Geo-Financial Risk in Wake of the ‘Treasury Wars’

Alastair Crooke, Valdai Discussion Club, 11 April 2015

It has been customary to consider the energy business in terms of political risk (governments falling, internal dissent etc.), and in terms of conventional economic risk.  And in the past, the geo-political has been seen as primordial: that is to say that the politics largely determined the financial and the energy conditions: one flowed from the other, as it were.  But is this still appropriate today?  Perhaps we should begin to reassess – for today, increasingly it is the geo-financial that is shaping the geo-political.

In the special circumstances of the post-war era, where the US economy effectively was the only developed economy left standing (dominating 50% of world trade); America was able to shape the Bretton Woods structures – with the dollar paramount as the global reserve currency, and with dominant influence within the IMF and World Bank – to its own agenda.  This allowed America to take to itself global economic governance.

Latterly, in the wake of America’s unhappy experience of decisive military interventions around the world in order to sustain its control of the global order, the US Treasury has been leveraging the dollar’s privileged position in what may be called the ‘Treasury’s wars’: using its neutron (financial) bomb – exclusion from the dollar-based trading and financial system – liberally to pursue political ends.  Today we have geo-financial war waged against Russia, (to a lesser extent China), and Iran, inter alia.  And the same tool has been used more discreetly to unseat heads of European governments too.  In short, Treasury war has trumped info, psy-ops, drone and special ops war as a principal tool to maintain control in a disintegrating global order.

How this introduces a different dimension of risk is that through prompting Russia and China to develop an analogue non-dollar based trading and financial trading system in order to reduce both states’ vulnerability to claims of US dollar jurisdiction, we have embarked on a competition that will affect everyone – but particularly the Middle East. Thus, we see Iran, Turkey and Egypt, (three pillars of the Middle East) – for very differing reasons – shifting in the direction of the non-dollar, Eurasian block.

Inevitably the flows of energy for the future will be affected by the outcome to this geo-financial ‘war’.  There is no reason to suppose that the template of distinct geo-financial alliances that emerges from this ‘war’ will correspond with the existing (post Cold War) political map.  They are likely to cut across one another.  For example, in the Middle East, there will be winners and losers amongst energy producers: some OPEC states may end up in one financial dispensation, and others in another

What heightens the risks (and unpredictability) of this new form of war, is that it comes at a time when ZIPR (zero interest rate policy) and QE (quantitative easing) have created a huge overhang ($9 trillion) of dollar denominated debt that is highly vulnerable to exchange rate oscillation – but that is precisely what we have today. Oil price ‘war’ has contributed to currency wars: so we have sanctions ‘wars’, operating alongside exchange rate wars, alongside currency wars and energy price ‘wars’ – and all happening at the same time that one of the greatest asset bubbles in history has been inflated by our unprecedented monetary tsunami.

No one knows the outcome to this incendiary mix (traditional economics offers little help), but what is clear is that energy producers and consumers both need to examine risk from a radically different perspective.  One that melds the reality of systemic financial vulnerability with the dynamic of geo-financial war pursued by some parties, whilst other states and regions seek to escape its hegemony by building a non-dollar framework.  Be sure that the map of future pipelines and their direction of flow will largely be determined by this complex war, and that there will be major losers as well as gainers