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14 January 2015

Cold War II - an Alternative Perspective




After seeing China in the headlines for a long time, the plummeting oil price and the sinking rouble have put Russia right back in the middle of the picture. This week, Richard Horswill presents a somewhat controversial view of the position of Russia vis-a-vis the United States. In the next week or so, we will be looking at it from a rather different angle.


Has Russia  - or perhaps more correctly, it’s leader, Vladimir Putin - become the bogeyman, the face of the “evil empire” challenging for superiority on the global stage by attempting to kick against the current number one, the country that has appointed itself as judge, jury and executioner for the world - the United States of America?

Conventional thinking...of weakness

Conventional thinking, according to Western media, is of a weakening economic outlook in Russia stimulated by a significant drop in the price of oil, natural gas and general mineral based commodities and a currency that has dropped precipitously as a consequence of that outlook, forcing the Russian central bank to act decisively to head off speculative attack by raising interest rates from 10.5% to 17% overnight. (The sort of decisive move, incidentally, that Western economies could not tolerate based on their current levels of debt and the associated servicing costs.) It may well be worth considering an alternative perspective as short term volatility may not necessarily consign Russia’s long term outlook to one of ultimate failure. Russia may at first glance be returning to its old ways; however, perhaps the geo-political game of chess that is being played out will see it maintain its energy advantage in Europe in the short/medium term while it expands its networks Eastwards. We are not dealing with the Russia of old; a more sophisticated country has emerged out of the shadows of its communist past - seemingly a counterintuitive view but one worth considering.

History repeats itself; bear that in mind when looking back at the events of 1989 - particularly the fall of the Berlin wall - which tell the story of victory in the ideological battle of capitalism versus communism and the despatch of the former USSR to an ideological graveyard. However, things change and now only 25 years later the new face of an evolved totalitarianism (Russia has elections but the perception is that the current regime is dominant) is one of long term resource based growth, capitalist tendencies and long term strategic planning. Admittedly, this is not without its problems of inequality, but currently, when polled, 49% of Russians supported Putin. Not quite the same with most western leaders. On the other side of the coin, the US is spiralling into a possible black hole of debt, Barack Obama looks like a lame duck president seeking any kind of historical salvation, while social unrest on both financial and racial grounds predominates alongside a skewed unemployment  picture which only adds to that unrest.(Although the headline jobless figure is sub six percent, data from shadowstats adding in short and long term ‘discouraged’ workers shows a far higher figure.)  Continual fire-fighting of economic issues and the ironic “capitalist” model of a command and control economy is bringing US economic strategy into disrepute to the point where it may have only one option left if history is a gauge of crumbling empires.

External demons

“The demonisation of an old enemy”. Blaming the woes of a nation on others. Is the US targeting Russia? Are we witnessing the collapse of the American dream and the rise of the American nightmare? Could it be that the current negativity surrounding Russia and Putin is a construct conducted through the medium of media propaganda in an attempt to coerce public opinion to support extreme measures against an old enemy? Are we on the cusp of a re- commencement of the cold war? 

Growing up during the first cold war was a frightening experience for me and probably many other children. I remember despising the Brezhnev regime as the media of the day painted a picture of military might and single minded global communism. This ideology frightened the like-minded and open western democracies into a unified group with NATO expanding to meet the threat of the USSR and Warsaw pact nations head on. The continued threat of nuclear war focused political minds. Mutually assured destruction (MAD) kept geo-political ambitions in check as shown in a previous exchange by leaders Khrushchev and Kennedy in avoiding a nuclear event over the Cuban Missile crisis.

Political regimes come and go and by 1989 the bankruptcy of the USSR was assured after years of overspending on its military and the long war it had fought in Afghanistan. (Sound familiar?) When the Berlin Wall fell and the gateway to the East opened, the US and its allies had finally defeated the Russian bear seemingly without firing a shot. (Although the CIA and the Pentagon had a big hand in destroying the USSR financially by helping to prolong the war in Afghanistan. Al-Qaeda had been born.)

And today?

Fast forward to today and it is the US that is over extending itself financially fighting war after war in order to “protect the world from itself.” Of course, it has been able to do this principally due to its ability to finance itself by the export of US dollars through the petrodollar standard and the bond market where the US has up to now been able to borrow trillions cheaply. They have also graduated to debt monetisation (quantitative easing) in order to keep the low interest rate pretence going a bit longer but cracks may be forming in its overall strategy; is the unsustainable nature of the US trajectory is becoming evident?

The Neo-Conservative doctrine currently being espoused by Washington is a somewhat strange ideology which forces democracy on other countries; that somehow seems undemocratic. Countries must develop at their own pace economically and politically. Just because a country has something we require does not mean we should invade it and install puppet leaders to undermine the self determination of the people of that country. The supposed land of the free, it would seem, follows the old adage “do as I say not as I do.” 

The US now potentially face a similar fate to that of the former Soviet Union unless they can somehow reduce their debt load on the back of less spending (military and welfare related) and become the economic power house they once were. That seems particularly challenging, looking at the offshoring of much of its lower end manufacturing capability which has dealt a blow to US manufacturing employment, thus supplying  a greater need for social welfare support adding costs to an already deficit based economy. As well, the boom in shale oil and fracking which has boosted US growth is currently being undermined by low prices and potentially putting smaller over-leveraged US oil operations in default. There are obviously sustainable fracking operations which will weather the current low price of oil, but it may well be that the industry will have to consolidate if it is to help stage manage the rebirth of US industry.  Could this be a potential black swan in the making? 

Although growth has been achieved in the US since the 2008 financial crash, it has been based on the expansion of the debt load. Admittedly, not all debt can be portrayed as erroneous, as providing it has a productive capability it should be able to wash its face.  The potential decline of empire, financial shortcomings and a necessity to reinvent itself are not things that are easy to manage in the short term. Its current path of protectionism  through military might and its global resource imperialism could be its financial undoing as its ability to maintain the dollar reserve status is now starting to be questioned. The current foreign policy of the US does seem one that campaigns to boost GDP growth through military spending that actually has little to no long term  basis of productivity. Based on the last decade or so maybe it is Russia that  has become the latest in a long line of bogeymen that US is using in an attempt to hide the decline of its productive base.

Sanctions...and the Rouble

Russia is currently being attacked politically and financially. Events in the Ukraine and Crimea from a Russian perspective are more about protection from an ever expanding US global hegemony. Financial sanctions against Russia have bitten, however they have also hurt its European trading partners. A seemingly well orchestrated financial attack on the Rouble has the smell of another effort to undermine the Russian economy. 

Russia has actually got quite a lot going for it over the long term based on its resource wealth and its central position for the delivery of those resources to the manufacturing powerhouses that need them (Germany and China); it will almost certainly weather the current economic storm particularly with China in the background helping to backstop Russia’s current predicament by supplying a large currency swap arrangement. ( Russia and China are well placed allies currently, based on their specific needs.) Its significance in the natural gas industry (demonstrated by the major pipeline deals with China and continuing supply to Europe) will certainly not change at current prices, which give it serious leverage in economic terms. Its overall resource base encompasses base and precious metals, diamonds and other minerals. It has significant central bank US dollar reserves  ($419 billion at last estimate in November 2014 according to IMF statistics) although it may have used up to $100 billion (or a little more) of those reserves recently protecting the Rouble, and gold reserves to which it continues to add; whilst it continues to receive dollars for its resources it clearly sees that by converting some of those dollars into gold it is helping to protect the stability of the Rouble for the long term. If Putin really wanted to throw a bomb into the financial system he could start accepting Roubles or gold in payment for exports. Russia as a sovereign nation has extremely low levels of debt unlike its western counterparts. Subsequently, Russia seems to be pretty much in control of its own destiny. Don’t let the western media convince you otherwise!    


This article was written by Richard Horswill. All views expressed are strictly his own.

 

      

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