Global Watch

Cold War II building up to full force

Dollar’s central role challenged
Currency War.jpg

As 2015 gets going the global geopolitical scene seems set for the full-blown return of the Cold War with a number of “theatres of conflict” already active and casting dark clouds of uncertainty on many fronts.

“Cold War II”, as we called the fast-changing geopolitical relations in May last year, is no longer just the subject of speculation. It is evident, not only in the rhetoric between especially Russia and the United States, but also in what is happening with the price of oil, the tensions around the Ukraine, sanctions against Russia and accusations of cyber aggression between the US and North Korea.

The term “Cold War II” is increasingly being used by analysts and commentators as the world’s major trade patterns and military alliances have changed radically over the last few months. The emerging picture is a complicated and still very confusing one. As predicted in September last year “Cold War II is shaping up to be a multifaceted one, for now mostly driven by economic interest”.

New financial order

One of the most important and potentially most disrupting factors in the developing new global environment is the almost frantic search for an alternative international financial system as the existing US dollar dispensation is coming to an end. George Friedman of Stratfor Global Intelligence describes the situation as the “desynchronization of the global economy”.

“That the major economic centres of the world are completely out of synch with each other, not only statistically but also structurally, indicates that a major shift in how the world works may be underway,” he writes.

As is always the case with situations of international tension and conflict, it is not possible to pin it on singular factors but there are always some that are more prominent than others.

The roots of the present fragility in the monetary system lie in the financial crisis of 2008/9 and the factors that led to it. Six years later the global economy is still not up to speed again. In fact, the hope that emerging economies, especially China, will get global growth going is fading, Europe is predicted to see little growth in 2015, with some areas slipping into recession or even depression.

The US economy is showing some signs of reviva,l but there are deep fears of the damage a strengthening dollar could inflict on other economies in a world flooded with “bail-out-dollars” over recent years. Many countries and trade blocks, wary of the possibility of a collapse of the dollar-based monetary system, have in recent years switched to trading based on national currencies.

It is noteworthy that while ten years ago dollar-denominated securities constituted 90% of reserves worldwide, that has now dropped to 60% and is still declining.

In what was probably a turning point in the present “currency war”, Russia, one of the world’s largest producers of energy commodities, in July last year gave momentum to their declared intention of no longer trading in US dollars but in roubles and the national currencies of its trading partners: Its energy company Gazprom signed a $400 billion gas deal with China and a slightly smaller one in November, denominated in roubles and renminbi.

The group of BRICS nations, including South Africa, the Shanghai Cooperation Organisation (SCO) – which includes Pakistan, Afghanistan, Iran and Mongolia, with Turkey also likely to join – will also trade in their national currencies.

At the same time US Federal Reserve (Fed) is set to start tightening their dollar supply and lift real interest rates, pushing up the value of the US currency.

This prospect was described by Ambrose Evans-Pritchard, international business editor of the United Kingdom’s The Telegraph on the first day of 2015 as “The year of dollar danger for the world”.

“America’s closed economy can handle a surging dollar and a fresh cycle of rising interest rates. Large parts of the world cannot. That in a nutshell is the story of 2015,” he wrote.

The American move comes at the same time that China is embarking on moves to tighten its own credit boom, which is set to dampen economic growth, and switch its economy from an investment-led to a consumer-led one.

In the words of Evans-Pritchard: “At best we are entering a new financial order where there is no longer an automatic “Fed Put” or a “Politburo Put” to act as a safety net for asset markets. That may be healthy in many ways, but it may also be a painful discovery for some (countries).

“The Euro zone would remain firmly in the doldrums, Japan’s growth prospects dropped quite precipitously (from 1,6% to just 0,9% in 2014 and from 1% to 0,8% in 2015). And the IMF also forecast that the big emerging markets – including South Africa’s BRICS partners (Brazil, Russia, India and China) – which were already faltering in their performance as the global growth engines of last resort would continue to do so.”

For a wide range of African countries, including South Africa and the new entrants to the club of oil producers, strongly dependent on the export of basic commodities, this is extremely bad news. We have already seen a plunge not only in oil prices (exacerbated by supply manipulation as part of the unfolding cold and currency wars), but also of other commodities like base metals.

To what extent the global economy is undergoing deep structural changes becomes clear from the Friedman article referred to above, which comes to the conclusion that “…a major crisis is occurring in economic theory…” and says: “A crisis in economic theory is not merely an academic affair. Investment decisions, career choices and savings plans all pivot on how we understand the economic world. At the moment, the only thing that can be said is that the world is filled with things that need explaining.”

As the last summit of the G20 group of nations for 2014 was coming to an end in November, British prime minister David Cameron warned that the world is facing a second economic crash against a “dangerous backdrop of instability and uncertainty”.

Geopolitical realignment

Much of what is happening on the economic and global financial fronts should be judged against the realignment that has in recent years become prominent on the geopolitical front.

Most observers and analysts date this trend back to the time when Russia became involved in the Ukrainian crisis, which began in November 2013 when its then president Viktor Yanukovych suspended the impending “association agreement” with the European Union and to the subsequent annexation of the Crimea region by Russia in March of last year. This resulted in the implementation of Cold War-like sanctions against Russia by the US and its NATO allies.

The roots of the problem, however, go back much further. It is important to note that despite a promise by the US at the time of the fall of the Berlin Wall and the supposed end of the Cold War in the early 1990s not to expand NATO eastwards, 12 of its 28 European members today are ex-members of the old Soviet bloc. Ukraine itself does not only border on Russia’s western front, but the Crimea has a large Russian population.

The US-led approach of sanctions against, isolation of and attack on the energy-market interests of Russia is at least in part driven by the US’s desire to secure European markets for itself.

But the risks associated by the present approach are high and support for it in the EU not as solid as many may think. The danger of Cold War II resulting in conflicts puts Europe not only at risk of again becoming the theatre of major armed conflict but brings with it economic vulnerabilities.

The US-led attack on the rouble and oil prices already impacted substantially on European banks heavily exposed to Russia, and their credit default swaps soared. There is a risk that some of those banks might collapse in a 2007 Lehman Brothers-style event if Russia decides to default. That could unleash an unpredictable chain reaction in global financial markets.

Last week a group of Germany’s leading politicians, diplomats and cultural celebrities wrote an open letter to German Chancellor Angela Merkel protesting her pro-US/anti-Russian policy.

On other fronts Turkey seems to be moving away from the US/European sphere of influence by turning to Russia for its energy needs and becoming an associate member of the SCO; Iran has moved into alliance with Russia; and Russian President Putin has recently visited India to negotiate a gas and arms deal.

To this can be added the ongoing tensions with extremist groups in the Islamic world, the fact that thousands of Germans took to the streets in the last week of 2014 to protest against Islamist immigration and the seemingly escalating “cyber war” between the US and North Korea.

It all adds up to a year likely to be riddled by even more extreme volatility and great uncertainty across the globe.

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