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Russia
warns US against supplying ‘lethal defensive aid’ to Ukraine
Moscow
has warned Washington a potential policy shift from supplying Kiev
with “non-lethal aid” to “defensive lethal weapons”, mulled
as US Vice President visits Ukraine, would be a direct violation of
all international agreements.
RT,
21
November, 2014
A
Russian Foreign Ministry spokesperson said that reports of possible
deliveries of American “defensive
weapons” to
Ukraine would be viewed by Russia as a “very
serious signal.”
“We
heard repeated confirmations from the [US] administration, that it
only supplies non-lethal aid to Ukraine. If there is a change of this
policy, then we are talking about a serious destabilizing factor
which could seriously affect the balance of power in the
region,” Russian
Foreign Ministry spokesmanAleksandr Lukashevich cautioned.
Ukrainian army soldiers with an
artillery field gun maneuver on the coastline near the eastern
Ukrainian city of Mariupol on October 21, 2014. (AFP Photo/Alexander
Khudoteply)
“We
paid attention not only to such statements, but also to the trip of
representatives of Ukrainian volunteer battalions to Washington, who
tried to muster support of the US administration,” Lukashevich
said.
The
Ministry made it clear that such a move by Washington would violate a
number of agreements.
“This
is a very serious signal for several reasons. First of all, this is a
direct violation of agreements, including the ones achieved in
partnership with the United States. I mean the Geneva Declaration
from 17 April,” said
the Russian Foreign Ministry spokesman.
Ukrainian President Petro Poroshenko requested lethal aid from the US during a visit to Washington in September.
The
American Vice President who has arrived in Kiev late Thursday has not
yet made any official announcement, but Reuters’ sources point to
the possibility that US might increase a “non-lethal” aid
package to Kiev instead of opting to supply arms.
Under
the non-lethal aid package, the US could deliver to Ukraine first
Humvee vehicles and radars but as officials pointed out such
deliveries would unlikely alter the conflict. Previous non-lethal aid
to Ukraine announced in September included military equipment such as
counter-mortar detection units, body armor, binoculars and other gear
worth $53 million.
At
the same time the US diplomatic branch announced that it will
continue to send advisers to Kiev and has allocated funds to Ukraine
to battle what both the US and Ukraine see as a threat from Russia.
“The United States, as you’re no doubt aware, is providing about $116 million in security assistance to help Ukraine in this effort,”State Department spokesman Jeff Rathke said Thursday. “This assistance also includes advising and training, and the United States will continue to send advisory teams to Kiev to help improve Ukraine’s combat medical care and to identify areas for additional security assistance.”
Rathke
also said that lethal assistance to Ukraine is not yet “off
the table.”
“Our
position on lethal aid hasn’t changed. Nothing is off the table,
and we continue to believe there’s no military solution. But we, in
light of Russia’s actions, as the nominee mentioned yesterday in
his testimony, this is – as he indicated, this is something that we
should be looking at,” Rathke
said.
For
now all will be decided Friday when Biden is expected to hold talks
with Ukrainian Prime Minister Arseniy Yatsenyuk and President Petro
Poroshenko. Following the talks, Biden and Poroshenko will make a
joint press statement.
As The "Sanctions War" Heats Up, Will Putin Play His 'Gold Card'?
Submitted
by John
Butler via Contra Corner blog,
The
topic of ‘currency war’ has been bantered about in financial
circles since at least the term was first used by Brazilian Finance
Minister Guido Mantega in September 2010. Recently, the currency war
has escalated, and a ‘sanctions war’ against Russia has broken
out. History
suggests that financial assets are highly unlikely to preserve
investors’ real purchasing power in this inhospitable international
environment, due in part to the associated currency crises, which
will catalyse at least a partial international remonetisation of
gold. Vladimir Putin, under pressure from economic sanctions, may
calculate that now is the time to play his ‘gold card’.
A
BRIEF HISTORY OF THE CURRENCY WAR
“We’re
in the midst of an international currency war. This threatens us
because it takes away our competitiveness.” Brazilian Finance
Minister Mantega uttered these words in September 2010,
about two years after the spectacular global financial crisis of late
2008. During and following the crisis, the euro declined by around
25% versus the dollar. The pound sterling declined by nearly 30%. And
while the Brazilian real also declined initially, it subsequently
regained these losses in less than a year, unlike either the euro or
pound. Dramatic swings in currency values can have a material impact
on relative rates of economic growth.
And when global economic growth
is weak, the temptation to devalue and take some global market share
from competitors is strong. “The advanced countries are seeking to
devalue their currencies,” claimed Mantega.[1]
The
decline in the value of the euro in 2008-11 was of special importance
because it exposed a key fault-line across the euro-area: That
between the competitive exporters of the North, such as Germany,
Poland and the Czech and Slovak Republics; and the less competitive
importers of the South, such as Italy, Spain, Portugal and Greece.
With the euro weaker, the exporters’ economies were booming. Yet
the fallout from the financial crisis fell hardest on the least
competitive euro members, threatening the solvency of their banks
and, by extension, the sustainability of their governments’
finances.
Thus
there emerged a ‘civil currency war’ in the euro-area, which is
still being fought at the ECB in
Frankfurt and in the national capitals. The South is facing default
and multiple countries have considered withdrawing from the euro,
threatening the entire project. The North remains reluctant to
provide bail-outs without a substantial quid-pro-quo in the form of a
meaningful restructuring of the chronically uncompetitive southern
economies.
A
dramatic escalation in the global currency war took place in Japan in
2012, following the election of Prime Minister Shinzo Abe,
who campaigned on a platform of proposed radical measures to get the
Japanese economy moving again. Thus he wasted no time in deploying
the most obvious weapon: currency devaluation. From October 2012 to
February 2013, the yen devalued by some 25%.
While
this did have the result of providing some short-term stimulus, the
overall effect was smaller and shorter-lived than hoped. Thus the
Bank of Japan took additional measures recently to weaken the yen
further. As of this writing, the yen has fallen by a further 15%. And
that’s not all: Abe is now promising to halt a planned increase in
sales tax and has called a snap election as a de facto referendum on
his radical economic policies. Further yen weakness following this
announcement suggests that the financial markets expect that Abe will
prevail and follow-through accordingly.
This
large cumulative yen devaluation is an attack on Japan’s
competitors in the global export markets, in particular those for
technologically advanced manufactured goods. Germany, Poland, South
Korea, Taiwan and Brazil are in this group and no doubt the weaker
yen is one reason why growth in these countries has been slowing of
late.
Germany
and Poland, however, now find they are fighting a three-front
currency war: Versus Japan for export market share; versus the US, EU
and NATO over the issue of economic sanctions against Russia; and on
the continuing front within the euro-area itself, where recently both
countries dissented from a recent ECB quantitative easing (QE)
initiative to purchase asset-backed securities.[2] How Germany,
Poland and other countries caught in the crossfire of the currency
and sanctions wars react will in turn have an impact on their trading
partners, and so on. The associated negative consequences for global
financial markets could be substantial.
RUSSIA,
NATO AND THE ‘SANCTIONS WAR’
In
recent years, there has been a series of increasingly serious
confrontations between US allies and Russia, beginning with the
Georgian war of 2008, continuing with the Syrian crisis of 2013 and
then, most recently, in Ukraine. While each of these crises has been
serious in its own way, not until now have they had an overt
international economic dimension. This is because the Ukraine crisis
has unleashed a ‘sanctions war’ that has escalated to the point
of doing real economic damage not only to Russia, but to Germany and
Poland, two of Russia’s largest trading partners.
So
far, the Russian economy has held up reasonably well, but recent
developments suggest that a deep recession is on the way. Lower
prices for oil—Russia is a huge exporter—will hit the Russian
economy hard. Moreover, with the Russian currency plunging by over
30% in recent months, consumer price inflation is going to rise
sharply.
So
what is Russia to do? Putin
is rumoured to be preparing a major programme to reduce corruption
and improve economic efficiency, but even if this is successful, it
is going to take time, and it can’t be expected to fully offset the
effect of sanctions. Unless they are lifted soon, Russia is facing a
period of economic misery.[3]
For
the US and NATO, Russian economic misery is precisely what the
sanctions war is all about: Cause
enough pain, so the thinking goes, and Putin will allow Ukraine to
crush the rebellion in the eastern part of the country and possibly
re-annex the Crimea.
While I am not an expert in these matters, it strikes me as highly
unlikely that Putin will give in under the pressure. He is popular in
Russia, not only because, up to now, he has overseen a prolonged
period of strong economic growth but also because he is regarded by
Russians as a strong leader standing up for Russia’s national
interests. Ordinary Russians support their ethnic bretheren in
eastern Ukraine and Crimea. They would be horrified if Russia allowed
Ukraine to crush the rebels. Also, because of the sanctions, Russians
will blame the US and NATO for the coming economic downturn, not
Putin.
If
I’m right that Putin stands his ground in Ukraine and remains
highly popular notwithstanding the inevitable recession, then what
does this imply for the currency wars generally? First,
it implies that Germany, Poland, Slovakia and most other Russian
trading partners are going to face a sharp economic deterioration as
well. In all cases, this is going to have some political effects. In
those countries with weak governments and unpopular leaders, the
opposition may support ending the sanctions as an expedient way of
gaining power. Indeed, in Slovakia the government has already voiced
opposition to further sanctions.[4]
Second,
it implies that, rather than just sit back and take the pain, Russia
is going to seek to reduce its economic dependence on the West. This
is already in evidence, with Putin having signed major deals in the
energy and defense industries with China and India, among other
countries. Stronger Russian ties with the other BRICS, or other
countries for that matter, may be of some concern to the US, but in
most cases there isn’t much the US can do about it.
One
crucial aspect of Russia’s dependence on the West is the global use
of the US dollar as the primary international transaction and reserve
currency. It is thus no surprise that the recent Russian energy deal
with China—involving the construction of a large gas pipeline
between the two countries—is to be financed and transacted in the
Chinese yuan rather than the dollar.
Not
only Russia, but the BRICS in general have regularly expressed their
dissatisfaction with the dollar-centric global monetary conventions,
including the Bretton-Woods legacy institutions of the IMF and the
World Bank.[5] Hence the BRICS have set about building their own
parallel institutions and have signed a number of bilateral
currency-swap deals with each other and non-BRICS trading partners in
order to reduce dollar dependence. While all these initiatives nudge
the BRICS and, by implication, the global economy generally, away
from the dollar, the process is slow and, absent an international
monetary crisis, is likely to take years.
For
Russia, however, the need to shore up the economy and the currency is
exigent. It cannot wait for the gradual evolution of the
international monetary system to reduce the impact of sanctions. So
what else might Russia do in the near-term?
A
GOLDEN ROUBLE?
One
intriguing possibility is one which Russia has, in fact, contemplated
before: Backing the currency with Russia’s gold reserves.[6]
In the late 1980s, as the Soviet Union was breaking up, the rouble
was in free-fall and inflation was soaring. Russia had essentially
zero access to global capital markets and relied on oil exports for
hard currency with which to trade with other nations. In 1989,
Premier Gorbachev invited two prominent US economists to Russia,
where they met with senior economic policy officials and recommended
precisely this as the best way to stabilise the rouble. One of the
two was former Fed governor Wayne Angell; the other, Jude Wanniski of
‘supply-side’ economic fame. In 1998, Mr Wanniski wrote that he
“became alarmed about the financial collapse in Russia,” and
decided to “write a piece on how to fix Russia right away, before
it was in complete chaos.” In the Wall Street Journal editorial
that followed, Mr Wanniski explained the longer history of the
gold-backed rouble idea:
In
September 1989, the Soviet government of Mikhail Gorbachev invited me
to Moscow for nine days to discuss my unorthodox views on how the
U.S.S.R. could make the conversion to a market economy. I’d been
arguing that the process had to begin by fixing the ruble price of
gold at a credible rate of exchange, which I believed then would be a
relatively easy thing to do. I still believe that.
Last
week, the former U.S. vice-presidential candidate for the Republican
Party, Jack Kemp, wrote a letter to President Bill Clinton. In it he
urged him to ask Mr. Yeltsin and his prime-minister nominee, Viktor
Chernomyrdin, to consider the gold solution as the quickest and
easiest way to end the financial crisis without more suffering by the
Russian people.
But
gold is preferable in this situation because the Russian government
could announce that it will defend the ruble in terms of gold at a
rate of 2,000 rubles per ounce and because it has control of the
ruble but not the foreign currencies of a currency board. That
is, Russia need not have gold ingots backing every last ruble in
circulation in order to keep the gold-ruble price stable. It can do
so by managing the supply of ruble liquidity, which the government
can do easily by buying and selling ruble interest-bearing bonds to
Russian banks. It should also make an unlimited amount of the
gold-ruble bonds available to ordinary people.
This
is how Alexander Hamilton solved the financial crisis that faced the
administration of George Washington in 1791.America’s
first Treasury Secretary fixed the dollar to gold and promised
creditors they would be paid all they were owed at par, with
interest. In 1947, West German Finance Minister Ludwig Erhard ended a
similar financial crisis by pegging the Deutsche mark to gold. At
these times, neither the U.S. nor the German government had any gold.
The gold promise worked because their own people understood that
their governments were not insolvent, but simply faced a short-term
cash crisis. In the same way, the Russian state today has small
liabilities, perhaps $200 billion, compared to the assets it
possesses, which easily amount to $10 trillion. The state, after all,
owns almost everything in 11 time zones, which it acquired in the
1917 revolution. All of these assets can be used to back up the
exchange rate by converting them at the ruble price of gold.
On
hearing that their government promises to pay ruble debt at a
2,000-to-one gold price — which implies a dollar/gold rate of 7 to
1 at the moment — the Russian people would have to decide if the
promise was credible. Would they rather have a gold-ruble bond paying
interest at a hard rate of 7 to 1, or a ruble note paying no interest
at a collapsing rate of 17 to 1? The question suggests the people
would rush to convert ruble notes into ruble bonds.
As
it is, the Russian people are transacting among themselves using $40
billion in U.S. currency, while the value of the ruble money supply
implodes toward zero. A government gold/ruble peg would quickly bring
the people to their banks with dollars, asking for the now more
valuable rubles. In short order, the government would have enough
dollars to pay Western banks the interest they are owed. As the
Russian government creates new ruble liquidity to meet increased
demand, the problems with insolvency at Russian banks also are
resolved. And as domestic commerce now would flow through ruble tax
gates instead of dollar barter, Mr. Yeltsin would be able to pay all
back wages in tax rubles instead of fiat money. By fixing to gold
instead of a currency-board basket, Russia would be able to collect a
bonanza in seigniorage.
If
President Clinton wished to follow through on his promise to help
President Yeltsin, he could ask his Treasury department to buy $3
billion to $4 billion of the gold-ruble bonds from its Exchange
Stabilization Fund. If this happened tomorrow, Russia could meet its
dollar obligations this week. If there were any further doubts among
Russians about the credibility of a gold ruble, they would dissolve
upon seeing the U.S. government actually buying their sovereign ruble
debt.
The
Russian government would soon be able to hasten an economic expansion
through supply-side tax reforms. But first things first. A ruble as
good as gold is what Dr. Angell ordered in 1989 and it is what the
doctor orders now.[7]
The
situation back in 1989 or 1998 was, thus, similar to if even more
serious than that faced by Russia today. But if the sanctions war
escalates? Things could get worse. Is Mr Putin or his senior advisers
aware of what was contemplated above? That gold could provide a
workable solution to stabilise the currency and economy? A distinct
possibility. How likely is it that they will make this move?
Well,
let’s consider the international context. Were Russia to back the
rouble with gold today, this would be a far more credible policy than
it could ever have been back in 1989 or 1998, when Russia’s
government was less stable and less popular, and Russia’s economy
was less well-integrated with those of China, Germany and other major
economies. Moreover, in recent years Russia has amassed a huge amount
of gold reserves.[8] Indeed, at current market prices, Russia’s
gold reserves would back a whopping 27% of the narrow rouble money
supply! That is a high ratio, far in excess of any other major
country and also in excess of the US Fed’s original stipulated gold
coverage minimum. Moreover, Russia is a large net exporter,
notwithstanding the sanctions, so Russia’s gold reserves, by
implication, are likely to continue to grow, rather than decline.
This
credibility is also reinforced by the Russian economy’s relatively
low debt.
Without
a large debt to service, there is little temptation or need to
inflate the currency. Indeed, Russian interest rates are currently
around 10%, implying a generous relative return on rouble cash
balances. Imagine the rouble were to be convertible into gold, AND
rouble interest rates remained at 10%. This implies a nearly
risk-free arbitrage of 10% between the rouble and gold. You can bet
than a large number of international investors would quickly sell
some gold, dollars, or other currencies, and acquire some roubles,
pocketing the hefty interest rate differential. That would support
the rouble, possibly leading to a large re-appreciation vis-à-vis
the dollar and other currencies left unbacked by gold. Rouble
interest rates could then decline, perhaps to quite low levels, where
an equilibrium would eventually be reached. It could have worked in
1989, or 1998. It is far more likely to work today.
COULD
A GOLDEN ROUBLE CATALYSE A GLOBAL REMONETISATION OF GOLD?
There
is another aspect to consider, however, which is the possible impact
this policy would have on the dollar and the international monetary
system. Recall that, as the primary global reserve currency, the
dollar circulates in vast quantities abroad, where it forms the bulk
of the monetary reserves of central banks. This is in part what
allows the US government and economy generally to finance themselves
at such low interest rates. But other factors equal, if the dollar
suddenly faces competition from a credible, gold-backed currency, it
is likely that, at a minimum, central banks are likely to diversify
at least some of their dollar reserves into interest-bearing,
gold-backed roubles. Countries importing oil from Russia would have
an additional incentive to do so as they would be able to pay for
Russian oil imports in roubles and avoid sanctions. Speculators (or
investors) anticipating an eventual internationalisation of the
rouble would front-run these developments, pocketing a nice return
over time.
The
implied upward pressure on US interest rates would be perhaps small
initially, but even a small rise in US interest rates would spell
trouble for a US economy that is so highly leveraged to low rates.
Growth would slow. The Fed could try to offset this by engaging in
renewed QE, but that could add fuel to the fire, resulting in
aggressive selling of dollars in the foreign exchange markets. In an
extreme but hardly impossible scenario, the dollar could lose reserve
status entirely, something that would be devastating for the US
economy. While
a sharply weaker dollar would help US competitiveness and exports
over time, it would crush the dollar’s effective international
purchasing power (eg for oil and other resources) and result in
soaring consumer price inflation. The combined negative impact of
higher interest rates on growth and rising consumer prices on
inflation would make the stagflationary 1970s look like a picnic.
Thus
dethroning the dollar does not end the currency wars but rather could
escalate them further instead as one country after another tried to
offset dollar weakness by weakening their own currencies. This
sort of ‘race to the bottom’ was seen in the 1920s and 1930s,
culminating in US President Roosevelt’s executive decision to
devalue the dollar by some 60% in 1934. In that instance, however,
the dollar remained backed by gold and by what was by far the largest
global economy at that time.
Not
so today. The
global economy has become increasingly multipolar, with both the
euro-area and China roughly as large as the US.
Moreover, the US has a huge accumulated and external debt, implying a
growing risk of debasement and devaluation in future. As it stands
today, only 2.3% of the narrow US money supply is backed by gold.
Thus the US is simply no longer in a position to be a ‘monetary
hegemon’, providing the global reserve currency.
But
as all large economies have their own debt or other financial issues
with which to deal, no major currency is in a position to replace the
dollar as the pre-eminent reserve. This implies that the global
monetary system is highly unstable. The dollar is hardly the only
currency at risk of debasement and devaluation. Game theory implies
that a race to the bottom is distinct possibility and it is unclear
whether the dollar would lead or follow in that race.
As
I further argue in my book, this
combination of economic multipolarity and the instability of the
current global monetary equilibrium is highly likely to result in at
least a partial if not full remonetisation of gold, with an
associated, large rise in price.Gold
is the ideal way for countries to settle their trade imbalances in a
world in which trust in currency stability is lacking. Accumulating
reserves that can be summarily devalued by trading partners in a
currency war is not a rational policy. Yet something must function as
a reserve asset if trade is to take place at all. Gold provides that
‘something’ as supply is stable and it cannot be arbitrarily
devalued. Backing currencies by gold would thus greatly increase
trust and, thereby, facilitate international trade.
Those
familiar with the 1870s will note that there are now strong parallels
with that important decade. Following German unification and the US
recovery from the Civil War, both of these economies were catching up
rapidly with Britain. Japan had begun to industrialise. Under these
multipolar conditions arose spontaneously, absent formal diplomacy,
the classical gold standard system that would underpin decades of
arguably the fastest sustained global economic growth ever
experienced in history.[10]
SO,
WILL PUTIN PLAY THE ‘GOLD CARD’?
Let’s
now return to Russia and leave aside a biased western perspective for
the moment. Putin
has arguably accomplished more for Russia than has any other
contemporary leader of a major country. Yes, he may be something of
an autocrat, but please show me one major developed country that has
never been ruled by an autocrat. (The USA began its life under George
III and borrowed the bulk of its legal code and political culture
from the UK.) Under Putin’s leadership, Russia has maintained its
territorial integrity, something that had been left in question
following the collapse of the Soviet Union, and Russia retains a
formidable military capable of defending its vast frontiers (although
not capable of policing the world). The economy has grown rapidly
and, while still resource-dependent, has begun to diversify in
various ways. (Keep in mind the young USA was regarded by Europeans
as a largely resource-dependent economy.) Russia
has built strong economic and political ties not only with the BRICS
but also many smaller economies in Eurasia and elsewhere around the
world. Russia
has only a small accumulated national debt, implying that this will
not be a drag on future growth, as is likely to be the case in the
US, EU and Japan. Russia also has an advantageous tax system, with a
top 13% rate of income tax. Yes, Russia remains an economically
unequal society, but we know what has happened to inequality
throughout the developed economies in recent decades, not just
following the 2008 global financial crisis.
Given
these achievements, Putin is not a leader to be taken lightly and we
should pay attention when he says it it his desire to end the
‘dictatorship of the dollar’, as he did just this week. [11]
Perhaps he will indeed play the gold card he has hidden up his sleeve
and thus kill two birds with one stone: shore up the rouble and
Russian economy on the one hand; dethrone the dollar on the other. A
period of international monetary and associated economic chaos might
ensue, but with Russia suffering already under unwelcome sanctions
and thus with relatively less to lose, Putin might calculate that now
is the time to make his move. He
may have already achieved his place in the Russian history books but
imagine how he will be regarded in world history books if he sets in
motion that which culminates ultimately in the return to some form of
global gold standard.
This
Is What Is Really Taking Place Behind The Scenes Of The Second
US-Russian Cold War
19
November, 2014
It
appears John Kerry is at it again. Russian Foreign Minister
Sergei Lavrov says the US Secretary of State called on him to "pay
no mind" to a statement by President Obama, in which Russia was
included to a list of top global threats. Seeking Russia's
cooperation in Iran and on the Korean Peninsula, Kerry
told Lavrov to "forget about" what Obama said.
As US foreign policy credibility dissolves, we leave it to Lavrov to
conclude, "it is flippant," he jabs, "it’s not
appropriate for a powerful country to have such a consumer attitude
to its partners -where
you’re needed, help us; where you’re not, obey us."
Russia’s Foreign Minister Sergey Lavrov says US Secretary of State John Kerry called on him to “pay no mind” to a statement by President Obama, in which Russia was included to a list of top global threats.
President Obama voiced the three most significant global threats at the UN General Assembly in September. Ebola topped his list, followed by “Russian aggression in Europe.” In third place was the threat represented by the Islamic State extremist group.
"The first time I took note of the listing of threats that President Obama took the liberty of doing was when I spoke at the UN General Assembly. Some time later, talking to John Kerry not so long ago, I asked him what it was supposed to mean. He said: "Forget about it".
He said "forget about it" because at that moment he wanted to discuss how we would coordinate our approaches toward resolving the [problem of the] Iranian nuclear program and the situation on the Korean Peninsula," Lavrov said during a regular 'government hour' hearing at the State Duma on Wednesday.
"You see, it's unseemly for a major and great power to take such a consumerist approach toward its partners. Where we need you, please help me, and where I want to punish you, obey me," he said.
*
* *
Not
exactly the angry picture of cold-war-ism that Obama projects to the
outside world as 'costs' are imposed on Europe!!
Do
nothing stupid!!
*
* *
Obama:
"So how did you like that whole "costs" part? Was it
too much? I think they bought it."
Vladimir:
"You have been fantastic. Truly flexible, and so persuasive: I
almost believed it myself. Great job comrade."
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