Economic Warfare

[Norfolk]

While the West has tended to view war as something normally separate from the rest of life, many of the Rest have tended to view war as the normal state of life, and therefore, war is waged against one's enemies in every aspect of life. That Iran sees fit to wage economic war upon the U.S. simply fits in that regard.

After all, Iran doesn't have anything that can take on Mickey Mouse at the cultural level - in a rather extended sense something that seems to be one of Iran's chief beefs with the U.S. - so Iran has to make an end-run around Mickey and Minnie and Donald Duck et al and hit the U.S. where it can still try to hurt them most, especially at the strategic level. At said level, the U.S. is vulnerable economically, and the weaknesses most exposed to Iranian attack are the price of petroleum and the value of the dollar.

That said, the U.S. waged a very effective economic campaign against the U.S.S.R. in the 1980's, and, combined with a comprehensive set of proxy wars, information warfare, cultural warfare, diplomatic pressures, alliances, support of dissidents and subversion, etc., took advantage of the weaknesses within the Soviet system to help to bring about its downfall. And without a single US Battalion having to be sent into battle against the Red Army. This sort of warfare was somewhat more in line with that of ancient Chinese military theory, for example, than with 20th Century Western military theory.

Nevertheless, US strategists of the 1980's clearly saw that to defeat the Soviets by military means was simply not worth the candle; other means were required, and in the circumstances, worked. At the risk of over-simplification, the US simply spent the USSR into the ground on military technology and procurement, knowing that the US could afford such expense, but the USSR would succumb to its own internal weaknesses in attempting to follow the US.

Nor is the US an amateur at economic warfare: that is how the US won during the Recent Unpleasantness, albeit in tandem with actual military force. The US Army pillaged, tore up, and burned out the economic heartland of the South in late 1864-early 1865; the US Army fighting in the Lower South deliberately avoided giving battle in most cases, and simply manoeuvered the Confederates out of their positions. Both World Wars involved the economic blockade and attempted strangulation of each others economies by both sides. In World War I, the Germany economy finally collapsed and the population starved; military collapse followed within months. Germany nearly accomplished the same thing with Britain in the spring of 1943.

Chinese strategic and military thought does not make a modern Western-style distinction between war on the one hand, and the life of society/civilization on the other. The use of military force is theoretically and ideally the final phase of a given war between enemies; prior to that, the war is waged by all other means, including economics. Only when the enemy is sufficiently weak, or is anticipated to become stronger later, is then directly struck with military force. But it is all war, the struggle for survival, growth, and supremacy, and from such perspectives, that's what life is about. A grim, red-in-tooth-and-claw neverending struggle for dominance.

It is only logical then that (sadly) many business types have long been devotees of Chinese strategic and military thought (amongst others).

[Fabius Maximus]

That said, the U.S. waged a very effective economic campaign against the U.S.S.R. in the 1980's...

Alternative view: the Saudi Princes waged one of the great economic wars of the post-WWII era against the USSR for control of the oil industry. They opened their spigots, crashed the price of oil, and bankrupted the USSR.

We take credit for defeating the USSR just as we often take credit for defeating NAZI Germany. Perhaps neither is fully deserved.

[Rex Brynen]

Alternative view: the Saudi Princes waged one of the great economic wars of the post-WWII era against the USSR for control of the oil industry. They opened their spigots, crashed the price of oil, and bankrupted the USSR.

I'm not sure the oil price lows of the mid- 1980s had anything to do with such lofty strategic aims. Rather, they were a combination of an increase in supplies and stocks due to high prices following the Iranian Revolution; a slowdown in demand due to these same high prices; and ambitious Gulf development expenditures (and hence pressures for larger OPEC quotas). When the price started to drop, the Saudis eventually tired of being the swing producer, and instead for a while sought to maintain revenues by offsetting price declines with production increases.

At most the (secondary) strategic aim was to reduce the market share of high-marginal-cost oil producers (with North Sea, older-well North American producers, and new explorations being more vulnerable by this time than the Soviets were).

[Norfolk]

Alternative view: the Saudi Princes waged one of the great economic wars of the post-WWII era against the USSR for control of the oil industry. They opened their spigots, crashed the price of oil, and bankrupted the USSR.

We take credit for defeating the USSR just as we often take credit for defeating NAZI Germany. Perhaps neither is fully deserved.

As to the role of Saudi oil in bankrupting the USSR, it was contributatory, but insufficient even in tandem with other factors. Additionally, the USSR was the largest producer of petroleum on the planet, and its reserves considerably outweighed those of Saudi. Not only was it quite self-sufficient for its own needs, but it could earn a pretty penny in foreign hard currency with its exports.

And considering the price of oil after 1973 compared to the price of oil prior to late 1973, even with the Saudis in effect generously subsidizing the West by keeping oil prices artificially low, such prices were still historically high; WWII was fought on $3 a barrel oil. Under no circumstances was the price of oil at any time post-1973 a major problem for the USSR, one way or the other. Even at only 6 times the 1940's price, the Soviets were making out pretty good.

As far back as the early 1970s, Kissinger had arrived at the conclusion that the Soviet economy would be unable to sustain its military strength much past 1984-5. The Soviet system was cracking internally, and the sheer burden of trying to keep up with US military equipment and R&D spending created unbearable stresses on a system that was dealing with general disillusionment at home, dissent within the populations of its satellites, and its own faltering economy - so badly mismanaged that it had to buy large quanitities of cereals from Western countries for years. The Soviet Union was crumbling under its own weight while its subjects were chipping away at it from within; the US pile-on in the 1980's forced an issue that could otherwise have dragged on for a few more decades had a rather less aggressive policy been pursued.

I'll grant you partially the comment about the defeat of Germany in WWII; but as to "we", I'm not American, and can assure you that the Commonwealth view of the outcome of WWII that it was won by British Brains, Russian Blood, and American Muscle differs substantially from the more popular US view. But the Commonwealth view is in no doubt that American Muscle was utterly essential to the defeat of Germany. No American muscle = no Nazi defeat.

Chinese investments (such as in US T-Bills) are being hurt by the devaluation of the US dollar, not only because even interest rate hikes (which are not occurring at the moment) are unlikely to be able to make up for the dollar's loss of value, but also because to convert cheaper US dollars into more expensive currencies entails additional loss. China is stuck holding the bag until the US dollar stabilizes - and the PLA's pay increases and equipment purchases are funded in no small part by hard currency earned from exports to the US.

In any event, economic warfare has long been a civilized way of taking the fight to the enemy, particularly for nation-states. It is but one of many ways war is waged by the state against its enemies, whether military force is directly applied or not: "Learning from the Stones: A Go Approach to Mastering China's Strategic Concept, Shi," by David Lai.

http://www.strategicstudiesinstitute....cfm?PubID=378

This article on Chinese strategic thought is for the most part easily assimilated, and this is assisted by the essential simplicity of Sinic conceptions of strategy. It is not complex, merely subtle and thoroughly comprehensive. Although this article is hardly comprehensive, and is fairly fundamental, taken with the Chinese strategic classics, there is little that subsequent theories of war do much other than add commentary or technology.

[kehenry1]

Necessity is the Mother of invention...

I believe it was 2006 when the Saudi representative to OPEC said that contrary to popular belief, Saudi Arabia had no interest in unstable and steeply rising oil prices. At that time, he Saudi's had promised to increase production by 900k. His reasoning was very simple. If oil prices continued to rise uncontrollably, eventually, it would effect the world economy and crash the supply demand in world wide recession or depression. Thus, destabilizing their own economy, causing unrest and potentially to internal unpleasantness.

However, this year the Saudi OPEC rep said that they could do no more to increase supply and stabilize the price. Thus, I believe the Saudi's are doing what we are doing and that is waiting to see what the market will do.

Their other fear is that, if the price hits the "pain threshold" for the US and Europe, we will do what we did in the late 70's and 80's like revamp our automobile manufacturing for improved fuel economy or possibly drive towards the invention of alternative energy. I don't think biofuels is a sustainable or long term answer. I believe the answer will return as solar or other energy sources with the advancement of nano-technology and anti-matter. But, that's for another discussion.

Suffice it to say, even with emerging economies and China's growth, if the US was able to develop other energy resources or, if oil finds in other nations (like the recent find in Brazil) can come onto the market quickly, the oil surplus that would be created would cause the oil market to crash. Not only is that bad for Saudi Arabia, its bad for Russia whose economy is also 50% reliant on energy exports. It's why they are in a rush to complete a transnational pipeline for gas and oil to China. They want to take advantage of a long term market growth when there is a possibility of stagnation or loss of market in other regions. Also the reason Iran was interested in pipelines with China. Problems with that to follow.

[kehenry1]

In regards to economic warfare and Iran, I noted here (scroll down and to bottom for additional links on Economic Warfare and Iran), whether Iran survives economically or not is not just linked to their oil and natural gas income, though it plays a major part, both good and bad.

For instance, Iran is now talking about building eight additional refineries for oil. Right now, they only have one. They are still rationing gasoline, though at a subsidized rate. The problem here is that, however much they are raking in on a bbl of oil, as a net importer of refined oil and gasoline, they are putting out a very large chunk of their income to buy it. It might sound good on paper, but it causes other issues.

Second, Iran is suffering from record inflation to go along with its "growth" period. Inflation is, in fact outstripping economic growth about 4 to 1. Housing prices have tripled. Food prices have quadrupled. This is in relation to both the incredible inflation of oil and the sanctions which have denied credit to even the basic importers. Some have sought an end run by working through third party nations like Dubai and Germany where they set up what appears to be other national companies. Yet, the price to import these food stuffs has increased along with the necessity to use huge, upfront cash deposits.

At the same time, Iran has been busy trying to repress their labor movements that are demanding a pay raise after over a decade of the same pay (most are making about $2/day). These people are having to work two or three jobs just to feed their families, buy gasoline and pay for heating, much less housing now that the rates are increasing so drastically. For the last two years, parts of Iran have had to institute heating rations because the nation is so dependent on exporting their energy resources to sustain their economy. Besides oil and natural gas, the third largest export from Iran is Hydro-electricity to Afghanistan and Iraq.

I posited a theory once that the unrest in Iraq and Afghanistan benefited Iran, not just politically, but economically since it keeps infrastructure from being developed in these nations to offset that export as well as the somewhat limited income from export of manufactured goods.

This need is created by their Soviet style economic system. More than 70% of all working Iranians are employed in a state run business. appx 50% are in the oil and natural gas industry which is just about the only money making industry out of Iran. Another 30% work in the service industry that is largely controlled by the IRGC, but have limited "money making" capabilities since it simply funnels internal funds from one hand to another. They do control certain textile and other manufacturing plants as well as mineral extraction.

At this time, neither their manufacturing nor mineral extraction nor even export of some food stuffs (another reason that food prices are high in Iran) is anywhere near being able to produce the amount of revenue necessary to create a diverse economy. Neither are the only 10% of private entrepreneurs in Iran capable of producing much in the way of export. While the Iranian Islamic Revolutionary dream is to create a self sustaining economy (as was once the Soviet model), it is impossible with the existing business and economic structure.

Their manufacturing and mineral extraction is in bad shape. Earlier this year, one of the showdowns that was happening in the Iranian cabinet was an argument between these two industries and the oil and natural gas industries over revenues produced as well as the amount of money being invested. They were accusing each other of being the cause of the economic problems in Iran. Even with all that energy export revenue, inflation is seriously damaging their capabilities to continue running the nation.

The mineral and manufacturing industries fought back stating that, if they had the infusion of cash that the oil and gas industry had to improve their infrastructure (including machines, transportation and even roads), they could be in a better place to produce revenue. Ahmadenijad settled that by replacing the mining and manufacturing industry ministers.

If you are truly familiar with the economic woes experienced by the USSR pre-collapse, you'd know that they suffered similar problems. Like the USSR, Iran has many price controls in place which means that these industries cannot even make money internally to help improve the situation.

Agriculture is equally damaged from lack of investment and expansion along with orders to export most of the food stuffs that created the net import of grains and other food staples like vegetables and fruit.

All of Iran's economic growth is in oil and natural gas. It is unsustainable. Unless, of course, they can get nuclear weapons and improve their regional hegemony, holding other regional suppliers "hostage" and forging alliances with countries like Venezuela, keeping oil supplies down and the price high by artificial reductions or limits. (Something that would be of some benefit to Russia as well since their economy is so heavily invested in the energy sector).

Other problems that Iran has is that the threats of potential strikes by the US have forced them to spend more on defense, though not much, it is still damaging. In fact, besides the probability of nuclear proliferation by Korea to Syria that precipitated a recent strike against Syria, the fact that Israel was able to easily circumvent Syria's Russian bought air defense system has caused Iran to have to invest in upgrades, further stressing their budget, along with other military equipment and preparation.

This juggling of funds and budgets is also apparent in their continuing inability to pay full monthly fees for the building of the Bushehr nuclear facility. Which has caused Russia to state they will continue to build the facility, but there will obviously be a slow down. In the meantime, Iran is putting a lot of money into buying and making centrifuges and other equipment for creating nuclear technology.

the long and short of it is, all of the money is staying at the top end, within major government structures, one major industry and being spent on imports of equipment and basic necessities outside the country. That is what is fueling inflation and keeping government run entities from increasing pay to workers. Money is not filtering down in the economy to allow for improved internal economic growth. Of course, corruption and Ahmadenijad's insistence on putting old IRGC cronies in position of power over these industries is creating a whole new economic class paradigm in Iran.

It's a point that we should be exploiting in our information warfare. Particularly, as the previous high separation of the economic classes was part of the original causes for the Islamic Revolution. The Islamists promised at that time to institute a more equitable "Islamic" system that had its roots in socialist economics learned in the universities of France and other European nations. the reason, of course, that the leftward, labor movements of Iran originally supported the revolution.

[kehenry1]

Back to the China-Iran oil and gas pipelines. These two inked a deal in 2004 for a ten year plan to create these pipelines that sought to by pass certain nations and the pipeline fees they would have to pay by planning to build these pipelines under the ocean, through the Straits of Malaca and the China Sea. ONe of the reasons that China has been making threatening noises towards Taiwan and arguing with Japan over control of long disputed Islands. They want to extend their international waters to protect these potential pipelines and work towards extracting resources that are just outside of their current boundaries.

Also one of the reasons that China has been working hard to improve their littoral navy and seeking possible aircraft carriers. They would have to protect this pipeline. It's very position through international waters would make it vulnerable to interdiction.

The problem with the pipelines are not just international borders. Neither China nor Iran at this time has the funds currently to invest in developing this pipeline. Plus, Russia's offer of an overland pipeline is much more feasible and possibly less expensive since it would be a major spur off of existing lines in the east and through the Caucus nations. Making the Iranian pipelines not quite the necessity they might have been if Russia simply maintained its focus on European markets.

Finally, sanctions that limit the amount of investment into Iran by any American corporation keeps Iran's ability to update its infrastructure limited and this pipeline a dream for the near future. which makes the proposition for eight new oil refineries interesting. Exactly how are they planning to build these refineries without huge foreign investment? Is China interested in that deal? Is the need for cash to spend on these investments and to offset inflation in China the reason that China is seeking to divest itself of some of its US assets. They need the cash for other projects and subsidizing their own gasoline.

One of the other things to look at is China's reluctance to support Iran as a full fledged member of the SCO. The SCO pact insists that an attack on one country is an attack on all like the NATO agreement. I think China sees that risk as too high considering their relationship with the US and their own desire to avoid conflict at this time (being without more than a littoral navy and their blue navy not anywhere near full strength). They are after long term economic growth and power, not war today.

Will China be enough of an investor for Iran or will Russia or Europe step up to invest? Would Russia do so at all considering their own interests in producing and exporting oil and refined products? is there an offering for a Russia/Iran pipeline that would allow oil to be refined and transported out of Iran through the Hormuz Straits? For Russia, a third or fourth port for exporting would be helpful, particularly one that bypassed the Dagestan, Igushetia and Chechen region. A long part of the Caspian Sea to port transportation system runs through this highly volatile region.

ON the other hand, the ME is highly unstable and risky for Russia unless they can help steer Iran towards more sane policies or offer more protection (a reason why they are upgrading their military besides their desire to hold sway over the Caucuses?)

Of course, Iran sees that Afghanistan and Iraq, developing nations with limited capabilities, as potential economic gold mines. Iran had also inked a deal with the new Iraqi government to refine oil for gasoline and pipe it back into Iraq. The problem, again, is that Iran has one refinery. Any utilization for export puts a strain on their own resources and increases the amount of net imported gasoline it requires for the state to function. Of course, this agreement put the Iranian oil minister in hot water with Ahmadenijad since it put further pressure on Iran's internal shortages.

They may be looking for Iraq to invest in the development of these refineries. Unsure on the possibilities. It is also unsure of the amount that European companies want to put into these additional refineries. To date, they have been pretty hesitant in investing large amounts in existing infrastructure. largely because it is so costly and secondly because Iran has been unable to or reluctant to put their share in, leaving these companies to shoulder most of the burden.

An additional problem is that investors see Iran as a high risk investment. Not just because of sanctions, but because of their internal economic structure. They don't want to risk what they are unsure of getting back. Not to mention that Iran in the previous decade and a half has taken considerable advancements against their oil revenues and has a tendency to nationalize certain industries.

According to current reports, Iran is only trading approximately 15% of their oil in US dollars right now. More than 50% is in Euros. The rest are in other denominations. This also presents a possible opportunity undermine their economy. Another factor in the demise of the USSR was the development of a large blackmarket that operated on the US dollar. The decrease in the value of the dollar could be somewhat helpful in this matter, allowing Iranians to purchase more black market commodities. Not only would this put another drain on the government run economy, reducing money returned into their economic system, but possibly devaluing their own currency against a black market currency.

The one problem with that is the IRGC controls the black market and smuggling in Iran (one of the reasons why we know they were complicit in the smuggling of EFP components and other arms into Iraq and Afghanistan). This might put more money in their hands. We would have to have a way to bypass it or make them complicit in their own economic downfall. Corruption in other states is sometimes good for us.

[kehenry1]

In regards to the devaluing of the US dollar. It is not always a bad thing. We have been running a significant trade deficit for years. At the same time, this administration has signed a significant number of free trade agreements with nations in South America, Eastern Europe and Caucus nations among the many. In order to make that a real, viable interest of our economy, these nations have to be able to afford to buy our goods. That means that their currency has to be somewhat competitive with ours.

We don't just want to put money in their economies buying cheap goods (thus reducing our trade with China and some of our economic risk), we want them to put it back into ours. As this report indicates, exports to Europe, where the Euro is strong against the dollar, has increased significantly and probably lent a 1 point increase in growth. that is actually good in the long term in creating US manufacturing mobs and staving off severe recession.

Our vulnerability though is the risk of a over extended credit lines and the price of oil. continued economic growth could off set the extended credit problems. the price of oil, on the other hand, can be offset by either a serious down turn in economy, thus oil utilization, an increase in availability through additional drilling either within the states or in new deposits or in old deposits with new technology or a new technology all together when we hit the "pain point".

I am hoping we work on the new technology. Not because I believe we will be totally oil independent, but because it would give us again the upper hand on energy development and control and create a new economic paradigm for the west. The potential income from both small and large markets would be a serious economic boon, not to mention the impact on many other industries like transportation and housing.

so, dollar down turn is not totally a bad thing as long as it is in small increments, over a measured time and stabilizes early enough. Improved economies in this hemisphere would provide a fairly protected market for us and diversify away from the East and the control of our markets by China and the ME.

Wow, hope that was coherent enough. You can visit the other links provided for additional information and reporting on the economic war. Just remember, high oil prices aren't necessarily good for even our most virulent enemies. They have to buy gas, support business, transport goods and maintain their military, too. all with not even a one hundredth of our income or budget.

Think of them as an octopus trying to put their tentacles all over the middle east. Everywhere they seek to expand, they expose themselves economically, politically, and even physically. a country with a 300 bil budget is hard pressed to compete on that level even regionally.

Pardon the length of this post. I hope it is coherent though I know there are many more issues that could be included in this analysis.