April 30, 2014; Dr. George Friedman: Thoughts from Ukraine

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: Today, David, we’re looking at the political and the geostrategic. You have talked, oftentimes, how the financial warps into the economic, and it affects the economic in a way that it ultimately becomes political, and from the political we move to the geostrategic, and what I’m thinking about right now is the situation that we are seeing over in the Ukraine, and in Crimea. I think we should look at that because it affects all of us.

David: Well, first of all, I think the importance of news headlines is overrated. On the one hand, they are very important, because it’s the way people analyze the world. It’s according to news headlines. If you know the top six news headlines you presume to know what is happening in the world. And I think it is very important to know that you are being sold something. On the one hand, it’s what you are supposed to think, so it is the conclusion you are supposed to come to in the article, in one sound bite. On the other hand, there is the need to sell script. There is the need to sell the newspaper, itself. Not that everything is sensationalized, but its importance is trumped up.

Kevin: You know what it reminds me of, Dave? Let’s say that you had two commentators who watching a chess game, and one of the commentators says, “Oh my gosh, he just took a pawn.” Well, now we all know that he just took a pawn. And then the next guy says, “Oh, look at that, he just moved his knight.” Well, that doesn’t really give you a perspective, does it? I mean, if, really, we’re looking at a geostrategic type of event, we need to look at perspective going back many years. Are we seeing something that is a repeating theme? Is it something that we can actually look in the future and say, “Well, gosh, in the last three or four times that Russia (just as an example) has done this, this is what they have done next.”

David: Today, we do want to talk about Ukraine. We do want to talk about Russia. We do want to talk about Crimea. And we do want to talk with George Friedman from stratfor.com and get his view, again, a view that is maybe 35,000 feet above the earth’s surface, but to have a bird’s-eye view, and see, again, beyond the headlines, what is happening here? And this is the approach we generally take. Last time we seriously considered things that were happening in the Middle East, who did we talk to? We talked to Bernard Lewis from Princeton University, one of the greatest academics relating to Middle Eastern politics and history alive today, in his late 90s.

Kevin: And really, Bernard Lewis was not even interested in talking about current events. If you look back at his writings, he was looking at the last 700 years in the Middle East, and that put it in perspective. I’m thinking a little bit of Friedman’s writing on stratfor.com, which is a great intelligence site, very similar to military intelligence except for it is accessible to the average man who wants to just read a more detailed strategic look. I think of his writings, just recently, on Russia. A lot of it, with the Crimean takeover, or whatever you want to call it, has been reprints from his book that goes back to 2009. Dave, we talked to Friedman in 2009 and he said Russia, up to the year 2020, would be re-gathering the band, basically, putting the band back together, the old Soviet Union.

David: Right. The move into Crimea was something that he talked about at that time. The pressure in Belarus, Ukraine, Georgia, these are things that are a well-trodden path for Friedman, because he takes, again, a perspective on events, and he is not sort of crafting his ideas in the context of news sources that are just basically batting around tidbits of data. Again, it’s not that these are unimportant, they’re very important, headlines are very important, if you want to understand what the person next to you is thinking. But that is not necessarily a reflection of reality. If you understand what is happening, you need to go underneath, beyond the headlines. And that is what we are going to do with our interview with George Friedman today.

Dr. Friedman, we have a number of questions for you. Take us up to 35,000 feet. You have written two books, The Next Decade, and The Next 100 Years. You’ve written more than that, obviously, but give us an update, an overview. Where are we today?

George Friedman: What I forecast when I first wrote The Next 100 Years was the fragmentation of Europe and the weakening of the Chinese economy. I think we’ve had both of those things. The Chinese economy is certainly much weaker than it was when I wrote the book. The European Union is really not integrated anymore. It is still there, of course, but each country is pursuing its own national interest. There is a rise of nationalism, a rise of the right wing. And now what we’ve also seen is the re-emergence of Russia, which I spoke about. And as I said in both books, what follows the post Cold War world is going to be at least a temporary reemergence of Russia as a major force. It has not yet demonstrated that it is a major force, but it certainly has demonstrated that it is going to be a major issue, and I think it will become a major force. And that really is what the world should be focused on now.

David: Germany, in recent years, has moved closer to Russia. Will we continue to see Crimea/Ukraine be an issue that changes that region’s diplomatic calculus?

George: It really can’t change the German position, for a couple of reasons. The first reason is that it imports about one-third of its energy from Russia, and while Russia needs to sell it, it doesn’t need to sell it nearly as much as Germany needs to receive it.

The second problem is that Germany exports the equivalent of 40% of its GDP to other countries, and about half of that goes to the free trade zone of the European Union, and it can’t really afford to fragment that, and a lot of Europe simply does not want a confrontation with Russia. Spain and Italy see no reason for it. The Germans really do not want to get involved in power politics. And so that’s going to leave the Poles and the other former Eastern Europeans in a difficult position. But I don’t think that Germany, itself, can afford to split with Russia over this. It needs to cooperate with it.

David: Let’s go across the pond. How might U.S. energy policies seek to undermine Russian fiscal stability.

George: Those policies are still evolving. The question of American energy exports and how they would be handled. These things aren’t settled. But we have this. We have had a technological revolution as dramatic as silicon valley was, in introducing the microchip, all the assumptions about energy in the world have been turned on their heads. The United States is now a major producer. The problem is logistic. How do you get it from here to there? We know how to do oil, and we do oil well. But really, in many ways, natural gas is game. And large scale transport of natural gas, the liquefaction of natural gas, is a technology not fully mastered, and most of the other transport systems can help economies, but you can’t really run the German economy on that. So the real question is going to be, do new technologies get developed for transport? Will the United States evolve, and so on? The problem is, all the answers to those questions are several years down the road, if they get answered, and during that time, Russia remains a major power.

David: We have seen Russia secure their interests in Crimea, Sevastopol, securing a warm water port. Has this also put a floor in the oil price? We see their arms sales to Iran, maintaining the conflict between Saudi Arabia and Iran. Is this some way of them, again, securing fiscal solvency for themselves?

George: Well, look. They suffered a huge reversal in Ukraine. From the Russian point of view, and they really do believe this, Western intelligence services fomented the rising, deposed a legally elected president because he had opposed a deal with the EU, deposed him on a pretty shady maneuver, and now is seeking to integrate them into the Western alliance system. So let’s remember that, from the Russian point of view, and I think there is some accuracy to it all, they suffered a huge reversal. Their seizure of Crimea, and it’s not so much a seizure, they were always the dominant power there, Crimea had belonged to Russia historically, it was transferred by the Soviets fairly arbitrarily in the 1950s.

And the massive invasion consisted of troops who had overwhelming presence in Crimea, stepping out of their bases and kind of taking over. They always dominated that. And it didn’t solve any major problem for them. It did guarantee that their naval fleet would operate out of Sevastopol in the Black Sea for an extended period of time, but it is still very hard for them to supply Sevastopol, to ship goods out. Their major port is not Sevastopol, it’s Odessa. It’s part of Ukraine, and it really matters to them that they have access to that. It matters to the world that they have access to that because a lot of energy comes out of there.

So I would argue that, really, we have to remember that the Russians had their heads handed to them in Ukraine. The Crimean maneuver was a kind of defensive maneuver that was far from an invasion, and the real focus should be on Odessa, and Russia really cares about that. To the Russians, Ukraine is as important as Texas is to the United States. It is a strategic entity that, if they lose control over it, they are in big trouble. So, as you can imagine, they are not going to be letting go, but let’s remember, they lost a big one there.

David: We’ve seen sanctions put in place with Syria, Iran. Sanctions have started light, and now with Russia are increasing. Talk to us about financial and economic statecraft. Is this sort of a complement to van Creveld’s idea of the changing face of warfare?

George: Well, you can do things with Syria, and you can do things with Iran, that you can’t do with the world’s 8th largest economy. The Russian economy is enormous. It is one of the major economies of the world. Its banking system is deeply tied to the European banking system, to some extent, the American banking system. The Europeans are totally dependent on energy exports from Russia. Placing significant sanctions on Russia, without shooting yourself in the foot, is a major effort.

The problem is that the Europeans can’t withstand the Russian retaliation. The Americans can. And therefore, as clever as it is to put sanctions on individual people so that they can’t come to the United States, those aren’t sanctions. That was an attempt by the administration to do absolutely nothing while appearing to do something. And it achieved something. People are acting as if sanctions were placed. But in fact, no sanctions have been placed on Russia, because no one can figure out a sanction that doesn’t blow up in the West’s face, particularly Europe, and the Germans are going to block sanctions. They can’t live with them.

David: Then we have NATO, obviously, Ukraine moving in the direction of NATO. The relevance, for years, of this organization, was waning. Has Putin brought the organization back from the dead, so to say?

George: Well, not really this one, because it includes countries like Portugal, Spain, and Italy that really have no stake in what was going on. The point of the original NATO was that everybody had a stake in containing the Soviet Union, that each member was not so much committed because it was a nice thing to join, but that each member really cared what the Soviets did. There are a lot of members of NATO that simply don’t care whether Ukraine is in or out of Russia, will pay lip service to opposing it, but are not going to boost their defense budget significantly. There are a bunch of countries that really do care, and they run from Finland to the Baltics, through Poland, Slovakia, Hungary, Bulgaria, and Turkey, and all the way to Azerbaijan. These countries are on the frontiers of Russia, and they are directly affected by what goes on, and they would love to have NATO backing it.

But many of these countries aren’t members of NATO, Azerbaijan, for example, and more importantly, many of these countries have interests that are way higher than those of others. So I think what we are going to see is the emergence of a new alliance system. And the real question is, will the United States participate in that new alliance system, or will they maintain their distance from Europe, allowing the balance of power to try to work itself out. As for the Western Europeans, this is not their game. They will maybe send a fighter plane or two, but they are not going to send the kind of forces that were deployed against the Soviet Union, and therefore, I think, rumors of the revival of NATO are premature.

David: This kind of goes back to where we began the conversation, in the next ten years, the next 100 years, you highlight a change in the balance of power in many parts of the world. Is our state department today disturbing any power balances at present?

George: The problem is, the Iran negotiations are an attempt to create a balance of power between Iran and Saudi Arabia and the GCC countries, between the Sunnis and the Shi’ites, between the Persians and the Arabs. In other areas, like between the Israelis and the Palestinians, with Kerry walking out of the talks, that basically was an attempt to say, “You guys work this out yourselves, and establish the balance of power.” It is in Ukraine that the United States, to the extent that the Russian claims about what the Americans did are true, and I don’t know that they are true, to that extent the United States has, not so much upset the balance of power, but has created a threat for all sides that the balance of power could collapse.

The problem with maintaining the balance of power is that you have to be highly disciplined, mostly highly disciplined to do nothing, mostly highly disciplined to stay out of things. And we don’t know what is going to happen in Ukraine. The most likely outcome is that this has all been about nothing, because when there are elections, and new governments, and austerity starts to bite, and unemployment starts to surge, and poverty starts to rise, which is hardwired into the IMF agreements, this government is going to become extremely unpopular and a lot of people are going to be very nostalgic about the old government.

That’s what the Russians are waiting for. The Russians are looking at this and saying, “We’ve suffered a serious defeat by having an anti-Russian government installed in Kiev, but we’re pretty sure we can get a pro-Russian government back into place once they realize that all that IMF support means is that they will lend money to Ukraine to pay back banks, and that takes care of hedge funds and banks that have loaned them money, but it won’t do anything for them. And as that emerges, the Russians are betting that it will all be back in their hands, and it may well be. And therefore, we haven’t yet upset the balance of power, we haven’t yet forced the Russians to do something that requires us to intervene, and this thing may work out. But it takes a long time to become mature enough to operate a balance of power policy where most of the time in foreign policy you do as little as possible.

David: George, thanks for joining us today. We have a whole list of other questions. We can pause here and come back on another day and continue on with the conversation. We appreciate your input and insight into the world as it is, and the world as we hope it to be.

Kevin: As always, Dave, we get the perspective. Like you said, it’s more of a bird’s-eye view rather than saying, “Okay, are we going to war this week, or not?” We see that Merkel, in Germany, and we see even in America, we’re caught between a rock and a hard place. Germany’s need for the energy of Russia is not something that is replaceable very quickly, and then we also have the situation where Germany has to look strong enough that the other republics that have broken away from Russia know that Germany has their backs. I’m thinking of the Baltics, I’m thinking of Poland. You have a number of people watching what is going to happen next, especially in the EU. What side are they going to support?

David: Well, it is interesting. We have Germany, with 38% of its natural gas needs coming from Russia, 35% of their oil needs coming from Russia. On the other side of the calculus you have corporate debt in Russia, 56 billion dollars, which has to be refinanced in the next 6-12 months. These are real monetary needs. These are real financial and economic dependencies, and unless there is resolution, you are going to see crisis. And frankly, it hits home much more with these countries than it does with the U.S.

So it’s one thing for us, on this side of the pond to start throwing rocks and imagining what the ripples might be, but it’s another altogether to be in that part of the world where you see and feel the ripples. This is, again, where I think we have sort of a bifurcation. We have the things that we want to put in place in terms of sanctions, with institutions, within individuals, and then there are the limitations that Merkel and Germany face, and the Europeans face, because again, this very high dependence on Russia for oil and gas and other traded products.

It reminds me of a conversation that the chairman of Siemens was having a number of months ago when he said, “Do you realize that German manufacturing prowess has been compromised by the fact that we pay a significantly higher price for natural gas than they do in America?” This is nothing speaking, really, to the relationship that they have with Russia, per se, but just to compare and contrast, why does he think he is going to have a hard time competing with U.S. manufacturing? Because of the fracking innovations in the United States, the low cost of natural gas in the United States, the potential for a manufacturing renaissance in the United States. And he looked at that, and I think this was a very clear communication from him to Merkel, using the press to bring home this particular point, and he said, even before Crimea was an issue, “Don’t upset the Russians too much,” because he knew that if the cost of natural gas and oil were to rise for Siemens, it means they lose trade competitiveness with all their major manufacturing competitors around the world.

Kevin: And it is worth pointing out that Siemens is who supplies the locomotives, this upgrade of the railroads for Russia. So, obviously, there are a lot of business ties in this, and I’m wondering, Dave, if this is why we are seeing these sanctions. They’ve basically told seven guys in Russia that they can’t come to Disneyland anymore. Let’s face it, these are not really tough sanctions at this point, and they have to play carefully, don’t they? I think about Harold James, who is referencing World War I, and of course, he has been a guest of ours in the past. He said, “France and England thought that they could just work with economic sanctions back in 1914. That didn’t work out very well.

David: Harold James is one of my favorite guests on the Commentary, in part, because his expertise is political economy. He is blending worlds and seeing things, I think, from a fairly holistic perspective, with history being very, very important, just as a Bernard Lewis would say, “You have to have a historical perspective on the Middle East to appreciate the nuances, the differences, between the factions and the parties that have a particular interest in play.” Well, Harold James would say, you had Britain and France, and they were pressuring Germany in the bygone era, and they figured that if they brought financial pressure on Germany, they would be able to cripple the Germans, when in fact, all they did was stoke the animosity, stoke the potential for a real crisis, and maybe they didn’t define the ultimate outcome in the war and the aggression that they received from Germany, but it certainly precipitated events. And it is interesting, we, in the West, face a certain challenge. That challenge is, I think, is one of hubris, one of pride, where we look and say, “Listen, if we want to change Syria, we’re going to change Syria. If we want to change Iran, we’re going to change Iran. We’re going to put together these financial issues and make life hell for them.” And then we turn to, as our guest today said, the 8th largest economy?

Kevin: You just can’t play the same ball.

David: When you push, be aware they may be pushing back, and in ways that are more considerable, and more detrimental, than what you have found with Syria, with Iran. And I think that is the challenge of our day, having a state department, having folks in Washington, and in capitals around the world, who think more of their ability to affect change than they may, in fact, be able to. Does that make sense?

Kevin: Well, it makes a lot of sense, actually. Another guest of ours, Ambrose Evans Pritchard, who writes for the London Telegraph, he said there is an old Russian proverb that we need to keep in mind, which says, “Russia will never be as strong as she looks. Russia will never be as weak as she looks.”

David: I think we see a normal pattern in the organization of ethnic Russians. You see that it has happened a couple of times in the satellite states.

Kevin: Lithuania, Moldova.

David: Right. And then, on top of that, you have Russia, that once those ethnic Russians are sort of organized in that particular state, and are basically looking for a stake in that place, then you have Russia that deploys their self-defense units, and basically says, “Our people have to be defended. And these people are our people.” And very interestingly, you will see Russian passports offered on a routine basis.

Kevin: And they fast-track the citizenship to Russia, so that they have citizens in all these other countries. And I guess you could reminisce and say, “Okay, what is Eastern Ukraine?” Eastern Ukraine was a part of Russia. Ukraine was a part of Russia. It was. We’re talking about Russia. Ukraine is Russia, it just was a subset of it, with a unique ethnic people-group. Now, the slaughter of 5-6 million people in Eastern Ukraine, and the replacement of those Ukrainians with ethnic Russians….

Kevin: That was under Stalin, wasn’t it?

David: Yes, the onion layers of complexity, just like you have in the West Bank, or in the Palestinian territories: Whose land is it? Well, what slice of time are we talking about? Are we talking about the last 20 years, the last 10 years, the last 50 years, the last 100 years, the last 1,000 years. This is a place that is rich with history, and rich in conflict, and to see how many wars have been fought in this particular plane, this particular wide-open space.

Kevin: So this is not just a 21st century event, is what you are saying. You were talking about the first step, you would basically have the Russian people rise up and remember their allegiance to Russia. Step two is to get them to demonstrate, or help support demonstrations from the Russian side, so that the government, in effect, whether it is Georgia, or Moldova, or Lithuania, has to actually do something about the demonstrations. That gives Russia military reason for step three, which is to go ahead and come on in, militarily.

David: And basically say, “We have to defend our people,” as an excuse to create a military presence there. And I think you could see that, you could see that in Ukraine, and it wouldn’t be a surprise at all.

Kevin: I’m going to take a risk here, Dave, because we’ve talked about this, how we can actually see the Russian side of things. Let’s look from the Russian side for just a moment.

David: Yes, but you have to understand how awkward this is for me, because I grew up in a family that is, frankly, quite anti-communist. And so the subtle suspicion that we still have as a family about Russia, I have to live with this legacy. Right or wrong, it is in my DNA to have a question mark, always, and wonder about the Russian bear. But here is where I understand and appreciate what Friedman described today as Russian insecurity, and saying, basically, wait a minute, NATO is pressing for more control, the West is pressing for more control. In fact, we were part and parcel of the overthrow of Yanukovich in Ukraine, and we just brought the West to the Russian doorstep, and all they are doing is pressing westward again. We’re pressing east, they’re pressing west, and trying to sort of counterbalance the move that we just made with the overthrow of Yanukovich.

Kevin: And when the Soviet Union fell, they lost 1,000 miles of buffer zone, which was the only protection they had when Napoleon came in and invaded, when Hitler came in and invaded. It’s that long, long range of just nothingness, I hate to say it, but that’s what really has kept them safe.

David: Again, this is really awkward for me, because on the one hand, I have what you might consider an anti-communist core, or a basic let’s assume communism is gone, and just still lingering suspicions over the Russian bear, and yet I get it. If I were in Putin’s shoes, do you know what I would be doing?

Kevin: Probably the same thing.

David: Probably the same thing, because I can’t lose that 1,000-mile cushion.

Kevin: Which means we’re going to see Belarus in the future probably realign with Russia, as well.

David: Well, this is just it. We are putting pressure there, and I don’t know why we’re putting the pressure there. It only makes sense to me in the context of destabilizing the Eurozone and putting pressure on Germany so that the U.S., the U.S. dollar, and the U.S. debt markets can reassert themselves, and again, be sort of reinforced as a go-to. When in the time of crisis, you need a stable asset, you go to the dollar. You go to the Treasury. And we are basically under-cutting, pulling the rug out from underneath, our primary competition today, in the marketplace.

Kevin: Which happens to be the euro.

David: The euro.

Kevin: Yes, that’s interesting. Well, Dave, you’ve told me many times, you couldn’t be a person who is in charge of statecraft. The lack of morality, the lack of ethics, you have to be pretty pragmatic, don’t you?

David: I think, beyond pragmatism, because I can even slip into pragmatism and find it acceptable, but you are talking about a world of duplicity. If you read Friedman’s two books, and I would strongly recommend them, I think, frankly, not only are they required on the bookshelf, they are required off the bookshelf. Get a pen, take note, learn something of the history, the nuance, of political statecraft, from a very unique perspective.

Kevin: It’s like worldwide chess game, it really is.

David: It is, and what you see, from Friedman’s perspective, is that to be good at statecraft is to really set morality aside. Again, this is the challenge. What’s right for our people may be wrong in terms of morality. Again, I’m speaking in broad generalities here, but I think, you read Friedman’s books, and you will come to sort of an icky conclusion. Some of the things that have happened, not only in the present context, but will continue to, and have, over the last 20-30 years, as you look at the machinations put in place by our state department, if you knew the details, you would cringe.

I don’t know how the history will read, but this is a very interesting time. We look forward to seeing more than just the headlines, and as and when there is more of the story, we’ll try to bring it to you through the Weekly Commentary.