1. The Fatal Flaw in the Bretton Woods System
In July 1944, more than nine months before the end of the second world war, 730 delegates from 44 allied countries gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, to agree upon a monetary system which would ensure financial stability in the post war world and hence prevent another such war happening again. At the heart of this agreement was a commitment by all those taking part, except the Soviet Union, to keep the exchange rates of their currencies within 1% of their established values by directly or indirectly tying them to gold. This was facilitated by the USA guaranteeing that it would always maintain sufficient gold reserves to exchange dollars for gold at a rate of $35 an ounce, thus making the dollar a convertible reserve currency which, in theory at least, was as good as gold.
The intention behind this scheme was both to prevent countries from engaging in competitive devaluations in order to win trade wars and to stop them from printing more money than was covered by their strategic reserves: something which many governments had been tempted into doing during the 1920s and 30s as a solution to depression and government insolvency, the most obvious example, of course, being Germany, where the Weimar Republic had resorted to printing money in a vain attempt to solve the impossible problem of paying war reparations while avoiding overtaxing a severely war-damaged economy which could hardly feed and clothe its population. With very little to buy in the shops, however, all this did was produce hyperinflation which actually made the situation even worse, wiping out people’s savings, destroying many of the businesses which had survived the war and giving rise to the kind of extremist politics which led to World War II.
It was thus with perfectly good intentions that the delegates at Bretton Woods arrived at this solution. The problem was that the solution, itself, relied on people acting responsibly when it was not always in the interests of everyone working within the system to actually do so, especially governments, which have an electoral interest in funding any increases in public expenditure out of borrowing rather than by raising taxes, the expenditure itself being generally popular, taxation less so.
This is important because, even if central banks do not print money to buy government bonds, as happens in the case of quantitative easing, simply by issuing bonds, governments, themselves, increase the base money supply. This is because treasury bonds are not that dissimilar to bank notes. Both are IOUs and both are transferable to third parties in exchange for other considerations. It is just that one is issued by a central bank, the other by a treasury department. And while on one it says ‘I promise to pay the bearer on demand the sum of [x] pounds’, on the other it says ‘I promise to pay the bearer on [a specific date] the sum of [the nominal value of the bond] and to make regular payments of interest in the interim’.
Thus both bank notes and treasury bonds are currency, the issuance of which, under the Bretton Woods agreement, was to be restricted to the value of the gold and other currencies which participating governments held in their strategic reserves: a monetary straightjacket which future governments would not only come to see as unnecessarily over-restrictive, but as detrimental to their short term interests.
Not that, to begin with, this was a problem, not least because, in the immediate post-war era, US economic growth was extremely brisk, with much of the world wanting US manufactured goods, which Europe and Japan were able to pay for out of the $13 billion which the USA lent them for reconstruction under the Marshall Plan. This meant that neither Europe nor Japan had to borrow money by issuing their own bonds – which few countries would have been able to do any way – while the USA was growing fast enough for its own borrowing requirements to be minimal.
For the USA, this was therefore its golden age. It lent the world money to buy American goods and became rich in the process. By the 1960s, however, this had all changed. With Japanese and European recovery, America’s share of the world’s economic output dropped from 35% to 27%. At the same time, the conservative administration of President Eisenhower, which had maintained a balanced budget for all but one of its eight years in office, gave way to the Democratic administrations of Kennedy and Johnson, who not only wanted to improve the lot of their principal constituency, the urban working class, but believed Keynesian economists when they told them that increasing public expenditure on social services, welfare and capital projects would stimulate economic growth, which, in turn, would boost tax revenues, out of which the borrowing could then be repaid, making it a blissfully benign circle which has never actually occurred in the whole human history.
Worse still, by his second term, President Johnson had been drawn into a full scale war in Vietnam which cost America more every year it went on.
The result was ever-increasing borrowing through the issuance of US treasury bonds which, again, to begin with, was not a problem. For when other countries held dollars as part of their strategic reserves, for the most part they did not actually hold them in dollar bills. This was because dollar bills don’t pay interest. Instead, therefore, most third party holders of dollars preferred to hold them in US treasury bonds, the reserve status of the dollar thus providing the US Treasury with a ready market.
It didn’t take long, however, for these third parties to work out just how many bonds the US Treasury was printing and by how much their value exceeded the value of gold held in Fort Knox when priced at $35 an ounce. As a result, countries not only started diversifying into other ‘reserve’ currencies such as the Swiss Franc, but started becoming very disillusioned with the entire system. In 1965, an irate President de Gaulle even threatened to demand that America exchange all of France’s dollar reserves for gold, even though he must have known that it would have been impossible for the US to do so without collapsing the whole system, thereby reducing the value of everyone’s dollar holdings.
Worse still from the point of view of the United Sates, with less foreign demand for US bonds, the US Treasury had to find other buyers for them, the most obvious candidates, of course, being domestic US banks. In order to buy more treasury bonds, while not starving US industry of bank borrowing, however, these banks, themselves, needed more money, which they could only obtain by borrowing it from the Federal Reserve. And where did the Federal Reserve get it? It printed it, of course.
With the Fed printing money and the US Treasury issuing more and more bonds, which no longer went out in such numbers to fill the strategic reserves of foreign governments, this then led to an increase in the domestic money supply, which, without a commensurate increase in domestic production, inevitably led to an increase in both price inflation and foreign imports.
What was happening, in fact, was that the US dollar was losing real value, something which happens to any currency when one produces more of it than one produces things to buy with it. In fact, the same thing was happening in Britain where the Labour government of Harold Wilson was following the same Keynesian policies as successive Democrat administrations in the US, and where the value of sterling had consequently been falling against a whole raft of other currencies for much of the same period. This meant that imports, priced in relatively under-valued currencies such as the Japanese Yen and West German Deutschemark, were much cheaper than UK exports priced in over-valued pounds. This in turn led to an ever-widening trade deficit, which had to be funded out the UK’s ever-diminishing strategic reserves, forcing the Wilson government to eventually devalue the pound by 14%, which it did in November 1967.
For America, however, the solution was far less simple. For it couldn’t just devalue the dollar against other currencies without also devaluing the dollar against gold. Nor would this have been by a mere 14%. For even as early as 1966, the latest year for which I have been able to find figures, there was already $24 billion of dollar denominated base money in circulation – $10 billion in the USA, $14 billion in the reserves of foreign governments – backed by gold reserves of just $13.2 billion. To bring the extant issued currency back into line with gold, therefore, the US government would have had to devalue the dollar by around 45%, increasing the price of gold to more than $50 an ounce. And while this would have increased the value of the reserves held by countries which possessed gold, it would have greatly reduced the value of the reserves of those countries which predominantly held dollars. They would then have had to have bought even more dollars or dollar denominated bonds to cover their own issued currencies, which most countries would have been very reluctant to do.
Instead, the Americans therefore started putting pressure on West Germany to revalue the Deutschemark upwards. Not only would this have made German exports to the rest of the world less competitive, however, but it would have also meant increasing their strategic reserves to match the new value of their issued currency, thereby adding insult to injury. In May 1971, therefore, West Germany opted, instead, to leave the Bretton Woods system and allow the Deutschemark to float freely on international currency markets, where the dollar duly fell against it by 7.5%.
At this point, other countries then also began to see just how overvalued the dollar was and started to demand that the US redeem dollars for gold. In July, Switzerland redeemed $50 million before also leaving the Bretton Woods system, while France redeemed $191 million. With US gold reserves being steadily eroded, the dollar now went into freefall against nearly every other currency with which it was traded, until on Sunday 15th August 1971, President Richard Nixon was finally forced to put an end to this fiasco by announcing that the United States was ‘temporarily’ suspending the conversion of dollars to gold, thus bringing the Bretton Woods system and the era of the gold standard to an end.
2. The Rise of the Petrodollar and the Bind in which the United States Consequently Found Itself
Not, of course, that this brought an end to the United States’ problems. For while the Bretton Woods system may have collapsed in August 1971, its legacy lingered on. In fact, in many ways, its legacy was even worse than the problems caused by the system while it was still in place. For while the system may have ended, there were still billions of dollars in US treasury bonds in the strategic reserves of foreign governments which no longer had any reason to continue holding them. Indeed, had I been the head of any of the central banks holding such dollar reserves at that time, I would have started selling them immediately. For once the selling started, the price was only going to go in one direction. That there was no immediate sell off is testimony, therefore, to the diplomatic pressure America was able to bring to bear on its allies during what was still the height of the Cold War.
Nevertheless, the United States had to find a longer term solution, especially as its trade deficit was still growing with the result that worldwide demand for dollars was in steep decline. President Nixon’s answer was therefore to send Henry Kissinger to talk to the world’s largest oil producer, Saudi Arabia, with the aim of convincing the Saudis to continue pricing their oil exclusively in US dollars in return for the USA providing them with diplomatic and military protection for as long as the arrangement was maintained.
Thus it was that the petrodollar was born: a dollar not convertible to gold but to oil. Moreover, once the deal with the Saudis had been struck, other oil producing countries, indeed the whole of OPEC, saw the benefit of a single global market for oil priced in a single currency. Nor did it end there. For with the demand for dollars rising, the value of the dollar now stabilised, not only giving national governments reason to hold dollars as part of their strategic reserves once again, but prompting traders in other commodities, such as metals and food, to see the advantage of not having to deal with dozens of fluctuating currencies, few of which were now as safe as the dollar.
Watching it land on its feet in this way after the debacle of 1971, many people must have therefore thought that the United States was truly blessed. The reality, however, was a little more complicated, not least because one of the more immediate implications of the dollar becoming the universal currency for trading in commodities was that, purely from the point of view of the American economy, the dollar was now permanently over-priced: something which, ordinarily, cannot happen.
I say this because on the free-floating international currency markets that had replaced the regime of fixed exchange rates which had prevailed under the Bretton Woods agreement, the price of a currency is determined solely by demand. In most cases, this, in turn, is determined by the strength of a country’s economy as measured by the demand for its good and services. If a country’s goods and services are in high demand, then there will be a high demand for its currency in order to pay for them. This then drives the price of the currency up until it reaches a point where demand begins to decline because the goods and services paid for with the currency have now become too expensive. This then drives the price down again until a point of equilibrium is found.
This didn’t happen with respect to the dollar, however, because it wasn’t the demand for American goods and service which drove the demand for the country’s currency, but the demand for commodities purchased by and from third parties. With the world economy constantly growing and the demand for commodities therefore continually increasing, this consequently meant that the price of the dollar was kept at a level consistently higher than it would otherwise have been the case, making imports into the United States cheap but American exports, priced in dollars, very expensive. Indeed, even within the domestic market, many US producers now found themselves becoming uncompetitive. High value-added sectors of the economy, such as computing, media and finance, where the US still maintained a number of unique advantages, all continued to thrive; but low value-added industries, such as manufacturing and engineering, either started to fall away or were moved off-shore. Indeed, in this regard, one can view globalization as a direct result of the petrodollar making it too expensive to manufacture goods in the USA.
As domestic production fell and imports further increased, this then led to an ever-widening and seemingly permanent trade deficit: something which, again, should not be possible. This is because all trade deficits represent money leaving the country to pay for the goods brought into it: something which very few countries can sustain for very long. Either they simply run out of foreign exchange or their currencies become so weak that their people cannot afford to buy foreign imports. This did not happen in the case of the United States, however, because of the dollar’s reserve currency status and the fact that countries prefer to hold treasury bonds in their currency reserves rather than actual bank notes. This meant that the dollars which Americans used to pay for their imported goods were almost immediately returned to the US by the recipient countries through the purchase of said treasury bonds.
For the last five decades, as a result, the US has been funding a trade deficit caused by the dollar being the universal currency for trading in commodities by borrowing money based on the dollar being a reserve currency: an arrangement which has thus totally reversed the flow of money and goods which the US enjoyed in the 1950s, when it lent money to Europe and Japan so that the Europeans and Japanese could buy US manufactured goods. Now the rest of the world lends money to America so that it can buy commodities and manufactured goods from them.
Not only has this resulted in the federal government being more than $30 trillion dollars in debt, however, but all the money coming back into the country through the sale treasury bonds has to be funnelled into the economy through the federal government: an arrangement which has had an immensely distorting effect on the economy’s structure.
This is because there are only a certain number of conduits through which the money can be channelled, the US government not being in the businesses of setting up new businesses, for instance, even if it could set them up competitively, which, given the over-priced dollar and the general inefficiency of government is highly unlikely. This therefore leaves only a few other options, one of the most prominent of which, of course, is the defence industry and the US military, which famously soaks up more money than any other military in the world, and which consequently has to justify this by constantly creating new threats to national security.
Allied in this endeavour, of course, are all the nation’s various intelligence and law enforcement agencies, the headquarters of which are clustered around Washington in places like Langley and Quantico, making Virginia one of the richest states in the union and security one of the country’s most high profile industries.
The problem with using security as a way of driving the economy, however, is that while it employs a lot of people, it doesn’t actually produce anything tangible. As a way of creating at least a semblance of productive economic activity, therefore, another highly favoured way of getting government borrowing into circulation is via the hundreds of corporations which continually lobby the government for funding for capital projects which are not commercially viable without government support, but which promise to create jobs, stimulate growth and/or save the planet. Generally known in America as boondoggles, these projects seldom produce anything worthwhile – except, of course, a lot of money for their promoters and political allies – but make it seem as if the government is actually doing something useful. Meanwhile, the vast majority of the population struggles to make ends meet doing minimum wage jobs in the retail, hospitality and other service sectors while claiming all the various benefits the government constantly creates in its never-ending war on poverty, the administration of which requires an army of government officials whose own employment, of course, provides yet another channel for getting all this government borrowing into people’s pockets.
The problem, of course, is that this is no way to run a healthy economy: something which the US economy hasn’t been for some time. Yes, there are still parts of it that appear to be thriving. Big Tech, the media and Wall Street all seem to be doing well, although given the latter’s dependency on low interest rates and quantitative easing, even this has got to be questioned. But there are whole sectors of the economy, such as the automotive and aviation industries, that are now mere shadows of their former selves, while others have been totally crushed beneath the weight of the nation’s over-valued currency, from under which the country can now never escape. For if it had had a problem in 1971, when the end of the Bretton Woods agreement meant that foreign governments had billions of dollars in US treasury bonds in their strategic reserves which they no longer had reason to hold, ceasing the petrodollar system today would mean that foreign governments would have trillions of dollars in US treasury bonds in their strategic reserves which they would no longer have reason to hold. What’s more, there would be no back-up solution, such as the petrodollar, to which the US could now turn.
The result would be a wholesale sell off of US treasury bonds, causing their prices to plummet and their relative yields to surge. Future borrowing would thus become more expensive and the Treasury might not even be able to refinance the debt when it fell due, leading to defaults. The Federal Reserve could always print more money, of course, but as the value of bonds fell, it could very quickly find itself with a negative balance sheet, in which the nominal value of the dollars it had issued exceeded the value of the treasury bonds and other financial assets it had available to redeem them, making the Fed technically bankrupt. This would likely lead to a collapse in the price of the dollar, which, in turn, would probably lead to hyperinflation. In fact, the situation could become so dire that it is possible that the USA, as a nation, would not survive, with individual states or confederations of states breaking away from the union, disavowing the federal debt and printing their own currencies.
3. The Never Ending War to Preserve the Petrodollar
Given what is at stake, it is hardly surprising, therefore, that, over the last two or three decades, the highest foreign policy imperative for all US administrations has been the preservation of the petrodollar and the dollar’s reserve currency status, for which it has been prepared to go to war on at least two occasions.
The first time was in 2003, after Saddam Hussein started selling Iraqi oil in Euros. The second was in 2011, after Colonel Gadhafi had been actively discussing the creation of an alternative reserve currency with fellow African leaders and had already amassed an estimated 150 tons of gold to this end. Not, of course, that it has ever been openly stated that either the second Iraqi war or the aerial attacks on Libya had anything to do with the dollar. Other pretexts were always found: weapons of mass destruction in the case of Iraq; Colonel Gadhafi’s supposedly genocidal attacks on the people of Sirte in the case of Libya. Not only has no evidence ever been produced to support either of these pretexts, however, but until they started threatening the petrodollar and the dollar’s status as a reserve currency, for decades, both men had been tolerated and even accommodated by the USA.
The problem America has, however, is that it cannot deal with every threat to the dollar’s supremacy in quite such a peremptory and high-handed manner, the prime example of a country it cannot just push around, of course, being Russia, which is not only an advanced military power which has never been successfully invaded in modern times – this despite the gargantuan efforts of both the Napoleon and the Third Reich – but which, because of its sheer size and the wealth of natural resources, poses a much a greater threat to the dollar as the universal currency for trading in commodities than Iraq or Libya ever did. This is because it produces so many commodities of its own. In addition to having the world’s largest known reserves of natural gas and possessing the world’s eighth largest reserves of oil, it is also the world’s largest exporter of fertiliser, for instance, the world’s second largest exporter of wheat, and is listed in the world’s top ten exporters of iron and steel, aluminium, corn, soybeans and copper. It is also the fourth largest producer of nickel, a metal which is used in a whole host of technologies without which the modern world simply couldn’t function.
Indeed, there is very little that it does not produce and in which it is not self-sufficient, making it hardly surprising, therefore, that, after the fall of the Soviet Union, it became the unofficial policy of the United States, as stated in the Wolfowitz Doctrine, to prevent the re-emergence of Russia as a world power. For while, today, many people see China as the bigger threat, this is to misunderstand the difference in the threats the two countries pose. China’s threat to the US is that it will soon surpass the latter as the foremost economic and military power on the planet. It does not however threaten the US with economic and sovereign extinction. In fact, the last thing China wants to see is the dollar’s collapse. After all, the US is China’s largest single customer for manufactured goods. Moreover, it currently holds around $3.6 trillion in US treasury bonds, which would become worthless pieces of paper if the US could not refinance them by selling more. The two countries are thus mutually dependent.
Not so Russia and America, which actually have very little trade with each other. America buys very few commodities from Russia, while Russia buys almost nothing from the USA, which, these days, exports very little other than arms, oil and foodstuffs, all of which Russia has in plentiful supply. Even more significantly, Russia holds very little of its strategic reserves in US treasury bonds. For despite being forced to sell its commodities in dollars for the last thirty years, for the last eight years it has been systemically turning its dollar reserves into gold, no doubt in readiness for the day when the US would freeze around half of what dollar reserves it still had left in foreign banks. If the dollar and the US economy were to collapse tomorrow, therefore, unlike China, whose economy would also collapse, Russia would remain almost unaffected.
Nor does Russia’s threat to America reside merely its immunity to the dollar’s potential demise. Due to its proximity to Europe, and Europe’s ever-growing dependency on Russian natural gas, it has also become the most likely cause of this eventuality: something of which the Americans have almost certainly been aware for at least a decade, ever since Europe, and Germany in particular, embarked upon a programme not just of decarbonisation but of denuclearisation as well, leaving Germany, and indeed most of Europe, with just two forms of energy from which to generate electricity: renewables, which are inherently unreliable and require either a backup source of energy or huge amounts of battery storage, and natural gas, of which Russian natural gas is the cheapest option.
This is because, unlike natural gas from other producers, which has to be liquefied and shipped to Europe in pressurised containers, where it is then turned back into gas in expensive purpose-built plants, Russian gas is brought to Europe in gaseous form through pipelines and can be used straight away without further processing.
As a result, Russia now provides around 40% of all Europe’s gas and could provide even more, having completed a fourth pipeline, called Nord Stream 2, under the Baltic, in September 2021. Indeed, Nord Stream 2 could be the answer to all Europe’s energy needs and was actually built as such by a consortium led by Gazprom and Shell. The problem is that, as a result of US pressure on Germany, it has still not been brought into service. Despite Europe’s severe gas shortage and soaring wholesale prices, it remains unused, and is almost certainly the proximate cause of the current crisis in US-Russian relations. For both sides know that if the valves of Nord Stream 2 were ever opened, Europe’s dependency on Russian gas would become such that Russia could both reasonably and irresistibly demand payment for it in roubles, thus setting a precedent which would eventually lead to the demise of the petrodollar.
It wouldn’t happen overnight, of course. For it would take some time for other producers of commodities to become emboldened enough to demand payment in their own currencies. The benefits of doing so, however, are so significant and obvious that the pressure on other countries to follow Russia’s lead would become overwhelming. This is because the price of a currency, as I described earlier, is determined by the demand for it. If a country starts pricing it commodities in its own currency, therefore, the demand for that currency, along with its price, goes up. As the value of the currency rises, so the cost of imports falls, which, in the case of third world countries, where a lot of commodities are produced, would significantly increase the population’s standard of living, especially if the increased purchasing power were used to buy plant and equipment to enhance overall economic performance.
Indeed, the logic of this so inescapable that the Americans must know that what they are dealing with here is an economic force beyond their control. The problem, however, is that it is also a force of history. For while the Americans have no choice but to try to prevent the Russians being paid in roubles for their gas, so the Russians cannot just sit back and ignore their own legitimate self-interest. Just as the Americans were therefore bound, at some point, to put a stop to any further increases in the sale of Russian gas to Europe, so the Russians were also therefore bound to regard this as an act of war.
4. Applying the Pressure
Although undeclared, it is a war which has been going on, in fact, ever since 2000, when the malleable Boris Yeltsin was replaced as Russian president by the far more formidable Vladimir Putin. It is just that the American strategy for fighting this war has been so subliminal that most people have not been aware of it, consisting as it does in a slow but persistent drip feed of propaganda aimed at alienating Russia from its European customers, primarily by depicting the new Russia as being no different from the old Soviet Union, and hence still the West’s mortal enemy: a position which apologists on both sides of the Atlantic have consistently sought to justify by pointing out that while the political orientation of the Russian government may have changed, the people running it have not, the ex-KGB officer, Putin, being a prime example.
Not, I should say, that the people putting forward this justification are entirely wrong. I have no doubt, for instance, that it was President Putin who ordered the assassination of Alexander Litvinenko in London in 2006. The sheer theatricality of the murder, using polonium210 – which can only be produced in any quantity by bombarding polonium209 with neutrons in a nuclear reactor – made it absolutely clear that it was an act of state sponsored terrorism by a nuclear power, designed to send the very clear message to its opponents in London that they were not untouchable. In fact, it is likely that Litvinenko was chosen, not for anything he himself had done, but simply to make this point. The real targets were Boris Berezovsky and all the other so-called oligarchs who, having looted Russia of so many of its assets during the Yeltsin period, had taken refuge in London when Putin came to power, and from whom Putin wanted some measure of restitution.
The attempted assassination of Sergei and Yulia Skripal in Salisbury in 2018, on the other hand, is far less clear cut, not least because, while the use, in this case, of the nerve agent novichok clearly points to Russia being responsible, the assassination actually failed: something which is totally unheard of when novichok is successfully applied – it being 100% lethal even in the smallest of doses – raising the question, therefore, as to whether the incident, as described, actually even occurred.
The argument in favour of it having actually happened and of the Russians being the perpetrators is that Sergei Skripal was a Russian military intelligence officer who had been convicted of spying for British intelligence in 2004 and sentenced to 13 years imprisonment. In 2010, however, he was released in an exchange of prisoners and allowed to emigrate to Britain, leading some people to suggest, therefore, that the assassination attempt was actually an attempted execution, intended to demonstrate to others that Russian traitors could not evade justice indefinitely.
If this were so, however, it rather raises the question as to why wait eight years? And why use novichok when a simple, execution-style bullet to the back of the head would have sent an even more cogent message? Indeed, why send a message at all? If it was the intention of the Russians to execute all former traitors who had evaded justice by being included in prisoner exchanges, why warn them? Indeed, why exchange them in the first place? Unless it was important to get their own people back. But then going around executing prisoners one has previously released as part of an exchange programme is hardly likely to induce others to participate in such programmes in future. None of it therefore makes sense.
What makes it even more suspicious is the fact that the head of MI6 in Moscow when Sergei Skripal was one of its agents was Christopher Steele, who, in 2016, was responsible for providing the Clinton presidential campaign with what has since become known as the Steele Dossier: an entirely fabricated report which purported to detail Donald Trump’s indiscretions with Russian prostitutes in a Moscow hotel and which further suggested that Trump was consequently in the Kremlin’s pocket. Designed to thus discredit Donald Trump while continuing to depict the Russians as archetypal villains, it was this document which not only set in train the entire Russiagate controversy which was to dog Donald Trump throughout his presidency – even though no actual evidence of Russian collusion was ever produced – but which prevented President Trump from normalising relations with Russia, as he had promised to do throughout his campaign, thereby enabling the Americans to maintain pressure on Russia at a time when it was caught up in two ongoing conflicts.
The first of these was the Syrian civil war, where the Russians were supporting their traditional and long standing allies in Syria’s Ba’athist government against a motley collection of insurgents, some of which may have started out as innocent protestors during the Arab Spring but which, by the end, were nearly all affiliates of either Al Qaeda or Islamic State, receiving their funding from Saudi Arabia and their weapons from the USA. That America should have been willing to arm – or allowed to be armed – groups which, in any other context, it would have regarded as Islamic terrorists, you may, of course, find rather strange or even questionable. What it demonstrates, however, is its near desperation, by this stage, to keep Russia mired in an enervating war and not allow it to succeed where America, itself, had so often failed.
It also reflection of the West’s unending hostility towards Ba’athism, which it has a long history of failing to understand, not least, one suspects, because it was the West which, by dividing the former territories of the Ottoman Empire into entirely artificial nation states after the first world war, created the problem which Ba’athism has since struggled to solve.
This was particularly the case with respect to Syria and Iraq, the borders of which were determined entirely by the French and British mandates and contained significant populations of both Sunni and Shia Muslims, making it almost impossible to put in place any form of multi-party democracy, in that, in each case, the parties would simply have divided along sectarian lines, leading to a rapid breakdown of the nation state itself. The Ba’athist solution to this was to create two purely secular states ruled, in each case, by a single party, in which all Muslims, and indeed all non-Muslims, including Christians, could participate. Not only did this alienate many Muslims, however, who saw it as a betrayal of Islam, it also alienated the West, which has always regarded one party states as undemocratic: an attitude which, in the case of Syria, was further reinforced when the shunned regime of Hafez Assad leased the naval base at Tartus on Syria’s Mediterranean coast to the Soviet Union in return for Soviet support, making the resulting Communist-Ba’athist, Russian-Syrian alliance an easy target for western propaganda, as it still is today.
In the Syrian civil war, this was made especially clear during the fighting for Aleppo where, almost every day, videos were released depicting the ‘White Helmets’ pulling children out of the rubble of bombed out hospitals and schools, giving rise to an almost universal condemnation of Syria and Russia for carrying out the bombing, while neglecting to point out that the civilian population in that part of the city was being held against its will and used as human shields by the insurgents. Having long since established in Western minds that it is always the Syrians and Russians who are the ‘bad guys’, however, the western media and public simply went along with this narrative. Seeing pictures of crying, shell-shocked children covered in dust, we didn’t ask who was really responsible for their plight. Even less did we ask who was behind the camera and whether the whole scene might have been staged for our benefit.
That’s not to say, of course, that Russian pilots and the Syrian soldiers were not responsible for civilian casualties. Millions of people were either killed or displaced during the fighting and, to the combatants on both sides, they were simply regarded as collateral damage. If you want to know who the real villains in this war were, however, all you have to do is examine the outcome. For the fact is that as soon as the Syrians and their Russian allies finally took Idlib, the insurgent’s last bastion in the north-west, the whole country was restored to peace and normality. For the first time in eight years, Christians in Aleppo were even able to celebrate Christmas, making it absolutely clear who the real oppressors had been.
5. The Long-Standing Enmity between Russia and Ukraine
With the civil war in Syria thus successfully resolved without Russia being entirely ostracized by the rest of the world, there was just one pressure point remaining, therefore, where the Americans could provoke the Russians into doing something so outrageous that their European customers would refuse to have anything more to do with them: Ukraine.
In fact, Ukraine had always been the most likely place where a conflict could be sparked. This is because of the long history of enmity between Russia and Ukraine which stretches back at least as far as the 17th century, when the Cossacks – a nomadic people who had traditionally roamed the Russian and Ukrainian steppe – switched their allegiance from the Poles, who had ruled Ukraine up until that point, to the Russians.
It happened during the Thirty Years War (1618-48) when Catholic Poland was fighting a war on two fronts: against Protestant Sweden in the west and Orthodox Russia in the east. Up until then, the Poles had paid an annual stipend to the Cossacks both to defend their Ukrainian possessions from the Crimean Tatars and to keep their Ukrainian serfs under control. As the wars with Sweden and Russia dragged on, however, they were forced to halve the number of Cossacks who received this annual payment, leading the Cossacks to offer their services to Russia.
Realising that whoever controlled the Cossacks controlled Ukraine, the Russians naturally saw this a great opportunity. For the Ukrainians, however, it was not quite the moment of liberation for which they might have been hoping. For while they clearly relished the casting off of the old yoke, indulging in an initial orgy of killing, in which they slaughtered somewhere between ten and twenty thousand Jews, whom absentee Polish landlords had previously employed to run their estates, all they really managed to achieve by this was the easy transfer of these estates from Polish to Russian ownership.
Nor were the Russians an improvement on their Polish predecessors in the way they treated their serfs. If anything, they were even worse. In many cases, they also continued to employ those Jews who had survived the pogrom as stewards, further inflaming Ukrainian antisemitism and giving rise to three hundred years of hostility between Ukrainians and Russians which, at times, has verged on an all-consuming hatred.
This reached its culmination during the second world war when, in the first summer of operation Barbarossa, the German army ‘liberated’ Ukraine from the Soviet Union, and a newly independent Ukrainian republic decided to ally itself with Germany, even providing a Ukrainian Waffen-SS division which committed untold atrocities all across southern Russian on its long, fateful journey to Stalingrad.
It would have been in full knowledge of all this, therefore, that, in February 2014, the US State Department helped stage a coup in Kyiv after the elected president, Viktor Yanukovych, refused to sign the political association and free trade agreement with the European Union which the US and EU had been pressing on Ukraine for over a year, preferring instead to renew and extend an existing treaty with Russia. Condemning this deal as the result of corruption and Russian pressure, the US and EU then backed Petro Poroshenko as the new president: a Ukrainian nationalist who immediately purged all ethnic Russians from the civil service and started to impose nationalist policies, such as the sole use of Ukrainian in Ukrainian schools, on the eastern, ethnically Russian provinces of Donetsk and Luhansk, thus giving rise to a separatist movement, which very quickly sparked a civil war.
As was almost certainly the intention, this then put Russia in an extremely difficult position. It wanted to help its fellow Russians withstand the attacks of the Ukrainian army in the Donbas region but could not intervene directly without starting an all-out war that would have justified further western involvement. Even arming and training the separatists left it open to charges of interfering in another country’s internal affairs. Even more complicated was its position in Crimea, which, contrary popular opinion, it did not actually invade. This is because, in 1997, as part of the Kharkiv Pact, it had leased back from Ukraine the strategically important naval base at Sevastopol. This meant that, in 2014, when the coup took place, its troops were already on the peninsula. They merely moved to secure the naval base by closing the isthmus which connects the peninsula to the Ukrainian mainland.
That this, in itself, was either an act of war or at least an infringement of international law is, of course, highly likely, as was the subsequent annexation of Crimea. Given the strategic importance of Sevastopol as Russia’s only major port on the Black Sea, however, and the fact that the population of the peninsula is 95% Russian and actually voted to become part of the Russian Federation rather than remain under the control of a government in Kyiv which, by then, was actually shelling Russian towns and villages in its eastern provinces, it is difficult to see what else Russia could have done.
Not that this makes it right, of course. And I’m certainly not defending it. What I think it is important to note, however, is that despite discovering that a not particularly friendly but not exactly hostile trading partner on its southern border had been transformed, almost overnight, into an implacable foe which was rapidly being armed by America and the EU and was actively seeking to join a military alliance which has only one purpose – opposition to Russia – Russia, in response, actually demonstrated a remarkable level of restraint. Other than secure its own strategic interests in Crimea and give succour to the separatists in Donetsk and Luhansk, its only really aggressive act was point out that, given the history of animosity between Ukraine and Russia, and the fact that NATO members are bound by its treaty to defend each other, inviting or allowing Ukraine to join the alliance was possibly not a good idea, in that, once it became a member, any future conflict between the Ukraine and Russia would very probably trigger World War III, which Russia itself could not allow.
Instead of taking this as a friendly warning, however, the West took it as a threat and responded by accelerating the rate at which it armed Ukraine with weapons which it still intermittently being used to shell Russian towns and villages in the Donbas region. And yet Russia still did nothing. For nearly eight years, in fact, it stood impassively by and let it happen, until September 2021 when the construction of Nord Stream 2 was finally completed and the Germans failed to turn it on, leading Russia to almost certainly conclude that eight years of patience and forbearance had earned it absolutely nothing.
6. The Biggest Game of Poker Ever Played
This doesn’t mean, of course, that the failure to open Nord Stream 2 was the only determining factor leading to the invasion of Ukraine. The fact that Russia began its troop build-up on Ukraine’s borders within a couple of months of the pipeline’s completion, however, strongly suggests that, at a minimum, it had an effect on Russia’s thinking, removing one of the key considerations weighing against an invasion and bringing to the fore other factors, such as the rate of Ukraine’s own military build-up and the fact that, had Russia waited any longer, a military solution might not have been possible.
In fact, some might argue that the Russians already left it too long. I say this because, as I write, the war still shows no sign of coming to an end. Worse still, from Russia’s point of view, the longer it drags on, the more the West’s position seems to harden. Yesterday, for instance, 4th May 2022, the EU announced that it would be ending all oil imports from Russia, thus making it absolutely clear that, if Russia thought that it could solve its Ukrainian problem with a quick military campaign and then, just as quickly, get things back to normal on the diplomatic and commercial fronts, it had sorely misjudged the situation.
If Russia’s gambled would thus appear to have misfired, however, the West is also taking something of a gamble. For banning Russian oil, for instance, will further drive up the price of petrol and diesel, which are already at all-time highs, thus further adding to inflation. In fact, nearly all of the sanctions which the West has so far imposed on Russia have to some extent backfired, having worse consequences for the West than they have had for their intended target. Even the freezing of $300 billion of Russian reserves held in foreign banks has had worse consequences for the West than it has had for Russia, forcing Russia to default on a number of interest payments to western creditors. More to the point, it gave Russia the perfect excuse to demand what it had been wanting to demand all along, that Europe pay Russia for its natural gas in roubles. After all, what country would accept payment for its goods in a currency which could be frozen as soon as hit one of its bank accounts?
Russia’s opponents, of course, will say that this just goes to show how you can’t trust the Russians and that the Germans were therefore right in not turning on Nord Stream 2. What this fails to acknowledge, however, is that Russia has not threatened to cut off any country’s gas supply on a whim of for some arbitrary reason. It wants to sell its gas. It has only threatened to cut off supplies in the case of non-payment in the currency of its choice, which any vendor is surely free to stipulate. In fact, in this case, the mechanism for making payments in Russia’s own currency is one in which the buyers wouldn’t even have to get their hands dirty by purchasing roubles themselves. For Russia has said that its customers can pay its intermediary, Gazprombank, in Euros. It is then Gazprombank which will convert these into roubles to pay Gazprom. It is just that the gas will be priced in roubles.
Even so, most people say that European customers of Russian gas shouldn’t do this and that they should therefore stop buying Russian gas altogether. It takes around two years, however, to build the kind of plant required to convert liquefied natural gas (LNG) back into gas. So what are these countries supposed to do in the meantime? Go without gas? In many cases, their economies would completely collapse. It’s why it is rumoured that five or six countries have already agreed to pay for their gas using the above method. And will they also start building LNG gasification plants? Perhaps. It is always good to have options. But natural gas will always be cheaper when delivered by pipeline, making it highly likely, therefore, that Russia will win this battle in the end.
Indeed, it is highly likely that the problems which sanctions against Russia are already causing to western countries, and which will only get worse as time goes on, will eventually lead to the kind of intense public pressure on western governments that will force them to find a solution. I mentioned earlier that Russia is the world’s largest exporter of fertilizer. As these exports have now been banned, wholesale prices for fertilizer have soared all around the world, causing farmers to use less. This means that crop yields this autumn are likely to be down, almost certainly causing food shortages. Between them, Russia and Ukraine also produce 76% of the world’s sunflower oil, none of which is now getting to the market. This has increased demand for palm oil, the biggest producer of which is Indonesia, which has consequently banned all exports, with the further consequence that all vegetable oil is now in short supply.
With real inflation already in double digits, oil and gas prices up by more than 50%, and food shortages just around the corner, if western governments don’t solve these problems by the beginning of next winter, when many people may not be able heat their homes, then the Biden administration, in particular, could face a heavy defeat in the mid-term elections, with the Republicans very probably gaining control of both houses of Congress and demanding that the administration negotiate a settlement.
Nor would this be particularly difficult. After all, Russia has already set out its three conditions for ending the war:
1. That Ukraine remain neutral and not therefore join NATO.
2. That Ukraine demilitarise, divesting itself of all the arms with which the West has been supplying it.
3. That Ukraine recognise the independence of Donetsk and Luhansk and Russia’s annexation of Crimea.
Apart from accepting the annexation of Crimea, moreover, none of these conditions are particularly odious. In fact, most people would see them as quite reasonable. The first two merely return the situation to what it was prior to 2014, while the third corrects what was really an oversight in setting Ukraine’s borders when it was granted independence from Russia in 1991. If the Russians were to agree, in return, that they would continue accepting dollars for their commodities, as well they might, then everyone would get more or less what they want… except, of course, the Ukrainians. However, it is not at all clear what the Ukrainians do actually want. To have their country systematically demolished? To be America’s pawn in this great geopolitical game? To simply vent their hatred of Russia?
Indeed, so senseless is this from Ukraine’s point of view that anyone with any sympathy for the country would surely urge them to seek a settlement rather than continuing the war by supplying them with weapons. The fact that not a single country in the West is actually doing this, therefore, is not only a sign that Ukraine is being ill-advised and ill-used, but that the West does not want the war to end, at least not at the negotiating table. Indeed, Democratic members of Congress, including Nancy Pelosi and Adam Schiff, have actually stated as much, saying that the US is in this war, not to see it end in compromise, but to win it. This, however, raises the question as to what winning the war would actually look like.
I ask this question because the only really imaginable form of victory which does not involve nuclear weapons and which is even remotely possible – that the Russians might simply give up and retreat back across their borders – seems to me extremely unlikely. They have already invested too much in the war to simply walk away. The loss of face for Vladimir Putin would also probably be too much for him to survive politically. My guess, therefore, is that the Russians will go on until they get something which they can at least present as approximating what they demanded at the outset. Moreover, the Americans must surely see this too. Given that a negotiated settlement is the only real solution, therefore, and one which it would be very easy to achieve, one consequently has to ask what game America and the West are actually playing.
Could it be, for instance, that the Americans know that the petrodollar has so hollowed out their economy and buried it under so much debt that, for them, the game is actually up? I ask this because it is why I suggested earlier that the Russians might well accept continuing to be paid in dollars for their gas in exchange for solving their Ukrainian problem. For they too must know that the dollar cannot last much longer and that, as long as they obtain some sort of settlement over Ukraine, in a year or two from now Europe will almost certainly be paying for its gas in roubles. It is just a matter of time, of which the Russians have always had an endless supply: patience, endurance and playing the long game being part of their national character. It is the Americans for whom time is running out and who will therefore do anything they can to prolong what they have left. The question for us is how much we are willing to pay to help America buy more time, and how we should position ourselves such that, when the time is finally up, we don’t follow the Americans into the chaos which is surely going to envelop them.
