Geopolitical Risk Theater Watch: Article Links October 28

From now on, I will be occasionally posting links on articles covering geopolitical risk theater. This should give us an idea of the evolving risks developments. I'll start with 12 articles

1 Jane.com NATO completes largest naval exercise in five years October 26

2 Aseanbriefing.com ASEAN Update: Understanding the Geopolitics of the South China Sea Dispute – October 27

A quote:

During the 2012 ASEAN summit in Phnom Penh, four member nations – Malaysia, Vietnam, the Philippines, and Brunei – all declared there were conflicting territorial claims with China in the South China Sea. This did not include ongoing disputes with Taiwan, whose claims are generally excluded from ASEAN dialogue. Yet, the ASEAN states were unable to agree on an appropriate response. Internal squabbling reached new heights when, for the first time in the group’s 45-year history, they were not even able to agree on a language for the summit’s concluding communiqué.

Aside from creating antagonism internally, ASEAN’s response – or lack thereof – clearly signaled to China the alliance’s key shortcoming: the incompatibility of individual interests with regional loyalty. Indeed, in addition to diluting US influence, China’s insistence on bilateral resolution of the South China Sea disputes deliberately takes advantage of this vulnerability.

3 FreeBeacon.com China's Alarming Military Buildup Is Shifting The Balance Of Power In Asia October 13

An excerpt

On China’s strategic nuclear buildup, the report identifies China’s large-scale buildup of both conventional and nuclear-armed missiles as a serious threat.

China’s has as many as 1,895 ballistic and cruise missiles, including up to 1,200 short-range missiles, up to 100 medium-range missiles, up to 20 intermediate-range missiles, up to 75 intercontinental missiles, and up to 500 ground-launched land attack cruise missiles.

The Pentagon after 2010 halted releasing annual assessments of Chinese missile forces that one expert said undercuts the Obama administration’s policy of seeking a more open Chinese military by “indirectly assisting Chinese secrecy.”

For short-range missiles, China currently is developing five new systems with ranges between 94 and 174 miles. The new missiles will have greater accuracy and lethality.

For targeting US forces in Japan and South Korea, China has deployed DF-21C theater-range missiles with ranges of about 1,240 miles and appears to have developed a second system, the DF-16.

Its new intermediate-range missile, to be deployed in the next five years, will be able to hit US forces on Guam, Northern Australia, Alaska, and US forces in the Middle East and Indian Ocean.

A variant of the DF-21D is a unique anti-ship ballistic missile that has been deployed in two brigades in southeastern and northeast China.

China’s nuclear strike forces remain couched in secrecy, the report said. “China’s official statements about its nuclear forces and nuclear capabilities are rare and vague in order to maintain ‘strategic ambiguity,’” the report says.

4 Moscow Times Russia Inches Toward Permanent Naval Presence in Mediterranean October 16

5 Inquisitr.com Russian Spy Plane Violates NATO Airspace, Estonia Alarmed October 23

Fighters scrambled to intercept a Russian spy plane in Estonia’s airspace and escort it back to Russia in what’s being considered the most serious violation of NATO airspace since the Cold War…

For the year 2014, the deployment of NATO fighters for interceptions like this one are up by around 300 percent from 2013. It’s not clear if there will be any lasting consequence for the Russian spy plane, except one: Baltic states will continue to be worried.

6 RT.com Poland to move thousands of troops to border with Ukraine October 27

7 Businessinsider.com Sweden's Epic Hunt For A 'Russian' Sub Shows Europe Is Terrified Of Putin October 24

8 Inquisitr.com Russian Jets Invading Japan Airspace In Record Numbers Over Past Year, Japan Wants To Know Why October 19

Russian jets flying perilously close to Japan airspace forced Japanese fighters to take to the skies 533 times over the past six months — a number up from 308 in the same time period a year earlier. Now Japan is trying to figure out why the Russian military jets have made Japan a target

9 BBC.co.uk Why is the US Navy practising for war with China? October 15

10 Wall Street Journal As China Deploys Nuclear Submarines, U.S. P-8 Poseidon Jets Snoop on Them October 24

The P-8s’ operations can bring them into confrontation with Chinese forces. In August, the Pentagon said a Chinese jet fighter had flown dangerously close to a U.S. P-8 during an interception near Hainan island, site of one of China’s submarine bases. China’s defense ministry publicly said its pilot flew safely and demanded that the U.S. cease surveillance operations near its base.

11 Wall Street Journal  China’s Submarines Add Nuclear-Strike Capability, Altering Strategic Balance October 24

The message was clear: China had fulfilled its four-decade quest to join the elite club of countries with nuclear subs that can ply the high seas. The defense ministry summoned attachés again to disclose another Chinese deployment to the Indian Ocean in September—this time a diesel-powered sub, which stopped off in Sri Lanka…

China’s nuclear attack subs, in particular, are integral to what Washington sees as an emerging strategy to prevent the U.S. from intervening in a conflict over Taiwan, or with Japan and the Philippines—both U.S. allies locked in territorial disputes with Beijing…

China's nuclear-sub deployments, some naval experts say, may become the opening gambits of an undersea contest in Asia that echoes the cat-and-mouse game between U.S. and Soviet subs during the Cold War—a history popularized by Tom Clancy's 1984 novel "The Hunt for Red October."

Chinese officials say their subs don’t threaten other countries and are part of a program to protect China’s territory and expanding global interests. Chinese defense officials told foreign attachés that the subs entering the Indian Ocean would assist antipiracy patrols off Somalia, say people briefed on the meetings.

12 Paul Craig Roberts: Vladimir Putin Is The Leader Of the Moral World lewrockwell.com October 27, 2014

Excerpts from Mr. Putin's speech:

On Western Foreign policies:

A unilateral diktat and imposing one’s own models produces the opposite result. Instead of settling conflicts it leads to their escalation, instead of sovereign and stable states we see the growing spread of chaos, and instead of democracy there is support for a very dubious public ranging from open neo-fascists to Islamic radicals…

On brinkmanship politics:

Joint economic projects and mutual investment objectively bring countries closer together and help to smooth out current problems in relations between states. But today, the global business community faces unprecedented pressure from Western governments. What business, economic expediency and pragmatism can we speak of when we hear slogans such as “the homeland is in danger”, “the free world is under threat”, and “democracy is in jeopardy”? And so everyone needs to mobilise. That is what a real mobilisation policy looks like.

Sanctions are already undermining the foundations of world trade, the WTO rules and the principle of inviolability of private property. They are dealing a blow to liberal model of globalisation based on markets, freedom and competition, which, let me note, is a model that has primarily benefited precisely the Western countries. And now they risk losing trust as the leaders of globalisation. We have to ask ourselves, why was this necessary? After all, the United States’ prosperity rests in large part on the trust of investors and foreign holders of dollars and US securities. This trust is clearly being undermined and signs of disappointment in the fruits of globalisation are visible now in many countries.   The well-known Cyprus precedent and the politically motivated sanctions have only strengthened the trend towards seeking to bolster economic and financial sovereignty and countries’ or their regional groups’ desire to find ways of protecting themselves from the risks of outside pressure. We already see that more and more countries are looking for ways to become less dependent on the dollar and are setting up alternative financial and payments systems and reserve currencies. I think that our American friends are quite simply cutting the branch they are sitting on. You cannot mix politics and the economy, but this is what is happening now. I have always thought and still think today that politically motivated sanctions were a mistake that will harm everyone, but I am sure that we will come back to this subject later.

We know how these decisions were taken and who was applying the pressure. But let me stress that Russia is not going to get all worked up, get offended or come begging at anyone’s door. Russia is a self-sufficient country. We will work within the foreign economic environment that has taken shape, develop domestic production and technology and act more decisively to carry out transformation. Pressure from outside, as has been the case on past occasions, will only consolidate our society, keep us alert and make us concentrate on our main development goals.

Of course the sanctions are a hindrance. They are trying to hurt us through these sanctions, block our development and push us into political, economic and cultural isolation, force us into backwardness in other words. But let me say yet again that the world is a very different place today. We have no intention of shutting ourselves off from anyone and choosing some kind of closed development road, trying to live in autarky. We are always open to dialogue, including on normalising our economic and political relations. We are counting here on the pragmatic approach and position of business communities in the leading countries…

On the growing risks of nuclear war:

From here emanates the next real threat of destroying the current system of arms control agreements. And this dangerous process was launched by the United States of America when it unilaterally withdrew from the Anti-Ballistic Missile Treaty in 2002, and then set about and continues today to actively pursue the creation of its global missile defence system.

Colleagues, friends, I want to point out that we did not start this. Once again, we are sliding into the times when, instead of the balance of interests and mutual guarantees, it is fear and the balance of mutual destruction that prevent nations from engaging in direct conflict. In absence of legal and political instruments, arms are once again becoming the focal point of the global agenda; they are used wherever and however, without any UN Security Council sanctions. And if the Security Council refuses to produce such decisions, then it is immediately declared to be an outdated and ineffective instrument.

Many states do not see any other ways of ensuring their sovereignty but to obtain their own bombs. This is extremely dangerous. We insist on continuing talks; we are not only in favour of talks, but insist on continuing talks to reduce nuclear arsenals. The less nuclear weapons we have in the world, the better. And we are ready for the most serious, concrete discussions on nuclear disarmament – but only serious discussions without any double standards.

What do I mean? Today, many types of high-precision weaponry are already close to mass-destruction weapons in terms of their capabilities, and in the event of full renunciation of nuclear weapons or radical reduction of nuclear potential, nations that are leaders in creating and producing high-precision systems will have a clear military advantage. Strategic parity will be disrupted, and this is likely to bring destabilization. The use of a so-called first global pre-emptive strike may become tempting. In short, the risks do not decrease, but intensify.

Have a nice day.

New York Times Op Ed: Vladmir Putin Pleas for Caution on Syria

Russian president Vladmir Putin takes his PR campaign against a military strike against Syria to the American public via a column at the New York Times.

Some choice quotes.

A military strike increases the risk of escalation and unintended consequences

The potential strike by the United States against Syria, despite strong opposition from many countries and major political and religious leaders, including the pope, will result in more innocent victims and escalation, potentially spreading the conflict far beyond Syria’s borders. A strike would increase violence and unleash a new wave of terrorism. It could undermine multilateral efforts to resolve the Iranian nuclear problem and the Israeli-Palestinian conflict and further destabilize the Middle East and North Africa. It could throw the entire system of international law and order out of balance.

The inconsistent US foreign policy of providing implicit support to ‘terrorists’

Syria is not witnessing a battle for democracy, but an armed conflict between government and opposition in a multireligious country. There are few champions of democracy in Syria. But there are more than enough Qaeda fighters and extremists of all stripes battling the government. The United States State Department has designated Al Nusra Front and the Islamic State of Iraq and the Levant, fighting with the opposition, as terrorist organizations. This internal conflict, fueled by foreign weapons supplied to the opposition, is one of the bloodiest in the world.

Mercenaries from Arab countries fighting there, and hundreds of militants from Western countries and even Russia, are an issue of our deep concern. Might they not return to our countries with experience acquired in Syria? After all, after fighting in Libya, extremists moved on to Mali. This threatens us all.

The false flag

No one doubts that poison gas was used in Syria. But there is every reason to believe it was used not by the Syrian Army, but by opposition forces, to provoke intervention by their powerful foreign patrons, who would be siding with the fundamentalists. Reports that militants are preparing another attack — this time against Israel — cannot be ignored.

The foreign policy of “bullying”

It is alarming that military intervention in internal conflicts in foreign countries has become commonplace for the United States. Is it in America’s long-term interest? I doubt it. Millions around the world increasingly see America not as a model of democracy but as relying solely on brute force, cobbling coalitions together under the slogan “you’re either with us or against us.”

The appeal to natural rights

My working and personal relationship with President Obama is marked by growing trust. I appreciate this. I carefully studied his address to the nation on Tuesday. And I would rather disagree with a case he made on American exceptionalism, stating that the United States’ policy is “what makes America different. It’s what makes us exceptional.” It is extremely dangerous to encourage people to see themselves as exceptional, whatever the motivation. There are big countries and small countries, rich and poor, those with long democratic traditions and those still finding their way to democracy. Their policies differ, too. We are all different, but when we ask for the Lord’s blessings, we must not forget that God created us equal.

Read the rest here

Russia’s Putin Turns Black Gold into Gold

Prices of gold has been falling but Russia’s Vladmir Putin keeps buying, converting proceeds of Russia’s oil exports to gold.

From the Bloomberg, (hat tip Mises Blog)

When Vladimir Putin says the U.S. is endangering the global economy by abusing its dollar monopoly, he’s not just talking. He’s betting on it.

Not only has Putin made Russia the world’s largest oil producer, he’s also made it the biggest gold buyer. His central bank has added 570 metric tons of the metal in the past decade, a quarter more than runner-up China, according to IMF data compiled by Bloomberg. The added gold is also almost triple the weight of the Statue of Liberty.

“The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency,” Evgeny Fedorov, a lawmaker for Putin’s United Russia party in the lower house of parliament, said in a telephone interview in Moscow.

Gold, coveted by Russian rulers including Tsar Nicholas II and the Bolshevik leader whose forces assassinated him, Vladimir Lenin, has soared almost 400 percent in the period of Putin’s purchases. Central banks around the world have printed money to escape the global financial crisis, sapping investor appetite for dollars and euros and setting off a scramble for safety.

In 1998, the year Russia defaulted on $40 billion of domestic debt, it took as many as 28 barrels of crude to buy an ounce of gold, data compiled by Bloomberg show. That ratio tumbled to 11.5 by the time Putin first came to power a year later and in 2005, after it touched 6.5 -- less than half what it is now -- the president told the central bank to buy.

Read the rest here

EUROASIAN Union: Regionalizing Cronyism or Despotism?

Russia’s Vladimir Putin has a grand design, he intends to integrate ex-Soviet Union states.

From the Businessinsider.com,

It's likely you've never heard of half of the prospective members of Vladimir Putin's plans for a "Eurasian Union".

However, if the plan goes ahead, you'll need to get familiar with them quick.

A Eurasian Union (EuU) including most of the former U.S.S.R. would become a major counterweight to the EU (a Eurasian Union could control up to 33 percent of the world’s proven natural gas reserves, according to Forbes).

Putin, who floated the idea in October of last year, at the time went to lengths to deny that the bloc would recreate the Soviet Union. However, Russia has already gotten many other former Soviet Union states to sign up for a free trade agreement, including Armenia, Moldova, Ukraine (which was initially set on joining the EU), Kyrgyzstan, and Tajikistan. Uzbekistan, Azerbaijan, and Turkmenistan could follow suit.

Purportedly the union is about a establishing a free trade bloc.

More from Reuters,

Putin said the new union would build on an existing Customs Union with Belarus and Kazakhstan which from next year will remove all barriers to trade, capital and labor movement between the three countries.

"We are not going to stop there and are setting an ambitious goal -- to achieve an even higher integration level in the Eurasian Union," Putin wrote in an article which will be published in Izvestia newspaper on October 4…

Putin wrote that he saw the way out of the global crisis through a regional integration, mentioning the European Union, Asia-Pacific Economic Cooperation, the North American Free Trade Agreement and the Association of Southeast Asian Nations as examples.

"These 'bricks' can assemble into a more stable global economy," Putin wrote.

Politicians espousing free trade or liberalization of the markets have always been welcome news. However one should be leery of any noble sounding intentions, because what politicians say almost always works to the contrary from what they do.

The great Professor Ludwig von Mises says that free trade is about practicing what has been preached

Everybody was in favor of free trade for all other nations and of hyper‑protectionism for his own. It did not seem to occur to anyone that free trade begins at home. For nearly everyone favored government control of busi­ness within his own country.

True to the word of Professor von Mises, we find that the supposed ex-Soviet free trade bloc are composed of mostly economically UNFREE nations.

According to the Heritage economic freedom index, Russia ranks 144^th, Ukraine 163^rd, Moldova 124^th, Armenia 39^th, Kyrgyz Republic 88^th, Tajikistan 129^th and potential participants Uzbekistan 164^th Azerbaijan 91^st and Turkmenistan 168^th.

Except for Armenia and the Kyrgyz Republic whom are classified as moderately free, all the rest led by Putin’s Russia has been mostly unfree.

And the deficiency in freedom has not been limited to economic sphere but has likewise been reflected in their respective political institutions. The following categorization according to Freedomhouse.org

Partly Free: Ukraine, Moldova Kyrgyz Republic

Not free: Russia, Tajikistan. Uzbekistan, Azerbaijan, Turkmenistan

So free trade looks likely a façade to what seems as covert design to control energy reserves which will likely be corralled by the political class and their regional private sector allies.

And like the EU, whom has gone in the direction of a political union, Putin’s union seems like a step towards centralization of the region’s political framework.

Genuine free trade doesn’t need trading blocs or treaties. All that is required of a nation need is to voluntarily open the doors for trade, regardless of the what neighbors or others do.

Again this golden nugget from Professor Ludwig von Mises.

It is hopeless to expect a change by an international agreement. If a country thinks that more free trade is to its own advantage, then it may always open its frontiers. But if it views free trade as a disadvantage to its own interests it will not be more willing to grant it in an international treaty.

Well I hope I am wrong on this, and that such trading bloc will pry open these mostly unfree economies and spur not only regional trade openness but a global one too.

Russia’s Entry to World Trade Organization will have Political Repercussions

Two major positive developments emanating from Russia.

One, Russians may have come to realize that state or crony capitalism has been doing them more than enough harm.

Signs of these have become evident with the latest election results (where Putin’s Party has lost the majority) and the unfolding street protests (over the election results) which could be portentous of a ‘Russian Spring’.

While displeasure over Vladimir Putin’s autocracy has led to a surge in communist followers, I’d say that this represents a default position for many, when seen from the perspective of Russia’s history, whom has traipsed from autocracy to communism and back to autocracy.

The Western concept of classical liberalism has hardly any influence to the Russians. Thus, free markets and economic freedom may seem as an alien concept.

But this is about to change dramatically, in my opinion.

As compliment to education, one way to introduce classical liberalism is to get people to feel the benefits from its exposure. Put differently, once people come to realize the benefits of freer domestic and external trade, then more will be demanded. And this will be manifested via political actions or policies.

And changes happens on the margins.

chart from tradingeconomics.com

The deepening of globalization trends in the 1990s accompanied by the collapse of the USSR (1991) has already been boosting Russian exports and imports.

Russia’s external trade consists of exports mostly dependent on natural resources and defense equipment (80% of total) while imports have been machinery, transport equipment, plastics, medicines, iron and steel, consumer goods, meat.

Since the transition away from USSR model and the desire to tap world markets, Russia has applied for WTO in 1993.

Timeline below of Russia’s WTO application from the BBC.

Also it is important to note that benefits accrued from Russia’s gradual opening of trade with the world has led them to pursue the WTO membership.

Thus, the approval of Russia’s membership to the World Trade Organization functions as the second and most important positive change.

Writes the China Daily,

Russia finally joined the World Trade Organization (WTO) on Friday, after 18 years of effort.

The world's 11th biggest economy is the last of the G20 countries to join the WTO and became its 154th member. Russia's entry means the BRICS countries (Brazil, Russia, India, China and South Africa) are now fully represented in the WTO.

Nigerian Trade Minister Olusegun Olutoyin Aganga struck a gavel to announce that the 8thWTO ministerial meeting here had agreed to accept the bid. Russia had to first reach bilateral agreements with 57 of its current 153 members to secure their support.

Like China, there will be mounting pressures from the collision of political forces from the escalating bottom-up forces vis-à-vis those currently benefiting from top-down political institutions.

Again like in China, an inevitable decisive choice would have to be made to tailorfit the politics with the economy: Either a return to communism to reinforce current political institutional arrangements along with the closing of their economies, or an evolution to a more representative form of government that would flow along with greater economic freedom.

And technology will play a crucial role in ascertaining the path to the resolution of these transitional conflicts.

Also, if the evolving trends will flow to the latter, then the important geopolitical implications would mean lesser risk of military confrontations, as political priorities will shift towards enforcing trade activities than to engage in brinkmanship politics which are premised on the politics of plunder that has encouraged conflicts.

When goods don’t cross the border, warned the great Frédéric Bastiat, armies will.

Apparently, the world seems to exhibit more signs in the acknowledgment of Bastiat’s wisdom, thus should be applauded and welcomed.

Overtime, if political economic trends persist on the path of economic freedom then Russia should be a prospective buy.

Russia’s Putin Loses Majority, Resurgence of Communists

Russia’s Vladmir Putin’s leadership appears on the edges.

From Reuters,

Russian voters have dealt Vladimir Putin's ruling party a heavy blow by cutting its parliamentary majority in an election that showed growing unease with his domination of the country as he prepares to reclaim the presidency.

Incomplete results showed Putin's United Russia was struggling even to win 50 percent of the votes in Sunday's election, compared with more than 64 percent four years ago. Opposition parties said even that outcome was inflated by fraud.

Although Putin is still likely to win a presidential election in March, Sunday's result could dent the authority of the man who has ruled for almost 12 years with a mixture of hardline security policies, political acumen and showmanship but was booed and jeered after a martial arts bout last month.

United Russia had 49.94 percent of the votes after results were counted in 70 percent of voting districts for the election to the State Duma, the lower house of parliament. Exit polls had also put United Russia below 50 percent.

And desperation against Putin’s autocratic crony capitalism has fueled the resurgence of communists.

From another Reuters article,

The Communist Party (CPRF) for most Russians evokes images of bemedaled war veterans and the elderly poor deprived of pensions and left behind in a "New Russia" of glitzy indulgence. Large swathes of society have appeared beyond the reach of the red flag and hammer and sickle.

Not that the Communist Party's doubling of its vote to about 20 percent presages any imminent assault on power. The memories of repression in the old communist Soviet Union, the labor camps and the "Red Terror" are still too fresh for many. But vote they did, if perhaps with gritted teeth.

"With sadness I remember how I passionately vowed to my grandfather I would never vote for the Communists," Yulia Serpikova, 27, a freelance location manager in the film industry, told Reuters. "It's sad that with the ballot in hand I had to tick the box for them to vote against it all."

For many Russians disillusioned by rampant corruption and a widening gap between rich and poor, the communists represented the only credible opposition to Putin's United Russia.

For some, desperation means jumping from the frying pan to the fire. The communist resurgence, who seem to base their preference by nostalgia, never seem to realize that Putin has been a product communism who used his position to snare power and to shape the current system.

They should rather realize that economic freedom and free trade will give them more chances of attaining prosperity than to depend on politicians, who will use all sorts of power grabs to enhance their status and privileges at the people’s expense.

Tradeoffs are a fact of life. The choice of politics over markets means greater risks of gaming of the system, corruption, wealth and power inequality, cronyism and poverty. It's a lesson that most people have yet to learn and digest.

Russia’s Vladimir Putin Calls US a ‘Parasite’ Economy

From Reuters,

Russian Prime Minister Vladimir Putin accused the United States Monday of living beyond its means "like a parasite" on the global economy and said dollar dominance was a threat to the financial markets.

"They are living beyond their means and shifting a part of the weight of their problems to the world economy," Putin told the pro-Kremlin youth group Nashi while touring its lakeside summer camp some five hours drive north of Moscow.

"They are living like parasites off the global economy and their monopoly of the dollar," Putin said at the open-air meeting with admiring young Russians in what looked like early campaigning before parliamentary and presidential polls.

As the world’s largest economy that owns the de facto world reserve currency, the US has naturally been taking advantage of this seignorage privilege.

Nevertheless, having abused this position through Keynesian policy induced boom bust cycles and the constant bailouts of the cartelized ‘too big to fail’ banking system, the US dollar’s dominance has been in erosion.

Chart from Wikipedia.org

But Mr. Putin's rants seem to be diverting blame on his country’s woes to the US.

Russia’s autocratic political economy has hardly been a beacon of economic progress worthy of emulation.

chart from the Heritage Foundation

This implies that Mr. Putin holds no moral high ground. It would be like the envious ‘pot calling the kettle black’.

Russia’s Putin Says US Federal Reserve Policies Represent ‘Hooliganism’

Even some governments recognize the implicit harm from US Fed policies.

This report from Wall Street Journal Blog (Bold highlights mine)

WSJ Blog AFP/Getty Images Prime Minister Vladimir Putin

Russian Prime Minister Vladimir Putin slammed expansionary U.S. monetary policy, calling it “hooliganism”, in remarks that followed more veiled criticism from China after Standard & Poor’s Corp. cut the outlook on its U.S. debt rating this week.

“We see that everything is not so good for our friends in the States,” Putin told lawmakers Wednesday.

“Look at their trade balance, their debt, and budget. They turn on the printing press and flood the entire dollar zone — in other words, the whole world — with government bonds. There is no way we will act this way anytime soon. We don’t have the luxury of such hooliganism,” he said.

Even as Putin blamed the U.S. for printing money — something for which Russia was criticized during periods of hyperinflation in the 1990s — other Russian officials said there is no alternative to the U.S. dollar and declined to discuss cutting the country’s dollar holdings.

Russia has the world’s third-largest international reserves after China and Japan, with the biggest part in U.S. government debt. However, Russia appears to have cut its direct Treasury holdings significantly in recent months, according to data from the U.S. Treasury.

Russia can be seen as benefiting from the recent policy of the U.S. Federal Reserve, linked to higher commodity prices. But an increase in dollar supply and low interest rates could also lead to a commodities bubble that could wreak havoc on Russia’s finances if oil prices later collapse.

Authorities of some nations earlier admonished the Fed’s actions as stoking a currency war.

The above report reveals that Russia’s Putin recognizes the consequences of the massive money printing operations as one of the bubble cycles and commodity inflation which eventually will sow chaos or devastate global economies again. (Could Putin be reading Austrian economics?)

It is not true that “there is no alternative to the U.S. dollar”. People will intuitively shift to either other foreign currencies or bring back hard currency once the ‘policies of hooliganism’ worsens.

With gold and commodities generally soaring, these represent symptoms of a worldwide “flight to real values” from the ongoing crackup boom.

Stratfor Video: A Crisis in the Kremlin

Russia seems caught between the clashing interest of political interest groups and the economy.

Stratfor: "A plan to remake Russia's economy threatens to unleash political infighting in Moscow -- upsetting a balance that Prime Minister Vladimir Putin has worked to maintain. If the plan goes through, the implications for industry and investors could be profound." (Hat tip: Stratfor & John Maudlin)

This is an example of the hazards from state capitalism...

Russia’s Vladimir Putin’s Interesting Davos Speech

Here is the interesting opening ceremony speech of Russia’s Prime Minister Vladimir Putin at the World Economic Forum in Davos, Switzerland which is a suggested read at the WSJ link, click here.

Some excerpts from the speech (bold highlights mine) with our accompanying comment (green font)…

``I just want to remind you that, just a year ago, American delegates speaking from this rostrum emphasised the US economy's fundamental stability and its cloudless prospects. Today, investment banks, the pride of Wall Street, have virtually ceased to exist. In just 12 months, they have posted losses exceeding the profits they made in the last 25 years. This example alone reflects the real situation better than any criticism…

``In our opinion, the crisis was brought about by a combination of several factors.

``The existing financial system has failed. Substandard regulation has contributed to the crisis, failing to duly heed tremendous risks. Add to this colossal disproportions that have accumulated over the last few years. This primarily concerns disproportions between the scale of financial operations and the fundamental value of assets, as well as those between the increased burden on international loans and the sources of their collateral.

``The entire economic growth system, where one regional centre prints money without respite and consumes material wealth, while another regional centre manufactures inexpensive goods and saves money printed by other governments, has suffered a major setback.

``I would like to add that this system has left entire regions, including Europe, on the outskirts of global economic processes and has prevented them from adopting key economic and financial decisions. Moreover, generated prosperity was distributed extremely unevenly among various population strata. This applies to differences between social strata in certain countries, including highly developed ones. And it equally applies to gaps between countries and regions. A considerable share of the world's population still cannot afford comfortable housing, education and quality health care. Even a global recovery posted in the last few years has failed to radically change this situation. And, finally, this crisis was brought about by excessive expectations. Corporate appetites with regard to constantly growing demand swelled unjustifiably. The race between stock market indices and capitalisation began to overshadow rising labour productivity and real-life corporate effectiveness..."

My comment: Mr. Putin simply is weighing against the imperfections and unwarranted distribution of privileges from the US dollar standard

``This is why I would first like to mention specific measures which should be avoided and which will not be implemented by Russia. We must not revert to isolationism and unrestrained economic egotism. The leaders of the world's largest economies agreed during the November 2008 G20 summit not to create barriers hindering global trade and capital flows. Russia shares these principles. Although additional protectionism will prove inevitable during the crisis, all of us must display a sense of proportion. Excessive intervention in economic activity and blind faith in the state's omnipotence is another possible mistake. True, the state's increased role in times of crisis is a natural reaction to market setbacks. Instead of streamlining market mechanisms, some are tempted to expand state economic intervention to the greatest possible extent. The concentration of surplus assets in the hands of the state is a negative aspect of anti-crisis measures in virtually every nation. In the 20th century, the Soviet Union made the state's role absolute. In the long run, this made the Soviet economy totally uncompetitive. This lesson cost us dearly. I am sure nobody wants to see it repeated. Nor should we turn a blind eye to the fact that the spirit of free enterprise, including the principle of personal responsibility of businesspeople, investors and shareholders for their decisions, is being eroded in the last few months. There is no reason to believe that we can achieve better results by shifting responsibility onto the state. And one more point: anti-crisis measures should not escalate into financial populism and a refusal to implement responsible macroeconomic policies. The unjustified swelling of the budgetary deficit and the accumulation of public debts are just as destructive as adventurous stock-jobbing.

My comment: An unexpected trenchant assessment from a cunning politician. However, what is said and what is done are two different airwaves.

``Unfortunately, we have so far failed to comprehend the true scale of the ongoing crisis. But one thing is obvious: the extent of the recession and its scale will largely depend on specific high-precision measures, due to be charted by governments and business communities and on our coordinated and professional efforts. In our opinion, we must first atone for the past and open our cards, so to speak. This means we must assess the real situation and write off all hopeless debts and “bad” assets. True, this will be an extremely painful and unpleasant process. Far from everyone can accept such measures, fearing for their capitalisation, bonuses or reputation. However, we would “conserve” and prolong the crisis, unless we clean up our balance sheets. I believe financial authorities must work out the required mechanism for writing off debts that corresponds to today's needs. Second. Apart from cleaning up our balance sheets, it is high time we got rid of virtual money, exaggerated reports and dubious ratings. We must not harbour any illusions while assessing the state of the global economy and the real corporate standing, even if such assessments are made by major auditors and analysts.

``In effect, our proposal implies that the audit, accounting and ratings system reform must be based on a reversion to the fundamental asset value concept. In other words, assessments of each individual business must be based on its ability to generate added value, rather than on subjective concepts. In our opinion, the economy of the future must become an economy of real values. How to achieve this is not so clear-cut. Let us think about it together.

``Third. Excessive dependence on a single reserve currency is dangerous for the global economy. Consequently, it would be sensible to encourage the objective process of creating several strong reserve currencies in the future. It is high time we launched a detailed discussion of methods to facilitate a smooth and irreversible switchover to the new model.

``Fourth. Most nations convert their international reserves into foreign currencies and must therefore be convinced that they are reliable. Those issuing reserve and accounting currencies are objectively interested in their use by other states. This highlights mutual interests and interdependence. Consequently, it is important that reserve currency issuers must implement more open monetary policies. Moreover, these nations must pledge to abide by internationally recognised rules of macroeconomic and financial discipline. In our opinion, this demand is not excessive. At the same time, the global financial system is not the only element in need of reforms. We are facing a much broader range of problems. This means that a system based on cooperation between several major centres must replace the obsolete unipolar world concept. We must strengthen the system of global regulators based on international law and a system of multilateral agreements in order to prevent chaos and unpredictability in such a multipolar world. Consequently, it is very important that we reassess the role of leading international organisations and institutions.

``I am convinced that we can build a more equitable and efficient global economic system. But it is impossible to create a detailed plan at this event today…"

My comment:

-Writing off bad debts will be an international issue, as the debt stock is distributed around the world. Besides what’s to distinguish between bad debts incurred from the recent crisis and bad debts from past economic mismanagement. In addition, moral hazard will be an issue to contend with.

-“Time we got rid of virtual money, exaggerated reports and dubious ratings” is a function of unintended effects of inflationary policies, unnecessary government interventions and distortive regulations.

-According to Mr. Putin “Assessments of each individual business must be based on its ability to generate added value, rather than on subjective concepts. In our opinion, the economy of the future must become an economy of real values. How to achieve this is not so clear-cut.”

Why isn’t it clear cut? The reason why the pricing mechanism is subjective is because it is always determined by human psychology. It accounts for the difference in marginal utility (priorities, values) among participants, it is also about the disparate assessment of the fluctuating balance between demand and supply, it signifies the distinct time preferences of individuals and has psychological dimensions (fear or greed and other biases) accompanying the above. Nonetheless pricing based market mechanism still should be the most optimum method of allocation for scarce resources.

Attainment of real values means the application of sound money and free markets.

As for the ``Excessive dependence on a single reserve currency is dangerous for the global economy” is both a geopolitical issue as much as it is a financial issue.

``The global economy could face trite energy-resource shortages and the threat of thwarted future growth while overcoming the crisis. Three years ago, at a summit of the Group of Eight, we raised the issue of global energy security. We called for the shared responsibility of suppliers, consumers and transit countries. I think it is time to launch truly effective mechanisms ensuring such responsibility.

``The only way to ensure truly global energy security is to form interdependence, including a swap of assets, without any discrimination or dual standards. It is such interdependence that generates real mutual responsibility.

``Unfortunately, the existing Energy Charter has failed to become a working instrument able to regulate emerging problems.

``I propose we start laying down a new international legal framework for energy security. Implementation of our initiative could play a political role comparable to the treaty establishing the European Coal and Steel Community. That is to say, consumers and producers would finally be bound into a real single energy partnership based on clear-cut legal foundations.

``Every one of us realises that sharp and unpredictable fluctuations of energy prices are a colossal destabilising factor in the global economy. Today's landslide fall of prices will lead to a growth in the consumption of resources.

``On the one hand, investments in energy saving and alternative sources of energy will be curtailed. On the other, less money will be invested in oil production, which will result in its inevitable downturn. Which, in the final analysis, will escalate into another fit of uncontrolled price growth and a new crisis.

``It is necessary to return to a balanced price based on an equilibrium between supply and demand, to strip pricing of a speculative element generated by many derivative financial instruments.

``To guarantee the transit of energy resources remains a challenge. There are two ways of tackling it, and both must be used. The first is to go over to generally recognised market principles of fixing tariffs on transit services. They can be recorded in international legal documents. The second is to develop and diversify the routes of energy transportation…

``However, unlike many other countries, we have accumulated large reserves. They expand our possibilities for confidently passing through the period of global instability.

The crisis has made the problems we had more evident. They concern the excessive emphasis on raw materials in exports and the economy in general and a weak financial market. The need to develop a number of fundamental market institutions, above all of a competitive environment, has become more acute.

My comment: The Energy market is essentially a government controlled market. Despite all the massive regulations surrounding the industry we see repeated and worsening inefficiencies which has resulted to sharp pricing volatility. And unfortunately, most of this has been unduly blamed on speculators than regulators. Moreover, trying to impose more regulations while attempting to be competitive seems to be an oxymoronic goal.

``We see higher energy efficiency as one of the key factors for energy security and future development.

``We will continue reforms in our energy industry. Adoption of a new system of internal pricing based on economically justified tariffs.

``This is important, including for encouraging energy saving. We will continue our policy of openness to foreign investments.

My comment: Oops! Policy of openness to foreign investments doesn’t seem to square with recent developments.

Separately, I would like to comment on problems that go beyond the purely economic agenda, but nevertheless are very topical in present-day conditions. Unfortunately, we are increasingly hearing the argument that the build-up of military spending could solve today's social and economic problems. The logic is simple enough. Additional military allocations create new jobs. At a glance, this sounds like a good way of fighting the crisis and unemployment. This policy might even be quite effective in the short term. But in the longer run, militarisation won't solve the problem but will rather quell it temporarily. What it will do is squeeze huge financial and other resources from the economy instead of finding better and wiser uses for them.

``My conviction is that reasonable restraint in military spending, especially coupled with efforts to enhance global stability and security, will certainly bring significant economic dividends. I hope that this viewpoint will eventually dominate globally. On our part, we are geared to intensive work on discussing further disarmament.

My comment: True, military spending isn’t a productive endeavor. But action should match rhetoric. According to Al Jazeera in 2007, ``Regionally Eastern Europe saw the biggest growth in military spending mainly because Russia's spending grew 86 per cent, or $35.4bn.”