Finance as foreign policy (Russia, 2008)
American commentators have argued that Russia’s current financial difficulties are evidence that Russia’s participation in the global financial system constrains Russian geopolitical adventurism. Russians have paid a (financial) price for the conflict in Georgia.
The Wall Street Journal notes that some in Russia see things rather differently: they believe that the US government put pressure on US banks not to rollover loans to Russian banks, and thus helped precipitate Russia’s current financial crisis. Gregory White reports:
As Russia’s stock market went into free fall this week, conspiracy theories circulated that Washington was egging on American financiers to punish Moscow for its incursion into Georgia last month. The theories gained enough credence that Russia’s finance minister, Alexei Kudrin, spoke with U.S. Treasury Secretary Henry Paulson late Wednesday and sought assurances that the U.S. wasn’t playing politics with Russia in the financial crisis, the Russian Finance Ministry said.
Mr. Paulson told Mr. Kudrin that the U.S. wasn’t, according to the Russian side. A U.S. account of the call wasn’t available. ….
The question broached by Mr. Kudrin in his phone call with Mr. Paulson reflects a view widely held in the opaque world of the Moscow elite. Russian officials have asked U.S. bankers in recent weeks if the banks have been ordered by U.S. officials not to lend to Russian companies, according to people familiar with the conversations. The banks deny any such order.
I believe Paulson. US banks haven’t been willing to lend to anyone, including other US banks, recently.
I suspect former Russian President and current Prime Minister Putin does not – perhaps because Putin and others know that they can influence the actions of Russian banks by whispering a few words into the right ears.
Rather than concluding that Russia’s financial integration limits his options, Putin may end up concluding that Russia should never have allowed its banks and firms to borrow so much abroad.
The potential strategic uses of financial power are a particular interest of mine. Russia isn’t alone in thinking that the US government has, in the past, used finance as a source of pressure on countries’ pursuing foreign policies that the US opposes. The British government, for example, was convinced that the US was pulling its sterling reserves during the Suez crisis. The available data suggests it wasn’t – it didn’t need to. The United States leverage came from the fact that the UK needed a large US or IMF loan in order to be able to defend sterling’s peg to the dollar – and the US wasn’t willing to support such a loan to a country pursuing policies the US didn’t support.
Who seems to have pulled out of sterling then, draining the Bank of England’s dollar reserves? India. And the international oil companies, who worried about the potential impact of a devaluation of sterling on their operations.
Such concerns are likely to multiply in a world where governments play an ever rising role in the market, and experiment with more aggressive strategies for managing money. Imagine the furor if sovereign funds — not US hedge funds – had been shorting the US broker-dealers ….
Incidentally, the scale of Russia’s government intervention this week has almost been on the same scale as the United States’ government intervention, which takes a bit of work – Russia on Thursday indicated it would spend $20 billion to buy Russian shares, deposit $60b of the Finance Ministry’s funds in Russian banks (perhaps running down its dollar and euro deposits at the central bank in the process?) and that the central bank of Russia would supply $20b in liquidity to Russian banks.
I would wager all i have and all i could borrow that russia’s market would continue to collapse if the US didn’t invoke a RTC… which of course requires Russian, Chinese, Japanese, Australian, and OPEC financing.
China and Russia are not strong enough to stand on their own without the US consumer. They learned that the hard way!
Not exactly surprising, if true – the US did much the same thing to South Africa. And to Anthony Eden, for that matter.
Of course, while it may be possible to beat Putin at hardball, there is little empirical evidence for the hypothesis. Since Russia is not without dollars, it is not without options.
For instance, Russia could easily take the first step in converting its financial system over to a gold basis, by announcing that it will (a) offer an electronic gold ruble (WMG, a private DGC, already circulates in Russia), and (b) transition all RTS/Micex corporations to gold accounting. This would be a shocking development, of course, but dollar reserves could be used in a variety of ways to buffer the shocks. And a shock-free life does not seem to be an option for Russia right now.
I think the existence of a sovereign DGC would make it clear that, to paraphrase Milton Friedman, you just can’t have a fiat currency and a free market in precious metals. The re-emergence of true hard currency anywhere in the world might well complete the transition of the OECD to full-on Argentina status.
«Putin and others know that they can influence the actions of Russian banks»
The American way is far better: American banks instead influence the actions of American presidents by generous campaign donations.
«by whispering a few words into the right ears.»
If that fails he is not above sending the tax ministry police in with machine guns, which is also quite persuasive, as well as often justified anyhow.
As to the main subject matter of course countries with lots of money use that to influence countries with less money, by intervening in the markets or not.
But I agree that the USA have too much trouble right now to afford dumping on Russia too.
Why would russia want to ruin the demand for its product? Without oil revenue, the whole thing falls apart.
When the US was on the ropes, the EM markets crashed far HARDER, as the US can recover on its own, but these EM exporters…
ha_ha: that’s what the reserves are for. The crash. The short run. In the long run, being the financial capital of the world is pretty profitable…
ha_ha is right re: ruining demand for major “hard” currency earner for russia, and i think 60% or so of their gov’t revenue.
what opec and russia are wondering about right now, i think, is how much can be charged without killing the goose that lays the golden eggs.
the us, europe & japan can likely afford to pay more per barrel than the emerging markets that are driving demand growth, after all. demand for the top of the barrel, iiuc, is down y-o-y in all three.
Some other observations:
* The russian leadership are keenly aware of how the USA used their alliance with the Saudis to bankrupt the Soviet Union that was relying on sales of oil to buy food. Foreign policy done with “finance”.
* Anyhow only the Chinese (and the Saudis and Japanese) currently have the reserves and savings to do massive exports of capital and lend to other countries. Putin should be asking them why they are not lending to Russia.
Also, thinking about that, and that the USA has been for quite a while a huge net importer of capital from the China, never mind lending or not to Russia: it may be in the best interests of the Chinese to pull the rug from under the USA financial system and economy.
I have read some paper that says that right now most of China’s growth rate is coming from internal investment and consumption, not exports.
A huge USA recession and a collapse of the dollar would drive down both the price of raw materials/fuels and the price of raw material/fuel assets, and the chinese economy in the future is probably going to be more constrained by the availability of raw materials than of export markets: its internal market may be able to sustain its growth, if enough raw materials/energy are available.
The chinese government might decide that they should stop lending to the USA, and use the dollar reserves that they have to buy up a lot of mines, agricultural land, etc. around the world at firesale prices.
After all USA corporates have already transferred a lot of their most critical production capacity and technology to China, under the control of the CCP, and that’s probably good enough for China, and they no longer need to subsidize the transfer of capital from the USA.
It has surely not escaped the notice of the chinese leadership that it is only their loans that are keeping the USA financial system alive, USA consumption stable, and natural resource prices high.
The chinese leadership probably have thought this ahead for a while, and as soon as they think that exports to the USA and transfers of productive capital and technology from the USA need to be subsidized anymore, they are going to pull the plug, and buy lots of nice natural resource assets. Which they have been doing already even at the current high prices.
All I knows is da Russian Mafia tells me all de new multi-millionares in Moscow sold their Russian stocks and bought US treasureals thru da London banks.
Uncle Pete is da bookworm of de Family ana he teach political science at NYU. He sez de feds is telling us dey are extending de Bush tax cuts ’cause it’s election year.
Sez dey are telling de Saudis dey will increase taxes so de dollar don’ta drop no more ana da Saudis can keep a pumping dat new million bbl/day supply dey brought on line. Dey also tell da Saudies Georgia is close on de map to Iraq, Iran and Afghanistan, and de Saudies don’t like those places much more dan de neo-cons do. So’s collapse de oil price and put Putin back in da poorhouse.
Sez dey tell the CICs that they not a gonna raise taxes so’s da consumer can buy a lots of Chinese stuff. Dat way da CICs don’ta leave us ana buy South American, Canada an maybe Russia, which we all know would be cheaper dan buying de US.
So’s it’s all how you play foreign policy dats important.
Note that Russia exports to Germany, France, Poland, Ukraine, not the US. While some may argue that commodities are theoretically fungible, in the real world Canada is and will remain our trusted ally and supplier.
I agree that China is rapidly becoming self-sufficient in energy. The world price of LNG is headed down, not up.
Da Feds is moving ahead fast in de “Debt as a weapon” club of de OECD. At $11.3T/$14T GDP, dat puts us at 80% strength of debt to GDP wid woulda put us close in power to Italy at 100% of GDP and catching up on de Japs at 140% of GDP. Better yet it might be upwards of 20% of world GDP, which woulda make it more like a fleet of ICBMs.
Sez here it’s a comprehensive 3 page plan, so’s even Bush can read it before signing it on Sunday. Den dey implement de plan on Monday, ana Hank sells de American public on de idea on Tuesday. Den I guess I go ta Tennis Night on Tuesday widda no more worries.
Da dems are on board too, and de financial committees in Congress act like dey know de importance of dis.
Chris Dodd:”There’s not a second act to this — we’ve got to get this right.”
==========================================
Congress asked to act quickly on $700B bailout
Sunday September 21, 7:04 am ET
With economy on the brink, White House launches campaign to quickly sell $700B bailout plan
WASHINGTON (AP) — President Bush says the White House is ready to work with Congress to quickly enact legislation to allow the government to purchase hundreds of billions of dollars worth of bad debt and bail out a troubled financial system that’s on the brink of sinking and taking the U.S. economy down with it.
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Congressional aides and administration officials were working through the weekend to fill in the details of the proposal. Treasury Secretary Henry Paulson was scheduled to appear on the Sunday talk shows to begin selling the $700 billion rescue, the largest since the Great Depression, to lawmakers and the American people.
The Bush proposal that would dole out huge sums of money to Wall Street firms and bankers is a mere three pages in length and fails to specify which institutions would qualify or say what — if anything — taxpayers would get in return.
“It’s a rather brief bill with a lot of money,” said Sen. Chris Dodd, D-Conn., the Banking Committee chairman. “We understand the importance of the anticipation in the markets, but we also know that what we’re doing is going to have consequences for decades to come. There’s not a second act to this — we’ve got to get this right.”
Democrats, who say they will work with the administration to pass a plan, are demanding it include relief for homeowners struggling with mounting debt, not just for Wall Street.
The proposal would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion to make room for the massive rescue
Brad Setser,
I am a great admirer of your blog.
But your reference to Russian ‘geopolitical adventurism’, obscures some rather crucial distinctions.
What happened in Georgia was a forcible attempt by Georgia to reintegrate South Ossetia — which was clearly intended to be followed by a similar forcible attempt to reintegrate Abkhazia.
Both these territories are only part of Georgia because of the arbitrary decisions of one of the most brutal and cynical practitioners of imperialist divide and rule strategies ever, Iosep Besarionis-dze Dzhughashvili — to give him his name in his native country, which was of course Georgia.
The last thing their inhabitants want is to be ruled from Tlibisi.
Both Putin and Medvedev have made it clear that they regard this as a defensive move. (Incidentally, it is Medvedev, not Putin, who is the current President — Putin is Prime Minister.)
This conviction appears to be general in the regime, and as far as one can see, among the Russian people (as also, the people of South Ossetia and Abkhazia.)
This does not indicate any desire either to restore the borders of the Soviet Union, or to engage in ‘geopolitical adventurism’ far from Russia’s borders.
What does appear to be happening, and could have serious implications, are a relaxation of inhibitions on the sale of arms to regimes that the U.S. does not like. About this, I fear, this is a certain element of payback for the arming of Georgia by the United States and Israel.
On all this, I recommend to you the report by Anatol Lieven on the discussions which just concluded between Western Russia watchers and Putin, Medvedev, and other senior regime figures in Valdai.
(See http://www.nationalinterest.org/Article.aspx?id=19906.)
Well did not Eisenhower force DeGaulle to exit Algeria by cutting off US loans? I thought that was well established. DeGaulle was a French imperialist until he ran up against US financial might.
Bilsex: Also, thinking about that, and that the USA has been for quite a while a huge net importer of capital from the China, never mind lending or not to Russia: it may be in the best interests of the Chinese to pull the rug from under the USA financial system and economy.
I don’t think so. It’s generally a good idea to maintain good realtions with everyone. Also trying to destroy the US economy now, mains that China won’t have any options if the US really starts doing something that is not in the Chinese national interest. With 12 aircraft carrier battle groups and several thousand nuclear missiles, the US can still make China’s rise to power extremely painful.
One thing that is interesting is that people often misperceive the world by assuming that the other side has the same motives they do. So Russia thinks that the US is playing games with US banks because that’s what Russia would do if it were in the same position.
Similarly, because the US wants to remain the dominant world power and does not want any other nations with similar levels of power, there is the assumption that China also has the same motives, when in fact China does not really want to be a global superpower, and fundamentally does not care if the US continues to rule the world.
Also I think that a direct order to sink Russia wouldn’t work, since there are too many Russians in American investment banks for any order to sink Russia to be carrieds out.
Bilsex: The chinese government might decide that they should stop lending to the USA, and use the dollar reserves that they have to buy up a lot of mines, agricultural land, etc. around the world at firesale prices.
If China stops lending then the dollar reserves become worthless. Also having mines and agricultural land throughout the world is useless because in order to get those resources to China, China either has to go overland through Russia or through sea lanes that can be blockaded by the United States. If China tries to sink the United States, then it risks having its overseas supply lines cut, making most of its resources useless. Also it means that China is now at the mercy of Russia, and that is not a good thing for China.
It’s in China’s national interest to maintain good relations with everyone so that if the US starts moving against Chinese interests, China can shift toward Russia, and if Russia starts moving against Chinese interests, China can shift toward the United States.
Blisex: It has surely not escaped the notice of the chinese leadership that it is only their loans that are keeping the USA financial system alive, USA consumption stable, and natural resource prices high.
Yes, and they are propping up the United States because it is in the Chinese national interest to do so.
Blisex: The chinese leadership probably have thought this ahead for a while, and as soon as they think that exports to the USA and transfers of productive capital and technology from the USA need to be subsidized anymore, they are going to pull the plug, and buy lots of nice natural resource assets.
No. That’s not the signal to pull the plug. China is only going to pull the plug on the United States if the United States does something that threatens Chinese territorial integrity. If the United States officially recognizes an independent Taiwan, then the plug will get pulled. Otherwise it won’t, since China needs to support of the US Navy to make sure that resources from the Middle East, South America, and Australia make it to China. If the US Navy blockades those shipments than owning resources is useless.
Perhaps Mr Putin’s cronies wanted the same handouts as their US colleagues and saw the crisis (it is very easy to wreck a market where all listed stocks are majority closely held and all by the same group) as a golden opportunity to share in Russia’s new wealth, to a even greater degree than before. Howzzat for a conspiracy theory? Brad, pse stick to serious topics..
David H.,
Such a delight to see sane comments on Georgia plus an interesting way to spell Josef Wissarionovitch’s name. Hats off! You must be Caucasian.
Rien Huizer,
Thanks.
Actually, I took the spelling from my countryman George Hewitt — Professor of Caucasian Languages at the School of Oriental and African Studies at London University.
Stalin did come from Georgia, so this would have been his original name — although malignant rumour suggested (and I think still suggests) that his father was an Ossete.
An interesting account of the background to recent developments in the Caucasus by Professor Hewitt is at http://www.circassianworld.com/News/Abkhazia_Kosovo.html
Of course he may be biased — I think his wife comes from Abkhazia.
My own origins are nothing so romantic — to take the name of an Old Testament prophet was not uncommon among devout nonconformists in South Wales.
The serious point is that one cannot study geoeconomics without studying geopolitics. And here, the devil really is in the detail.
It really is necessary to look at the complexities of ethnicity and religion in the Caucasus, as in Iraq — rather than assuming one is dealing with ‘nations’, in the sense that France for example is a ‘nation’.
Otherwise one ends up producing policies which create a shambles — as the U.S.and U.K. have done in Iraq.
David — I was trying to describe the argument various American pundits (see Dan Drezner for example) have made, not to make a judgment of my own about the merits of a situation I know little about. I do tho suspect that the current borders make little sense — but then again, that is the case with many borders created over time.
As for “President Putin” — d’oh. I knew he was now the PM. Tho it seems he still runs the show …
nice point that Russia’s intervention is on the scale of that the the U.S. its true – but at least for now Russia actually still has savings and a fiscal surplus. Though it might not after this given that Russia was already scaling up spending this year (including on a long awaited big infrastructure spree) and that the government has finally agreed to take a cut in its oil take (export tax cut), it might not for long. But the net result probably means fewer dollars and euros purchases. likely accelerating a shift that was already ongoing…and the earlier rouble selloff (July/Aug) only added to the demand for dollar financing as Russians sought to change their roubles, exacerbating the liquidity crunch
but if the Russians are blaming any one for cutting off borrowing, shouldn’t the European banks get some blame. I would have thought that a good chunk of the rollover financing was from EU banks, especially in the UK. as was the loss of capital raising from UK listings
«China won’t have any options if the US really starts doing something that is not in the Chinese national interest. With 12 aircraft carrier battle groups and several thousand nuclear missiles, the US can still make China’s rise to power extremely painful.»
«China needs to support of the US Navy to make sure that resources from the Middle East, South America, and Australia make it to China. If the US Navy blockades those shipments than owning resources is useless.»
Here and elsewhere you suggest that the USA would go to war with China if China stopped lending to the USA; basically that receiving several hundred billion dollars a year from China in soft loan is a vital USA interest.
Interesting position, but one that may be realistic, considering the extreme attitudes of the current administration, never mind McCain.
«the USA would go to war with China if China stopped lending to the USA; [ ... ]
Interesting position, but one that may be realistic, considering the extreme attitudes of the current administration, never mind McCain.»
I can imagine the scene on TV: The President, flanked by Mrs Palin and Mr. Paulson and Mr. Bernanke:
“Fellow Americans, the Chinese Communist Party have been hiding in caves and mobile trailers a number of Weapons of Mass Deflation; we also know that they have links with Osama bin Laden and al-Quaeda-in-Bejing, the financial terrorists who have shorted the twin pillars of New York investment, BS and LB.
They are ready to deploy these WMDs at short notice, stopping the loans that stand at the root of our American Way, threatening our lack of civilization.
Under the wise doctrine of my predecessor, we are committed to a pre-emptive strike to secure our future against this threat and the attacks of the financial terrorists: I have ordered the US Navvy to blockade all chinese overseas traffic and ports.
I have also ordered scores of our nuclear missile launched at the Chinese missile bases, to awe and shock them into continuing to lend their reserves to our treasury.
Our brave troops are ready to come ashore and march to Bejing while the population welcomes us with showers of flowers as we liberate them from their oppressive regime.
This legimate pre-emptive defense action will be concluded in 6 months, and a new democratic regime will be established in the heart of east asia.”
Blisex said:
“The chinese leadership probably have thought this ahead for a while,
and as soon as they think that exports to the USA and transfers of productive capital
and technology from the USA need to be subsidized anymore, they are going to pull the
plug, and buy lots of nice natural resource assets.”
Twofish said,
“No. That’s not the signal to pull the plug. China is only going to pull the plug
on the United States if the United States does something that threatens Chinese
territorial integrity. If the United States officially recognizes an independent Taiwan,
then the plug will get pulled. Otherwise it won’t, since China needs to support of the
US Navy to make sure that resources from the Middle East, South America, and Australia
make it to China. If the US Navy blockades those shipments than owning resources is useless.”
As I understand it or misunderstand it, China has to pull the plug fairly soon, say
within the next few years, since the cost to China to peg the yuan to the dollar
rises on an exponential curve every year. (And, yes, I know the yuan is supposedly
floating.) Therefore, want it or not, the plug will be pulled.
From China’s perspective there may be advantages to a precipituous pulling, possibly
triggering economic collapse in the United States and perhaps even, like dominos,
other nations. If that’s the goal, actually right now might be a good time to
do it.
But I wonder if that strategy is really in China’s best interests. Now, it may
be too late, and a precipituous drop in the value of the dollar relative to the yuan
may be inevitable regardless, but if China wants a more controlled transition, right
now would be a good time to let the dollar fall significantly.