Hillary Mann Leverett on U.S. Policy Toward the Islamic State and the Folly of Sanctioning Russia



This weekend, Hillary went on MSNBC’s Melissa Harris-Parry  to discuss the Obama administration’s fumbling response to the Islamic State (see here and here or click on videos above) and the West’s rising tensions with Russia over Ukraine (see here or click on videos above).  Regarding the calls for the Obama administration to expand the current U.S. air campaign against IS targets in northern Iraq into Syria as well, Hillary recounts

“I remember a year ago this weekend.  I was on a different program [see here], and I said, ‘Wait a minute.  Don’t go bomb Assad’s military in Syria, because they’re one of the only militaries that’s fighting ISIS.  We’ll essentially be al-Qa’ida or ISIS’ air force if we do so.’  The president was correct, even though he took a lot of backlash, not to bomb Assad’s army last year, and he’s probably correct not to [mount a bombing campaign against ISIS] this year, because that’s exactly what ISIS wants—they want the United States back in, full throttle, to send hundreds of thousands of troops back and make this an all-out war with the United States to take over their swath of the Middle East.”

And, while Obama’s surely more-revealing-than-he-intended acknowledgment, “We don’t have a strategy,” was maladroit in the extreme, Hillary reminds,

“In the Bush administration, we forget, but it took the administration about a month to come up with plans to attack Afghanistan.  They also had no strategy, even though al-Qa’ida had been attacking us for six years, from 1995 on.  We knew al-Qa’ida, we knew Afghanistan, but we had no strategy.

My concern is that the president—and it isn’t just the president, but it’s the entire foreign policy elite and bureaucracy—has not learned a thing since 9/11.  Here we are—we know Iraq, we had 150,000 troops there, we were there for years, we bombed that country for a long time.  We know the situation, and we still don’t have a strategy…

If there were a strategy, it would actually tell the American public the hard things they need to hear, which is that you don’t partner with, align with, have coalitions just with countries that have like-minded, so-called ‘values.’  You deal with countries as they are—like Iran and Assad’s Syria, who are the only governments in the region fighting ISIS.  And to have this policy that keeps them in the ground is enormously destructive to the United States.”

Hillary points out another serious defect in the U.S. policy discussion—namely, political and policy elites’ collective and willful refusal to acknowledge that the Islamic State has popular support:

“A Saudi-funded newspaper, Al Hayat, did a poll in Saudi Arabia, of Saudi public opinion.  They found that 92 percent of Saudis believe that ISIS conforms to their view of Islamic values and Islamic law.  So we have our head in the sand—that this makes no sense, everybody hates [ISIS], and we can recruit our Sunni autocracies as allies to fund even more Sunni militants to deal with this.  That is insane…

[T]o the extent that we support governments, like the Saudi government, that Saudis themselves and ISIL have as their target—their target is to bring down the Saudi government, to bring down the other Gulf autocracies and take over the heart of the Hijaz, Mecca and Medina—to the extent we are sending $60 billion in weapons systems to Saudi Arabia, ISIS has us in their sights.  Remember that the execution of [James] Foley happened not just because they were looking to kill an American, but when we started bombing them in Iraq.  It’s a very deliberate, sophisticated military strategy.”

On Russia and Ukraine, Hillary offers up the critically important but almost universally avoided truth about the self-damaging quality of America’s increasingly promiscuous resort to financial sanctions as a foreign policy tool (a truth that can also be made with reference to U.S. policy toward Iran):

“Not that I would agree to use force, but President Obama preemptively, almost immediately, and repeatedly has taken force off the table, and has said that we’re essentially going to rely on sanctions—sanctions that have not affected Russian calculations, and we have no basis to believe they will affect Russian calculations.  What we do know about sanctions is that it will be extremely counterproductive for us.  It will accelerate the replacement of the dollar as the world’s reserve currency.  We’ve seen Russia and China coming closer together, the increase in the Chinese currency, the RMB, [becoming] more accepted internationally.  And once foreigners stop wanting the dollar, we’re done as a superpower.”

But that’s where the flailing and failing American hegemon seems determined to go.

–Flynt Leverett and Hillary Mann Leverett

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Flynt Leverett on Iraqi Politics, Iranian-Iraqi relations, and How to Think About the Islamic State

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Shortly before Iraqi Prime Minister Nouri al-Maliki announced that he would support the nomination of Haidar al-Abadi to replace him, Flynt appeared on KPFK’s Background Briefing with Ian Masters to talk about Iran’s relations with Iraq and the importance of understanding the Islamic State as an externally-supported transnational movement.  To listen to the segment, click here.

Regarding Iran’s role in shaping the trajectory of Iraqi politics, Flynt notes,

“It’s certainly true that Iran has substantial influence over the Dawa party (Mr. Maliki’s party and Mr. Abadi’s party); it has great influence over basically all of the Shi’a Islamist parties.  Many of these parties started as opposition groups (opposition to Saddam Husayn).  The Islamic Republic supported many of these groups in exile in opposition to Saddam, and when Saddam was overthrown, these groups, these parties came back to Iraq and they became basically the most important political players in Iraqi politics.  Iran has very, very good relationships with all of them, with virtually all of the major figures in each of these parties.  They have a very strong relationship with Maliki; I’m sure they have a strong relationship with Abadi.

It’s wrong, though, to think of the Iranians as basically picking winners and losers in these battlesI think the Iranians are very careful basically to make sure they always have optionsEssentially, whoever would be able to put together a majority coalition in the parliament that would enable him to become the next prime minister of Iraq, whether it’s Mr. Maliki or whether it’s somebody else, is going to be someone, almost by definition, that the Iranians have a good working relationship with.  They try not to be in a situation where they put all their eggs in one basket, stake everything on one particular candidate.”

As to why Iran continues to support Iraq’s territorial and political integrity, Flynt explains,

“I think one reason why Iran would like to see Iraq stay together is that the majority of the population in Iraq is Shi’a, it’s at least sixty percent Shi’a.  And while you could, in theory, create this Shi’a-majority state in southern Iraq (it would be an oil-rich state, a fairly populous state), there are also Shi’a who live throughout Iraq; there are Shi’a who live in provinces where they’re not the majority of the population.  And if you broke up Iraq, the status of those Shi’a would be much more exposed, much more at risk.

I think also, from a geopolitical standpoint, if you’re worried about what can happen in Sunni-majority parts of Iraq where you have this ISIS state taking root in a context where Iraq is at least nominally unitary, why would you think that’s going to be better if you actually break up Iraq?  That problem isn’t going to get better; it could, in significant ways, get worse, from an Iranian standpoint.

So, in terms of not wanting to see post-Saddam Shi’a political gains eroded in Iraq and also in terms of the geopolitics and the problems that could come up in non-Shi’a-majority parts of Iraq, the Iranians think it’s better to try and manage those problems with Iraq as a unitary state than not.”

Turning to the Islamic State, Flynt argues that it needs to be understood as an externally-supported transnational movement.

“I think it is a big mistake to read the Islamic State movement as just a bunch of thugs.  I think these guys are very smart, and they have a political program, an expansionist political program, that aims to create a state which actually controls an ever-expanding amount of territory.  They have a political program that is, by orders of magnitude, more developed than anything al-Qa’ida ever came up with.  These guys are in serious business, not just from a military or we might say a terrorist standpoint; they’re in serious business politically…

I think they have gotten support from a number of different sources, including some of our so-called allies.  There has been a lot of financial support at least that’s come out of Saudi Arabia, some Gulf Arab states, for the Islamic State.  Turkey has been supportive of them at various junctures.  So they do have external support.

It is [also] a transnational movement.  It’s not overwhelmingly Iraqi at all.  There’s an important figure in the movement who’s a Chechen, from Russia.  There are Uighurs from China who are fighting in it.  There are people from all over the Arab world, really from all over the Muslim world who have come to join this cause.

So it is not just a bunch of thugs.  This is a serious movement, with serious external support and a transnational base.”

Just as the Islamic State movement has a transnational base, it is increasingly having a transnational impact.  That the Islamic State has an appreciable presence in Syria as well as in Iraq is well-known.  The most recent manifestation of the movement’s transnational impact can be seen in Lebanon, where it has attacked the town of Arsal near the Lebanese-Syrian border.  This means that the only possible solution to the ISIS problem is necessarily regional in nature.

But U.S. policy remains disinclined to pursue a genuinely regional approach to dealing with the Islamic State.  As Flynt points out, understanding Iraq’s current political challenges and the Islamic State’s rise requires a critically sober examination of the deep incoherence and internal contradictions in American strategy toward Iraq and toward the Middle East as a whole:

The United States says it supports a unitary Iraq—and yet, even before the invasion of 2003 when Saddam was overthrown, the United States for the last twenty or twenty-five years has been pursuing policies that progressively undermined any potential national unity in Iraq.  I think there’s a real strategic incoherence there in American policy, cutting across multiple administrations of both parties.

One reason the United States says it still supports a unitary Iraq is because basically none of Iraq’s neighbors—whether those are countries the United States has close alliances with, like Turkey, or whether it’s a country like Iran that the United States has strained relations with—everyone in the neighborhood says it doesn’t want to see Iraq broken up.  The United States makes noises like it respects that.”

But those noises don’t comport with the deeply destructive on-the-ground impact of U.S. policy.  In reviewing ISIS’s external supporters, Flynt notes that the United States has its “own hand to play in the creation and growth” of what is now called the Islamic State:

“Everybody talks about what a great idea the ‘surge’ was in Iraq in 2007-2008, but basically what the surge amounted to was U.S. arming and training 80,000 Sunni militants of various descriptions.  While we were training them, we paid them $300 a month each so that they wouldn’t kill Americans during the period while we were training them.  But we helped to feed what is now ISIS in a big way with the surge.

Then, after the unrest started in Syria in March 2011, and Saudi money, Gulf Arab money started flowing to this group (ostensibly so they could fight the Syrian government under President Assad), we basically turned a blind eye to all of this.  We wanted to see the Syrian opposition supported, we wanted to see President Assad overthrown, and these guys were the most capable fighters in that arena.  So, if our so-called allies were supporting these guys, that was fine with us.  And now—certainly for us and, I think, there’s a good chance for the Saudis—this movement has slipped the leash, and is no longer really responsive to some of the places from which it got early support.”

Even now, in dealing with the Islamic State, the Obama administration’s decision to launch airstrikes against ISIS fighters plays right into the Islamic State’s jihadist narrative.  As Flynt puts it, “Nothing will rehabilitate these guys like getting bombed by the United States.”  More broadly,

The biggest mistake we have made (and the 2003 invasion is a major manifestation of this, but not the only manifestation of it) is to think that we can micromanage political outcomes in a place like Iraq—whether by deciding who we arm, who we don’t arm, to whom do we provide close air support, to whom do we not provide close air support—that we can use these kinds of crude tools and micromanage political outcomes in a society that’s this complicated.  This is not just ‘it doesn’t work’; it is grossly self-damaging and counterproductive for American interests.

The demographics of Iraq as such that, in any kind of representative political order, the major political players are going to be, first and foremost, Shi’a Islamists, and, secondly, Kurdish parties.  That’s just where the demographics are.  Sunnis in Iraq are probably at this point twenty percent of the population at best, at most.

And so we’ve got to understand that elected governments in Iraq—every government elected since Saddam was overthrown has been a coalition of Shi’a Islamists and Kurds.  We may not like that, we may not like that these guys are all friends of Iran or others we don’t like, but that is the reality.  And if you want to try to maintain some semblance of order in this part of the Middle East, you have to be willing to work with the governments that are there, the governments that are rooted there, work with them, quit trying to undermine them, quit withholding cooperation with them [as we did with]… Maliki The United States messed up Iraq by trying to play those games, and it can only make things worse if it continues to play them.”

–Flynt Leverett and Hillary Mann Leverett

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Hillary Mann Leverett on America’s Real Strategic Failure in Iraq


Hillary appeared on CCTV’s The Heat to discuss President Obama’s decision to order U.S. airstrikes against the Islamic State of Iraq and Syria (ISIS); click on the video above or here.  In her segment, she focused on the deep causes and historical antecedents of America’s current policy crisis in Iraq.

“President Obama is now the fourth U.S. president in a row to order military action in Iraq, which some refer to (I think accurately) as the ‘graveyard of American ambition.’  That’s the big strategic picture here—that, regardless of what we bomb, how much we bomb, this is the graveyard of American ambition.

The invasion of Iraq, the continued occupation, and, now the blowback that we’re receiving puts the United States, I think, in a dire strategic corner.

–If we bomb, we are likely to galvanize Sunni Muslims across the Muslim world, not just in the Middle East.  It’s not going to be everybody, but we’re likely to galvanize a strong recruitment tool for the Islamic State in Iraq and Syria.

–If we don’t bomb, we could face a really serious confrontation in or around Erbil, where the United States has thousands of people—not just in the American consulate and all of the associated U.S. government agencies there, but a lot of businessmen, from oil companies and other places.

So we’re really, I think, in a serious, if not dire strategic corner.”

As Hillary explained, America’s broader strategic failure in Iraq has its own deep roots and historical antecedents—which are, in turn, inextricably and causally related to the rise of ISIS (which, since the end of June, has been calling itself simply ad-dawla al-islāmiyya—“the Islamic state”).

“It’s a problem the United States has had for decades, and it’s a bipartisan buy-in by the foreign policy elite here in Washington:  first, training the Sunni Islamist militias in Afghanistan in the 1980s, to oust the Soviets, and then in more recent times the Bush administration’s strategy, what was called the ‘surge,’ was really about arming, funding, and training 80,000 Sunni Islamists inside Iraq.  And then President Obama, on his watch, armed, trained, and funded Islamist militias in Libya and so-called ‘moderate’ opposition in Syria

We have been, over the years, pursuing these policies that have been not only counterproductive but, in recent history (the past three years), have fed upon themselves.  So we’ve destroyed the state in Libya, opened it up to an Islamist internecine militia battle zone; same thing in Syria, and we’ve continued to turn a blind eye to that happening to IraqThese three battlefields, in a lot of ways, are melding together, the fighters are melding together.  ISIS is not made up of primarily or overwhelmingly Iraqis.  There are Chechens from Russia, there are Uighurs from China, there are Saudis, there are Tunisians, there are lots of other nationalities there.

So this idea that we are constantly presented in Washington, that if Prime Minister Maliki were just more inclusive, this wouldn’t be a problem, is really strange on its face.  There is no government in Iraq, Prime Minister Nouri al-Maliki or anybody else, who could be more inclusive of a terrorist organization that has significant foreign fighters within it.  That just can’t be.  [And, of course, ISIS also has] a great deal of money, and U.S. weapons that they’ve either confiscated or they were given indirectly by our so-called ‘allies’ in the Gulf.”

Responding to what is becoming part of Washington’s current conventional wisdom—that Obama’s “failure” to use force in Syria and his politically-driven reticence to re-engage in Iraq have conditioned ISIS’s rise—Hillary points out that this argument depicts on-the-ground dynamics in a manner diametrically opposed to on-the-ground reality.  By doing so, it precludes sober consideration of the real requirements for a political solution.

“There’s a lot of focus here in Washington on how the president’s failure to bomb the Syrian military last year, in 2013, led to this increase in power of ISIS.  It’s really just the opposite.  The Syrian military was one of the few armies battling ISIS on a daily basis.  If we could actually change the focus here—and it’s something that many Americans cannot even conceive of, because of the political narrative laid out principally by the White House that the Syrian government is irredeemable—if we could possibly change that and see what our interests are (which is that the Syrian government is fighting ISIS), that could…could open the door to talk to inconvenient but essential players, like the Syrian government, like the Iranian government, that have a lot of keys to the solution here.”

More broadly, Hillary argues that the idea of putting American “boots on the ground” in Iraq again is not just “politically untenable” for President Obama; this idea reflects a mindset—about using military forces to micromanage political outcomes in non-Western countries the United States wants to subordinate—that, strategically, “has failed us going all the way back to Vietnam.”  As she elaborates,

“It has failed us in Vietnam, it has failed us throughout the Middle East, in Iraq and Afghanistan.  We have a proven track record of that not working to achieve strategic objectives.

While I would agree that the United States has to be very engaged in the Middle East, very engaged in the world, the idea to be ‘interventionist’ is very, very problematic, particularly in the Middle EastIt has not worked for us; we have a proven track record of failure in that regardWe need to step back and not say, ‘Qadhafi has to go, Assad has to go,’ and now, ‘Nouri al-Maliki in Iraq has to go.’  Instead, we [should] recognize that’s the Iraqi government.  It’s certainly not perfect; no government is.  We agreed to sell them F-16s and Apache helicopters, attack aircraft, so that they could take of some of these problems themselves, and then we withheld them because [al-Maliki] wasn’t doing what we thought he should be doing politically.

That’s not going to work.  I agree we should support governments that are there and sell them arms as other countries do, but to try and manipulate and micromanage political outcomes has failed us over and over again.”

Because—contrary to presidential candidate Barack Obama’s rhetoric in 2008—the Obama administration has not rejected this profoundly self-damaging mindset, it is facing massive strategic failure in the Middle East.  The administration is not, as many of its critics charge, simply responding to one crisis after another.  In reality, Hillary notes,

“Many of [these crises] are self-generated—in large part because of the administration’s strategic failure in responding to the Arab Awakening, principally in 2011.  President Obama had a new shot when he came into office, and I think repeatedly has failed to put together a coherent strategic plan, outcome, for looking at the Middle East.  We get focused on these day-to-day problems, as horrific as they sometimes are, without thinking about the strategic picture.

So the pressure, for example, to try to force Prime Minister Nouri al-Maliki out has just made him turn to Russia—which, literally overnight, doubled the aircraft we had given IraqNouri al-Maliki has gotten much closer to the Iranians.  And now you hear Iraqi government officials say those [Russia and Iran] are their real friends—because when they needed it, when they were asking for airstrikes against ISIS, the president, the Obama administration was withholding them until [Iraq] had a more ‘inclusive’ governing policy.

This is not a strategy, either for the Middle East or for the United States in the world, as we see power shifting from the west to the east, and we see critically important countries in the east—whether it’s China, India, or Russia, Iran or Iraq—because the United States is so antagonistic to all of them, they are aligning togetherThat is something that is not going to turn out well for the United States.”

–Flynt Leverett and Hillary Mann Leverett

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Petrodollars, Petroyuan, and the Ongoing Erosion of American Hegemony

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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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