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The IMF Changes its Rules to Isolate China and Russia

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Reprinted from www.counterpunch.org by Michael Hudson


The nightmare scenario of U.S. geopolitical strategists seems to be coming true: foreign economic independence from U.S. control. Instead of privatizing and neoliberalizing the world under U.S.-centered financial planning and ownership, the Russian and Chinese governments are investing in neighboring economies on terms that cement Eurasian economic integration on the basis of Russian oil and tax exports and Chinese financing. The Asian Infrastructure Investment Bank (AIIB) threatens to replace the IMF and World Bank programs that favor U.S. suppliers, banks and bondholders (with the United States holding unique veto power).

Russia's 2013 loan to Ukraine, made at the request of Ukraine's elected pro-Russian government, demonstrated the benefits of mutual trade and investment relations between the two countries. As Russian finance minister Anton Siluanov points out, Ukraine's "international reserves were barely enough to cover three months' imports, and no other creditor was prepared to lend on terms acceptable to Kiev. Yet Russia provided $3 billion of much-needed funding at a 5 per cent interest rate, when Ukraine's bonds were yielding nearly 12 per cent."[1]

What especially annoys U.S. financial strategists is that this loan by Russia's sovereign debt fund was protected by IMF lending practice, which at that time ensured collectability by withholding new credit from countries in default of foreign official debts (or at least, not bargaining in good faith to pay). To cap matters, the bonds are registered under London's creditor-oriented rules and courts.

On December 3 (one week before the IMF changed its rules so as to hurt Russia), Prime Minister Putin proposed that Russia "and other Eurasian Economic Union countries should kick-off consultations with members of the Shanghai Cooperation Organisation (SCO) and the Association of Southeast Asian Nations (ASEAN) on a possible economic partnership."[2] Russia also is seeking to build pipelines to Europe through friendly instead of U.S.-backed countries.

Moving to denominate their trade and investment in their own currencies instead of dollars, China and Russia are creating a geopolitical system free from U.S. control. After U.S. officials threatened to derange Russia's banking linkages by cutting it off from the SWIFT interbank clearing system, China accelerated its creation of the alternative China International Payments System (CIPS), with its own credit card system to protect Eurasian economies from the shrill threats made by U.S. unilateralists.

Russia and China are simply doing what the United States has long done: using trade and credit linkages to cement their geopolitical diplomacy. This tectonic geopolitical shift is a Copernican threat to New Cold War ideology: Instead of the world economy revolving around the United States (the Ptolemaic idea of America as "the indispensible nation"), it may revolve around Eurasia. As long as the global financial papacy remains grounded in Washington at the offices of the IMF and World Bank, such a shift in the center of gravity will be fought with all the power of the American Century (indeed, American Millennium) inquisition.

Imagine the following scenario five years from now. China will have spent half a decade building high-speed railroads, ports power systems and other construction for Asian and African countries, enabling them to grow and export more. These exports will be coming on line to repay the infrastructure loans. Also, suppose that Russia has been supplying the oil and gas energy needed for these projects.

To U.S. neocons this specter of AIIB government-to-government lending and investment creates fear of a world independent of U.S. control. Nations would mint their own money and hold each other's debt in their international reserves instead of borrowing or holding dollars and subordinating their financial planning to the IMF and U.S. Treasury with their demands for monetary bloodletting and austerity for debtor countries. There would be less need for foreign government to finance budget shortfalls by selling off their key public infrastructure privatizing their economies. Instead of dismantling public spending, the AIIB and a broader Eurasian economic union would do what the United States itself practices, and seek self-sufficiency in basic needs such as food, technology, banking, credit creation and monetary policy.

With this prospect in mind, suppose an American diplomat meets with the leaders of debtors to China, Russia and the AIIB and makes the following proposal: "Now that you've got your increased production in place, why repay? We'll make you rich if you stiff our New Cold War adversaries and turn to the West. We and our European allies will help you assign the infrastructure to yourselves and your supporters, and give these assets market value by selling shares in New York and London. Then, you can spend your surpluses in the West."

How can China or Russia collect in such a situation? They can sue. But what court will recognize their claim -- that is, what court that the West would pay attention to?

That is the kind of scenario U.S. State Department and Treasury officials have been discussing for more than a year. The looming conflict was made immediate by Ukraine's $3 billion debt to Russia falling due by December 20, 2015. Ukraine's U.S.-backed regime has announced its intention to default. U.S. lobbyists have just changed the IMF rules to remove a critical lever on which Russia and other governments have long relied to enforce payment of their loans.

The IMF's role as enforcer of inter-government debts

When it comes down to enforcing nations to pay inter-government debts, the International Monetary Fund and Paris Club hold the main leverage. As coordinator of central bank "stabilization" loans (the neoliberal euphemism for imposing austerity and destabilizing debtor economies, Greece-style), the IMF is able to withhold not only its own credit but also that of governments and global banks participating when debtor countries need refinancing. Countries that do not agree to privatize their infrastructure and sell it to Western buyers are threatened with sanctions, backed by U.S.-sponsored "regime change" and "democracy promotion" Maidan-style.

This was the setting on December 8, when Chief IMF Spokesman Gerry Rice announced: "The IMF's Executive Board met today and agreed to change the current policy on non-toleration of arrears to official creditors." The creditor leverage that the IMF has used is that if a nation is in financial arrears to any government, it cannot qualify for an IMF loan -- and hence, for packages involving other governments. This has been the system by which the dollarized global financial system has worked for half a century. The beneficiaries have been creditors in US dollars.

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http://michael-hudson.com/
Prof. Hudson has written the introductory chapter in "China in the Next 30 Years" and its sequel. His "Super Imperialism: The Economic Strategy of American Empire," "America's Protectionist Takeoff" and "Trade, Development and Foreign (more...)
 

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