Diplomacy

The BRICS and the Almighty Dollar

Posted on by j.giglio

When the BRICS (Brazil, Russia, India, China, and South Africa) summit was held last month in South Africa, it highlighted both the group’s main economic strengths and the divergent interests that make it difficult for them to leverage those strengths.  Whether those differences can be resolved will have a major impact on the U.S. in general, and the dominance of the dollar in particular.

Nearly two dozen countries formally applied to join the group. The bloc invited top oil exporter Saudi Arabia, along with Iran, Egypt, Argentina, Ethiopia, and the United Arab Emirates, to join in an ambitious push to expand their global influence as a viable counterweight to the West.  This is certainly the goal of Beijing and Moscow.

Developing countries are increasingly the biggest the most dynamic parts of the world economy.  This has resulted in both the shift of a vast amount of know-how from the West to the rest and the development of new know how in the rest—not just in China but also in India.

The new BRICS members bring together several of the largest energy producers with the developing world’s biggest consumers, potentially giving the bloc outsized economic clout.  Most of the world’s energy trade takes place in dollars, but the expansion could enhance the group’s ability to push more trade to alternative currencies.

This is a win for China and Russia, who would very much like to undermine the dominance of the US dollar. This would be especially helpful to Russia as its economy struggles with sanctions imposed after its invasion of Ukraine last year.  China is looking to build a broader coalition of developing countries to extend Beijing’s influence and reinforce its efforts to compete with the US on the global stage.

Former French President Valery Giscard d’Estaing called the dollar’s role as the world’s reserve currency “America’s exorbitant privilege.” Most Americans don’t think about the value of the dollar.  But for the rest of the world, its value on currency exchanges is a big deal.

U.S. monetary policy is closely watched around the world because interest rate hikes by the Federal Reserve increase the dollar’s value and make loans denominated in dollars more expensive to repay in local currencies. This is certainly an advantage for the U.S.

But the dollar’s unique position is under threat on several fronts and will likely experience a stress test in the future. The most immediate and unnecessary threat would stem from the self-inflicted wound of the U.S. defaulting on its debt.

One of the bedtime stories D.C. politicians tell themselves is that the dollar is unassailable. If Americans have learned anything from history, it is that there is no escaping it. Moving on from history requires some honesty and truth telling, but truth tellers are an endangered species among the political elite.

There are a growing number of countries, notably China and Russia, that resent the US’s weaponization of the dollar on global markets.  Their de-dollarization efforts bear watching. Another threat arises from technology, as central banks around the world work to develop their own digital currency networks.

Though home to about 40 percent of the world’s population and a quarter of global GDP, the bloc’s ambitions of becoming a global political and economic player have long been thwarted by internal divisions and the lack of a coherent vision.

The BRICS countries also have economies that are vastly different in scale and governments that often seem to have few common foreign policy goals, which complicates their decision-making.  China’s economy, for example, is more than 40 times larger than South Africa’s.

Russia, isolated by the United States and Europe over its invasion of Ukraine, is keen to show Western powers it still has friends. Brazil and India, in contrast, have both forged closer ties with the West.  Given these differences it is unclear how the group will be able to act in unison and enhance their clout on the global stage.

OPEC+ decision to cut oil production will impact gas prices

Posted on by j.giglio

Earlier this month, the 23-member oil-cartel known as OPEC+ (Organization of the Petroleum Exporting Countries), of which Russia is a member and led by Saudi Arabia, announced it would slash production by 2 million barrels per day.  The production cut is equal to 2% of the world’s daily oil production.  The cut was seen as a slap in the face to President Biden.  The move by OPEC+ drew angry criticism from Washington and the White House accused the Kingdom of taking sides with Russia.

In response the Biden Administration said it plans to re-evaluate the U.S.’s eight-decade old alliance with Saudi Arabia. It is hard to forget that during the Presidential campaign in 2020, the president’s money quote was he promised to make Saudi Arabia a “pariah” state.  He said there is “very little social redeeming value in the present government in Saudi Arabia.” He has criticized the Crown Prince for his role in the killing of Washington Post journalist and political opponent Jamal Khashoggi.  All this while courting Iran, an arch enemy of Saudi Arabia, in the hopes of striking a nuclear deal that would give Tehran billions of dollars to threaten the security of Gulf States.

Still for months the leader of the free world lobbied Saudi Arabia to help ease energy prices by pumping more oil into the market.  These pleas fell on deaf ears. The Administration urged the Saudis to wait for the next meeting of OPEC+ on Dec. 4 before making a decision on production cuts.  The Administration wants to hold down gas prices to advance the Democrats’ chances in the midterm congressional elections. Now the administration has announced it will sell 15 million more barrels of petroleum from the nation’s strategic reserve, aiming to ease gas prices.  The White House said it was prepared for more sales of the $400 million barrels in the strategic petroleum reserve if there are further disruptions in the world markets.

Not only that but the White House is starting to relax some of the sanctions on the authoritarian government in Venezuela which sits atop some of the world’s largest oil reserves to allow Chevron to resume pumping oil and exporting oil to the U.S.  There is an ominous sound of barrel scraping here.

Congressmen from both parties called for retribution against the cartel as well.  Some called for taking direct action against Saudi Arabia such as denying it access to military hardware and passing legislation allowing OPEC+ members to be sued under antitrust laws.

The Saudi’s rejected the accusation that it was getting in bed with Russia. They stated that the decision to cut output was driven purely by economic considerations and in response to future uncertainty about demand for oil.   OPEC+ was doing what it usually does.  They want to regulate the flow of crude oil to world markets in an effort to control prices. That is what the cartel is all about, full stop.. They are seeking to protect their national economic interests as has always been the case. The Saudi’s need money to provide for a decarbonized future and to fund its on-off war in Yemen.

The irony here is that according to the U.S. Energy Information Administration in September 2019, the U.S.  became a net exporter of crude oil and petroleum products for the first time since 1973.  In 2022, the U.S. will again be a net oil importer.  The Administration’s policy has been to ween the American economy off fossil fuels in favor of clean energy.  Quite apart from bans on fracking, bans on drilling, the President’s first act in 2021 was to scrap the cross-border permit for Canada’s XL pipeline which was projected to carry 900,000 barrels of crude oil a day into the U.S.

Events like the coronavirus and the tragic war in Ukraine should have revealed the dangers of being dependent on unreliable regimes and geopolitical adversaries.  These choices have left the U.S. in  an untenable, vulnerable place.

Why the U.S. should be concerned China is making moves in ‘America’s backyard’

Posted on by j.giglio

The United States is losing ground to China in the battle for influence in Latin America and the Caribbean (LAC). The People’s Republic of China (PRC) is strengthening its relationships in the region often called “America’s backyard”.

China’s growing footprint in the region has raised concerns in Washington that the PRC is leveraging its economic might to further its strategic goals and displace American dominance in the region.

As General Laura J. Richardson, commander of the United States Southern Command, testified before Congress in March, “The PRC continues its relentless march to expand its economic, diplomatic, technological, informational, and military influence in LAC and challenge U.S. influence in all these areas”.

The region is increasingly important to China in both economic and political terms.  It possesses an abundance of natural resources and raw materials, and a productive environment for trade and investment.

In addition to securing strategic resources, expansion in the region helps China increase its sphere of influence and achieve certain political goals in the global geopolitical chess game by challenging the U.S. in its own neighborhood; one the U.S. overlooked for years as it focused on the Middle East and elsewhere.

The PRC is now South America’s top trading partner and a major source of foreign direct investment and lending in energy and infrastructure.  It is also forging cultural, educational and political ties.

For instance, in 2000, less than 2 percent of LAC exports went to China. By 2021, that number had risen to $450 billion.  China is currently the second largest trading partner for LAC after the U.S., and LAC-China trade is expected to more than double by 2035.

Another Chinese objective is to use economic agreements to isolate Taiwan by persuading LAC countries to abandon diplomatic recognition of Taiwan’s sovereignty.  Currently, 25 of the 33 Latin American countries recognize the PRC rather than Taiwan.

The COVID-19 pandemic further elevated China’s status in the region. Beijing supported Latin America early on with large shipments of masks, personal protective equipment, medical supplies such as ventilators, diagnostic test kits and vaccines to curry favor with the various countries.

In September 2013, Beijing officially launched the trillion-dollar Belt and Road Initiative (BRI), using a name that harkens back to the famed Silk Road.  It is at the center of Chinese foreign policy and includes a web of investment programs that seek to develop infrastructure and promote economic integration with partner countries. It represents a direct threat to the US because China is seeking to use it as a connective link with the whole world on its path to becoming the global superpower.

Since 2017, 21 LA countries have signed on to the Belt and Road Initiative and more are expected to join.  In the face of China’s footprint in LAC, the Monroe Doctrine seems to have been forgotten.

In response to China’s impressive trajectory in LAC, President Biden, who took the lead on LAC policy during the Obama administration, and the G-7 leaders agreed in June 2021 to launch a global infrastructure initiative, Build Back Better World (B3W).  This initiative is consistent with the view that China is a strategic competitor to the U.S. in the global superpower game that some call a new Cold War.

B3W seeks to offer an alternative to China’s BRI. Its goal is to advance infrastructure development in low -and middle- income countries, including LAC. It is an international extension of the White House’s domestic Build Back Better proposal.  The LAC is the first region on the B3W’s radar.

How the initiative will be implemented to compete successfully with China in LAC is an open question.  What is clear, however, is that the superpower rivalry is good news for LAC countries.

History may show Latin America to be among the winners of the new Cold War. The U.S. will now pay the requisite amount of attention to the region and provide welcome resources.

 

Do Economic Sanctions Work

Posted on by j.giglio

When Western policymakers want to influence an outcome and military intervention is deemed too risky, economic sanctions are a favorite non-lethal tool in their bag of tricks. The war in Ukraine is the latest example of their use.

Attacking a country’s economy through sanctions can be a way of hitting your enemy where it hurts—in the pocketbook. And it’s a lot easier than going to war. The question is whether sanctions cause as many problems as they solve.

Economic sanctions are not a novel concept in international diplomacy. The aim of weakening the enemy through the material deprivation of its population long predates modern times. In fact, it dates back to the ancient Greeks, when Athens imposed a trade embargo on its neighbor Megara in 432 B.C. that helped trigger the Peloponnesian War.

Economic sanctions come in different forms depending on the desired outcome. Besides economic and trade sanctions, these measures include targeted actions such as arms embargoes, freezing assets, commodity restrictions and travel bans on key individuals and organizations.

These sanctions can be imposed by a single country or multilaterally, by like-minded nations, or international bodies such as the United Nations and the European Union. Sanctions can be wide-ranging, banning all transactions with a specific country, while targeted or smart sanctions aim to minimize collateral damage to the general population and instead focus on specific individuals or entities believed to be responsible for offending behavior.

The economic sanctions placed on Russia following its invasion of Ukraine are the widest ranging ever placed on a major economic power. Will they work? Restrictions on Iran, Venezuela, and North Korea, for example, impoverished their populations but haven’t led to political change.

To take just one example, the war in Ukraine has put pressure on European energy markets where supply and demand were already being disrupted. Consider will the European Union’s (EU) proposed oil sanctions on Russia weaken Putin’s ability to finance the war? Fossil fuel exports provide the revenue for Russia’s military buildup and brutal aggression against Ukraine.

The 27 members of the EU buy a quarter of their oil and more than 40 percent of their gas from Russia, paying $450 million per day for oil and $400 million per day for gas. There is no consensus yet among EU members on stopping Russian gas imports.

The EU recently stopped Russian coal imports, and after dithering over a decision to sanction Russian oil imports, the EU Commission has committed to weaning itself off Russian oil. The President of the Commission announced that oil imports from Russia will be banned after six months and refined petroleum products by the end of the year, ratcheting up its efforts to cut off a key source of funding for the Kremlin.

This was the EU’s sixth package of sanctions against Moscow, and its biggest and costliest step yet toward supporting Ukraine and ending its dependence on Russian fossil fuels.

Now the EU is struggling to replace that oil. It is also making a big bet that Russia will not retaliate by turning off natural gas supplies, as they have already done with Bulgaria and Poland for refusing to pay in rubles. Just as Europe hopes to find new oil suppliers, so Russia is working hard to line up alternative buyers such as India to minimize the impact on their bottom line and to continue to take advantage of higher oil prices to compensate for lower volume.

China is a likely market. Last year a third of Russian oil exports went to China. While Russia relies on oil and gas exports for 45 percent of its revenue, according to the International Energy Agency, it may well be that the EU’s oil ban won’t cause large and lasting damage unless China joins the Russian oil boycott, and that is highly unlikely.

But it’s very likely that the proposed ban will hurt the European economy and Europeans are going to have to deal with higher energy prices.