May 31, 2008

May 31, 2008 | Commentary on Russia, Middle East

The Real World: Oil & shifting geopolitics

U.S. Secretary of the Treasury Henry (Hank) Paulson is heading to Saudi Arabia, Qatar, Kuwait and the United Arab Emirates, to ask the oil producers to pump more oil to get gasoline prices down. He will also ask their Sovereign Wealth Funds, the ships of the line and aircraft carriers of the 21st century geo-economics, to pump more cash into the ailing U.S. banking system, which is already suffering in the aftermath of the sub-prime crisis.

The global financial tectonic plates are shifting, and we can only hope that the United States comes out of it OK. Today Iran, Russia, Venezuela, and even U.S. friend Kuwait, are dumping the dollar in favor of the euro in energy transactions.

Abandonment of the dollar as the principal international currency for energy transactions is likely to decrease demand and increase the supply of dollars, continuing the slide of the U.S. currency which started three years ago.

A weaker dollar and higher inflation may add insult to injury in the prolonged process of America's economic deterioration. Countries that only a decade ago were America's partners, if not its friends, such as Russia, are spearheading today's global geopolitical change - away from the U.S. hegemony. High oil prices are the cause.

The coffers in Moscow and Teheran are full of oil cash. China, the manufacturing powerhouse of the world, is benefiting from the global demand for everything from building materials to tools. China today has the largest currency reserves in the world, while Russia is in third place behind Japan, but catching up fast.

Russia, Iran, and Venezuela are playing a geopolitical game into which they would like to lure China, India and Brazil. At a recent Brazil, Russia, India, China (BRIC) meeting of foreign ministers, the Russian position on Kosovo was adopted.

The BRIC ministers also supported the Russian plan of creating an alternative global economic system to the post-World War II Bretton Woods arrangement, which includes the World Bank, the International Monetary Fund, and interbank clearing mechanisms.

At a recent Third International Congress on Turkey-Asia relations organized by the Turkish strategic studies institute TASAM, in which this author participated, the emerging Russia-India-China axis was the toast of the day.

This may be a case of too little, too early. After all, the inherent contradictions between New Delhi and Beijing and even between Moscow and Beijing are too numerous to enumerate.

Yet, Russia's leaders wrote the book on using money and energy muscle to buy friends and influence neighbors. Moscow made an example out of Ukraine by cutting its gas supply on New Year's Day for four days.

Money talks. A lot of money talks a lot. A recent trip to the European Parliament in Brussels demonstrated that Germany is Russia's best friend in the European Union, and German representatives would rarely say a bad word about Moscow.

German businessmen lobby Chancellor Angela Merkel of the Christian Democratic Union on behalf of Russia day in and day out. And the leader of her Social Democrat coalition partner, Foreign Minister Frank-Walter Steinmeier, is also known as the leader of the pro-Russian faction in the German government.

There is much more to this than mere rhetoric. Germany bucked the United States at the Bucharest NATO summit and object´┐Żd to Georgia and Ukraine being issued a North Atlantic Treaty Association membership plan.

Russia's Gazprom has hired Steinmeier's boss, former German Chancellor Gerhardt Schroeder, as chairman of the Nordstream pipeline consortium, to the tune of 1 million euros a year, and made a similar offer to former Italian Prime Minister and top Eurocrat, Romano Prodi. Prodi declined for now.

Russian Prime Minister Vladimir Putin does brisk energy business with Italian Prime Minister Silvio Berlusconi, and with French President Nicolas Sarkozy, though both are considered pro-American. German businessmen enthusiastically also lobby Merkel on the Kremlin's behalf.

Russia, argues Lucio Caracciolo, the well known Italian geopolitical expert and editor of the journal Limes, may have become the second most influential country in Europe after the United States.

To stave off geopolitical and economic decline and to combat its oil-rich adversaries, the U.S. needs to recognize the damage high oil prices are doing, and to design a strategy to change the geo-economic equation.

In the short term, the U.S. needs to expand its domestic energy sector. Increasing oil and gas production in the West, along the Pacific and Atlantic continental shelf, and in Alaska, will help. More production from unconventional oil sources, such as oil sands and oil shale, is also crucial. A coal and nuclear power build-up are necessary as well.

The U.S. Congress should also abolish the corn ethanol subsidy and lift tariffs on the really competitive ethanol made from sugar cane. Brazil and Africa can produce more ethanol than Iowa and Nebraska. However, in the long term, more advanced technological solutions are vital to stem the global wealth redistribution to OPEC potentates and other America-haters.

A budgetary discipline by the Congress, coupled with a steady repayment of our domestic and foreign national debt will go a long way to restore the U.S. global economic clout.

World powers have risen and fallen over major economic factors, such as deficit spending, the loss of industrial base, and stifling innovation and entrepreneurship. This does not have to be the case with the United States. The U.S. should not be intimidated - or bankrupted - out of existence.

Ariel Cohen, Ph.D., is senior research fellow in international energy security and Russian and Eurasian Studies at The Heritage Foundation.

About the Author

Ariel Cohen, Ph.D. Visiting Fellow in Russian and Eurasian Studies and International Energy Policy in the Douglas and Sarah Allison Center for Foreign and National Security Policy, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation
Douglas and Sarah Allison Center for Foreign and National Security Policy

First Appeared in the Middle East Times