Australia needs to decide whether to cling to the dangerous skirts of a dying empire or grasp the opportunities offered by a new multipolar world, writes James O’Neill.
THE LAST TWO or three years have seen a fundamental shift in the global monetary system, the full implications of which will take some time to emerge.
There are a number of symptoms of this global shift, but Australian commentators persist in reviewing each of these symptoms without recognising their relationships.
One of the financial pillars of the post-World War II economic structure has been the role of the United States dollar, which, since the Bretton Woods Agreement of 1944, has effectively been the world’s sole reserve currency.
Initially, the dollar’s role was underpinned by U.S. gold holdings, until Richard Nixon removed the convertibility of the dollar to gold in 1971. That should have spelled the end of U.S. financial power, but instead a new unit assumed a central role — and that was the creation of the "petrodollar". In what was then a secret agreement, Nixon’s National Security Adviser Henry Kissinger negotiated with the Saudis an agreement whereby, in exchange for U.S. arms and security commitments, oil would henceforth be traded only in U.S. dollars.
If you consider the US need to protect the Petrodollar, you will understand the basis for much of US foreign policy globally for decades. https://t.co/KV4A1OZeij— David Brady, CFA (@GlobalProTrader) June 29, 2017
The second pillar of post-war U.S. political power was its willingness to use military force to crush any opposition to its dominance — and, in particular, to counter any moves that threatened the dollar’s status and the central role of the petrodollar as enabling an economy that otherwise defied economic logic to maintain a pre-eminent position.
Both these pillars are now crumbling at a rapid rate and it is the reaction to that diminishing status that is the key to understanding much of contemporary U.S. geopolitical behaviour, particularly in the Middle East and Asia.
The first major cracks in the petrodollar system appeared under Saddam Hussein’s Iraq in the early 21st century. Saddam announced in November 2001 that Iraq was switching from the U.S. dollar to the Euro for its oil sales. Iraq was, at the time, one of the world’s top oil producers.
It was not a coincidence that the Bush Administration immediately began its massive demonisation of Iraq and its alleged possession of and intended use of "weapons of mass destruction". The phrase, "a brutal dictator who kills his own people" was repeated ad nauseum. That same phrase is currently directed at Syria’s Bashar al-Assad.
The propaganda campaign against Iraq and its leader was followed by the invasion of 2003, in which Australia was a willing accomplice. The appalling consequences of that invasion persist to the present day. None of its major architects – Bush, Blair or Howard – have been held accountable in any court of law.
Libya suffered a similar fate in 2011, when its leader (another "brutal dictator who killed his own people") Muammar Gadhafi announced that he would no longer sell Libya’s oil in dollars (as Africa’s largest producer), but instead use gold-backed dinars. That would have caused chaos to the dollar-based system. Libya was therefore attacked and destroyed. Again, the tragic consequences of that invasion reverberate to the present day – as Hersh pointed out in London Review of Books – thereby creating direct linkages to the Syrian war that commenced in the same year.
In Assad’s case (another "brutal dictator who kills his own people"), it was the refusal to allow the transit of Qatari gas to Europe, where it was intended by American planners to be used to supplant Russia as the principal supplier.
Another huge crack in American dominance can be traced to Chinese President Xi Jinping’s speech in Kazakhstan in September 2013, when he announced his grand strategy of what has variously been called the New Silk Roads, One Belt, One Road (OBOR), and the Belt and Road Initiative (BRI).
The transformational nature of this huge infrastructure project has been discussed elsewhere. Its importance in this context is that part of the overall strategy is that there are a number of sub-components. They include the progressive interlinkages with the Shanghai Cooperation Organisation (SCO), which India and Pakistan joined this year as full members; the Eurasian Economic Union (EEU); and BRICS (Brazil, Russia, India, China and South Africa). Each of the three organisations has important overlapping memberships.
China, in terms of parity purchasing power, is now the world’s largest economy. It is the largest trading partner of 124 of the world’s nations.
That gives China enormous economic power and with it the ability to determine, among other things, the monetary basis of its trading activities. It has now reached agreement with more than 100 countries to conduct their mutual trade in Yuan rather than the dollar. Russia is now the world’s largest producer of crude oil and, in 2016, overtook Saudi Arabia as China’s largest supplier.
A side benefit of receiving oil and gas from Russia rather than the Middle East is that it can be transported through one of the massive pipeline developments that the two countries are developing rather than via the Straits of Malacca, which is vulnerable to a naval blockade by the U.S. and its allies, including Australia. Just this past week, the U.S. and Australia began their annual exercise Talisman Sabre, which practises just such a blocking manoeuvre.
"I'm pleased about that message it sends our friends, allies, partners and potential adversaries."
The U.S. sees the exercise as countering “Chinese assertiveness” in the South China Sea. That the Chinese might see the exercises, added as they are to the 400 U.S. military bases that encircle China, as something other than "countering Chinese assertiveness" is not something that appears to enter the heads of either American or Australian strategists.
For obvious reasons, neither Russia nor China has any motive to underwrite the petrodollar and its linkages to U.S. economic and military power. Since 2015, trade between the two countries has increasingly been denominated in either rubles or yuan — the latter currency joining the IMF’s basket of reserve currencies in October 2016.
Future of the petrodollar
What has achieved almost no attention in the Western media is that, in June 2017, China and Saudi Arabia began negotiations to end the petrodollar as far as trade between their two countries was concerned — and that henceforth China would purchase Saudi oil with Yuan. It would be an unlikely coincidence that Trump’s first foreign foray, in June 2017, was to Saudi Arabia with the announcement of huge arms deals. It would be surprising if an unpublicised element of the trip was not an attempt to shore up the petrodollar in the face of what are now overwhelming pressures for its eclipse.
That same trip saw Trump denounce Qatar as a "sponsor of terrorism" and for Saudi Arabia to announce a list of demands that Qatar should meet. Putting aside the irony of Saudi Arabia and the U.S. denouncing anyone as a "sponsor of terrorism", the real reason for Qatar’s sudden demonisation has wider roots.
Over the past two years, Qatar has signed gas supply deals with China worth $86 billion. That trade is being conducted in yuan. Qatar has also taken steps to improve relations with Iran, with whom it shares the world’s largest natural gas field. When Saudi Arabia and other Gulf States announced sanctions on Qatar, it was Iran that offered civilian supplies in aid and the use of its ports. In a further significant move, Turkey sent 40,000 troops to Qatar to assist with its defence in the event of any move by Saudi Arabia to try and militarily enforce its demands.
In 2017, Iran also dropped the dollar as the medium of its oil and gas related trade. Apart from being one of the world’s largest producers of natural gas, Iran is also an associate member of the SCO (with full membership likely this year of next) and is a vital link in the North-South Transportation Corridor linking India with Russia via Azerbaijan. Iran is also playing a major role in helping Russia and Syria defeat ISIS terrorism in the region.
Again, it is no surprise that Iran was on General Wesley Clark’s list of seven countries targeted by the Bush administration for regime change. Libya, Iraq and Syria were also on the list.
It is similarly no surprise that Trump has publically targeted Iran and, despite the nuclear deal brokered by Russia in 2015, has, rather than easing tensions, exacerbated them by threats and further sanctions. Iran’s real “crime” since at least 1979 has been to refuse to kowtow to American demands.
Dismantling U.S. hegemony
What Russia and China have done, in short, together with important allies such as Iran, is to begin to systematically dismantle both the economic and the military basis upon which U.S. hegemony has been built over the past 70 years. As has been their traditional response, the U.S. has reacted militarily to this undermining of their hegemony — either by direct military intervention, as in the above examples, or by waging proxy wars in a variety of theatres.
As Tony Cartalucci notes, sowing dissent and disruption as a means of challenging and preventing China’s rise as a geopolitical power is a well documented and long-standing tool of U.S. foreign policy. Fomenting trouble in the South and the East China Sea, and on the Korean Peninsula, fits the same pattern as did the coup in Ukraine in February 2014 to disrupt and demonise Russia.
Such policies are bound to fail in the longer term, although the potential for disastrous consequences in the shorter term is an ever-present danger. Traditional American allies such as Australia need to decide where their true national interests lie. Do they cling to the dangerous skirts of a dying empire, or will they grasp the opportunities offered by the transition to a multipolar world.
James O'Neill is a former academic and has practised as a barrister since 1984. He writes on geopolitical issues, with a special emphasis on international law and human rights. He may be contacted at email@example.com.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License
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