The Washington Post
July 7 2014
By Simon Denyer
Secretary of State John F. Kerry and Treasury Secretary Jack Lew will visit Beijing on Wednesday and Thursday for the sixth annual Strategic and Economic Dialogue. And while Washington has been focused more on Iraq, Syria, Ukraine and Russia, some say the U.S.-China relationship is facing its stiffest test since President Richard M. Nixon traveled to Mao Zedong’s China in 1972… .
The Obama administration’s foreign policy rebalance or “pivot” to Asia has been widely interpreted in China as an attempt to contain its rise.
U.S. efforts to bolster ties with regional states such as Vietnam and to reassure nervous Asian allies such as Japan and the Philippines that it
- stands ready to defend them militarily have created a new narrative in Beijing —
- that the United States has encouraged China’s neighbors to push their territorial claims more aggressively… In Washington, a rival narrative is taking hold:
- that China is intent on pushing its territorial claims through the threat of military force and that it ultimately wants to push the United States out of Asia…
China says it has historical claims to a huge swath of the South China Sea… Some argue that President Xi Jinping may see external threats as useful in ushering in tough reforms, including of the military; others say that China is simply baring its fangs as it seeks to build a new Asian order in which it, not the United States, is the major player in the region. Most agree, though, that China is asserting itself partly because it now possesses a modern deep-water navy and professional coast guard.
Whatever the reason, China’s rise has left the United States caught between its commitments to allies and its desire to maintain a constructive relationship with China… In April, President Obama visited U.S. allies Japan, South Korea and the Philippines in a trip that pointedly excluded China. While in Japan, he became
- the first president to explicitly say that the U.S. defense treaty covered islands administered by Japan. In the Philippines,
- he signed a new 10-year defense agreement.
There has been an equal and opposite reaction from Beijing. When U.S. Defense Secretary Chuck Hagel implicitly accused China in May of “intimidation, coercion or the threat of force” in asserting its territorial claims and warned that the United States “will not look the other way when fundamental principles of the international order are being challenged,” Lt. Gen. Wang Guanzhong called Hagel’s comments “excessive” and “suffused with hegemony, incitement, threats and intimidation,” China Central Television reported.
July 10, 2014
For years, analysts and scholars have theorized about the looming “Thucydidean Trap” awaiting China and the United States. The numerous historical examples of a rising power clashing with an established power have prompted comparisons of the modern Asia-Pacific with pre-World War I Europe or even with Athens and Sparta, the original victims of the trap described by the Greek historian Thucydides. China and the U.S. both pledged to avoid the historical pattern, in part by creating a “new type of great power relations.” But the current atmosphere suggests that the Thucydidean trap may have already sprung. Graham Allison, Director of the Belfer Center at the Harvard Kennedy School, outlined the classic Thucydidean trap back in 2012:
Athens’ “dramatic rise shocked Sparta, the established land power on the Peloponnese. Fear compelled its leaders to respond. Threat and counter-threat produced competition, then confrontation and finally conflict.” Allison emphasized the “two crucial variables: rise and fear.” A change to the international order in inevitable as China rises, Allison argued, the only question is whether leaders and societies alike can make the “huge adjustments” necessary to pave the way for a peaceful transition.
Two years later, neither China nor the U.S. seems particularly interested in actually taking the steps necessary to forge a “new type great power relationship,” though they both famously pledged to do so at the summit between Obama and Xi last summer. Instead, few steps have been taken to address the fear and insecurities on both sides that lie at the heart of the Thucydidean Trap…
Xi seems to have decided on the opposite tactic, opting instead to use China’s increasing military (as well as economic and diplomatic) clout to push on long-standing territorial claims. This has fostered exactly the sort of fear that Thucydides warned about, as China’s neighbors turn to the U.S. for support. Washington itself is also worried that China’s rise poses a fundamental threat to its interests in the region, from alliance relationships to the vital trade corridors in the South China Sea. The U.S., in turn, has done its part in nudging its relationship with China further towards conflict.
The “rebalance to Asia” has essentially become synonymous with increased military force:
- more U.S. marines in Australia,
- a new defense cooperation agreement with the Philippines, and
- support for Japan to stretch its defense limitations.
Along with this is tacit support for the rival claimants in China’s territorial disputes. It’s not hard to see where China gets the idea that the U.S. is trying to contain its rise.
To help ease tensions on a structural level, the U.S. would need to roll back its emphasis on increasing a military presence in the region. More fundamentally, the U.S. needs to accept that China will play a greater role in deciding regional and global affairs than at any time in modern history…
Despite their avowed commitment to avoiding the Thucydidean Trap, neither the U.S. nor China has given any signs that they are willing to deviate from the classic pattern of a security dilemma, upping the ante tit-for-tat. Certainly, at this stage neither side will want to take de-escalatory action unless it’s given a clear sign of goodwill from the other counterpart.
The best we can hope for in the short-term are modest confidence-building measures, including increased military transparency on both sides and a serious commitment to avoid provocative actions.
…Reuters reported Thursday that Putin, in a visit to the newly annexed Crimea, said Russia should aim to sell its oil and gas for rubles globally, because the dollar monopoly in energy trade was damaging Russia’s economy. “We should act carefully,” Reuters quoted Putin as saying. “At the moment we are trying to agree with some countries to trade in national currencies.”…
According to Treasury Department records, Russia in March sold off one-third of its U.S. Treasury debt holdings. Russia reduced its U.S. Treasury holdings from $153 billion in March 2013 to $100.4 billion in March 2014. The most recent numbers remain at a reduced level, with Russia holding $111.4 billion in U.S. treasuries in May 2014, compared to $143.4 billion in May 2013. The Russian sell-off of U.S. Treasury debt has been widely interpreted as reflecting Moscow’s adverse reactions to economic sanctions the Obama administration imposed on Russia as punishment for taking over Crimea and threatening military involvement in Ukraine. The Voice of Russia reported May 13 that Russia’s Ministry of Finance is ready to give a green light to a plan to radically increase the role of the Russian ruble in export operations while reducing the share of Russia’s dolar-denominated transactions. The Voice of Russia report detailed a “de-dollarization meeting” chaired by First Deputy Prime Minister Igor Shuvalov involving top level experts from Russia’s energy sector, banks and governmental agencies. The leaders were summoned to find a way to increase Russia’s ruble-denominated dollars to retaliate against the recently imposed U.S. economic sanctions.
In May, China agreed to buy $400 billion of Russian-produced natural gas over 30-years, valued in domestic currencies, in what was touted as Gazprom’s biggest contract ever. In August, Russia signed a historic deal with Iran to purchase $20 billion of oil in rubles, bypassing Western sanctions against Iran while hastening the petrodollar’s decline… “China has 3 trillion dollars [in reserve holdings], but they are buying gold as fast as they can,” Rickards told RT.com in May. “China worries that the U.S. is going to devalue the dollar through inflation so they want to have a hedge if the dollar goes down, so the gold will go up.” Forbes reported in March that China replaced India as the world’s largest consumer of gold. China’s holdings of U.S. Treasury debt has declined from $1.39 billion in May 2013 to approximately $1.27 billion in May 2014.
Petrodollar – Wikipedia refers to United States dollars earned through the sale of its petroleum (oil) to another country. In 1971 Richard Nixon was forced to close the gold window taking the U.S. off the gold standard and setting into motion a massive devaluation of the U.S. dollar. In an effort to prop up the value of the dollar Nixon negotiated a deal with Saudi Arabia that in exchange for arms and protection they would denominate all future oil sales in U.S. dollars. Subsequently, the other OPEC countries agreed to similar deals thus ensuring a global demand for U.S. dollars and allowing the U.S. to export some of its inflation. Since these dollars did not circulate within the country they were not part of the normal money supply, economists felt another term was necessary to describe the dollars received by petroleum exporting countries (OPEC) in exchange for oil…
Petrodollar recycling – Wikipedia refers to the phenomenon of major petroleum – producing nations – mainly the OPEC members – earning more money from the export of oil than they could feasibly invest in their own economies… During the late 1970s and early 1980s, states such as Saudi Arabia, Kuwait and Qatar amassed large surpluses of petrodollars which they could not invest in their own countries. This was due to small populations or being at early stages of industrialization. These petrodollar surpluses can be defined as net US dollars earned by those nations which were in excess of the internal development needs of those nations. These surpluses could be profitably invested in other nations. Alternatively, the world economy would have contracted if that money was withdrawn from the world economy while the exporting nations needed to be able to profitably invest to preserve their wealth for the future… From 1974 to the end of 1981, total current account surpluses for all members of OPEC amounted to $450.5 billion. Ninety percent of this surplus was accumulated by the Arab countries of the Persian Gulf and Libya, with Iran also accumulating oil surpluses prior to the Iranian Revolution in 1979. The petrodollars were invested by commercial banks in the US and Europe. As the recessionary condition of the world economy made investment in corporations less attractive, bankers lent the money to developing countries especially in Central and South America… In an alternative view of petrodollar recycling, based on balance of payments and banking data from the 1970s and 1980s, David Spiro shows that a large portion of Arab petrodollars were invested directly in US government securities, and in the financial markets of the largest five economies.
Aug 8, 2012
by Christopher Doran
Iran poses a far more serious threat to the U.S. than its disputed nuclear aspirations… It began in
- 2005, when Iran announced it would form its own International Oil Bourse (IOB), the first phase of which opened in 2008. The IOB is an international exchange that allows international oil, gas, and petroleum products to be traded using a basket of currencies other than the U.S. dollar. Then in November
- 2007 at a major OPEC meeting, Iran’s President Mahmoud Ahmadinejad called for a “credible and good currency to take over U.S. dollar’s role and to serve oil trades”. He also called the dollar “a worthless piece of paper.” The following month, Iran—consistently ranked as either the third or fourth biggest oil producer in the world—announced that it had requested all payments for its oil be made in currencies other than dollars.
The latest round of U.S. sanctions targets countries that do business with Iran’s Central Bank, which, combined with the U.S. and EU oil embargoes, should in theory shut down Iran’s ability to export oil and thus force it to abandon its nuclear program by crippling its economy. But instead, Iran is successfully negotiating oil sales via accepting gold, individual national currencies like China’s renmimbi, and direct bartering.
China and India are by far the most significant players, with Russia playing a supporting role. China is Iran’s number one oil export market, followed by India. Both have been paying for at least part of their Iranian oil imports with gold, and according to the Financial Times, have also been paying in their own currencies, the Chinese renmimbi and Indian rupee. As neither currency is easily convertible as international currency, they will be used to pay for Chinese and Indian imports. And on 22 June, Russian media reported that China imported almost 524,000 barrels per day in May, a whopping 35% jump from the previous month. There is only so much the U.S. can do if China continues to do business with Iran. China holds $1 trillion dollars of U.S. debt, and the U.S. is utterly dependent on cheap Chinese manufacturing. Significantly, just as the newest and toughest round of U.S. sanctions kicked in at the start of July, Iran’s PressTV announced that China would be investing at least $20 billion to develop the north and south Azadegan and Yadavaran oil fields which will produce 700,000 barrels per day. Azadegan is estimated to contain 42 billion barrels, making it one of the world’s largest oil deposits. America has more leverage with India, but with the “BRICs”—Brazil, Russia, India and China—showing increasing solidarity in dealing with the U.S. and Europe, U.S. options are still limited. In January Bloomberg reported that all Russian trade with Iran was being conducted in Russian rubles and Iranian rials, and not U.S. dollars. Instead of shunning Iran as per U.S. dictate, many countries are simply finding ways around the sanctions. On 20 June, ten days before the tougher sanctions came into place, Turkey and Iran announced that they would trade in their local currencies and bypass dollar transactions. Turkey is Iran’s fifth largest oil market. Local currency that has little convertible value internationally is one thing. Gold is quite another, and on 9 July, the Financial Times reported that Turkey had paid $1.4 bn in gold for Iranian oil in May. In January, Fars, Iran’s state run media, reported that all Iranian trade with Japan, Iran’s third biggest oil importer, was dollar free. The Tehran Times reported in July that South Korea, Iran’s fourth largest oil market, was considering bartering manufactured goods for Iranian oil, and Reuters reported that Indonesia was considering doing the same for palm oil. Sri Lanka and Vietnam were also considering dropping the dollar to guarantee ongoing access to Iranian oil.
How the Petrodollar System Works
In a nutshell, any country that wants to purchase oil from an oil producing country has to do so in U.S. dollars. This is a long standing agreement within all oil exporting nations, aka OPEC, the Organization of Petroleum Exporting Countries…
This means that every country in the world that imports oil—which is the vast majority of the world’s nations—has to have immense quantities of dollars in reserve. These dollars… are invested. And because they are U.S. dollars, they are invested in U.S. Treasury bills and other interest bearing securities that can be easily converted to purchase dollar-priced commodities like oil. This is what has allowed the U.S. to run up trillions of dollars of debt: the rest of the world simply buys up that debt in the form of U.S. interest bearing securities.
The flip-side of this are the countries that produce and export oil, in particular Saudi Arabia and the other Arab producers. The only way the system can possibly work is if oil producers refuse to accept anything other than U.S. dollars as payment for their oil. This they have done since the Nixon Administration’s manipulation of the OPEC oil crisis in the mid-1970’s, which succeeded in getting Saudi Arabia, traditionally the world’s dominant producer, to agree to accept only dollars for oil. The Saudis used their influence to get the rest of OPEC to agree as well.
In return, the U.S. offered to militarily defend not so much Saudi Arabia, but the horrifically repressive monarchy that ruled it…
Nixon and his Secretary of State Henry Kissinger also got the Saudis to agree to invest their mega oil profits in the U.S. economy. In addition to buying interest bearing U.S. government securities, the Saudis also invested in New York banks…Because the OPEC oil embargo had quadrupled global oil prices, the Saudis and other Arab producers suddenly had a great deal of money to invest.
The money parked in those New York banks then became available to be loaned to the rest of the world, which faced major financial crises due to—yes, you guessed it—the sudden quadrupling of oil prices. By the year 2000 and Iraq’s dramatic switch to selling Iraq’s oil in euros, Saudi Arabia had recycled as much as $1 trillion, primarily in the United States. Kuwait and the United Arab Emirates recycled $200–300 billion.
And because those loans were in U.S. dollars, they had to be paid back in U.S. dollars. When U.S. interest rates skyrocketed to 21 percent in the early 1980’s, interest on the loans also skyrocketed.
This in turn precipitated a third world debt crisis, which was mercilessly exploited by Wall Street and the U.S. In this case, the exploitation came in the form of requiring countries to “structurally adjust” their economies along neoliberal lines in return for World Bank and IMF bailout loans.
By 2009, the total debt owed on these bailouts and other loans was an astounding $3.7 trillion. In 2008, they paid over $602 billion servicing these debts to rich countries, primarily the United States. From 1980 to 2004, they paid an estimated $4.6 trillion.
The short version is that from the 1944 Bretton Woods agreement which set up the International Monetary Fund and the precursors to the World Bank and World Trade Organisation,
- the dollar was accepted as the international currency for all trade.
Crucially though, the dollar was backed up by gold, which was fixed at $35 an ounce. This meant the U.S. had to have enough gold on hand to back up any and all dollars it printed. Faced with escalating costs from the Vietnam War,
- in the early 1970s Nixon abandoned the gold standard and
- replaced it with the petrodollar system described above. Almost simultaneously, he abolished the IMF’s international capital constraints on American domestic banks, which in turn
- allowed Saudi Arabia and other Arab producers to recycle their petrodollars in New York banks. The petrodollar system, and U.S. ability to manipulate the dollar as the global reserve currency and hence global debt, has been the bedrock of American economic power.
But since the global financial crisis, U.S. policy has been to keep interest rates extremely low to stimulate borrowing. This has meant that the rate of return on those interest bearing securities that the rest of the world has invested in to enable them to buy oil exclusively priced in dollars is also now extremely low. In other words, there is no longer any real financial incentive for the rest of the world to sell its oil in dollars. Nor, crucially, is there as much incentive for OPEC and staunch U.S. ally Saudi Arabia to continue to kowtow to the petrodollar recycling system…
U.S. Protection of Dollar Dominance
By accepting and encouraging countries to pay for its oil in currencies other than the U.S. dollar, Iran has deliberately taken the same action that… led directly to the U.S. invasion of Iraq. In September 2000, Saddam Hussein announced that Iraq would no longer accept the “currency of its enemy”, the U.S. dollar, and from that time onwards any country that wanted to purchase oil from Iraq would have to do so in euros… Like Iraq pre-invasion, Iran is not a member of the WTO, has not had any dealings with the IMF since 1984, and does not have any debt with it or the World Bank. Like Iraq before it, and evidenced by China’s oil development contracts, the U.S. and its oil companies are cut out of any future oil development in Iran.
Like a post-sanctions Iraq, Iran has the potential to be the dominant power in the region and to provide development assistance on a vastly different model to that imposed by the WTO, World Bank and IMF, against which so much of the Middle East is rebelling.
Christopher Doran… teaches in the department of labor studies at Indiana University, Bloomington, and the department of Political Sociology at Indiana University, Columbus.
Apr 30, 2014
Ukraine Unveils Reform Program with IMF Support
INTERVIEW WITH REZA MOGHADAM (Director of the IMF’s European Department)
Ukraine unveiled a comprehensive program of economic reforms, backed by a $17.01 billion IMF loan approved on April 30 by the institution’s Executive Board. The loan, under a two-year Stand-By Arrangement, backs a policy program… The IMF approval makes $3.2 billion immediately available to Ukraine with the remainder subject to frequent reviews. The Stand-By Arrangement entails exceptional access to IMF resources, amounting to 800 percent of Ukraine’s IMF quota…
In an interview, Reza Moghadam, Director of the IMF’s European Department, emphasizes the needs for Ukraine to address deep-seated structural problems and vulnerabilities. He also notes that the Ukrainian authorities have taken ownership of economic reforms, which are long overdue and urgently needed…
IMF Survey: What are the key challenges facing Ukraine today?
Moghadam: Ukraine is experiencing its second major economic crisis in six years. An overvalued exchange rate accompanied by loose fiscal policy and sizable losses in the state-owned gas company Naftogaz resulted in
- large twin deficits,
- a steady rise in indebtedness,
- recurrent difficulties with external financing, and
- depletion of international reserves. Such vulnerabilities made the economy especially susceptible to economic and political shocks that eventually led to the current crisis.
The new government that took office in late February has quickly taken steps toward restoring macroeconomic and financial stability. However, in addition to entrenching macroeconomic stability, Ukraine needs to undertake deep-reaching structural reforms to reduce imbalances, improve governance and the business climate…
IMF Survey: What are the main elements of Ukraine’s economic reforms?
Moghadam: In terms of key reforms, the authorities have committed to:
- Maintain a flexible exchange rate... Going forward, support competitiveness by keeping public and minimum wage increases in line with productivity growth.
- Maintain confidence in the financial systemand strengthen the infrastructure for financial regulation and supervision. Ensure that banks strengthen their balance sheets as necessary.
- Meet near-term fiscal obligations and gradually reduce the fiscal deficit…
- Achieve a self-sustained energy sectorand reduce its fiscal drain by eliminating Naftogaz’s deficit by 2018 as a key benchmark toward the goal of energy independence.
- Implement comprehensive structural reforms, including in the areas of public procurement and tax administration…
IMF Survey: What are the chief measures to reduce the fiscal deficit?
Moghadam: The authorities have proposed that the initial phase of fiscal adjustment rely on a mix of expenditure and revenue measures, with emphasis on the former. Expenditure restraint will be exercised through
- the suspension of unaffordable wage and pension increases planned by the previous government,
- public employment reduction through attrition,
- savings on government purchases enabled by a new procurement law, and
- rationalization of social assistance spending through better targeting and means testing…
IMF Survey: How significantly will gas and heating tariffs increase?
Moghadam: Energy prices in Ukraine are exceptionally low. Currently, the gas price for households in Ukraine is $85 for one thousand cubic meter. In Russia—a gas producing and exporting economy—the price is $158 for one thousand cubic meter. The regional differences are even larger with prices in Ukraine being 4 to 9 times lower than in neighboring gas-importing economies…
IMF Survey: How confident are you of the authorities’ commitment to the reforms? How much ownership does it have? Do they have sufficient implementation capacity?
Moghadam: The authorities see the program as a historical break with a past marked by crony capitalism, pervasive corruption, and poor governance which weighed heavily on the economy. They believe that there is a window of opportunity for bold and ambitious reforms in order to transform Ukraine into a dynamic and competitive emerging market economy with a transparent government and a vibrant business environment…