiscal policies of a decadent avaricious political culture that refused to raise enough taxes to pay for its own ambitions — a culture that tolerates corrupt public accounting standards, low-balled cost estimates, etc. — all packaged in “bundled” legislation that rendered spending and taxing bills impossible for members of Congress to read let alone comprehend. By the same token, estimates of U.S. military capabilities have turned out to be wildly overstated. The Bush administration’s misplaced confidence in the efficacy of American arms represents a strategic misjudgment that has cost the country dearly.

In short, the blind ambitions of the political class in the United States have become disconnected from the external geopolitical realities those ambitions purport to cope with as well as from the internal economic environment that is supposed to sustain those ambitions. In the end, the real world always intrudes. The double mismatch means a series of comeuppances and painful adjustments (which all Americans will have to bear) are now inevitable. Mr. Putin’s move into Georgia should be seen as a wake up call in this regard, but judging by the hyperbolic reactions of politicians like Messrs. Bush and McCain and Ms. Rice, as well as most pundits in the main stream media, the alarm may well fall on deaf ears, much as persistent warnings about America’s debt binging and housing bubble were dismissed earlier as the ranting of inveterate pessimists and doom-mongers.

Other sources
The Limits of Power: The End of American Exceptionalism

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• McCain and his anti-Russia rhetoric
• The Russian – Georgian War
• Question of the day: Would we go to war for Georgia?
• The U.S response to Georgia is missile defense in Poland
• Gorbachev gives the lie to Western claims about South Ossetia

Recently, I have become very concerned about the deteriorating geopolitical situation and its likely effects on the global economy. The Georgia-Russia situation produced a response from the U.S. to defend Poland with a missile shield, which could be labeled provocative at best.

In further escalation of U.S. -Russian tensions, the response from Moscow was to threaten Poland and say that Poland was exposing itself to a military strike. Is a new Cold War already underway? I certainly believe so.

Stephen Cohen of the liberal magazine “The Nation” made a compelling case for this two years ago.

The real U.S. policy has been very different–a relentless, winner-take-all exploitation of Russia’s post-1991 weakness. Accompanied by broken American promises, condescending lectures and demands for unilateral concessions, it has been even more aggressive and uncompromising than was Washington’s approach to Soviet Communist Russia. Consider its defining elements as they have unfolded–with fulsome support in both American political parties, influential newspapers and policy think tanks–since the early 1990s:

A growing military encirclement of Russia, on and near its borders, by U.S. and NATO bases, which are already ensconced or being planned in at least half the fourteen other former Soviet republics, from the Baltics and Ukraine to Georgia, Azerbaijan and the new states of Central Asia. The result is a US-built reverse iron curtain and the remilitarization of American-Russian relations.

-Stephen Cohen, The Nation, 21 Jun 2006

Paul Krugman has a very good piece called “The Great Illusion” on his blog which fits into this thesis quite well about the end of globalization. He compares the present geopolitical volatility and backlash to globalization to events 100 years ago. For anyone who thinks about the interconnection between politics and economics, this is a must-read piece.

Along the same lines, in a piece I wrote in March, I said:

The asset bubble of the late 1990s was one of the largest in history. Rather than allow this bubble to fully unwind, the Greenspan Fed created more asset bubbles, especially in housing, leveraged finance, private equity and asset-backed securities. It is possible that the U.S. will escape with a garden-variety downturn, but, in the face of one of the largest asset bubbles of all time, this is unlikely. In the end, a margin squeeze from high energy prices or a dollar shock could be crucial factors tipping us into a downturn. However, ultimately these factors will be merely the catalysts; the true cause of the expected malaise in 2008 lies in the imbalances in an asset-driven economy.

This downside scenario was not predestined. Unfortunately, crucial policy errors by the U.S. Federal Reserve all along the way have had led us to a ‘point of no return.’ The global economy, now supported in the main only by the overextended U.S. consumer, finds itself at stall speed, susceptible to any number of potential exogenous shocks. Ultimately, the economic malaise created by this confluence of events will take years to unwind. A positive outcome to this process is dependent wholly on liquidation of excess credit and consumption.

This process will be extremely painful in the short term, but will lead to a healthy economy long-term. Unfortunately, experience shows that these painful steps will only be taken as a last resort. Moreover, geopolitical events become volatile in a world of economic insecurity, leading to political upheaval and protectionism. [Emphasis added]
-The U.S. Economy 2008

Ultimately, the benefits of globalization may well becoming to an end, both politically and economically. Not unlike a century ago, we are entering a more volatile geopolitical period with likely negative economic consequences.

Related articles
Russia warns Poland over missile shield – FT
Bush warns ‘bullying’ Russia – FT

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The U.S. has decided brinkmanship is the way to deal with the Russians. Having seen Georgia overrun by the Russian military, Poland jumped at the chance to have a stronger U.S. defense behind them and so they now have it. Less than two years ago Russia said the following about missile defense:

U.S. plans to expand its embryonic missile defence shield to the Czech Republic and Poland are an “an obvious threat”, the Russian military says.

Poland has confirmed the U.S. wants to negotiate the use of its territory to build part of its missile defence base.

On Sunday, the U.S. asked permission from the Czech Republic and received the backing of Czech PM Mirek Topolanek.

Washington says it needs interceptor missiles in Europe to stop attacks by states like Iran or North Korea.

It hopes to build a radar station in the Czech Republic and to site interceptors in Poland.

Poland’s Deputy Foreign Minister Witold Waszczykowski confirmed that Washington has approached Warsaw over the project and said: “We are now waiting for firm proposals.”

But Moscow insists that the installation of U.S. missiles in countries close to its western border would change the strategic balance in Europe.

Lt Gen Vladimir Popovkin, commander of Russia’s space forces, said Moscow would interpret the move as a military threat.
-BBC News, 22 Jan 2007

What Russia’s response will be remains to be be seen. At least for now, Poland have the backing Georgia did not get.

Poland and the U.S. reached an agreement Thursday that will see a battery of American missiles established inside Poland, a plan that has infuriated Russia and raised the specter of an escalation of tension with the region’s communist-era master.

The deal, which was to be signed later Thursday in Warsaw by Poland and the U.S., includes what Polish Prime Minister Donald Tusk called a “mutual commitment” between the two nations — beyond that of NATO — to come to each other’s assistance in case of danger.

That was an obvious reference to the force and ferocity with which Russia rolled into Georgia in recent days, taking the key city of Gori and apparently burning and destroying Georgian military outposts and airfields.

Mr. Tusk said that the North Atlantic Treaty Organization would be too slow in coming to Poland’s defense if Poland were threatened and that the bloc would take “days, weeks to start that machinery.”

“Poland and the Poles do not want to be in alliances in which assistance comes at some point later — it is no good when assistance comes to dead people. Poland wants to be in alliances where assistance comes in the very first hours of — knock on wood — any possible conflict,” Mr. Tusk said.

“This is a step toward real security for Poland in the future,” he added.

Mr. Tusk, speaking in a televised interview from the capital, said the U.S. agreed to Polish proposals that it help augment its defenses in exchange for placing 10 missile defense interceptors.

Mr. Tusk said that the U.S. met the key Polish demands “concerning the permanent presence of Patriots, missiles that will be able to effectively protect our territory.”
-WSJ, 14 Aug 2008

Either way you look at it this is a case of you reap what you sow.

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General Musharraf, the man at the America’s side in the War on Terror who came to power in a military coup d’etat, is out. His replacement is unknown. This is further evidence that the geopolitical situation is becoming extremely volatile.

President Pervez Musharraf is expected to leave office in the next few days before Pakistan’s Parliament takes up impeachment proceedings against him, following a breakthrough in secret talks designed to ease his departure from office, people familiar with the situation say.

“Musharraf will neither face impeachment nor be prosecuted,” one person said. Mr. Musharraf is expected to step down once a guarantee of safe passage and immunity from prosecution has been struck. “We expect a major development in the next 48 hours,” this person said.

The secret talks have involved Mr. Musharraf’s aides and members of the leading political party.

-WSJ, 14 Aug 2008

While this is not the best news for the US, it at least allows Musharraf to save face and avoid a likely impeachment.

However, for the Pakistanis many questions remain. Who will replace Musharraf as President with Benazir Bhutto having been assassinated? Will the new regime allow the U.S. a free hand in the Pakistani region bordering Afghanistan? Will Russia or China attempt to exploit regime change to their own benefit? Irrespective of what happens going forward, none of the contenders to the Presidency have enough legitimacy to add stability to a region in need of it. And that alone is bad news for the US.

With Musharraf gone, the U.S. will likely have to re-assess its geopolitical aims as one pro-U.S. leader after another from Europe and Asia has fallen. In particular, given Moscow’s recent moves in Georgia, Central Asia looks vulnerable as a reliable future outpost for U.S. oil interests. The oil rich region is surrounded by China, Russia, Pakistan, and Iran, making it a treacherous place for U.S. economic interests. The former Soviet states may now find Russia a more threatening presence to the north.

In my view, this is blowback from American overreach under George W. Bush, a man who famously did not even know who Musharraf was when he was running for President in 1999. The U.S. is finding itself lonelier at a crucial time in its economic history.

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I wrote a blurb on the Georgia-Russia struggle on my blog. But I wanted to add a blurb here from Mikhail Gorbachev’s Op-Ed in today’s Washington Post. His viewpoint stands in great contrast to the punderati of Washington. Framed in a real understanding of Russia, Gorbachev speaks a truth that no one in Washington is hearing.

The past week’s events in South Ossetia are bound to shock and pain anyone. Already, thousands of people have died, tens of thousands have been turned into refugees, and towns and villages lie in ruins. Nothing can justify this loss of life and destruction. It is a warning to all.

The roots of this tragedy lie in the decision of Georgia's separatist leaders in 1991 to abolish South Ossetian autonomy. This turned out to be a time bomb for Georgia's territorial integrity. Each time successive Georgian leaders tried to impose their will by force -- both in South Ossetia and in Abkhazia, where the issues of autonomy are similar -- it only made the situation worse. New wounds aggravated old injuries.

Nevertheless, it was still possible to find a political solution. For some time, relative calm was maintained in South Ossetia. The peacekeeping force composed of Russians, Georgians and Ossetians fulfilled its mission, and ordinary Ossetians and Georgians, who live close to each other, found at least some common ground.

Through all these years, Russia has continued to recognize Georgia's territorial integrity. Clearly, the only way to solve the South Ossetian problem on that basis is through peaceful means. Indeed, in a civilized world, there is no other way.

The Georgian leadership flouted this key principle.

What happened on the night of Aug. 7 is beyond comprehension. The Georgian military attacked the South Ossetian capital of Tskhinvali with multiple rocket launchers designed to devastate large areas. Russia had to respond. To accuse it of aggression against "small, defenseless Georgia" is not just hypocritical but shows a lack of humanity.

Mounting a military assault against innocents was a reckless decision whose tragic consequences, for thousands of people of different nationalities, are now clear. The Georgian leadership could do this only with the perceived support and encouragement of a much more powerful force. Georgian armed forces were trained by hundreds of U.S. instructors, and its sophisticated military equipment was bought in a number of countries. This, coupled with the promise of NATO membership, emboldened Georgian leaders into thinking that they could get away with a "blitzkrieg" in South Ossetia.

- Mikhail Gorbachev, Washington Post, A Path to Peace in the Caucasus

Please read the post in its entirety on the Post website.

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