Petrodollars, Petroyuan, and the Ongoing Erosion of American Hegemony

WFRJulyAug2014

The World Financial Review has published our latest piece, “The Rise of the Petroyuan and the Slow Erosion of Dollar Hegemony.”

–In it, we explain how, for four decades, the dollar’s standing as the world’s most important currency—which has undergirded much of America’s post-World War II primacy in international affairs—has rested largely on the greenback’s dominant role in international energy markets.  In explaining this, we underscore that Washington’s ability to leverage the security concerns of Saudi Arabia and other Persian Gulf Arab states to influence their decision-making on how their oil exports are priced and their petrodollar surpluses recycled has been central to consolidating and maintaining the dollar’s unique role in international energy markets.

–We also explain how China’s rise, as a global economic power and as Persian Gulf energy producers’ most important incremental market, poses the biggest challenge yet to the indefinite prolongation of dollar dominance, in international energy markets and more generally.  In this regard, the emergence of the “petroyuan” alongside the petrodollar will almost certainly accelerate the ongoing erosion of America’s wider hegemony.

While we don’t explore this in great detail in the article, there is an important Iranian angle to our story:  for over four decades, ruling elites in Saudi Arabia and some of its Persian Gulf Arab neighbors have feared the rise of a modern, economically advanced Iran; this grounds a large share of the concerns felt by Gulf Arab elites that the United States has leveraged to create and perpetuate the oil-dollar nexus.

– In the 1970s, Persian Gulf Arab states watched as late imperial Iran grew richer from higher oil prices, converted much of its wealth into a large, sophisticated, and mostly U.S.-supplied military apparatus and began to assert Iranian power around the Persian Gulf.

–From the 1979 Iranian Revolution, the Saudis and some of their Gulf Arab neighbors have been even more worried about the Islamic Republic of Iran.  While Iran’s conventional military capabilities have atrophied severely since the revolution, the Islamic Republic’s model of participatory governance combined with indigenous technological advancement and foreign policy independence represents a different sort of “threat” to Gulf Arab polities.

–More recently, as we note in our article, in many ways the petroyuan got its start in Iran; for several years now, China has paid for some of its oil imports from the Islamic Republic with renminbi.

To read the article, please go to http://www.worldfinancialreview.com/ or click here for the PDF.  We’ve also appended the text (with links) below. 

The Rise of the Petroyuan and the Slow Erosion of Dollar Hegemony

by Flynt Leverett and Hillary Mann Leverett

 For seventy years, one of the critical foundations of American power has been the dollar’s standing as the world’s most important currency.  For the last forty years, a pillar of dollar primacy has been the greenback’s dominant role in international energy markets.  Today, China is leveraging its rise as an economic power, and as the most important incremental market for hydrocarbon exporters in the Persian Gulf and the former Soviet Union to circumscribe dollar dominance in global energy—with potentially profound ramifications for America’s strategic position.             

Since World War II, America’s geopolitical supremacy has rested not only on military might, but also on the dollar’s standing as the world’s leading transactional and reserve currency.  Economically, dollar primacy extracts “seignorage”—the difference between the cost of printing money and its value—from other countries, and minimises U.S. firms’ exchange rate risk.  Its real importance, though, is strategic:  dollar primacy lets America cover its chronic current account and fiscal deficits by issuing more of its own currency—precisely how Washington has funded its hard power projection for over half a century.    

Since the 1970s, a pillar of dollar primacy has been the greenback’s role as the dominant currency in which oil and gas are priced, and in which international hydrocarbon sales are invoiced and settled.  This helps keep worldwide dollar demand high.  It also feeds energy producers’ accumulation of dollar surpluses that reinforce the dollar’s standing as the world’s premier reserve asset, and that can be “recycled” into the U.S. economy to cover American deficits.

Many assume that the dollar’s prominence in energy markets derives from its wider status as the world’s foremost transactional and reserve currency.  But the dollar’s role in these markets is neither natural nor a function of its broader dominance.  Rather, it was engineered by U.S. policymakers after the Bretton Woods monetary order collapsed in the early 1970s, ending the initial version of dollar primacy (“dollar hegemony 1.0”).  Linking the dollar to international oil trading was key to creating a new version of dollar primacy (“dollar hegemony 2.0”)—and, by extension, in financing another forty years of American hegemony.

Gold and Dollar Hegemony 1.0 

Dollar primacy was first enshrined at the 1944 Bretton Woods conference, where America’s non-communist allies acceded to Washington’s blueprint for a postwar international monetary order.  Britain’s delegation—headed by Lord Keynes—and virtually every other participating country, save the United States, favoured creating a new multilateral currency through the fledgling International Monetary Fund (IMF) as the chief source of global liquidity.  But this would have thwarted American ambitions for a dollar-centered monetary order.  Even though almost all participants preferred the multilateral option, America’s overwhelming relative power ensured that, in the end, its preferences prevailed.  So, under the Bretton Woods gold exchange standard, the dollar was pegged to gold and other currencies were pegged to the dollar, making it the main form of international liquidity.

There was, however, a fatal contradiction in Washington’s dollar-based vision.  The only way America could diffuse enough dollars to meet worldwide liquidity needs was by running open-ended current account deficits.  As Western Europe and Japan recovered and regained competitiveness, these deficits grew.  Throw in America’s own burgeoning demand for dollars—to fund rising consumption, welfare state expansion, and global power projection—and the U.S. money supply soon exceeded U.S. gold reserves.  From the 1950s, Washington worked to persuade or coerce foreign dollar holders not to exchange greenbacks for gold.  But insolvency could be staved off for only so long:  in August 1971, President Nixon suspended dollar-gold convertibility, ending the gold exchange standard; by 1973, fixed exchange rates were gone, too.

These events raised fundamental questions about the long-term soundness of a dollar-based monetary order.  To preserve its role as chief provider of international liquidity, the U.S. would have to continue running current account deficits.  But those deficits were ballooning, for Washington’s abandonment of Bretton Woods intersected with two other watershed developments: America became a net oil importer in the early 1970s; and the assertion of market power by key members of the Organization of Petroleum Exporting Countries (OPEC) in 1973-1974 caused a 500% increase in oil prices, exacerbating the strain on the U.S. balance of payments.  With the link between the dollar and gold severed and exchange rates no longer fixed, the prospect of ever-larger U.S. deficits aggravated concerns about the dollar’s long-term value.

These concerns had special resonance for major oil producers.  Oil going to international markets has been priced in dollars, at least since the 1920s—but, for decades, sterling was used at least as frequently as dollars in order to settle transnational oil purchases, even after the dollar had replaced sterling as the world’s preeminent trade and reserve currency.  As long as sterling was pegged to the dollar and the dollar was “as good as gold,” this was economically viable.  But, after Washington abandoned dollar-gold convertibility and the world transitioned from fixed to floating exchange rates, the currency regime for oil trading was up for grabs.  With the end of dollar-gold convertibility, America’s major allies in the Persian Gulf—the Shah’s Iran, Kuwait, and Saudi Arabia—came to favour shifting OPEC’s pricing system, from denominating prices in dollars to denominating them in a basket of currencies.

In this environment, several of America’s European allies revived the idea (first broached by Keynes at Bretton Woods) of providing international liquidity in the form of an IMF-issued, multilaterally-governed currency—so-called “Special Drawing Rights” (SDRs).  After rising oil prices engorged their current accounts, Saudi Arabia and other Gulf Arab allies of the United States pushed for OPEC to begin invoicing in SDRs.  They also endorsed European proposals to recycle petrodollar surpluses through the IMF, in order to encourage its emergence as the main post-Bretton Woods provider of international liquidity.  That would have meant Washington could not continue to print as many dollars, as it wanted to support rising consumption, mushrooming welfare expenditures, and sustained global power projection.  To avert this, American policymakers had to find new ways to incentivise foreigners to continue holding ever-larger surpluses of what were now fiat dollars.

Oil and Dollar Hegemony 2.0

To this end, U.S. administrations from the mid-1970s devised two strategies.  One was to maximise demand for dollars as a transactional currency.  The other was to reverse Bretton Woods’ restrictions on transnational capital flows; with financial liberalisation, America could leverage the breadth and depth of its capital markets, and it could cover its chronic current account and fiscal deficits by attracting foreign capital at relatively low cost.  Forging strong links between hydrocarbon sales and the dollar proved critical on both fronts.

To forge such links, Washington effectively extorted its Gulf Arab allies, quietly conditioning U.S. guarantees of their security to their willingness to financially help the United States.  Reneging on pledges to its European and Japanese partners, the Ford administration clandestinely pushed Saudi Arabia and other Gulf Arab producers to recycle substantial parts of their petrodollar surpluses into the U.S. economy through private (largely U.S.) intermediaries, rather than through the IMF.  The Ford administration also elicited Gulf Arab support for Washington’s strained finances, reaching secret deals with Saudi Arabia and the United Arab Emirates for their central banks to buy large volumes of U.S. Treasury securities outside normal auction processes.  These commitments helped Washington prevent the IMF from supplanting the United States as the main provider of international liquidity; they also gave a crucial early boost to Washington’s ambitions to finance U.S. deficits by recycling foreign dollar surpluses via private capital markets and purchases of U.S. government securities.

A few years later, the Carter administration struck another secret deal with the Saudis, whereby Riyadh committed to exert its influence to ensure that OPEC continued pricing oil in dollars.  OPEC’s commitment to the dollar as the invoice currency for international oil sales was key to broader embrace of the dollar as the oil market’s reigning transactional currency.  As OPEC’s administered price system collapsed in the mid-1980s, the Reagan administration encouraged universalised dollar invoicing for cross-border oil sales on new oil exchanges in London and New York.  Nearly universal pricing of oil—and, later on, gas—in dollars has bolstered the likelihood that hydrocarbon sales will not just be denominated in dollars, but settled in them as well, generating ongoing support for worldwide dollar demand.

In short, these bargains were instrumental in creating “dollar hegemony 2.0.”  And they have largely held up, despite periodic Gulf Arab dissatisfaction with America’s Middle East policy, more fundamental U.S. estrangement from other major Gulf producers (Saddam Hussein’s Iraq and the Islamic Republic of Iran), and a flurry of interest in the “petro–Euro” in the early 2000s.  The Saudis, especially, have vigorously defended exclusive pricing of oil in dollars.  While Saudi Arabia and other major energy producers now accept payment for their oil exports in other major currencies, the larger share of the world’s hydrocarbon sales continue to be settled in dollars, perpetuating the greenback’s status as the world’s top transactional currency.  Saudi Arabia and other Gulf Arab producers have supplemented their support for the oil-dollar nexus with ample purchases of advanced U.S. weapons; most have also pegged their currencies to the dollar—a commitment which senior Saudi officials describe as “strategic.”  While the dollar’s share of global reserves has dropped, Gulf Arab petrodollar recycling helps keep it the world’s leading reserve currency.             

The China Challenge

Still, history and logic caution that current practices are not set in stone.  With the rise of the “petroyuan,” movement towards a less dollar-centric currency regime in international energy markets—with potentially serious implications for the dollar’s broader standing—is already underway.

As China has emerged as a major player on the global energy scene, it has also embarked on an extended campaign to internationalise its currency.  A rising share of China’s external trade is being denominated and settled in renminbi; issuance of renminbi-denominated financial instruments is growing.  China is pursuing a protracted process of capital account liberalisation essential to full renminbi internationalisation, and is allowing more exchange rate flexibility for the yuan.  The People’s Bank of China (PBOC) now has swap arrangements with over thirty other central banks—meaning that renminbi already effectively functions as a reserve currency.

Chinese policymakers appreciate the “advantages of incumbency” the dollar enjoys; their aim is not for renminbi to replace dollars, but to position the yuan alongside the greenback as a transactional and reserve currency.  Besides economic benefits (e.g., lowering Chinese businesses’ foreign exchange costs), Beijing wants—for strategic reasons—to slow further growth of its enormous dollar reserves.  China has watched America’s increasing propensity to cut off countries from the U.S. financial system as a foreign policy tool, and worries about Washington trying to leverage it this way; renminbi internationalisation can mitigate such vulnerability.  More broadly, Beijing understands the importance of dollar dominance to American power; by chipping away at it, China can contain excessive U.S. unilateralism.

China has long incorporated financial instruments into its efforts to access foreign hydrocarbons.  Now Beijing wants major energy producers to accept renminbi as a transactional currency—including to settle Chinese hydrocarbon purchases—and incorporate renminbi in their central bank reserves.  Producers have reason to be receptive.  China is, for the vastly foreseeable future, the main incremental market for hydrocarbon producers in the Persian Gulf and former Soviet Union.  Widespread expectations of long-term yuan appreciation make accumulating renminbi reserves a “no brainer” in terms of portfolio diversification.  And, as America is increasingly viewed as a hegemon in relative decline, China is seen as the preeminent rising power.  Even for Gulf Arab states long reliant on Washington as their ultimate security guarantor, this makes closer ties to Beijing an imperative strategic hedge.  For Russia, deteriorating relations with the United States impel deeper cooperation with China, against what both Moscow and Beijing consider a declining, yet still dangerously flailing and over-reactive, America.

For several years, China has paid for some of its oil imports from Iran with renminbi; in 2012, the PBOC and the UAE Central Bank set up a $5.5 billion currency swap, setting the stage for settling Chinese oil imports from Abu Dhabi in renminbi—an important expansion of petroyuan use in the Persian Gulf.  The $400 billion Sino-Russian gas deal that was concluded this year apparently provides for settling Chinese purchases of Russian gas inrenminbi; if fully realised, this would mean an appreciable role for renminbi in transnational gas transactions.

Looking ahead, use of renminbi to settle international hydrocarbon sales will surely increase, accelerating the decline of American influence in key energy-producing regions.  It will also make it marginally harder for Washington to finance what China and other rising powers consider overly interventionist foreign policies—a prospect America’s political class has hardly begun to ponder.

–Flynt Leverett and Hillary Mann Leverett

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What’s Really at Stake in the Impasse Over Centrifuges—Hillary Mann Leverett on the Iran Nuclear Talks

      

Earlier this week, Hillary appeared on CCTV’s The Heat to discuss the Iran nuclear talks; click on video above or see here.  In her segment, she focused on what really drives the divide between Tehran and the Western members of the P5+1 (the United States, Britain, and France) over Iranian enrichment—namely, the clash between the Islamic Republic’s commitment to strategic independence and Western powers’ determination that Tehran must accept their directives regarding implementation of the Nuclear Non-Proliferation Treaty (NPT) and the dynamics of Middle Eastern power politics.  As Hillary notes,

“There has been progress on some significant issues—but this fundamental issue about enrichment is critically important.  It gets to not just the number of centrifuges…The issue is really a question of independence.

Iran is fiercely devoted to its independence.  That’s what the Islamic Revolution was all about—for Iran to be independent of foreign powers—and it wants this civilian nuclear program as part of its program for independence.  So it needs to not dismantle any of its current infrastructure—which includes about 10,000 operating centrifuges—and to increase it, to a have full-fledged civilian nuclear power program.

The United States wants just the opposite.  The United States has finally come around, after more than ten years of pounding its fist on the table, to admitting that maybe Iran could have a symbolic program—but that Iran needs to remain dependent on other countries…Not only does this go against the very principles of the revolution in Iran, for independence, but, in fact, Iran tried that.  They bought fuel from Argentina, until the United States got angry and forced Argentina to cut it off.  And they were part of a project called Eurodif, where Iran bought ten percent of that project, and then they were cut off.

So that’s the fundamental divide—whether to keep Iran dependent on the international community, or to allow them to be independent.  That is going to be a very difficult bridge to cross…It’s not a matter of time; it’s a matter of mentality.”

Of course, official Washington’s hegemonic mentality—and its accompanying pretensions—are increasingly at odds with the actual distribution of power in an evolving international order.  In part, this reflects the declining utility of America’s military might; to paraphrase a line from that timeless study in the exercise of power (and classic Hollywood blockbuster film), The Godfather, “the United States doesn’t even have that kind of muscle anymore—and can’t really use that much of what it still has.”  As Hillary elaborates, that’s an important reason the United States is negotiating, however reluctantly, with Iran:

“It’s interesting that President Obama has refrained…since January of this year, from saying that all options are on the table, for two reasons.  One, I think, in terms of allowing the negotiations to go forward, is to take the military option off the table as an offensive rhetorical device against the Iranians.

But part of this is real.  This is something that, from all my trips to Iran, I understood.  The Supreme Leader there, security and political analysts there, realized a few years ago that after America’s failed interventions in Iraq, Afghanistan, Libya, and Syria, we don’t have the military option on the table, and that gives room for negotiations.

So, even though I’m not optimistic there’s going to be a deal, a comprehensive deal either today or in four months (the new deadline), I do think that there’s enough incentive on both sides to continue negotiations for a very long time.  And you may see in September, when the United Nations convenes in New York, you may see not only continued intensive negotiations of high-level officials, but potentially even a President Obama-President Rohani meeting—not to actually seal the deal, but to inject enough momentum to keep things going past the November congressional elections and continue to kick this can down the road.”

Hillary is similarly skeptical about the prospects for a unilateral Israeli attack against Iran:

“Even though a tragically high number of Palestinians have been killed in this current conflict [in Gaza], there is a bit of exposure of the emperor wearing no clothes, that the Israelis are not able to defeat HAMAS in Gaza.  And the Iranians certainly see the Israelis having no clothes, that they don’t have the technical capability to bomb Iran’s nuclear facilities.  With that, there is, again, more time for negotiations.”

Beyond the purely military dimension of America’s relative decline, the rising influence of non-Western powers—China, Russia, and, in the Middle East itself, Iran—has also helped push the United States into multilateral nuclear talks with the Islamic Republic.  As Hillary explains, that’s an important reason the P5+1 is negotiating with Iran:

“The world has changed in the past ten years.  Ten years ago, when the United States would say that the U.S., Israel, France, and Britain were ‘the international community,’ nobody really made that much noise.  Today, they do.  So today, the United States has to take the views of, particularly, Russia and China very squarely into account.  They have to be at the table, and they have to buy into what the political and security order is going to look like in the Middle East—not just how many centrifuges Iran is going to have.  That’s why we have the negotiations.”

Yet, even though it has been pushed into multilateral nuclear negotiations with Iran, the United States continues to take hegemonically assertive positions in the talks.  Take Washington’s positions on the duration of a prospective final agreement, the number of centrifuges Iran should be “allowed” to operate under a final agreement, and limiting Iran’s alleged “breakout” capability.  As Hillary describes,

“The United States wants at least a ten-year, and they’re gunning really for a twenty-year deal.  That has nothing to do with proliferation.  That has to do with their wanting to outwait the Supreme Leader, the Supreme Leader’s life…so that the Islamic Republic has, in their view, a prospect of collapsing into a more pro-American political order.

The Iranians are not buying into that…they’re focused more on what their practical needs are, based on when they have contracts or prospective contracts for nuclear plants, when they need the fuel, and how much fuel they need.

That gets into the number of centrifuges—and, again, this is where the Supreme Leader has spoken about numbers that are much greater than the Americans are willing to consider at this point.  But he’s focused on what are the practical needs—the practical needs as told to him by the head of Iran’s atomic energy agency, who (guess what) has his Ph.D. from MIT here in the United States, and who knows what he’s doing.

So [the Iranians] are really talking about a practical needs-based approach, based on a sovereign country pursuing a technical, practical program.  The United States is focused on power and influence, and on maintaining a pro-American political and security order in the Middle East

The so-called ‘breakout issue’ is also a lot of smoke and mirrors.  Again, it’s aimed at limiting Iran’s domestic, indigenous, sovereign capacity to pursue this program.

If the United States and its so-called partners were really interested in proliferation, they would accept the Iranian deal, which is to convert all—not some, but all—their enriched uranium into oxide, into powder to make into fuelAll of itYou’d solve the proliferation issue overnight, but the United States isn’t interested in thatWe’re interested in constraining capacity, to constrain Iran’s power—its rising power, particularly in the Middle East—at a very volatile time for the United States.”

Hillary goes on to discuss the strategic imperative for the United States to pursue “Nixon-to-China”-style rapprochement with the Islamic Republic—and, in the process, “to change America’s strategy from one of dominance and hegemony in the Middle East to one that is a balance of power, that recognizes and deals with all the critical powers as they are, not as we would like to transform the Middle East.”

–Flynt Leverett and Hillary Mann Leverett

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Leveretts on International Law and the Gaza Crisis—and U.S. Policy Toward Russia, Ukraine, and the Iran Nuclear Talks

   

Photo by Ezz al-Zanoun, APA Images

Photo by Ezz al-Zanoun, APA Images

As the human toll of Israeli military action in Gaza mounts, the Obama Administration continues its cynical endorsement of Israel’s “absolute right” of “self-defense.”

Earlier this week, Flynt appeared on RT’s CrossTalk to discuss the Gaza crisis; see here or here (YouTube).  Over the weekend, Hillary went on MSNBC’s Melissa Harris-Parry (on both Saturday and Sunday) to discuss the Gaza crisis (see here, here, and here), as well as the West’s mounting tensions with Russia over Ukraine (see here, here, here, here, here, and here) and the extension of the P5+1 nuclear talks with Iran (see here).  We highlight below some themes discussed.

The Gaza Crisis, International Law, and the Road to a One-State Solution

Among various substantive points in the CrossTalk episode on which Flynt appeared, the discussion was distinguished by one of the other guests—Martin van Creveld, a well-known Israeli military historian at Hebrew University—yelling at Flynt to “shut up” and then storming off the set, all within the first nine minutes of the program.  Flynt’s apparent offense was to challenge Prof. van Creveld’s assertion that Israel is no longer occupying Gaza.

Flynt noted that, while Israel withdrew soldiers and settlers  from inside Gaza in 2005, it continues to control—strictly and severely—Gaza’s air, land, and sea access to the world; thus, “under international law, Israel is still occupying Gaza.”  (For analyses on this important point, see—for starters—here, here, and here.)  For Prof. van Creveld or anyone else to claim otherwise is, literally, to “reinvent international law”—and not in a positive or legitimate way.

As Hillary explains on Melissa Harris-Parry, international law has much broader relevance to the Gaza crisis:

There is a legal solution, which [the United States] has repeatedly blocked at the United Nations, and that is to allow the state of Palestine to sign up to, to adhere to the International Criminal Court.  Samantha Power, our ambassador there, has said publicly, she has made it her number one priority, every month, to meet with international institutions to block the entry of the state of Palestine to get legal protection.  Legal protection would constrain American power, would constrain Israeli power, and that’s why we oppose it…

There is this body of international law that came out of World War II, came out of the persecution of the Jewish people.  There is a body of international law that was instituted, that was created with the U.S. hand, with Europeans, so that this would never happen to another people again.  Th[e Palestinians] are a protected civilian population under occupation; that’s the law.  The United States should get out of the way.

Politically, too, there is a way forward, as Hillary lays out:

“We don’t talk about it because we demonize [HAMAS] as a terrorist organization that can’t possibly have a sane idea, but what they have put on the table is a ten-year ceasefire with Israel, in exchange for Israel lifting the siege of the civilian population in Gaza, with an internationally supervised airport and seaport…That is a critically important contribution to conflict resolution.”

However, as Hillary underlines, this runs up against both Israeli and American strategic preferences:

“The Israelis want to manage occupation, they want to manage a siege.  The Palestinians don’t want that.  It’s as simple as that.  I’ve been to Gaza several times, as a student, as a U.S. official, as a U.S. diplomat.  It is, under the best of circumstances, a horrific place to live.  No one wants to live there.  The vast majority of the population are refugees, without clean water, without health care, without basic necessities.  They don’t want a siege.  What HAMAS is offering is to change that situation, to change that dynamic.

The problem is that, for the United States and Israel, we would prefer to have the management of conflict, to have the management of an occupation.  We don’t really want to see a resolution of this.  That’s why the Middle East peace process has always failed—because we don’t really want a two-state solution, we don’t want the constraint of Israeli and American power in the Middle East.”

And that, Flynt argues, puts the parties and the rest of the world on the road toward a one-state solution to the Palestinian conflict:

“Israel essentially has no strategy for dealing with the Palestinian problem.  It is committed to open-ended occupation.  We are already at a point where the number of Arabs living under Israeli control exceeds the population of Israeli Jews, which means that what we call the state of Israel is already a minority regime in the areas that it controls.  And as long as Israel continues this open-ended occupation of Arab populations, it is going to face resistance, it is going to face violence.  HAMAS is not some foreign force imposed on Israel; it is a home-grown resistance movement.  Until Israel—and I think this would require, basically, an utter recasting of the Israeli state—until Israel is prepared to stop being an occupying power, this is what it is going to suffer, and it is increasingly going to delegitimate itself in the process

That is what Israel has brought on itself.  The two-state solution is, at this point, in my view, effectively dead, and we are on what is going to turn out, I think, to be a very, very slow, very, very bloody, very painful but ultimately inevitable trajectory toward a one-state solution.”

In this context, it may be worth noting that, this year, July 25 will be Qods Day.

Ukraine and American Policy Toward Russia

Hillary linked the current debate over how to deal with Russia to the American political class’s eager embrace of the George W. Bush administration’s “fraudulent case” for invading Iraq just over a decade ago:

“This is the bipartisan failure of our political class, that we buy into over and over again, based on assumptions of who we deem to be the bad guy…The foreign policy elite in the United States have acted, from day one after the collapse of the Soviet Union, like we defeated Russia, and we’ve acted that way ever since.  What Putin represents is a rise to that attitude, that we defeated them.  We have basically no response—there is no endgame in trying to bring Putin down, to bring Russia down.  We’ve tried that in Iraq, in Libya, in Syria, and it has failed.  And now we’re taking it to the doorsteps of one of the world’s historic superpowers, a power with nuclear weapons, a cyber army, dollars, and oil.  This is not going to turn out well for us…

This is about Russia’s reemergence to power and its challenge to the United States.  It really does need to be dealt with on a Russian-American level, where there is an assurance that we will not encourage, support, or in any way facilitate—for Ukraine or any of these other countries close to Russia—their entrance into NATO.  That is the red line for Putin, and if we could do that, that opens the door to conflict resolution.  Everything else is noise.”

–Flynt Leverett and Hillary Mann Leverett

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What Gaza’s Crisis Shows About Israel’s Ambitions and America’s Decline

Al Jazeera has published our latest piece, titled “Gaza’s Crisis, Israeli Ambitions, and US Decline.”  To read it, click here; we’ve also appended the text below.  As always, we encourage readers to post comments, Facebook likes, etc., both on this site and on Al Jazeera’s Web site.

Gaza’s Crisis, Israeli Ambition, and US Decline

As Israel’s military kills and injures hundreds of civilians in Gaza—whose population Israel is legally obligated to protect as an occupying power—people around the world, including in the United States, wonder why official Washington appears so indifferent to even the most graphic instances of “collateral damage.”

The primary reason is that most American policy elites still believe the United States needs to dominate the Middle East, and that Israeli military assertiveness is instrumentally useful to this end—a mindset the Israel lobby artfully reinforces.

Since World War II—and especially since the Cold War’s end—the US political class has seen Middle Eastern hegemony as key to their country’s global primacy. For two decades following Israel’s creation, it contributed little to this; thus, the United States extended it virtually no military or economic assistance, beyond negligible amounts of food aid.

Washington started providing substantial assistance to Israel only after it demonstrated a unilateral capacity, in the 1967 Arab-Israeli War, to capture and hold territory from Arab states allied, for the most part, with the Soviet Union.  Support for Israel grew through the rest of the Cold War; after the Cold War, US policymakers doubled down on the US-Israeli “special relationship,” calculating that facilitating Israel’s military superiority vis-à-vis its neighbours would help solidify US post-Cold War dominance over the strategically vital Middle East.

The instrumental nature of the “special relationship” also shaped what seems, from outside, Washington’s chronically ineffectual stewardship of the so-called Middle East peace process—especially in seeking a two-state solution to the Israeli-Palestinian conflict.  Notwithstanding rhetorical professions, neither Israel nor the US has ever wanted a two-state outcome.

Palestinian self-determination precluded 

Israel’s national security strategy has long rested on a military doctrine—which Israeli officials misleadingly label “deterrence”—requiring that Israel’s military be capable of using force first, disproportionately, and whenever and wherever in its neighbourhood Israeli politicians want.  Pursuing a two-state solution seriously would ultimately curb this freedom of unilateral military initiative.

Moreover, for a Zionist project with inherently religious roots, a two-state outcome would mean surrendering too much of the Jewish Biblical homeland to sustain the Jewish immigration on which Israel’s long-term future depends.

Likewise, the US never intended the peace process to help Palestinians achieve real self-determination—for that would inevitably constrain Israel’s exercise of military supremacy over its neighbourhood, attenuating America’s own drive for Middle Eastern dominance.  The process has instead been conducted to empower Israel, to subordinate Palestinians and other Arabs into an increasingly militarised US sphere of influence, and to leverage Arab states’ buy-in to this scenario.

These dynamics are vividly displayed in Israeli and US approaches to Gaza.  The roots of Gazans’ current trials go back to 2005, when Israel withdrew soldiers and settlers from Gaza.  Widely credited with having pushed Israel to take these steps, Hamas won internationally supervised Palestinian elections the following year.

But Gaza’s occupation was far from over.  While Israel had withdrawn soldiers and settlers, it hardly let Gazans exercise anything approaching sovereignty:  Israel’s military continued exerting strict control over their access to the world—whether by land, sea, or air—and over flows of food, medicine, and other essential goods into their territory.  For nearly a decade, this siege has eroded living conditions for 1.7 million people.

After becoming the elected governors of Gaza’s population, Hamas offered Israel a long-term truce, if Israel withdrew to pre-1967 borders.  Instead of negotiating with Hamas, to consolidate a sustainable and truly self-governing entity in Gaza that could ground broader conflict resolution, Israel and the US rejected Palestinians’ electoral choice and worked in multiple ways to isolate Hamas and undermine its popularity by increasing civilian suffering in Gaza—including, in 2006, 2008-2009, and 2012, through military assaults inflicting thousands of Palestinian casualties.

In some respects, this approach “succeeded,” for a while.  By this spring, Hamas was at what even ardent supporters described as its weakest point, in terms of financial resources and regional backing, since its founding.  (To be sure, Hamas contributed to this by abandoning its base in Syria and counting on Egypt’s short-lived Muslim Brotherhood government to become its biggest regional backer.)

US failure

But Israel’s insistence on perpetuating occupation—even without settlements—is renewing Hamas’ resistance agenda.  Earlier this week, after Israel accepted an Egyptian ceasefire proposal that would have done nothing to address the ongoing siege, Hamas made its own proposal: a ten-year truce, including a comprehensive ceasefire—if Israel met a set of ten demands.

Among them: opening all land crossings into Gaza, lifting the naval blockade, establishing an international airport and a seaport, freeing all prisoners arrested in the Israeli military’s current campaign, and committing not to re-enter Gaza for a decade.

Israel, of course, is not about to accede to any of this. And so the world waits to see if a ceasefire can be brokered, or whether Israel’s military, after bombing at least 1,800 sites in Gaza since July 8, is mounting a “boots on the ground” operation there which, Israeli officials warn, could last “many months.”

Among this situation’s many tragic aspects, one is particularly galling:  After strategically failed interventions in Afghanistan, Iraq, Libya, and (by proxy) Syria, it is abundantly evident that Washington’s quest to dominate the Middle East has not just failed.  This quest has sapped US capacity to shape positive strategic outcomes in the region and, at least in relative terms, weakened the United States as a global player.  Looking ahead, the experience of the Arab Awakening casts further doubt on the long-term plausibility of co-opting unrepresentative Arab governments into a US-led regional order that, among other things, enshrines Israel’s perpetual military ascendancy.  Yet, US policy elites stick with their hegemonic script.

The alternatives to Washington’s failed quest for hegemony are twofold:  to shift US strategy towards cultivating a stable balance of power in the Middle East and to promote greater reliance on international law and institutions as contributors to regional and global stability.  Either or both would compel fundamental revision of US posture towards Israel.

Cultivating a stable regional balance will take serious engagement with all relevant actors, including those (Hamas, Hezbollah, Iran) that seek to constrain Israel through both hard and soft power.  It will also require the United States to stop enabling Israel’s unfettered freedom of military initiative, which contributes to regional instability.  Similarly, promoting international legal frameworks as strategic stabilisers is meaningless unless Washington stops shielding Israel from the political consequences of thwarting them—whether by regularly violating international humanitarian law or by opting out of the Nuclear Non-Proliferation Treaty and developing the region’s only indigenous nuclear arsenal.

Unfortunately for Gaza’s people and US interests, the US political class remains deeply resistant to these imperatives.

–Flynt Leverett and Hillary Mann Leverett

 

 

 

 

 

 

 

 

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What Washington Has Learned From Negotiating With Iran—And What It Still Needs to Learn

The National Interest has published our latest piece, co-authored with the University of Tehran’s Seyed Mohammad Marandi, titled “What Has America Learned from Negotiating With Iran?” To read it, click here; we’ve also appended the text below.  As always, we encourage readers to post comments, Facebook likes, etc., both on this site and on The National Interest Web site.

What Has America Learned From Negotiating With Iran?

Flynt Leverett, Hillary Mann Leverett, and Seyed Mohammad Marandi  

While negotiators from Iran, the United States and the rest of the P5+1 will not meet their July 20 target for a comprehensive nuclear agreement, it is clear they won’t walk away from the table in a huff.  So, as the parties prepare to continue the process, what has America learned from negotiating with Iran, and what does it still need to learn to close a final deal?

One thing Washington has learned is that the Islamic Republic is deeply committed to protecting Iran’s independence.  Thirty-five years ago, Iran’s current political order was born of a revolution promising Iranians to end subordination of their country’s foreign policy to the dictates of outside powers—especially the United States.  Since then, the Islamic Republic has worked hard to keep that promise—for example, by defending Iran against a U.S.-backed, eight-year war of aggression by Saddam Hussein’s Iraq and fending off a steady stream of U.S. and Israeli covert attacks, economic warfare and threats of overt military action.

On nuclear matters, the Islamic Republic’s commitment to protecting Iranian independence focuses on the proposition that Iran has a sovereign right, recognized in the 1968 Nuclear Nonproliferation Treaty (NPT), to enrich uranium indigenously under International Atomic Energy Agency (IAEA) safeguards.  The Islamic Republic terminated the purely weapons-related aspects of the U.S.-supplied nuclear program it inherited from the last shah, going so far as to reconfigure the Tehran Research Reactor—which, when transferred by the United States in the 1960s, only ran on fuel enriched to weapons-grade levels (over 90 percent)—to use fuel enriched to just below 20 percent.

But the Islamic Republic has also been determined to develop a range of civil nuclear capabilities, including indigenous enrichment for peaceful purposes.  It won’t surrender Iran’s right to do so—even in the face of massive U.S. and Western pressure and sanctions.  Beyond sovereignty and practical needs, Iranian policy makers judge that appeasing Washington on the issue will simply lead to more aggressive U.S. demands and pressure on other disputes.

America may have begun to recognize that respecting Iranian independence is key to diplomatic progress.  For over a decade, Washington has insisted—contrary to how the vast majority of states read the NPT and to America’s own publicly stated view during the Treaty’s early years—that Iran has no right to enrich.  Even today, while Secretary of State John Kerry acknowledges Iran’s right to a “peaceful nuclear program,” the United States refuses to acknowledge that this includes a right to safeguarded enrichment.

However, when Washington has moved, in practical ways, to accept safeguarded Iranian enrichment, Tehran has responded positively.  In the Joint Plan of Action agreed last November, America and its British and French partners dropped their longstanding demands that Iran cease all enrichment-related activities before substantial diplomatic progress would be possible.  Furthermore, the United States and the rest of the P5+1 agreed that a final deal would encompass an Iranian enrichment program.  In return, Tehran made multiple commitments to diminish what America and its Western partners portray as the proliferation risks of Iran’s nuclear activities.  These confidence-building measures—which, the IAEA reports, Iran has scrupulously implemented—include stopping enrichment at the near-20 percent level needed for TRR fuel, converting part of its near-20 percent stockpile to oxide form and diluting fissile-isotope purity in the rest, freezing its centrifuge infrastructure and accepting IAEA monitoring well beyond NPT requirements.

While U.S. officials have started to grasp the importance of respecting Iran’s independence, they have yet to draw this insight’s full implications—the main reason a final deal isn’t at hand.

America and its Western partners continue demanding that Iran dismantle most of its safeguarded centrifuge infrastructure—a demand with no basis in the NPT or any other legal instrument and which contributes nothing to Western powers’ purported nonproliferation goals.  Iranian Foreign Minister Javad Zarif has made clear that, in a final deal, Iran could agree to cap temporarily the scope and level of its enrichment activities and to operate its centrifuges in ways rendering alleged scenarios of rapid “breakout” implausible (e.g., no stockpiling of low-enriched uranium).

Unfortunately, Western demands for dismantlement appear grounded in a determination that Tehran must “surrender” in a final deal—to forego sustainable indigenous enrichment capabilities and instead rely on foreign fuel suppliers (especially Russia).  If Western powers insist that Iran compromise its sovereign rights, there will be no final deal, no matter how long talks are extended.

The United States also still needs to learn—however incomprehensible this may seem to some—that the Islamic Republic is, in fact, a legitimate order for the overwhelming majority of Iranians living inside their country.

Besides restoring Iranian independence, the revolution that produced the Islamic Republic promised Iranians to replace externally imposed autocracy with an indigenously created system, grounded in participatory Islamist governance.  For thirty-five years, this is what the Islamic Republic has offered Iranians the chance to build.  With all its flaws, the Islamic Republic has delivered for its people in important ways, including impressive (and progressive) developmental outcomes in poverty alleviation, educational access, health-care delivery, scientific and technological advancement, and improving the status of women—despite decades of war, threats of war, and intensifying sanctions.

Still, many American elites persist in depicting the Islamic Republic as a system so despised by its own people as to be chronically in danger of overthrow—a fantasy that has driven Western enthusiasm and not-so-tacit support for regime change in Iran.  Beyond its falsity, this misapprehension of reality continues to warp the Western approach to nuclear diplomacy with Tehran.  Beyond dictating the “acceptable” scope of Iran’s indigenous capabilities, Western powers want the limits on Iran’s nuclear activities in a final deal to apply for well over a decade.  Conversations with Western officials indicate that this demand—also with no basis in the NPT or any other legal instrument—is motivated by assessments that the Islamic Republic will not last for more than ten years.  By insisting on a more-than-ten-year term, Western powers are calculating that, when a final deal expires, Iran will have a political order less committed to strategic independence.

This is both foolhardy and reckless.  The Islamic Republic is not about to disappear—and no truly legitimate Iranian government will compromise what the vast majority of Iranians see as their nation’s sovereign rights.

When the United States fully understands that, the nuclear issue will almost resolve itself.

–Flynt Leverett and Hillary Mann Leverett

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