by Michael Hudson
Part 3 - Oil diplomacy and America’s dream for post-Soviet Russia
The expectation of Gorbachev and other Russian officials in 1991 was that their economy would turn to the West for reorganization along the lines that had made the U.S., German and other economies so prosperous. The mutual expectation in Russia and Western Europe was for German, French and other investors to restructure the post-Soviet economy along more efficient lines.
That was not the U.S. plan. When Senator John McCain called Russia “a gas station with atom bombs,” that was America’s dream for what they wanted Russia to be – with Russia’s gas companies passing into control by U.S. stockholders, starting with the planned buyout of Yukos as arranged with Mikhail Khordokovsky. The last thing that U.S. strategists wanted to see was a thriving revived Russia. U.S. advisors sought to privatize Russia’s natural resources and other non-industrial assets, by turning them over to kleptocrats who could “cash out” on the value of what they had privatized only by selling to U.S. and other foreign investors for hard currency. The result was a neoliberal economic and demographic collapse throughout the post-Soviet states.
That was not the U.S. plan. When Senator John McCain called Russia “a gas station with atom bombs,” that was America’s dream for what they wanted Russia to be – with Russia’s gas companies passing into control by U.S. stockholders, starting with the planned buyout of Yukos as arranged with Mikhail Khordokovsky. The last thing that U.S. strategists wanted to see was a thriving revived Russia. U.S. advisors sought to privatize Russia’s natural resources and other non-industrial assets, by turning them over to kleptocrats who could “cash out” on the value of what they had privatized only by selling to U.S. and other foreign investors for hard currency. The result was a neoliberal economic and demographic collapse throughout the post-Soviet states.
In some ways, America has been turning itself into its own version of a gas station with atom bombs (and arms exports). U.S. oil diplomacy aims to control the world’s oil trade so that its enormous profits will accrue to the major U.S. oil companies. It was to keep Iranian oil in the hands of British Petroleum that the CIA’s Kermit Roosevelt worked with British Petroleum’s Anglo-Persian Oil Company to overthrow Iran’s elected leader Mohammed Mossadegh in 1954 when he sought to nationalize the company after it refused decade after decade to perform its promised contributions to the economy. After installing the Shah whose democracy was based on a vicious police state, Iran threatened once again to act as the master of its own oil resources. So it was once again confronted with U.S.-sponsored sanctions, which remain in effect today. The aim of such sanctions is to keep the world oil trade firmly under U.S. control, because oil is energy and energy is the key to productivity and real GDP.
In cases where foreign governments such as Saudi Arabia and neighboring Arab petrostates have taken control, the export earnings of their oil are to be deposited in U.S. financial markets to support the dollar’s exchange rate and U.S. financial domination. When they quadrupled their oil prices in 1973-74 (in response to the U.S. quadrupling of its grain-export prices), the U.S. State Department laid down the law and told Saudi Arabia that it could charge as much as it wanted for its oil (thereby raising the price umbrella for U.S. oil producers), but it had to recycle its oil-export earnings to the United States in dollar-denominated securities – mainly in U.S. Treasury securities and U.S. bank accounts, along with some minority holdings of U.S. stocks and bonds (but only as passive investors, not using this financial power to control corporate policy).
The second mode of recycling oil-export earnings was to buy U.S. arms exports, with Saudi Arabia becoming one of the military-industrial complex’s largest customers. U.S. arms production actually is not primarily military in character. As the world is now seeing in the kerfuffle over Ukraine, America does not have a fighting army. What it has is what used to be called an “eating army.” U.S. arms production employs labor and produces weaponry as a kind of prestige good for governments to show off, not for actual fighting. Like most luxury goods, the markup is very high. That is the essence of high fashion and style, after all. The MIC uses its profits to subsidize U.S. civilian production in a way that does not violate the letter of international trade laws against government subsidy.
Sometimes, of course, military force is indeed used. In Iraq, first George W. Bush and then Barack Obama used the military to seize the country’ oil reserves, along with those of Syria and Libya. Control of world oil has been the buttress of America’s balance of payments. Despite the global drive to slow the planet’s warming, U.S. officials continue to view oil as the key to America’s economic supremacy. That is why the U.S. military is still refusing to obey Iraq’s orders to leave their country, keeping its troops in control of Iraqi oil, and why it agreed with the French to destroy Libya and still has troops in the oilfields of Syria. Closer to home, President Biden has approved offshore drilling and supports Canada’s expansion of its Athabasca tar sands, environmentally the dirtiest oil in the world.
Along with oil and food exports, arms exports support the Treasury-bill standard’s financing of America’s overseas military spending on its 750 bases abroad. But without a standing enemy constantly threatening at the gates, NATO’s existence falls apart. What would be the need for countries to buy submarines, aircraft carriers, airplanes, tanks, missiles and other arms?
As the United States has de-industrialized, its trade and balance-of-payments deficit is becoming more problematic. It needs arms export sales to help reduce its widening trade deficit and also to subsidize its commercial aircraft and related civilian sectors. The challenge is how to maintain its prosperity and world dominance as it de-industrializes while economic growth is surging ahead in China and now even Russia.
America has lost its industrial cost advantage by the sharp rise in its cost of living and doing business in its financialized post-industrial rentier economy. Additionally, as Seymour Melman explained in the 1970s, Pentagon capitalism is based on cost-plus contracts: The higher military hardware costs, the more profit its manufacturers receive. So U.S. arms are over-engineered – hence, the $500 toilet seats instead of a $50 model. The main attractiveness of luxury goods after all, including military hardware, is their high price.
As the United States has de-industrialized, its trade and balance-of-payments deficit is becoming more problematic. It needs arms export sales to help reduce its widening trade deficit and also to subsidize its commercial aircraft and related civilian sectors. The challenge is how to maintain its prosperity and world dominance as it de-industrializes while economic growth is surging ahead in China and now even Russia.
America has lost its industrial cost advantage by the sharp rise in its cost of living and doing business in its financialized post-industrial rentier economy. Additionally, as Seymour Melman explained in the 1970s, Pentagon capitalism is based on cost-plus contracts: The higher military hardware costs, the more profit its manufacturers receive. So U.S. arms are over-engineered – hence, the $500 toilet seats instead of a $50 model. The main attractiveness of luxury goods after all, including military hardware, is their high price.
This is the background for U.S. fury at its failure to seize Russia’s oil resources – and at seeing Russia also break free militarily to create its own arms exports, which now are typically better and much less costly than those of the U.S. Today Russia is in the position of Iran in 1954 and again in 1979. Not only do its oil sales rival those of U.S. LNG, but Russia keeps its oil-export earnings at home to finance its re-industrialization, so as to rebuild the economy that was destroyed by the U.S.-sponsored shock “therapy” of the 1990s.
The line of least resistance for U.S. strategy seeking to maintain control of the world’s oil supply while maintaining its luxury-arms export market via NATO is to Cry Wolf and insist that Russia is on the verge of invading Ukraine – as if Russia had anything to gain by quagmire warfare over Europe’s poorest and least productive economy. The winter of 2021-22 has seen a long attempt at U.S. prodding of NATO and Russia to fight – without success.
The line of least resistance for U.S. strategy seeking to maintain control of the world’s oil supply while maintaining its luxury-arms export market via NATO is to Cry Wolf and insist that Russia is on the verge of invading Ukraine – as if Russia had anything to gain by quagmire warfare over Europe’s poorest and least productive economy. The winter of 2021-22 has seen a long attempt at U.S. prodding of NATO and Russia to fight – without success.
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