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Guest Post: Why The West's Financial Warfare Against Russia May Lead To The Real Thing
Authored by Harold James, originally posted at European Voice,
The revolution in Ukraine and Russia's illegal annexation of Crimea have generated a serious security crisis in Europe. But, with Western leaders testing a new kind of financial warfare, the situation could become even more dangerous.
A democratic, stable, and prosperous Ukraine would be a constant irritant – and rebuke – to President Vladimir Putin's autocratic and economically sclerotic Russian Federation. In order to prevent such an outcome, Putin is trying to destabilise Ukraine, by seizing Crimea and fomenting ethnic conflict in the eastern part of the country.
At the same time, Putin is attempting to boost Russia's appeal by doubling Crimeans' pensions, boosting the salaries of the region's 200,000 civil servants, and constructing large, Sochi-style infrastructure, including a $3 billion (€2.2bn) bridge across the Kerch Strait. This strategy's long-term sustainability is dubious, owing to the strain that it will put on Russia's public finances. But it will nonetheless serve Putin's goal of projecting Russia's influence.
For their part, the European Union and the United States have no desire for military intervention to defend Ukraine's sovereignty and territorial integrity. But verbal protests alone would make the West look ridiculous and ineffective to the rest of the international community, ultimately giving rise to further – and increasingly far-ranging – security challenges. This leaves Western powers with one option: to launch a financial war against Russia.
As the former US Treasury official Juan Zarate revealed in his recent memoir “Treasury's war”, the US spent the decade after the 11 September 2001 terrorist attacks developing a new set of financial weapons to use against the United States' enemies – first Al Qaeda, then North Korea and Iran, and now Russia. These weapons included asset freezes and blocking rogue banks' access to international finance.
When the Ukrainian revolution began, the Russian banking system was already over-extended and vulnerable. But the situation became much worse with the toppling of Ukrainian President Viktor Yanukovych and the annexation of Crimea, which triggered a stock-market panic that weakened the Russian economy considerably and depleted the assets of Russia's powerful oligarchs.
In a crony capitalist system, threatening the governing elite's wealth rapidly erodes loyalty to the regime. For the corrupt elite, there is a tipping point beyond which the opposition provides better protection for their wealth and power – a point that was reached in Ukraine as the Maidan protests gathered momentum.
Putin's public speeches reveal his conviction that the EU and the US cannot possibly be serious about their financial war, which, in his view, would ultimately hurt their highly complex and interconnected financial markets more than Russia's relatively isolated financial system. After all, the link between financial integration and vulnerability was the main lesson of the crisis that followed the collapse of US investment bank Lehman Brothers in 2008.
In fact, Lehman was a small institution compared to the Austrian, French, and German banks that have become highly exposed to Russia's financial system through the practice of using deposits from Russian companies and individuals to lend to Russian borrowers. Given this, a Russian asset freeze could be catastrophic for European – indeed, global – financial markets.
Putin's plan for destabilising Ukraine is thus two-pronged: capitalise on linguistic or national animosities in Ukraine to foster social fragmentation, while taking advantage of Western – especially European – financial vulnerabilities. Indeed, Putin sometimes likes to frame it as a contest pitting him against the power of financial markets.
The arms race that preceded the First World War was accompanied by exactly the same mixture of military reluctance and eagerness to experiment with the power of markets. In 1911, the leading textbook on the German financial system, by the veteran banker Jacob Riesser, warned: “The enemy, however, may endeavour to aggravate a panic...by the sudden collection of outstanding claims, by an unlimited sale of our home securities, and by other attempts to deprive Germany of gold. Attempts may also be made to dislocate our capital, bill, and securities markets, and to menace the basis of our system of credit and payments”.
Politicians began to grasp the potential consequences of financial vulnerability only in 1907, when they faced a financial panic that originated in the US but that had serious consequences for continental Europe (and, in some ways, prefigured the Great Depression). That experience taught every country to make its own financial system more resilient to ward off potential attacks, and that attacks could be a devastating response to diplomatic pressure.
That is exactly what happened in 1911, when a dispute over control of Morocco spurred France to organise the withdrawal of 200 million Deutsche Marks invested in Germany. But Germany was prepared and managed to ward off the attack. Indeed, German bankers proudly noted that the crisis of confidence hit the Paris market much harder than markets in Berlin or Hamburg.
Countries' efforts to protect their financial systems often centred on increased banking supervision and, in many cases, enlarging the central bank's authority to include the provision of emergency liquidity to domestic institutions. Subsequent debates about financial reform in the US reflected this imperative, with some of the US Federal Reserve's founders pointing out the military and financial applications of the term “reserve”.
At that time, financial-reform efforts were driven by the notion that building up financial buffers would make the world safe. But this belief fuelled excessive confidence among those responsible for the reforms, preventing them from anticipating that military measures would soon be needed to protect the economy. Instead of being an alternative to war, the financial arms race made war more likely – as it may well be doing with Russia today.
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Newsflash, China is on the US petro-dollar team, they have a $600B a year dollar surplus, pricing oil in dollars is a wet dream for China, it makes them very competitive in the international arena.
Without the petrodollar China would have far less leverage with Russia.
They will play both sides until cleaned out.
"The revolution in Ukraine"?
Mr. James, you must be joking. Hitler`s taking power was more pacific compare to this. And all we know the end that Hitler power let to.
More Obongo/Goebbels propaganda... total bullshit. A democratic, stable, and prosperous Ukraine would be a constant irritant – and rebuke – to President Vladimir Putin's autocratic and economically sclerotic Russian Federation.
RIGHT!!! Like Ukraine was stable and prosperous... they have been on the brink of total insolvency for years... and the US fomenting a coup by NeoNazis did little for "stability"... eh? And the most recent OBVIOUS dirty trick/false flag was the threatening of the jew... NOT by Obunga's NeoNazi pals, but by the OTHER SIDE!!! Brennan has his fingerprints all over THAT load of rat shit...
And just a little FYI, BathHouse Barry: China, India and Germany are on Russia's side in this... you are about to be humiliated once again... ditto our poor country... tell Jobba Janet Yellen to gird her loins.
Not so sure Germany is, but good post never the less.
The Obama administration has already indicated that the Russian troop build-up is nothing to be concerned about... http://www.youtube.com/watch?v=lLjfxIAzqkg
Nice slant, I dont agree at all, Putin aint the bad guy, the EU is the beggar thief thug and Obama and Yellen are co-accomplice getaway drivers-waiting in the car like cowards.
"This strategy's long-term sustainability is dubious, owing to the strain that it will put on Russia's public finances"
Great quote, I think I've heard several US financial officials say the exact same thing not about crimea but nearly all of our federal "programs" are totally unsustainable.
Like Greece spending is sustainable?
BTW the "cost" is miniscule in the big picture of Russia petro assets and protecting ethnic Russians.
The EU bankers are planning a $25B + debt bomb for Ukraine the first year of takeover, and they'll dump debt on that Kyiv mob until they have nothing left to leverage, then forceclose.
Reselling Communism to living already burned ex-communists has got to be a tough sell, but German bankers have managed to do it.
Your powers of analogy make me grin. And the rest is spot on, thank you.
the US spent the decade after the 11 September 2001 terrorist attacks...
Oh yes. 9/11 was an attack by some guy in a cave in Afghanistan</sarcasm>
"BEST 9/11 DOCUMENTARY EVER!(FULL MOVIE)"
https://www.youtube.com/watch?v=QU961SGps8g&feature=youtu.be
True, but I beleive he had cable TV and the internet in that cave.
The only fascism I see is that which I observe in America - which is a police state.
Another article with more of the same in the MDM: that Russia is the 'bad guy'. What BS!
Neo-Nazis in Kiev is much better and only at 5 billion dollars.
Hello, Detroit, you'll have wait another year because the US spent 5 billion dollars on the Nazis. Maybe next year.
Stopped reading right here.
They had their entire glorious past to build their strong and proud nation state. Where is it? Ah, I get it: evil Russians, evil Poles, evil Turks, evil Jews, in short all non-Ukrainians - all of them do everything they do with one and only purpose in life: to prevent the Ukraine from spreading its wings.
All capable Ukranians have been throughout history leaving the country. What's left is a "community" built on the following ethos: "Stepan, our neighbor is trying to crawl out of the crap we're all sitting in. — He forgot our history! We have to drag him back in quick."
russia really needs a good slap.
at the end of world war 2, since soviets were combating the nazi's, west was never given a good chance to slap the bullshit off of their face. west was able to discipline the japanese and the germans (both of which never have even though about fucking around again might i remind you all), but not able to discipline the soviets. this time around, i really hope small-man syndrome putin (at a hefty 5ft 6in, much smaller than even the average full grown male in the west) just fucks around just a bit more with ukraine so that theres cause to discipline those damn soviets.
You're an idiot, right?
It reads kind of violent psychosexual impulses/"worldview" here. Be very glad that you're not its spouse. Or neighbor.
Have no fear, Russia has received plenty of slaps, they were militarily attacked on their soil by the Brits and the Yanks, yes, the US army landed at Vladivostok in the1920s. Russia was promised financial aid in return for defeating Germany, which they never received. If you like to read, Tragedy and Hope, otherwise watch Oliver Stone's History of America. And don't worry about the Chinese, they've been slapped around plenty too.
The author, Harold James, seems to be a brainwashed, mediocre writer or a propagandist. I don't read European Voice but I think it's probably a propaganda apparatus judging by the name.
Stopped reading at the end of the first paragraph, absolute BS.
EU and US sponsored propaganda.
Everybody with more than half a brain knows and understands the why's and wherefore's of the problems in Ukraine.