Fight Club

By Grant Williams

April 1, 2014




“I don’t want to belong to any club that will accept me as a member.”
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“In another world...”
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“This is my last election. After my election I have more flexibility.”
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“The truest wild beasts live in the most populous places.”
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“Those are my principles, and if you don’t like them ...well, I have others.”
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In November 1975, at a summit meeting in the picturesque Château de Rambouillet near Paris, leaders of the six richest industrial powers gathered to form a rather exclusive, though completely informal, little club.

Takeo Miki, Prime Minister of Japan; President Gerald Ford of the United States; the United Kingdom’s PM, Harold Wilson; West German Chancellor Helmut Schmidt; and Aldo Moro, Prime Minister of Italy, joined Valéry Giscard d’Estang, the French President, in establishing what was tagged the “Group of Six” or, as it would become known in today’s AOW (abbreviation-obsessed world), the G-6.

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A year later, upset at being left out of the club, Canada applied for and was granted membership after a month-long pledge drive in which Prime Minister Stephen Harper had to shotgun a six-pack of Molson, ride a moose bareback through the streets of Montreal, and ring the doorbell at the White House and run away.

Thus was borne the Group of Seven (G-7see how this works? Pretty clever, huh?).

The G-7 would meet informally (at enormous taxpayer expense) in a few dive bars like the Dorado Beach Resort in Puerto Rico, the Schaumburg Palace in Bonn, the Akasaka Palace in Tokyo, and the San Giorgio Maggiore in Venice; and at these gatherings the attendees would eat gourmet meals, quaff the finest wines, and discuss how to make the world a better, fairer place (right, a tweet of the menu, sent out somewhat ill-advisedly by David Cameron from the latest G-8 gathering, in June 2013).

Your tax dollars hard at work.

Anyway, the little club remained closed to outsiders until, in 1997, UK PM Tony Blair and US President Bill Clinton invited Russian President Boris Yeltsin to pop along to Naples to observe the G-7 on the understanding that full membership in the club would be forthcoming.

To nobody’s surprise, in 1998 Russia participated in its first informal gathering, and, hey presto, the club was now....? Come on....? Yes, you’ve got it, the G-8!

Among its members, in 2012 the G-8 accounted for 50.1% of nominal global GDP:

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Source: United Nations


The G-8 essentially encompasses the top third of the world, as you can see from this map (the EU is included on the fringes of the G-8, as they are represented at each meeting though they cannot host or chair. The EU essentially applies the same policy as my mother used to when she wouldn’t let me go out and play with my friends unless I took my little brother along with me):

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Source: Wikipedia


However, even a cursory glance at the list of the world’s largest economies is enough to make glaringly obvious the elephant in the room: the G-8 is actually the “G-8 of the top 11,” since China, Brazil, and India actually occupy places 2, 7 and 10 on the list of the world’s largest economies. Poor old Canada has been pipped by India, though it has a healthy lead over #12, Australia.

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(God forbid the Aussies ever make it into the club. The menu for any summit hosted by them would look altogether different than that tweeted by the clueless Cameron, though the dress codethongs & boardies — would at least mean none of those group photos of uncomfortable-looking men in expensive suits.)

In order to counter this glaring imbalance, both the UK and France have suggested that the group be expanded to include what has been labeledThe Outreach Five.”

Seriously? That sounds like the worst Motown band of all time; but everything MUST have a cute little moniker, so this lot are the O-5, and they have attended several meetings (purely as observers, of course).

The O-5 are:

China, Brazil, India, Mexico, and South Africa.

Now, the first three on that list are self-explanatory, and Mexico — with a GDP of $1.1 trillion (which puts it at #14 on the list) — has a pretty solid case for inclusion, but South Africa?

A GDP of $384 billion (which puts it at #29, just behind Thailand, Poland, Belgium and Iran) is something of a stretch, although... I suppose Capetown and the Kruger National Park DO make for great venues for “informal gatherings.”

Cynical? Moi?

Anyway, amidst the ongoing turmoil in and around Ukraine and in amongst the threats and counter-threats this past week, was a movement, led by Britain’s David Cameron, to punish Russia’s President, Vladimir Putin, by telling him he was no longer part of this very exclusive club:

(UK Daily Telegraph): The Group of Seven big economies (G7) should cancel a meeting with Russia in June, British Prime Minister David Cameron said on Monday as world leaders kicked off a two-day nuclear security summit in The Hague.

“We should be clear there’s not going to be a G8 summit this year in Russia,” Mr Cameron told reporters ahead of a hastily-convened meeting with other leaders of the G7 — a group of industrialised nations that excludes Russia, which joined in 1998 to form the G8.

The other six members of the G-7 rallied round Cameron and agreed that the upcoming summit in Sochi, scheduled for June, would be moved to the bright lights of Brussels, and Russia would be excluded — though they were at pains to point out that the exclusion would be temporary.

Having been slapped across the back of the legs, it was time for Putin to make the promises necessary to reingratiate himself with the giants of the G-7, like François Hollande, who talked tough as Russian troops casually wandered into sensitive military installations in Crimea, meeting precisely zero resistance:

(Reuters): “We have to also think about other sanctions if there is an escalation,” French President Francois Hollande said before the summit.If there are illegitimate claims, if there are troop operations, if there are threats, then there will be other sanctions.”

However, just when the G-7 had Vlad the Invader right where they wanted him, he outmaneuvered them in a manner that could potentially shift those sands I was talking about in previously unfathomable ways.

(Get ready for handshakes between a bunch of important yet unfamiliar people, folks. Lots of ‘em.)

First up was a move by Russia towards closer alignment with one of the glaring omissions from the G-8 — and the undisputed leader of the O-5 China:

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(Reuters): When President Vladimir Putin signed a treaty this week annexing Crimea to great fanfare in the Kremlin and anger in the West, a trusted lieutenant was making his way to Asia to shore up ties with Russia’s eastern allies.

Forcing home the symbolism of his trip, Igor Sechin gathered media in Tokyo the next day to warn Western governments that more sanctions over Moscow’s seizure of the Black Sea peninsula from Ukraine would be counter-productive.

The underlying message from the head of Russia’s biggest oil company, Rosneft, was clear: If Europe and the United States isolate Russia, Moscow will look East for new business, energy deals, military contracts and political alliances.

The Holy Grail for Moscow is a natural gas supply deal with China that is apparently now close after years of negotiations. If it can be signed when Putin visits China in May, he will be able to hold it up to show that global power has shifted eastwards and he does not need the West.

“The worse Russia’s relations are with the West, the closer Russia will want to be to China. If China supports you, no one can say you’re isolated,” said Vasily Kashin, a China expert at the Analysis of Strategies and Technologies (CAST) think tank.

Some of the signs are encouraging for Putin. Last Saturday China abstained in a U.N. Security Council vote on a draft resolution declaring invalid the referendum in which Crimea went on to back union with Russia.

Although China is nervous about referendums in restive regions of other countries which might serve as a precedent for Tibet and Taiwan, it has refused to criticize Moscow.

The possibility of that gas deal getting done drifted across the media without really making any kind of a mark, but the numbers around it are worth highlighting.

Gazprom, the state-owned gas firm, plans on shipping 38 billion cubic metres of natural gas to China every year beginning in 2018.

Trade between the two nations grew 8.2% in 2013 to $8.1 billion, but this is a tiny number in the scheme of things and only enough to give Russia seventh place on the list of China’s largest export markets. Russia fares even worse in terms of trade going in the opposite direction, as they languish outside the top 10 countries sending goods into the Middle Kingdom.

This will change.

Count on it.

It’s safe to say that, going forward, this mushrooming trade will NOT be conducted in US dollars, but rather via the recent bilateral direct-trade agreements signed between the two Eastern superpowers to enable deals to be struck directly in yuan and rublesbypassing the US dollar.

SIDETRACK ALERT!


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Incidentally, this agreement with Russia is just one of a slew of similar pacts made by the Chinese in recent months; and just this week there were yet more announcements of important tie-ups between China and her trading partners that will bring the isolation of the US dollar inching closer still:

(Bloomberg): Germany’s Bundesbank and the People’s Bank of China agreed to cooperate in the clearing and settling of payments in renminbi, paving the way for Frankfurt to corner a share of the offshore market.

The central banks signed a memorandum of understanding in Berlin today, when Chinese President Xi Jinping met German Chancellor Angela Merkel, the Frankfurt-based Bundesbank said in an e-mailed statement....

China is loosening exchange-rate controls in an overhaul of its $9 trillion economy. The accord follows the establishment of a 350 billion-yuan ($56 billion) and 45 billion-euro ($62 billion) bilateral swap line between the PBOC and the ECB in October, bolstering access to trade finance in the euro area...

Elsewhere, the UK had a similar announcement to make:

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(BBC): The Bank of England has agreed a deal with the People’s Bank of China to make London a hub for Chinese currency dealing.

The memorandum of understanding, to be signed on Monday, sets out settlement and clearing arrangements for the renminbi, or yuan, in London.

The signing is expected to be followed by the appointment of a London clearing bank for yuan.

62% of yuan payments outside of China already take place in London.

Following an agreement with Beijing last year, London asset managers are the only ones in the West able to invest directly in Chinese stocks and shares in yuan.

Last year the UK and Chinese central banks signed a three-year currency swap arrangement worth 200bn yuan which allows them to swap currencies and can be used by firms to settle trade in local currencies rather than in US dollars.

Amazingly enough, the yuan — a currency which operates within a fixed band and under strict government control — has become the second most-used currency in global trade finance, overtaking the euro last October.

My good friend Simon Hunt — a man who is as clued in as anybody I know about what is really going on in China — has been monitoring developments in Chinese yuan-based trade very closely, and I used his fantastic database to create the chart below for a panel I spoke on in Australia late last year.

The chart shows the dramatic acceleration of global trade which is being conducted in yuan. Amazingly enough, from a starting base of near zero in 2009, the yuan now accounts for an eye-watering 17% of global trade.


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Source: Simon Hunt Strategic Services


But after that little detour into the weeds of China’s currency strategy, it’s time to return to our regularly scheduled programming and our friends in Russia.

When we left Vlad & his chums, Russia had just announced a big natural gas deal with the Chinese; and now, as we rejoin our story, we find Mr Putin wasting no time at all in cozying up to another large nation which has been conspicuously absent from any club beginning with GIndia:

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(Reuters): Rosneft, the world’s top listed oil producer by output, may join forces with Indian state-run Oil and Natural Gas Corp to supply oil to India over the long term, the Russian state-controlled company said on Tuesday.

Rosneft CEO Igor Sechin, an ally of President Vladimir Putin, traveled to India on Sunday, part of a wider Asian trip to shore up ties with eastern allies at a time when Moscow is being shunned by the West over its annexation of Crimea.

With EU nations threatening to cut their reliance on Russian oil and gas, Russian officials have started to look East.

Rosneft said it had also agreed with ONGC they may join forces in Rosneft’s yet-to-be built liquefied natural gas plant in the far east of Russia to the benefit of Indian consumers....

The company said Sechin and the head of Indian conglomerate Reliance Industries also met and discussed potential cooperation in developing Russia’s offshore resources, viewed by Moscow as a source of future oil production growth.

India was the last country in Sechin’s Asian trip, where he also visited Japan, South Korea and Vietnam....

Russia is trying to diversify its energy flows away from its core European markets, with Rosneft leading the race with plans to triple oil flows to China to over 1 million barrels per day in coming years.

Russia, China, and India, along with Brazil, would make for a very powerfulinformal allianceindeedthrow in our friends in Mexico and the likes of Indonesia, Japan, Pakistan, Bangladesh, and Nigeria (the countries filling out the rest of the slots in the list of the world’s most-populous nationsex-the USAall of whom have natural alliances with the rest of the group) and you have a body which represents roughly 30% of global GDP. Even more importantly, they contain 42% of the world’s population, and THAT is where whatever growth the world manages to generate in the coming years will be coming from.
Let’s call them the GoP (the Group of People):

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Source: United Nations/Census Data


A world in which those countries were aligned would look very interesting indeed:


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Note the key footholds in both South America and Africa.

This is the nature of the current shifting of the political sandscape.

Countries are maneuvering for a place in the post-US-dollar world they see rushing towards them as US hegemony comes under increasing pressure, both from inside its borders (it has the largest deficit in world economic history) and abroad (major powers are aligning with the explicit purpose of reducing dependence on the increasingly shaky US dollar).

Make no mistake: should the Chinese ever announce some kind of commodity-backed currency (and that commodity would most likely be gold), or should the GoP announce a central peg of their own around which they could (and would) all trade, they would supplant the dollar as the world’s reserve currency, and it would be game over for the US.

Nothing would please Russia more, and China would shed not a tear.

The parlour games being played around Ukraine are just one example of the political sandscape shifting in ways both obvious and barely perceptible. Elsewhere, very quietly, the ground beneath the political incumbency is becoming more unstable by the day.

Last week in France, Marine Le Pen’s Front National secured what sounds at first glance like a poor result in local elections, but the far-right party’s garnering of 5% of the total votes cast — while fielding candidates in fewer than 600 of the country’s 36,000 municipalitiesshook the French political establishment to its foundations:

(UK Guardian): The FN secured one mayor elected outright in the northern town of Hénin-Beaumont, a former coalmining area traditionally in Socialist hands, and enough votes to take part in the second-round runoff in nearly 230 municipalities. The FN goes into next Sunday’s vote ahead in a number of major and symbolic towns and cities including Avignon, Perpignan and Béziers.

Commentators said the country had been washed by a wave of “bleu Marine” (a play on the FN leader’s name and the colour navy blue). Le Monde described it as a “political earthquake”.

“The new age of the extreme rightread the headline in the left-leaning Nouvel Observateur magazine. Even if the FN only ends up with a handful of town halls, it’s certainly a historic performance and success for Le Pen’s party.

“The FN appears more and more clearly as an alternative, capable of taking responsibility and managing the affairs of a community, and this is the greatest success of Marine Le Pen.”

France’s biggest selling newspaper, Ouest-France, said the FN was now the “third political force” in the country.

I wrote recently about the potential for some seismic changes in the European political landscape in “Behold, Politics,” and the votes cast for Marine Le Pen’s Front National last week are the first concrete sign of those changes beginning to take place.

Elsewhere this past week in Europe, there was another sign of things to come — and this time it played out in the UK as Deputy Prime Minister Nick Clegg of the pro-European Liberal Democrats threw down the gauntlet to the staunchly anti-European Nigel Farage of UKIP to join him in the first of two live televised debatesostensibly on whether the UK should remain part of Europe, but in reality a desperate attempt to both blunt the challenge presented by Farage’s surging popularity and at the same time restore some credibility to Clegg’s ailing junior coalition partners.

As regular readers will know, Farage is the very embodiment of the anti-establishment movement. A pint-drinking, chain-smoking everyman who looks like he’d be more at home debating the issues of the day in a London pub than in the European parliament, Farage spent 20 years as a commodity trader and is one of the few politicians amongst the current crop to have a background in the private sector.

Clegg, on the other hand, is the archetypal politician: public school and Oxbridge-educated, related to aristocracy (albeit of the Russian variety), and a man who has been involved in politics for his entire adult life.

The debate was fascinating to watch.

Farage’s bluster and soapbox oratory versus the polished politics of Clegg. Farage’s passion and intensity versus Clegg’s measured tone.

In the aftermath, the political pundits had their say on who emerged victorious, and they were unanimous:

Mary Riddell: No minds will have been changed. The Faragistes who see their champion as the battler against faceless, bloodless, heartless power-brokers will be happy. But Nick won. As he should have. Easily.

Dan Hodges: Nick Clegg kept calm and stuck to the facts. And it became clear facts are Nigel Farage’s enemy. He became increasingly angry and bombastic.

By the end Clegg was engaging easily and effectively with his audience. Nigel Farage appeared to be cracking jokes to amuse only himself.

His explanation of his reason for employing his wife was especially embarrassing. Fortunately, by that point, few people in the audience appeared to be listening to him.”

Toby Young: Overall, Clegg came across as more in command of the detail (possibly because he’d been briefed by the civil service beforehand) and for that reason I think he edged it.... Farage will certainly have pleased his supporters, but not much more than that.”

So... a humiliating public mauling of poor Nigel. But here’s where it gets interesting:

(UK Daily Telegraph ): In the Telegraph’s poll more than 81 per cent of readers said they thought Nigel Farage had won the debate.

A YouGov poll found that 57 per cent of people thought Mr Farage won the debate.

This is perhaps the most important point.

Regardless of what those who spend their lives around politics believe, the public is ready for change, and they will be very hard to sway unless somehow they feel that quality of their lives can improve drastically — and that is not about to happen.

Measuring political performance by traditional metrics is a waste of time in a world where the people will simply vote for change.

We saw it in Greece, we saw it in Spain, and now we’ve seen it in France. Next up, European elections in six weeks’ time.

Public disaffection with the world’s leaders is growing by the day — you can feel it — and nowhere was that made more apparent recently than in Holland last week when Barack Obama, halfway through his tour of Europe, took to the stage alongside Dutch PM Mark Rutte.

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Obama, so used to adoring hordesnot only at home, but wherever in the world he is reading a teleprompter giving a soaring lesson in oratory — was presented with the answer to the age-old question about the sound of one hand clapping after he concluded, at a press conference, remarks espousing the USA’s core values” of privacy, the rule of law, and individual rights. (Click HERE to watch the most awkward end to a speech since Sally Field accepted the Oscar for Best Actress in 1985.)

People can’t even bring themselves to be polite to the incumbent political class anymorenot even to a rock star like Obama.

Make no mistake, from Ukraine to Holland, from the United Kingdom and France to Greece, Italy, and beyond, politicians are under immense pressure to “do somethingin order not to lose their grasp on power.

There was case in point just this week when embattled Turkish PM Tayyip Erdogan blocked the access of his electorate to both Twitter and YouTube. The reason? Well, that would be because the social media sites leaked a recording of his government planning a false-flag war with Syria to galvanize support behind him.

Unable to deny the authenticity of the recording, Erdogan went on the offensive, denouncing the leaks as an “act of terrorism” against Turkey. (Where have we heard THAT phrase before?)

And you wonder WHY people are tiring of the incumbent political class?

But that kind of thing is the domain of dictators and tyrants, right? I mean it’s not as though Western leaders would engage in baseless fearmongering to try to demonize a perceived enemy in order to try to sway public opinion...

(UK Daily Telegraph): Somewhere on the landscape behind that line of trees, or hidden by that riseWestern governments believe that Russia is gathering an army fully equipped to invade eastern Ukraine.

President Barack Obama gave a warning on Friday that Russian troops were “massing along that border”, adding: “It may simply be an effort to intimidate Ukraine — or it may be that they’ve got additional plans.”

The Americans have not named specific locations, but it appears that intelligence analysts have concluded that Russian forces are gathering the three elements needed for a sustained offensiveartillery, supplies and communicationsunder the cover of military exercises.

The most conservative American assessments, apparently based on satellite data, say that Russia has massed between 40,000 and 50,000 troops within striking distance of Ukraine, including those already in Crimea. That total has apparently risen from 30,000 only a week ago.

But the Russian invasion forceif it is here — is very well camouflaged. As the fog lifted, murky shapes were revealed as trees, houses and old Lada cars. No tanks emerged from the gloom, no suspicious flights of helicopters passed overhead, and no green painted trucks rumbled down the roads.

In a 200 mile trip along the border region, the only Russian armour on display in this flat landscape was of a much older vintage, and stood on plinths in town squares.

It’s tough to hide 40,000 troopsnot to mention the accessories they tend to bring with them.

The interesting shift here, however, is the tone of the press coverage, which has shifted noticeably to the inquisitorial since the embarrassment of Iraq and the WMD fallacy. A skeptical and emboldened press is perhaps the most dangerous opponent for embattled governments right now.

Men like Putin understand the ruthlessness required to keep an iron grip on power, and the press is largely an irrelevance to them, while those in the West prefer the velvet glove approachwriting checks to their electorate, taking the softly, softly approach with their foreign policy, and constantly courting the press desperate for approval (echoes of Sally Field once again).
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Russia’s temporary exclusion from the G-8/G-7 and the accompanying sanctions are designed to send a message to Vladimir Putin and force him to the negotiating table over Crimea; but though the sanctions imposed will certainly cause some discomfort in Russia, the Western press is already questioning the validity of moves which impact individual companies such as Rossiya Bank and Rusal (the world’s largest aluminium company, which teeters on the brink of insolvency in the wake of the recently imposed sanctions):

(FT): Rusal warned of “material uncertaintyover its future as the world’s largest aluminium producer reported a $3.2bn loss in its worst annual performance since 2008.

The Russian aluminium group, controlled by Oleg Deripaska and listed in Hong Kong, confirmed that it had asked lenders to delay a repayment due next month on part of its $10bn net debt pile.

It said that it expected to complete long-running negotiations with its banks to amend the terms of its debt, but warned that there could be no certainty it would succeed.

Management acknowledge that these conditions result in the existence of a material uncertainty with respect to the group’s ability to continue as a going concern,” the company said. Rusal’s auditor, KPMG, included an “emphasis of matterparagraph in its report on the company’s earnings statement to draw attention to the issue.

Expect no such compassion from Putin. Instead, Russia’s leader is already working to tighten his alliances and broaden his power base amongst the GoP.

Many commentators point to the potentially devastating effect on Russia’s economy that the sanctions put in place by the EU and the US might have, whilst others emphasise Russia’s moves to strengthen their ties to the East and reduce reliance upon their Western trading partners.

One thing is certain: the combination of Putin’s hardline approach and refusal to play by Western rules, along with the West’s desperation not to take any action without the explicit backing of their electorates, means that, for now at least, Putin’s path through what could have been a tricky bracket has been very smooth indeed.

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(Thanks, Mikey)

How this plays out is anybody’s guess right now, but this much I know: one should NEVER underestimate the ability of the average Russian to bear hardship, nor should one ever underestimate the West’s lack of fortitude once any situation becomes politically unpalatable.

I also know that everywhere you look around the world, electorates are just itching to vote for change and to hand power to new parties and new leaders, many of which are extreme in nature and possess the ability to seriously upset the status quo.

What else do I know? Well, I know that neither Russia nor China feels the US’s place at the top of the food chain is either justified or indefinitely sustainable, and they both smell weakness.

Ukraine is just one in a series of situations which will shape and reshape the geopolitical sandscape in coming decades, and the squabbles amongst the G-8/G-7 threaten to strengthen existing alliances and forge new ones in the crucible of conflict.

Pay very close attention to the sand beneath your feet, folks. It is unstable and unpredictable, and that is the most dangerous combination of allask Vlad.