Originally published in the Informanté newspaper on Thursday, March 12, 2015.
2014 was a tumultuous year for
Russia. Before, Russia was seen as a newly up-and-coming democratic and free
market successor to the Cold War-era USSR. Since the start of Putin’s first
Presidency, the Russian Federation’s GDP grew on average 7% per year. President
Putin was on quite friendly terms with US President George W. Bush, as well as
the leaders of Brazil, Venezuela, Germany and Italy.
Still, Russia opposed foreign
overreaches by the United States. In 2003, for example, Putin opposed George W
Bush's move to invade Iraq without the benefit of a United Nations Security
Council resolution explicitly authorizing the use of military force. But its
interventions were quite strategic and limited, though opposed as well, in the
Abkhazia and South Ossetia regions of Georgia.
All this makes Russia Ukrainian
moves seem… inconsistent. Its foreign policy decisions and military tactics are
unusual to say the least – provoking but never quite reaching the level where
NATO or the United States have a case for a military response. Could it be that
Putin has another play he’s making? After all, with Russia’s ruthless political
game, it takes a certain kind of person to remain in power for 15 years –
someone who is long-term results-oriented, and quite pragmatic.
Perhaps Putin is playing a
different sort of game. Let us go back to July, 1944, in Bretton Woods, New
Hampshire in the United States. 730 delegates from all 44 Allied Nations in
attendance at the United Nations Monetary and Financial Conference. With World
War II in full swing, the Allies were desperate to rebuild the international
economic system – and the United States insisted the system be based on the US
Dollar, backed by gold.
Notably, the Soviet Union (the
Russian Federation’s predecessor) declined to ratify the agreement, stating
that the institutions created (the IMF and the World Bank) were ‘branches of
Wall Street.’ Nevertheless, with the US
Dollar now equivalent to gold, it started to be used as a foreign exchange
reserve currency, alongside gold. But this system was not to last.
On 15 August 1971, US President
Richard Nixon unilaterally suspended the conversion of US Dollar into gold.
This termination signified that monetary policy was now subordinated to the
foreign policy of the United States, and was the start of the American monetary
hegemony. Furthermore, in order to prevent a run on the US Dollar, Nixon
negotiated, first with Saudi Arabia, later the rest of OPEC, that all future
oil sales would be denominated in US Dollars, in exchange for arms and military
protection.
With oil being a prime commodity
in our modern economy, the US Dollar thus became the world’s leading reserve
currency – and in effect, a petrodollar, since if you needed petroleum, you
needed the dollar. This ‘world reserve
currency’ status has never been popular with other nations – indeed, as early
as the 1960’s, France called it the US’s ‘exorbitant privilege,’ as it resulted
in an ‘asymmetric financial system’ where foreigners ‘see themselves supporting
American living standards and subsidizing American multinationals.’ As the
economist Barry Eichengreen so eloquently held: “It costs only a few cents for
the Bureau of Engraving and Printing to produce a $100 bill, but other
countries had to pony up $100 of actual goods in order to obtain one."
But the energy market today is
quite different from that in the 1970’s. Putin’s Russia has become an energy
behemoth – it supplies 30% of Europe’s gas, and 35% of its oil. And yet all
energy purchases were still dollar denominated. And a post-Soviet Russia was in
no position to demand that it be paid in anything else. As Rick Falkvinge
noted: “Russia needed sanctions from the United States, so its energy supply to
Europe couldn’t be denominated in US dollars anymore.”
Thus, the ‘invasion’ of Ukraine. And
the United States obliged by providing Putin exactly what he needed to break
the hegemony of the petrodollar. Sanctions against Russia, powered by the might
of the US Dollar. And Putin was ready.
By May last year, Russia and China
(the only nations still capable of manned space missions) signed a US$400
billion gas deal, non-dollar denominated. By August, it had signed a
500 000 barrel a day deal with Iran, also non-dollar denominated. And by
January this year, Russia has divested itself of its US Dollar reserves,
completely withdrawing from the petrodollar system. As a result, the
petrodollar has had negative exports for the first time in 18 years.
And with the United States’
unilateralism over the past few years not making it many friends, and currently
still struggling to recover from its financial-system led recession, it is in
quite a precarious position. It could be that Putin has finally delivered the
blow that the Soviet Union never could – and started the decline of the US
Dollar as the world’s reserve currency. After all, no reserve currency status
lasts forever.
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