Currency Wars_ The Making of the Next Global Crisis - James Rickards [83]
New Year’s Day 2009 saw another Russian shutdown of deliveries to Ukraine. This time the consequences were more severe, with widespread factory closings in Eastern Europe and unheated homes in the dead of winter. By January 7 the gas war had escalated and direct Ukrainian supplies were reduced to zero. But then Ukraine diverted the transit supplies to its own use, and the shortages spread throughout Eastern Europe, seriously affecting Hungary, Poland and other states. Russia was holding Ukraine hostage, but Ukraine held the rest of Europe hostage to protect itself—a result that might have been foreseen by Russia. Finally, on January 18, an all-night summit conference between Putin and then Ukrainian prime minister Yulia Tymoshenko produced a new pricing plan, and Russia resumed supplies.
It seems unlikely the world has seen the end of the natural gas wars. Putin has recently suggested that the rest of Europe should help Ukraine with its cash shortages to protect itself from the consequences of future supply disruptions. This regionalizes the problem and shows how aggressively Russia is willing to use the gas weapon and the currency weapon in combination.
Russia recently released its official “National Security Strategy of the Russian Federation up to 2020,” an overview of the global strategic opportunities and challenges confronting Russia. In addition to the usual analysis of weapons systems and alliances, the strategy draws the link between energy and national security and considers the global financial crisis, currency wars, supply chain disruptions and struggles for other natural resources, including water. The strategy does not rule out the use of military force to resolve any of these finance- or resource-related struggles.
The perfection of Russia’s use of the blue fuel weapon arises in the midst of the global financial crisis. This provides Russia with its own force multiplier—something that amplifies offensive power beyond its normal value. Russia’s cutoffs of natural gas are devastating at the best of times. Coming amid a European sovereign debt crisis and housing market collapse, the next gas cutoff could have a catastrophic impact.
Of course, victims of blue fuel warfare have a remedy. They can turn their backs on NATO, the euro, the dollar and the West, and rejoin the Russian sphere of influence in exchange for secure, dependable and reasonably priced energy. Russia does not require its new vassals to adopt the totalitarian political systems of the Soviet past. It only requires that they be dependable allies in geopolitical matters and join a regional ruble currency bloc while maintaining a facade of democracy, as does Russia itself.
Russia also speaks openly of the dethroning of the dollar as the dominant reserve currency. While the Russian ruble is in no position to replace the dollar in international reserves, it could become a regional reserve and trade currency for Russian and Central Asian gas suppliers and Eastern European gas customers, dislodging the dollar to that extent at least. For now, it is enough to say that Russia has warned the world of the coming blue fuel wars in both words and deeds. Energy is a wedge used to forge a regional economic bloc with a regional reserve currency, the ruble. The dollar will be left out in the cold.
Beijing
What is most striking about Chinese history is how often and how suddenly it has swerved from order to chaos through the millennia. Despite the appearance of economic dynamism in China today, sudden collapse is entirely possible and could be caused by things such as inflation, rising unemployment, ethnic tensions or a burst housing bubble. Prolonged and widespread unemployment is potentially more destabilizing in China than in the more developed economies, especially when combined with lost upward mobility for tens of millions more citizens.
In addition to normal population stresses, China is sitting on a demographic powder keg in the form of twenty-four million “excess