How Important and Realistic is an Iranian Nuclear Weapons Program?

Colleagues: Please find attached an exchange that might interest you between me and Allan Myer, a longtime friend, fellow Army Colonel and Soviet specialist, and colleague in the Reagan White House (he was initially with the NSC Defense Group, then became a speechwriter). He is currently an investment advisor and serves as the Chairman of the Israel Project, a strongly pro-Israel group.

First, an excellent op-ed by Allan in the Boston Globe, advocating a very tough stance against the Iranian potential nuclear weapons program. Following is my response expressing doubt over the importance and likelihood of an Iranian nuclear weapons capability, and asking if this issue hasn’t taken second place to the emerging–and in my mind more important–“tacit alliance” between Washington and Tehran in combating the Islamic State.

Myer responds with a very thoughtful and stirring analysis of the intentions of the leadership in Iran with respect to Israel, and why Israel feels so strongly about totally halting the Iranian nuclear weapons program. And, he dismisses the import of any tacit working relationship between Iran and the U.S. in combating ISIS. I found it interesting that after his scorching analysis of the intentions and actions of the Iranian regime, Myer concludes that he is optimistic that, if the U.S. pursues a tough negotiating stance against Iran, the leadership in Tehran will abandon its nuclear weapons program!

Enjoy! Ty

Al Myer exchange

Save the Date for this upcoming Forum…

The Geostrategic Ramifications of

the Surge in Global Oil Production

with

Dr. John Scire and Dr. Jerry O’Driscoll

and a commentary by Dr. Tyrus W. Cobb

The Ramada, 9:00 a.m., Tuesday, January 13th

The recent drop in global oil prices is impacting economies everywhere.  Since mid-June, the price of crude oil has dropped by over 40%– going from a high of $115 to about $64 today.  The rapid fall in oil prices is due primarily to a incredible upswing in production, coupled with a global recession that has lessened demand.

The amount of oil that has come online this year is staggering.  Production has soared in the United States, and other major exporters have not decreased production in order to stabilize prices.  Indeed, Libya, Saudi Arabia, Nigeria and Iraq have all increased output in recent months.  At the same time, global oil demand this year is declining.

There are clear winners and losers in this dramatic change in petroleum production.  Oil in the most geopolitically important commodity, and changes in oil markets create clear cut winners and losers.  Major oil producers, such as Russia, Venezuela and Iran, that have grown accustomed to high prices that underpin their national budgets, are suffering severe economic hardships (oh, now that’s too bad!).  At the same time, the surge in Northern American production might be the single most important factor in the U.S./Canada ability to sustain high levels of GDP growth.

This session will be led by Dr. John Scire and Dr. Jerry O’Driscoll.  Scire will discuss the rapid surge in production and the dramatic fall in prices.   He is the author of numerous works on energy policy and politico-military affairs.  O’Driscoll will look at the impact of these changes, particularly on government budgets and net consumers of energy.  He is a fellow at the CATO Institute, served as VP and director of policy analysis at CitiGroup, and was VP and economic advisor at the Federal Reserve bank in Dallas.  Dr. Tyrus Cobb will provide an assessment of how this dramatic change is impacting Russia.

No need to RSVP now, but please mark this unique and exciting event on your calendars.

WOUNDED BEAR

As the Russian economy sinks into recession, Putin blames it all on Western malfeasance. Internal authoritarianism grows, Russia becomes more aggressive in its neighborhood, and Cold War hysteria leads to soaring approval ratings for Putin

  • By Tyrus W. Cobb
Introduction

This paper lays out the deteriorating state of the Russian economy and highlights other developments that also threaten regime viability, especially very negative demographic trends. It delineates actions taken by Putin internally that have gradually eliminated any semblance of democracy or, more importantly, competing centers of power. The paper notes that Moscow has become more aggressive, especially in the neighboring regions (the “near abroad” despite, or maybe because of, this growing weakness.

The Russian Economic Decline Grows

Russia’s economy is moving into recession, driven by lower global oil prices, western sanctions and an archaic economic system. The combination of US/European sanctions and, especially, the rapid drop in the price of oil and gas, means Russia will lose over $140 billion this year in hard currency earnings.

  • Russian Finance Minister Siluanov said Moscow will lose $90-$100 billion because of a 30% drop in global oil prices. Russia has been the world’s leading energy exporter and depends on revenues from oil and gas exports for as much as 60-65% of its budget revenues!
  • Siluanov also admitted that western sanctions (“geopolitical moves”) will cause a loss of $40 billion annually, and lead to a contraction of capital inflows for investment and a likely outflow of privately held funds searching for more a secure repository.
  • The system itself is the foundation of the inability to respond to these new challenges. Russia’s economy remains dominated by state-owned industries and banks; capital lays in the hands of an increasingly smaller elite of Putin’s confidants (the Oligarchs or better the “kleptocracy”); repressive domestic measures against social media and free expression further limit entrepreneurial activity…..Putin and the “Siloviki” (power brokers) remain distrustful of the private sector, which, although small, has performed very well.

Siluanov’s frankness runs against the grain of bravado from President Vladimir Putin, who plays down the impact of sanctions imposed over Russia’s annexation of Crimea and support for the armed rebellion in eastern Ukraine. Putin and his cronies also blame the contraction in oil prices and vastly expanded supply of gas and petroleum in the global marketplace on “collusion” between the US, the Saudis and other major producers. However, unlike 1985 when Washington and Riyadh did conspire to drastically lower oil prices by flooding the market, primarily to cause severe economic disruptions to the Soviet economy, there is no evidence that anything but market forces are responsible for the surge in oil/gas production and rapid falloff of prices (oil, which was going for upwards of $110 a barrel, is now at $68 and falling!).

Contrast Russia’s economic performance with that of the U.S. The impressive efficiency of the American energy sector has enabled the U.S. to emerge as not only the world’s leading producer of liquid hydrocarbons, but also as the world’s largest energy exporter. As a result the value of the dollar has soared, that of the ruble has fallen.

Can Russia withstand the combination of sanctions and falling oil prices?

  • For the short term, yes. Russia’s foreign debt is just 35% of GDP; this is not 1998 when Moscow defaulted on its debts.
  • Russia is still, surprisingly, running a current accounts surplus. This is being achieved, however, by sharp cutbacks in imports, which will soon be felt by the populace (Russia imports half its food supply!)…..While farm production domestically is expanding by about 8% a year (from a very low base), this will not be enough to make up for declining food imports.
  • The oil-backed economic surge of the last 15 years has hit a wall. The ruble has depreciated parallel to the decline in oil prices, going from 33 to a dollar when oil was at $118, to 54 to the dollar when oil dropped to $70. Even here the ruble has been held at these levels only by rapid infusions of capital from the central bank, much of which has ended up in foreign exchange markets (this can’t continue).
  • Most of Russia’s indicators of economic health have fallen this year. Inflation is at its highest level in three years; capital outflows will exceed $100 billion this year; the ruble has lost about 20% of its value since January.
  • Russia will have to cut back on imports, on which it depends heavily for food stocks and consumer goods, as well as industrial equipment. Next year Russian companies, many state backed, will have to repay about $130 million in foreign debt. Fears of repatriation or just an inability to secure a return on investment has already constrained foreign capital inflows.
  • Putin has announced an ambitious upgrading of its defense sector, including plans to start a 10 year, $770 billion defense rearmament spending program. Spending on defense has been emphasized in the last five years of relative solid economic gains, growing 30%. Defense Minister Rogozin has promised that Russia will completely replace its nuclear forces by 2020! That seems impossible right now.
  • The energy sector has only expanded 1% on average over the past decade. It is highly inefficient. State-run enterprises are equally the beneficiary of government largess, even while demonstrating widespread corruption, inability to compete in open competition, and wasteful spending.
Russia faces severe demographic challenges

We can’t devote much space here to Russia’s demographic issues; indeed, I treated that as a separate subject sometime back. Suffice it here to note that while the country is suffering a severe economic decline, it also confronts a demographic transition that will change the face of Russia. Consider:

  • Russia’s birth rate declined to a historic low of 1.2 in the last decade, and has now only risen to 1.6—both below the replacement rate of 2.1. Russians, especially males, suffer from high rates of alcoholism. Infant mortality is also high. As a result Russia is projected to lose about 44% of its population by 2050!
  • At the same time, the growth rate of Muslims far outpaces that of Russians. It is on average about 4:1; 7:1 in volatile Dagestan and 4:1 in that terrorist breeding ground, Chechnya. Consider this—the draft age cohort (18-year olds) in Russia this year is 50% Muslim! By the year 2100 Russia could easily become a Muslim-majority country!
  • Of course the vast majority of Muslims in the country are secular and by and large have acclimated to being part of Russia. But terrorist sympathies abound and foreign jihadist groups have made inroads in areas that are heavily Muslim. Islamic “educational” institutions abroad generously fund foreign “students” and inculcate a jihadist mentality, which these disciples bring back to Russia
Despite Economic Strains, Putin’s Russia becomes more aggressive
  • Rejecting Western warnings, Moscow moved rapidly to take advantage of calls for “assistance” from Russians living in Crimea, eventually annexing a province that it felt was historically part of Russia.
  • Moscow has provided extensive monetary, military and organizational support for the separatist movement in Eastern Ukraine. Despite denials, Russian special operations and armor units have moved into the “Donetsk” region, supporting the breakaway “Republic”. Russian troops, backed by heavy artillery and tank fires, poured across the border, decimating Kiev’s poorly trained, equipped and organized armed forces.
  • Harassment of US Embassy officials in Moscow has been stepped up.
  • Military flights have violated the air space of the Baltic countries; Russia has also used its media to promote a sense of being part of a greater Russia by Russian populations living there.
  • Putin accuses the US of attempting to impose a “unilateral diktat” on the rest of the world, in language not heard since the height of the Cold war. His anti-West rhetoric serves to push up his popularity ratings. “The Western powers believe in their own ‘choseness and exceptionalism’ so that they can decide the fate of the rest of the world”, Putin claims. Soviet commentators frequently blame all Russia’s problems on the US and the West—Washington is behind the Chechen conflict, it is attempting to break Ukraine away from its historic ties to Russia by supporting “nationalists”, “fascists” and “Russian haters”, etc.
  • Soviet propagandist’s now speak flippantly about nuclear war; indeed a sense of nuclear euphoria is sweeping the country as Kremlin spin doctors whip up anti-Western frenzy.
And Internally, Putin Moves the country toward authoritarianism
  • Despite the plethora of problems, Putin’s popularity continues to soar. His approval rating was 65% in January; by March it was 80%, after the annexation of Crimea. In August it reached 87%! Some 62% of Russians say that things overall are improving. Why? For many Russians national pride is more important than economic difficulties. So far economic setbacks have not translated into widespread dissent.
  • Why is that? Part of the explanation is that there is no viable alternative, no means for potential competitors to reach the population. In addition, the increasing control of the media by Putin and his inner clique has trumpeted alleged Western malfeasance as the reason why citizens might be feeling pain.
  • New laws will severely restrict the freedom of social media and websites. The tighter rules are intended to bring most servers and much of the Internet under government control. That is impossible, but the end result will be a severe crippling of free expression on all media.
  • In many ways Russians do see the dangers ahead. Most understand that they face higher inflation and a substantial drop in their standard of living. But Putin remains a strong source of hope. This is an authoritarian leader, one with a charismatic personality, and most Russians feel that he offers a vision for the future, even as any shortcomings are always the result of western chicanery.
  • This has been buttressed by surreal tales of Putin as a mythological hero….a video portraying Putin as Hercules, staving off the Hydra of Western/US malfeasance is proliferating; a sickly sweet tribute to Putin with hundreds of school children singing “Happy Birthday, President of the Russian federation”, is everywhere; a musical group singing Putin’s praises in a utopian Russian fantasyland is yet another.
Conclusion

High energy prices have been the foundation that has generated more than a decade of strong economic growth and served as the basis of Putin’s popularity. But Putin must know that plunging oil prices were at least partially responsible for the fall of both Gorbachev and Yeltsin. Low oil prices are the lubricant that spurs economic growth in America; it is the basis as well for Russia’s decline.

  • The costly intervention in Ukraine, the seizure of Crimea, promotion of agitation by Russian populations in nearby countries, billions spent defending the ruble, and unsustainable expenditures for the purpose of enhancing regime support, all have led to budget-breaking spending and western sanctions.
  • If Russia reaches the day when it has exhausted its reserves, it will struggle to find lenders. Will this be a repeat of Yeltsin’s 1998 crisis? That set the stage for Putin’s ascendency, the “anti-Yeltsin”. Will history repeat itself?
  • Putin is betting that Russians will weather worsening conditions, and in the short term they will. But what will happen when the average Russian can no longer afford or even find shoes, cosmetics, medicine or cheap electronics? Once their patience runs out, one observer notes, “Russians can be a terrifying force….as the Soviet government found out in 1991”, during another major oil slump.
  • Will Russia seek to end its isolation by allying with China? That certainly seems to be the case, given the very large energy agreements that have been announced between Moscow and Beijing. But China is a power incomparably greater than Russia and Moscow would have to resign itself to being the very junior partner in this “alliance”.
  • The key question that must be considered is this: Is Russia, a “Wounded Bear”, more dangerous in decline than in a time of strong economic growth and domestic tranquility? If so, what is Putin and Moscow likely to do as the country frays?

–Tyrus W. Cobb served as Special Assistant to President Reagan for National Security Affairs (1988-89) and earlier (1983-88) as Director of Soviet, European and Soviet Affairs on the NSC.

NSF Participants:

This is the final announcement for our next meeting in conjunction with the Northern Nevada International Center.  The event is free, but please make sure to RSVP!  Please note the RSVP process is therefore different for this event, but will go back to normal for our January program.

General Ward

US Economy surges

while the rest of globe slows

But why do the majority of Americans not feel

they are gaining ground?

  • By Tyrus W. Cobb

The American economy is growing impressively, as many key indicators reflect significant progress in a number of key areas. This strong performance contrasts with stagnating growth in much of the rest of the world, including Europe and, especially, Russia and Japan. Here are some key stats:

  • U.S. GDP growth is the highest for any developed country, growing 4.2% in Q2 and 3.5% in Q3. In contrast GDP was barely positive in Europe (0.2%) and Russia (0.5%). This is Russia’s worst economic performance since 2009, due to sanctions and lower oil prices. Japan actually officially went into recession, as GDP fell 0.5%!
  • Global corporate outlook remains discouraging, except in the U.S.  European and Asian companies have expectations of worsening global economic climate….low hiring intentions, anticipation of higher interest rates, fears of geopolitical unrest (Ukraine, Mideast). Many see “triple dip recession” coming.
  • In contrast, U.S. unemployment nationally fell to 5.8%, down from 8% just two years ago.
  • Corporate profits are at record highs.
  • The U.S. is adding 200,000 jobs per month.
  • Oil imports are dropping fast while production is rapidly increasing. So much so that the U.S. will soon become the world’s #1 oil producer (thanks to fracking)….Gasoline prices are falling fast.
  • The dollar is at its strongest level in years.
  • The stock market is at record highs.
  • Consumer confidence rose 12% over the past year; home sales were up 5.6% annually and most purchases were by families, not investors; retail sales, especially autos and clothing, way up.
  • And, perhaps most significantly, the deficit is going down! That came as a shock to “deficit hawks” like me, but the deficit this year will be $506 billion, or only 2.9% of GDP, representing a 70% decline from Obama’s first year in office and Bush’s last. In 2013 it was $680 billion.
But not all Americans are benefitting

Amid the very positive economic news, there are two important data points that raise concern: First, the stagnation in wages that has left the majority of Americans feeling pessimistic about their future, and second, the increasing concentration of wealth in the hands of fewer and fewer people.

With respect to wages, a Wall Street Journal poll found that 50% of Americans surveyed felt the country was still in recession. A PEW survey found that those who earn less than $75,000 a year felt they were “falling behind”.

The problem is that income for all wage earners has been stagnant for 30 years, and the average family income is the same as it was in 1995 (adjusted for inflation). While jobs have indeed been added, high paying jobs haven’t. Much of the employment gains reflect the unemployed going back to work part-time, for contract work, or for lower salaries and lesser benefits.

In contrast to the stagnation in living standards most Americans have experienced, income and wealth for the top 3% of U.S. families is now at historically high levels. Families in the bottom 90% have seen a deterioration in their net worth, with the bottom 10% having substantial declines. At the same time, the income and net worth of the top layers have soared.

As the graph below demonstrates, wealth has been concentrating in an increasingly smaller segment of the population. While the top 0.01% held about 3.3% of the U.S. net worth in 1960, today that sliver of the populace holds 11.4%!

 top-wealth-shares

Do these developments have political ramifications?

“Every time the stock market hits a new high, I look over my shoulder to see if they are getting the guillotines ready!”

        Wealthy New York investor

That increasing concentration of wealth in the hands of a very few sounds like Karl Marx’s most apocalyptic predictions being realized. However, to date that development has not ignited the American people—indeed, as the recent elections showed, the electorate resoundingly supported candidates from the party that is the least interested in any “wealth redistribution” schemes!

That may be changing. As former White House aide David Rothkopf has written:

Given this greatest of threats to average Americans — the threat that there is no better future out there for them and their children and that they will toil away producing profits to be enjoyed only by a privileged handful of Americans — we can count on the political debate in the United States for the next two years to turn less and less on the Islamic State or Ebola and more and more on the time bomb placed at the foundations of the U.S. economy — an economic engine of division and destruction that is gradually pulling the country apart and instilling anger and frustration in many of its citizens (especially those in the bottom fifth, those who are not only out of the money but consigned to inescapable lifetimes of struggle and subsistence).”

Let me know what your opinions are on this issue of wealth/income inequality. Is Rothkopf overstating the significance? I’ll come back to the debate once I have thought more about the issue and have the benefit of your thoughts.

– Tyrus W. Cobb, PhD