The Oil and Glory Interview: Paul Kennedy

Economic historian Paul Kennedy is arguably the West's most influential scholar on the decline of great powers. When you hear or read someone talking about whether or how America is being eclipsed as the world's pre-eminent power, you are almost always getting a derivation of Kennedy's seminal 1987 work, The Rise and Fall of Great Powers.

Two narratives are currently going on. One is the global financial turmoil. The second is America’s place in the world now and going forward. To plumb those subjects and others, Oil and Glory caught up with Kennedy by phone at his New Haven, CT., home, where his grandchildren gave him a respite to talk.

Here is a related story. And the edited interview:

Q – Many experts are comparing the upcoming G20 summit with the 1933 World Economic Conference. Do you agree with the analogy?

A – You know how Truman said he’d give anything for a one-handed economist? You are going to want a one-handed economic historian. Since you already have some historians telling you about the analogies, let me just go through what is different.

This time we are talking of most of the world coming together – North-South, and East-West. Then, there was still a western-oriented discussion. The Soviet Union was in its own, closed environment. Most of the world was in its own tariff regime.

The biggest difference is the absence of anyone seeking to alter the territorial status quo. The Depression allowed extremist countries to exploit a resentful public at home. For those getting too alarmed, by 1933 you already had bad guys who were in power. In Japan you already had a regime that had invaded and controlled Manchuria. Mussolini was in power in Italy, the Nazis were already assuming autocratic power. … [Today] I don’t think anyone is busy with revengeful, pro-war militaristic feelings. Certainly not any in the G20. You don’t have a massive bifurcation between war and peace that a massive Depression can exacerbate. The world is more integrated now than then.

Q – There were 66 countries represented in 1933, and Maxim Litvinov was present from the Soviet Union

A – Don’t get bemused by the number of countries in 1933, or the word of U.S. recognition of the Soviets at the time; Roosevelt wanted to [recognize the Soviets anyway]. And really, you had just the eight or nine important countries. I’m more impressed by the representativeness in this conference than in 1933.

Q – What is your feeling how G20 will shape up?

A - Something will be done in London to satisfy everybody. The sherpas will be pleading with [Nicolas] Sarkozy to keep his mouth shut and don’t go into denouncing the dollar-denominated system. [The rise of another reserve currency] will happen anyway.

I think that this crisis, if sensibly managed, is going to be managed by eight or nine central banks. You are going to see more behind the scenes working together – Japan, China, the United States, Germany, France, Canada, the European Central Bank, India.

Q – You must get this question a lot: How does the current situation, and America’s place, stack up against the themes that you present in Rise and Fall?

A – It surprises the author that the book goes on selling and getting quotes. It is helped by the bad intervention in Iraq. So you have imperial overstretch, that if you are committed too much abroad, you are going to hurt yourself. The second part of the equation – that you need a balance between the capacity to pay on one hand, and obligations to pay on the other – has been the financial crisis. Since it started in the U.S., it is about the U.S. hurting itself with its spending policies. The knock-on effect of this crisis is that it has hurt world trade in a way one didn’t expect a year ago.

One way you can see it is the U.S. being at the fulcrum of world affairs, and likely to be for some time. But you can also see that by the end of this year, the U.S. financial situation is going to be highly overstretched. For me, the jury is out. It is as difficult as puzzling out where China is going. Is America still the vital power, or whether it is declining relatively. The debate has intensified. That fact tells me that the U.S. is not going to go away. There is a competing expectation, whether there is a world order that is more multi-polar, which I think we are moving toward, or a hub and spoke with the U.S. at the center.

Simon Johnson's Revolt

Simon Johnson, a former chief economist at the International Monetary Fund who teaches at the Massachusetts Institute of Technology, for months has been a frequently quoted voice on the recession. But now, he is verging on the type of celebrity status that, short of a Nobel or a Clark medal, is the best an economist can hope to attain.

That is, an appearance on Comedy Central.

In his March 12 appearance on Stephen Colbert, Johnson repeats a refrain that he trotted out in an interview the previous month with Bill Moyers, and in a just-released Atlantic Monthly piece titled “The Quiet Coup.” The Atlantic piece is fascinating reading.

The dual theme is that the U.S. recession makes the country look much like developing nations that experienced serious downturns over the last decade or so; and, he asserts, that the U.S. economy has been seized by a financial oligarchy that must be dethroned if the country is to right itself.

I called Johnson today to ask whether he's in open rebellion against the establishment. “No,” he protested. “I’m totally mainstream. Look, I was the chief economist of the IMF.”

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Johnson's “waking up moment,” he says, came when he returned to the IMF two years ago as chief economist (he previously was in the Fund in 2004). “When I started meeting top people in government, I realized that something was rotten in Denmark, not to pick on Denmark,” said. “There was a problem in finance. I hadn’t realized until then how bad of shape we were in.”

“The Obama administration should not be as deferential as it has been to financial interests,” Johnson said.

What is the reaction of the bankers with whom Johnson has conferred over the past decade or so? “Most of these guys agree with me completely. Not the CEOs of the top five banks. But the others think the big finance guys got too big. They realize there is a need for a change.”

The Oil and Glory interview: Joseph Stiglitz

Joseph Stiglitz stepped down as chief economist of the World Bank a decade ago after his outspoken criticism of Washington and International Monetary Fund economic policies left him afoul of powerful foes including then-Treasury Secretary Larry Summers.

Today, however, the Nobel laureate in economics is attracting attention as much of his economic doomsaying has proven correct. Among other things, Stiglitz opposed Russia's fast privatization of companies, which he said was predictably ripe for exploitation by a shrewd few who became massively wealthy; he said that laws and institutions should have been established before shedding companies.

This week, Stiglitz is in New York, talking about a United Nations Commission of Experts he has led to study the world financial crisis. The panel is issuing recommendations tomorrow. Oil and Glory caught up with Stiglitz this morning by phone from his Riverside Drive apartment.

Here is the story in Business Week.

And the edited interview:

Q – You are calling for a new global currency to replace the dollar. What is the crux of the idea?

A – The central idea is that the current system of depending on a single currency and the political and economic management of that currency is volatile. It’s inequitable because poor people are lending to the U.S. at low interest rates. In a global economy, you need a global reserve system, and that’s what we’ve proposed.

Q – Are you calling for outright replacement of the dollar, or complementing it with another reserve currency?

A – It’s a matter of moving to multiple currencies. Over time you would replace the dollar as a reserve currency. No one thinks it would happen overnight.

Q – Timothy Geithner, Ben Bernanke and President Obama himself yesterday all opposed the idea. Comment?

A – [Obama] has to say that. It doesn’t mean anything. If he were to say anything else, it would suggest he doesn’t have confidence in the dollar. It’s a little bit disappointing that he is not a little bit more open. He is worried as you might imagine that there is a bandwagon forming that there is something wrong with the dollar, with the balance sheet of the Fed. So they are putting on a brave face.

Q – You have been critical of the Geithner plan on toxic assets.

A – Very much so.

Q – Why?

A – The government is picking up the downside risk, and giving away the upside. There are incentives [for investors in the toxic assets] to delay resolving the mortgages. You don’t care about prices going down, because the government is picking up that risk, so you wait for the prices to go up. It’s totally distortive. It is designed to be a huge giveaway to the banks.

Q – You are also proposing replacing the G20 with a United Nations body. What’s this all about?

A – We are calling for a Global Economic Coordination Council. There is no rhyme or reason to the current system other than who President Bush invited to it. The new body would have more political legitimacy and a broader mandate. It could demand, for instance, that the World Bank and the IMF report to it and evaluate how they are performing.

Q – Why not fix the G20 rather than creating a new body? Is what you propose likely to happen?

A – Yes. [German Chancellor] Angela Merkel is strongly pushing the idea. People in the G20 are saying this is how we need to go.

Q – Do you feel vindicated regarding the alarms you raised in the 1990s over weaknesses in the global financial system and securitized mortgages [see here and here]?

A – Yeah. Yeah. I wish we had paid attention earlier so we didn’t have this mess. By and large most of what I said came true.

Q – One blog has dubbed you the “Chuckling Economist.” You do have humor. But I think they mean something else.

A – That’s funny. I’ll have to take a look at that.

The Oil and Glory Interview: Mikhail Gorbachev

Mikhail Gorbachev is on one of his regular swings through the West. I caught up with him in Washington, where he appeared at the Reconciliation Forum, a conference sponsored by the Americas Business Council.

This time, the trip coincides with the 20th anniversary of the first vivid signs of the coming Soviet collapse, culminating in the November 1989 fall of the Berlin Wall. Given the state of global finance, triggered by the U.S. banking crisis, Gorbachev is doing not a little bit of gloating.

Speaking before an audience today in Washington, Gorbachev called Georgian President Mikheil Saakashvili "a puppet of the United States." I asked him whether he regarded the financial crisis as a comeuppance for the U.S. He said yes, and later offered up that the worsening war in Afghanistan, too, is just desserts for Washington.

Here is the story in Business Week. Here is the transcript of the interview.

The Other Khodorkovsky Case

Much attention is focused on the latest news of dethroned Russian oligarch Mikhail Khodorkovsky, the imprisoned former CEO of Yukos Oil who is undergoing a new trial in Moscow at the moment. But a second drama is also going on in the six-year-long Khodorkovsky saga -- a $33.4 billion legal battle against Russia being staged by Yukos' divested owners.

In 2003, Russian commandos stormed Khodorkovsky's private jet after he launched a political challenge to then-President Vladimir Putin. He was sentenced to eight years in prison for fraud and tax evasion, and the Kremlin -- backed by western investment banks -- sold off highly profitable Yukos in apparently fixed auctions, mostly to the Russian oil company Rosneft. Also imprisoned was Platon Lebedev, chairman of Bank Menatep, Khodorkovsky's holding company.

Last week, Tim Osborne, a London lawyer who is representing GML, as Bank Menatep is now called, passed through Washington in what has become a routine in the shareholder effort to gather political support for their case in the U.S. and Europe. Osborne visits the State and Energy departments, with congressmen, and has testified before Congress.

Despite Khodorkovsky's imprisonment, his public relations effort remains formidable.

In London, Canadian lawyer Robert Amsterdam is Khodorkovsky's main legal spokesman, writing a much-read blog, delivering speeches and generally talking up his client's cause. Khodorkovsky and Lebedev have another, official web site, too.

In Washington, Osborne is represented by the influential lobbying firm APCO, where he and I spoke. Osborne says that Khodorkovsky is no longer a shareholder of GML, and that the legal battle has no political motive. Yet official interest is almost entirely reliant on western sympathy for the jailed former oligarch. And, if Russia happens to decide that it wants to settle -- something that Osborne doesn't expect -- GML might "do a different deal if Lebedev and Khodorkovsky were part of the equation," he says. Meaning that Khodorkovsky is still woven into the company's fabric.

Despite the loss of the Yukos oilfields, GML retains some $3 billion in assets including real estate, alternative energy investments, cash and bonds, Osborne said. But the oilfields beckon.

The GML case is complicated. It's based on a reading of the Energy Charter Treaty, an obscure agreement meant, among other things, to facilitate the movement of oil and natural gas across multiple borders. It's been signed by 51 states, including Russia.

Osborne argues that, under the treaty, GML can sue in The Hague for compensation for expropriation. GML must persuade the Permanent Board of Arbitration that it has jurisdiction. If GML wins that round, the panel will begin hearing arguments on the merits of the case.

Russia is arguing that it isn't bound to the Energy Charter because the Duma didn't ratify it. Osborne contends that the signature alone obligates, but admits that the assertion "is not a slam dunk" -- in order to make it stand, he needs officials in Brussels, Paris, London, Berlin and Washington to maintain a solid front that the Energy Charter is valid.

"It's really about pressure," Osborne says, "to try to get this raised with the Russians as often as possible by as many people as possible."

New Washington Team and a Fresh Game in Russia, Iran and the Caspian

After much gnawing over the notion, the Bush administration decided last year to issue a White House invitation to Turkmenistan President Gurbanguly Berdymukhamedov. That was wise -- this trained dentist is one of a handful of indispensable players in Eurasian energy.

Alas, the invitation was also late -- geopolitical rival Vladimir Putin had marked up a several-year-long head start of mutual state visits between Moscow and Ashgabat. And it was clumsy: the Turkmen leader was asked to come after the November presidential election. In other words, after Bush was officially a lame duck.

Understandably, Berdymukhamedov declined.

Today, the Obama administration is trying to lower the temperature in U.S. relations with Russia, what it calls a "reset." In two weeks, President Obama will meet with President Medvedev in London. As part of the warming-up exercise, Secretary of State Hillary Clinton is cobbling together a basic agreement for the presidents' perusal on replacing the Strategic Arms Reduction Treaty, which expires in December.

At the same time, the administration is forming its foreign policy team for Eurasia, the former Soviet Union, and energy. Russia has largely regained the upper hand in Central Asia and the Caucasus, which Washington had treated as a region of U.S. strategic interest since it backed construction of the Baku-Ceyhan oil pipeline connecting the Caspian and Mediterranean seas in the 1990s. Washington called it the East-West Energy Corridor.

Will the Obama administration get its timing better in terms of inviting Berdymukhamedov to the White House? If so, he might become friendlier toward the parade of U.S. diplomats and oil company executives who call and email me and others regularly with tales of woe regarding their reception in Ashgabat.

Members of the new team include Mike McFaul, the long-time Russia hand who co-wrote a prescient analysis of the Russian economy in Foreign Affairs a year ago. McFaul is running the Russian and Eurasian Affairs desk at the National Security Council. Also at the NSC is Liz Sherwood-Randall, a key architect of the U.S. embrace of Uzbekistan dictator Islam Karimov in a stint at the Pentagon during the Clinton administration, who will watch the rest of the former Soviet Union. The talk is that NSC chief James Jones will also establish a new NSC slot for global oil, but I've heard the names of no firm candidates. At the State Department, the administration is losing Steven Mann, the ultra-experienced Coordinator for Eurasian Energy Diplomacy, who was offered various posts, but instead is leaving to go into the private sector. Stepping back into Eurasian energy is Dick Morningstar, who served as Caspian czar during the 1990s before leaving to teach law at Harvard and Stanford.

In addition, there's talk in Washington of deputizing Vice President Joe Biden as a direct, regular interlocutor with Putin, along the lines of the Al Gore-Viktor Chernomyrdin Commission of the 1990s, which scored numerous successes on political and commercial issues.

In terms of energy itself, the Obama administration has signaled a break with previous administrations by naming a team focused on climate change and alternative fuels. But, in the case of Eurasia, policy can't be one-size-fits-all. Fossil fuels are king there, and Putin has recently handily bested U.S. diplomacy in that sphere. The final act of his triumph was the five-day Russian-Georgian war last August, which revived Russia's premier great power status throughout the former Soviet Union.

Recently, the U.S. has struck back with an West-East corridor. Turning the trans-regional corridor into a two-way route, West-East is a railroad route to supply U.S. troops in Afghanistan with non-lethal commercial supplies -- food, toilet paper and the like. Want to sell something that the troops can use? This is the way to get it there.

The context is the apparent U.S. loss of the Manas Air Base in Kyrgyzstan, and the uncertainty of the overland supply route from Pakistan through the Khyber Pass.

After Russia helped to persuade the Kyrgyz to eject Manas, it told Washington that it was willing to pick up some of the slack. (One alternative overland route starts in the Baltics, runs through Russia, and on through Kazakhstan and Uzbekistan to Afghanistan; traffic on this route could be expanded, Russia points out).

But the last 16 years in the region have been all about the uncanny power of alternative routes on geopolitics. So the U.S. appears to have politely declined and, in addition to the trans-Russia route, begun to run the West-East corridor through Georgia and Azerbaijan, across the Caspian to the Kazakhstan port of Aktau, then on to the Uzbekistan city of Termez and Afghanistan.

The ultimate game-changer in the region would be a U.S. diplomatic breakthrough with Iran. Clinton has tried to set the stage by inviting Iran to a March 31 conference in The Hague on Afghanistan to be attended by her and ministerial-level officials from some 75 countries.

As part of the attempted thaw with Moscow, Clinton is also trying to get Russia to help forge a breakthrough with Iran. There's talk of an Obama trip to Moscow in July.

Though Clinton is focused on other benefits to be gained by normalized relations with Iran -- mainly a better chance for Middle East peace -- such a change would also open up a new source of oil and natural gas. And that would change the geopolitics of Europe by diversifying its natural gas supply. That makes the Iran policy in part a new Russian policy.

The Game-Changing Financial Crisis

We already know how the financial crisis has changed the landscape around us. After a drumbeat of reckoning that has brought low the titans of Wall Street and Citibank, today we hear that the venerable American International Group is breaking itself up. The crisis also provided the opening for President Obama to seek all his main campaign pledges at once -- universal health care, education reform, carbon-emissions trading, a green economy, and a reordering of the tax code.

Investors, businessmen and diplomats who poured in to the Soviet Union and Eastern Europe two decades ago are familiar with how upheaval creates opportunity. Today, I have a piece in Business Week on how today's crisis has shaken up the economic equation abroad, creating potential openings where little chance of progress previously existed.

Three examples are China and climate change; Iran and Russia. On all three, the U.S. the West, and the countries themselves can or already are capitalizing on the changed atmosphere to their own advantage. In the case of the latter two, the financial crisis could alter the natural gas chessboard in Europe.

As in the case of the investment banks, the financial crisis also holds much potential peril for economies abroad. I wrote a piece over the weekend on how development banks are trying to stave off potential dangers of the crisis in Eastern Europe. The New York Times' Steve Erlanger, my former colleague in Moscow, has a good piece explaining the fears of a fresh East-West divide in Europe.