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The Strange Story of Russia’s Eurobond or How the West is Forcing Russia to Improve its Financial System

The Western attempt to sabotage Russia’s recent Eurobond issue was not only an entirely predictable failure but it has ended up strengthening Russia’s financial system.

Alexander Mercouris

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The story of the floating of Russia’s eurobond is a revealing tale of Western arrogance and Western blindness, not just about Russia but about the operation of the financial markets.   In the process Western actions have achieved the opposite of what Western leaders intended.

On 5th January 2016, as the second oil price fall approached its lowest point, I wrote an article in which – amongst other things – I challenged the entire theory of a Russian budget crisis, which was at that time fashionable. 

I said that if the fall in oil prices did cause a gap in Russia’s budget that Russia would be unable to fill from its Reverse Fund, the Russian government would simply do what all other governments regularly do when they find themselves in the same situation, which is borrow the money to fill the gap.  My precise words were as follows:

“If Russia ever were to find itself in a position where it had to finance a budget deficit of 4.4% of GDP after the Reserve Fund had run out, it would do so by raising the money by floating a bond on the international money markets – or conceivably in Russia – something which most governments do most of the time.

The sanctions do not prevent Russia from doing this and – since what we are talking about is a sovereign bond – it is legally doubtful they can be extended to prevent it.”

As if to prove my point, just a few weeks later, on 5th February 2016, the Russian government unexpectedly announced that it was going to do just that – borrow on the international money markets by floating a eurobond.  The total amount it said it planned to raise this year in this way was $3 billion.

The announcement provoked surprise, with most people seemingly unaware that the sanctions do not prevent the Russian state – as opposed to certain sanctioned Russian individuals and companies – from borrowing in the international money markets.  Few people seemed to understand that without a UN Security Council Chapter VII Resolution it is almost certainly legally impossible to bar a sovereign state like Russia from borrowing in the international money markets in peacetime.

When the point was finally understood talk followed that the proposed eurobond was simply a device to circumvent the sanctions.  The Russian state acting as a sort of agent would supposedly borrow on the international money markets and pass the money on to the sanctioned individuals and companies to provide them with the money they were barred from raising themselves.

On 11th March 2016, in a subsequent article I said this was nonsense:

“Quite apart from the fact that doing something like that would be the one guaranteed way of scaring off Western buyers from future bond issues, it would mean the Russian government is willing to take on the foreign debt of Russian companies onto its books, thereby transforming their debt into sovereign debt. 

Anyone with any knowledge of the way the Russian government does its business would know that is inconceivable.  Given the exorbitant cost in interest payments to the country’s budget of doing such a thing, there is no possibility anyone in the Russian government is considering it, since it violates the fundamental principles of sound budgeting and financial management upon which the Russian government runs its budget.”

In the event the prospectus of the eurobond contained an undertaking that any money raised from the sale would not be provided to sanctioned individuals or companies but would be used to strengthen Russia’s budget and its foreign exchange reserves.

I also pointed out in the same article the true reason for Russia floating a eurobond when there are more than sufficient funds in the Reserve Fund to cover fully Russia’s budget needs this year:

“Briefly, the Russian government wants to show the world that it can fund its budget by borrowing if it has to and that the sanctions do not prevent it doing so.

In passing, a successful bond issue will also show that the market does not agree with the repeated downgrades of Russia’s credit rating carried out by the three big international credit rating agencies – a fact which the Russians, who are in constant dialogue with the credit rating agencies, will doubtless point out to them.”

Though over time the Western financial press rather grudgingly admitted there was nothing illegal about Russia floating a eurobond there continued to be claims – or hopes – it would fail to find buyers.

As to that here is what I said in the same article on 11th March 2016:

“Russia’s exceptionally strong financial position – with a strong government committed to keeping the deficit low and under control, very low levels of government debt, large foreign currency reserves, a big trade surplus, an abundance of natural resources, and a good recent history of paying debt on time despite the oil price fall and the sanctions – means it should have no difficulty (borrowing if it wants to).

As to the likely success of the issue, the growing consensus is that – as I predicted – barring a sudden catastrophic change in the international situation or in the world economy, it will find no lack of buyers and will therefore be a success, though – as The Economist also correctly points out – the Russian government can also borrow on its own domestic financial markets within Russia itself – as it has previously done – if it has to.”

Strong indications the eurobond issue would indeed be a success in fact came within days of my writing that.  In mid March 2016 Gazprom tapped the Swiss capital market looking to raise 500 million Swiss francs ($505 million).  The issue was be four times oversubscribed.

Faced with this situation Western governments had a choice.  They could have bowed to the inevitable accepting that Russia had a right to float a eurobond for which it would have no difficulty finding buyers.  Or they could try to sabotage it.  Not surprisingly they chose the second option.

The result was a sustained campaign by Western governments to sabotage the sale.  This took various forms.  The one that attracted most attention was a campaign to pressure Western banks – some of which had shown an interest in helping Russia place the eurobond – to boycott the sale. 

Other forms received less publicity.  They included warnings to Western fund managers to get their clients to boycott the eurobond. 

There were also legally dubious efforts to prevent Euroclear and Clearview, the main Western bond depositories, from providing clearing services despite trade in the bonds being entirely legal and despite the fact that Euroclear and Clearview are private entities which have agreements with Russia to provide Russia with such services for its bonds.

Western leaders and officials appear to have assumed these steps would stop the sale or would cause its failure with the bonds offered failing to find buyers.

Placing a government bond is a massively complex operation.  It is the job of the banks that manage the sale to place the bonds most advantageously on the market.  That requires deep knowledge of the market in order to achieve the most effective outreach to potential buyers.  There are also immense technical challenges in receiving and processing the bids, in deciding amongst them if the issue is oversubscribed, and in transferring the bonds to the buyers.

A small number of Western banks have the necessary expertise to carry out such operations and do so with great efficiency.  By contrast Russian banks like Sberbank and VTB have little such experience since by comparison with Western banks they are relatively small and have far shorter trading histories.  It is not therefore surprising that Western governments apparently assumed that without help from Western banks the bond sale could not happen or would fail.

As for Euroclear and Clearview, the clearing services they provide not only provide buyers with security for their bonds but mean they can dispose of them electronically without having to go through the cumbersome process of despatching paper certificates.

By mid April Western officials appear to have convinced themselves their campaign to stop the issue had worked.  Under Western government pressure most – though not all – Western banks had pulled out of involvement in the placement.  The banks that were left were smaller ones that do not usually take the lead in making such placements. 

Meanwhile reports circulated that worries about the lack of guaranteed clearing services by Euroclear and Clearview together with Western government warnings were deterring the big Western institutional investors from participating in the bond sale.

The Western financial press – obviously heavily briefed by Western officials – started to report that Russia’s attempt to float the bond was proving to be a failure.  Certain comments by Russian Finance Minister Siluanov that Russia did not actually need to borrow in the international money markets this year (which is true) were misrepresented to mean the sale of the bond had been called off.

The result was that when Russia floated its eurobond a few days ago  – with Russia’s VTB bank acting as the sales manager – the Western financial press was taken by surprise.  This was so even though the plan to float the bond had been announced more than 2 months ago. 

As news of the sale filtered in the Western financial press – again no doubt taking its lead from Western officials – retreated into denial. 

The Financial Times initially called the response “tepid”, reporting the Russians had only raised $1.7 billion out of the $3 billion they were seeking. 

If the Russians had indeed offered bonds worth $3 billion for sale but had only been able to sell bonds to a value of $1.7 billion that report would have been true and it would have been right to call the bond sale a failure.  In fact the Russians offered 8,750 10 year bonds each at a price of $200,000 with an annual yield of 4.75% and sold all of them.  The total asking price of the bonds offered for sale was $1.75 billion (8,750x200k) – exactly the amount which was raised from the sale.   

The Financial Times confused the $1.75 billion of bonds the Russians offered in this one issue with the figure of $3 billion of bonds the Russians say they may sell over the course of the whole year.  VTB – the bank that managed the sale – has confirmed there may be more sales of more bonds later this year.  The Russian Finance Ministry however says this will depend on whether the state of Russia’s budget justifies doing it.

As for the demand for the bonds, the Russians say the offering attracted bids totalling $7 billion ie. the sale was more than three times oversubscribed.  That does not make the response look “tepid”.

As the success of the sale became increasingly clear, the Western financial press switched to saying that demand for the bonds came largely from investors within Russia, or from Russian investors buying the bond from offshore.  They also claimed there was little trading in the bonds in the secondary bond market, and pointed out that the 4.75% annual interest Russia is paying on the bonds is high, which they say is proof that demand for the bonds was weak. 

Why the fact the bond might have been bought principally by Russian investors (investing in a bond issue of their own government) should be a problem is not explained.  However it seems it may not even be true.  The Russians have not provided a precise regional breakdown of all the bids they received.  However they say 70% of the bonds with a value totalling $1.2 billion were sold to foreign investors (a third of them British) and that these foreign investors were not Russians using offshore accounts.  Since the Russians checked all the bids before deciding which of them to accept they are in a position to know.

As for the two other claims – that there was little trading in the bonds in the secondary bond market and about the 4.75% interest rate – they are serve as good examples of the sort of portentous statements Western commentators like to make, which actually mean little and which more often than not – as in this case – simply beg the question.

This was a bond floated by a country – Russia – which is currently under sanctions and which is in conflict with the Western powers.  Its sale was managed without the involvement of any of the big Western banks.  There is for the moment uncertainty as to whether or not the two big depositories, Euroclear and Clearview, will provide clearing services for it.

Of course a bond floated in such circumstances would have to be offered at a higher rate of interest to attract buyers.  Of course some buyers would have doubts about buying it, which together with concerns about the the absence of clearing services provided by Euroclear and Clearview and the non-involvement of the big Western banks no doubt accounts for the alleged lack of trading in the bonds in the secondary bond market.  It tells us nothing about the relative success or failure of the bond sale to make these points.  The real point is that the bond was nonetheless and despite these obstacles successfully sold and that the interest Russia must pay on it – 4.75% – is by no means excessively high and is well below distress levels.  As for the alleged lack of trading in the bond in the secondary bond market, that will almost certainly pick up over time as investors doubts are assuaged.

In summary, not only has Russia successfully floated a bond despite the sanctions and despite the Western campaign to sabotage it, but the bond was heavily oversubscribed and was sold mostly to foreign investors.  Even Russia’s waspish former Finance Minister Alexey Kudrin – a man who has never been shy of talking down Russian economic successes – says the bond issue was a success.   On the facts it is impossible to disagree with him.

That however is only half the story.

Even if the Western campaign to sabotage the bond was on its own terms a failure, it did nonetheless produce a result, though one completely different from the one Western governments intended.  It showed that Russia can float bonds in the international money markets without the help of Western banks and despite the denial of clearing services by Euroclear and Clearview and in the face of a sustained campaign by Western governments to stop it doing so.  Russia has been able to do this by relying on its own institutions first and foremost its own banks.

By campaigning to stop Western banks from participating in the bond sale Western governments ensured that it was a Russian bank – VTB – that managed the sale.  In the process VTB has gained valuable experience in providing this service, making it more capable of doing so again in the future.

The reason the decision was taken to offer bonds worth only $1.75 billion for sale instead of the full $3 billion talked about was almost certainly VTB’s inexperience in managing such a sale, not worries about a lack of buyers.  The same was almost certainly true of the decision to conduct the sale over 2 days rather than one.  The total bids on the first day apparently came to $5 billion so it cannot have been worries about lack of buyers on the first day that lay behind these decisions.  However limiting the offering to $1.75 billion instead of $3 billion and holding the sale over 2 days rather than one is precisely the sort of step that is sensibly taken in order to reduce the pressure on an inexperienced bank and its sales team so as to avoid mistakes. 

The experience VTB has now gained through its successful conduct of the sale will make it more capable of carrying out such sales in future.  As it gains experience it will be able to manage larger sales over shorter periods.  With each offering its reach will grow, extending to more of the high value international investors Russia wants to attract when it sells its bonds.

As for the attempts to block Russia using the clearing services provided by Euroclear and Clearview, these are legally speaking so dubious – given that what is involved are trades in perfectly legal bonds – that if Euroclear and Clearview persist with them they are likely to face legal challenges.   The Russians have confirmed they are in talks with Euroclear and they are almost certainly in discussion with Clearview as well.  No doubt their lawyers – the British law firm Linklaters & Alliance – will be explaining to Euroclear and Clearview during those talks that the Russians are reserving all their legal options and that none have been ruled out.  Given that the attempt to sabotage the sale of the bonds has been a failure there is little point any longer in denying them clearing services.  Probably Euroclear and Clearview have already come round to this view and the probability is they will quietly agree to provide the bonds with the usual clearing services shortly.

The attempt to block Russia’s access to clearing services for its bonds – just like the earlier threats to drive Russia out of the SWIFT interbank payments system and to stop Russian banks from providing debit and credit card services through Visa and MasterCard – in fact exposes the basic fallacy of the West’s whole approach to Russia.  Western politicians and Western officials simply cannot grasp that Russia is as sophisticated a society as their own. 

Ultimately Euroclear and Clearviews are just a depositories, just as SWIFT is just an electronic payment system and Visa and MasterCard are just card providers.  There is no magic about what they do.  Western leaders and officials however always seem to think there is.  It never seems to occur to them that others like the Russians if barred from using them can simply duplicate what they do.  

This pattern of misguided belief in Western superiority – and Russian inferiority – recurs again and again.  Western leaders and Western officials wildly overestimated the effect of the sanctions on Russia, assuming they would result in a credit crunch.   They apparently believed the entire Russian banking system would grind to a stop if it was disconnected from SWIFT and that a threat to do so would panic the Russians into making political concessions.  They also seem to have believed that the mere suggestion that Visa and MasterCard might block debit and credit cards issued by Russian banks would lead to a crisis of confidence in the Russian banking system.

In the event the Russians have had no difficulty meeting their financial obligations despite the sanctions and the anticipated credit crunch has simply not happened.  Meanwhile, in response to the threats to disconnect Russian banks from SWIFT, the Russians have developed their own electronic interbank payment system as a potential alternative to SWIFT.  It was successfully tested earlier this year and though for the moment it is only functioning as a back-up, in the event of Russia’s disconnection from SWIFT it could be activated immediately.  Similarly what the veiled threats to interfere with the operation of Russian debit and credit cars has done is made Russia introduce its own Mir bank card, wholly independent of Visa and MasterCard, both as a back-up and as an alternative to them.

Notwithstanding this record of failure, Western politicians and Western officials seem to have been blinded by the same assumptions of Western superiority – and Russian inferiority – in relation to the recent bond sale.

They seem to have assumed that no Russian bank would be able to duplicate the sort of management of a multi-billion dollar sovereign bond sale that Western banks can provide.  They also seem to have assumed that if Western depositories like Euroclear and Clearview declined to offer the bonds their clearing services that would stop the sale of the bonds dead in its tracks.

In fact Russia already has its own bond depository systems, including ones set up in collaboration with China to provide clearing servicing for bonds issued in Chinese currency.  As Russia increasingly switches to bonds floated in its own currency and in Asian currencies there is no reason why these depository services should not be extended to provide clearing services for all types of bonds that Russia issues.  As a matter of fact, though it has received scant attention, at the same time that Russia was floating its eurobond in the international money markets, it also successfully floated over a 2 week period on its own domestic market three rouble bond issues to a total value of around $600 million.

The biggest mistake of all is however in Western leaders’ failure to understand their own markets. 

At a time when there is a general shortage of safe bonds it should have been obvious that a bond offered by Russia – financially one of the world’s strongest states – which comes with a very good rate of return because of the (relatively) high interest rate would have no difficulty finding buyers since it would be seen as both highly profitable and extremely safe.  Using legally dubious means to try to stop it was frankly foolish and was an invitation to failure.  So of course it has proved.

At its most basic level what it has done is confirm the point I made originally: the Russians are able to raise all the money they need on the international money markets and there is nothing Western governments can do – short of declaring war – to prevent them.

It is however even bigger than that.  By trying to block the Russians from using the services of Western banks and Western depositories to float their bond what Western governments have actually achieved is force the Russians to do it themselves.  The result is that the Russians have now gained knowledge of how to conduct a multi-billion dollar international sovereign bond sale, just as previous Western actions forced them to set up their own electronic interbank payment system in place of SWIFT and create their own Mir bank card. 

Having gained this knowledge the Russians have no reason not to use it and there is no reason to think they won’t.  The Finance Ministry is already saying Russia will in future use only its own banks and depositories when conducting future bond sales.  Perhaps it’s exaggerating but more likely it means what it says.  Why after all shouldn’t it?  

Truly Western governments when it comes to Russia seem intent on proving Nietzsche’s dictum true: that which does not break us makes us stronger.  Certainly that has been true of Russia’s eurobond sale.  By trying and failing to sabotage it the West has only managed to make Russia stronger.

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Republicans call Justice Department’s Bruce Ohr to testify, but where is British Spy Steele? (Video)

The Duran – News in Review – Episode 78.

Alex Christoforou

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Representative Mark Meadows tweeted Friday…

“DOJ official Bruce Ohr will come before Congress on August 28 to answer why he had 60+ contacts with dossier author Chris Steele, as far back as January 2016. He owes the American public the full truth.”

Lawmakers believe former Associate Deputy Attorney General Bruce Ohr is a central figure to finding out how the Hillary Clinton campaign and the Democratic National Committee paid PR smear firm Fusion GPS and British spy Christopher Steele to fuel a conspiracy of Trump campaign collusion with Russians at the top levels of the Justice Department and the FBI.

House Intelligence Committee Chairman Devin Nunes (R-CA) said Sunday to Fox News’ Maria Bartiromo…

So here you have information flowing from the Clinton campaign from the Russians, likely — I believe was handed directly from Russian propaganda arms to the Clinton campaign, fed into the top levels of the FBI and Department of Justice to open up a counter-intelligence investigation into a political campaign that has now polluted nearly every top official at the DOJ and FBI over the course of the last couple years. It is absolutely amazing,

According to Breitbart, during the 2016 election, Ohr served as associate deputy attorney general, and as an assistant to former Deputy Attorney General Sally Yates and to then-Deputy Attorney General Rod Rosenstein. His office was four doors down from Rosenstein on the fourth floor. He was also dual-hatted as the director of the DOJ’s Organized Crime Drug Enforcement Task Force.

Ohr’s contacts with Steele, an ex-British spy, are said to date back more than a decade. Steele is a former FBI informant who had helped the FBI prosecute corruption by FIFA officials. But it is Ohr and Steele’s communications in 2016 that lawmakers are most interested in.

Emails handed over to Congress by the Justice Department show that Ohr, Steele, and Simpson communicated throughout 2016, as Steele and Simpson were being paid by the Clinton campaign and the DNC to dig up dirt on Trump.

The Duran’s Alex Christoforou and Editor-in-Chief Alexander Mercouris examine the role Bruce Ohr played in Hillary Clinton’s Deep State attack against the Presidency of Donald Trump, and why the most central of figures in the Trump-Russia collusion hoax, British spy for hire Christopher Steele, is not sitting before Congress, testifying to the real election collusion between the UK, the Obama White House, the FBI and the DOJ.

Remember to Please Subscribe to The Duran’s YouTube Channel.

Via The Washington Times

Republicans in a joint session of House committees are set to interview former Associate Deputy Attorney General Bruce Ohr this month to gauge whether a complex conspiracy against Donald Trump existed among Hillary Clinton loyalists and the Justice Department.

“DOJ official Bruce Ohr will come before Congress on August 28 to answer why he had 60+contacts with dossier author Chris Steele as far back as January 2016. He owes the American public the full truth,” tweeted Rep. Mark Meadows, North Carolina Republican and member of the House Oversight and Government Reform Committee.

His panel and the House Judiciary Committee plan to hold a joint hearing to interview Mr. Ohr, according to The Daily Caller.

FBI documents show that the bureau bluntly told dossier writer Christopher Steele in November 2016 that it no longer wanted to hear about his collection of accusations against Mr. Trump.

But for months afterward, the FBI appeared to violate its own edict as agents continued to receive the former British spy’s scandalous charges centered on supposed TrumpRussia collusion.

 

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The US-Turkey Crisis: The NATO Alliance Forged in 1949 Is Today Largely Irrelevant

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Authored by Philip Giraldi via American Herald Tribune:


There has been some reporting in the United States mass media about the deteriorating relationship between Washington and Ankara and what it might mean. Such a falling out between NATO members has not been seen since France left the alliance in 1966 and observers note that the hostility emanating from both sides suggests that far worse is to come as neither party appears prepared to moderate its current position while diplomatic exchanges have been half-hearted and designed to lead nowhere.

The immediate cause of the breakdown is ostensibly President Donald Trump’s demand that an American Protestant minister who has lived in Turkey for twenty-three years be released from detention. Andrew Brunson was arrested 21 months ago and charged with being a supporter of the alleged conspiracy behind the military coup in 2016 that sought to kill or replace President Recep Tayyip Erdogan.

Erdogan has asserted that the coup was directed by former political associate Fetullah Gulen, who lives in exile in Pennsylvania, but has produced little credible evidence to support that claim. In the aftermath of the coup attempt, Erdogan has had himself voted extraordinary special powers to maintain public order and has arrested 160,000 people, including 20 Americans, who have been imprisoned. More than 170,000 civil servants, teachers, and military personnel have lost their jobs, the judiciary has been hobbled, and senior army officers have been replaced by loyalists.

Gulen is a religious leader who claims to promote a moderate brand of Islam that is compatible with western values. His power base consists of a large number of private schools that educate according to his curriculum, with particular emphasis on math and sciences. Many of the graduates become part of a loose affiliation that has sometimes been described as a cult. Gulen also owns and operates a number of media outlets, all of which have now been shut by Erdogan as part of his clamp down on the press. Turkey currently imprisons more journalists than any other country.

It is widely believed that Erdogan has been offering to release Brunson in exchange for Gulen, but President Donald Trump has instead offered only a Turkish banker currently in a U.S. prison while also turning the heat up in the belief that pressure on Turkey will force it to yield. Washington began the tit-for-tat by imposing sanctions on two cabinet-level officials in Erdogan’s government: Interior Minister Suleyman Soylu and Justice Minister Abdulhamit Gul. Ankara has now also been on the receiving end of a Trump tweet and tariffs have been placed on a broad range of Turkish products, to include steel and aluminum.

The view that economic pressure will force the Turks to yield could be mistaken and demonstrates that the Administration does not include anyone who knows that Americans have been unpopular in Turkey since the Gulf War. The threats from Washington might actually rally skeptical and normally pro-western Turks around Erdogan but U.S. sanctions have already hit the Turkish economy hard, with the lira having lost 40% of its value this year and continuing to sink rapidly. Foreign investors, who fueled much of Turkey’s recent economic growth, have fled the market, suggesting that a collapse in credit might be on the way. Those European banks that hold Turkish debt are fearing a possible default.

It is a spectacle of one NATO member driving another NATO member’s economy into the ground over a political dispute. Erdogan has responded in his autocratic fashion by condemning “interest rates” and calling for an “economic war” against the U.S., telling his supporters to unload all their liquid valuables, gold and foreign to buy the plummeting lira, a certain recipe for disaster. If they do that, they will likely lose everything.

Other contentious issues involved in the badly damaged bilateral relationship are conflicting views on what to do about Syria, where the Turks have a legitimate interest due to potential Kurdish terrorism and are seeking a buffer zone, as well as Ankara’s interest in buying Russian air defense missile systems, which has prompted the U.S. to suspend sales of the new F-35 fighter. The Turks have also indicated that they have no interest in enforcing the sanctions on Iran that were re-imposed last week and they will continue to buy Iranian oil after the November 4th initiation of a U.S. ban on such purchases. The Trump Administration has warned that it will sanction any country that refuses to comply, setting the stage for a massive confrontation between Washington and Ankara involving the Turkish Central Bank.

In terms of U.S. interests, Turkey, which has the second largest army in NATO, is of strategic value because it is Muslim, countering arguments that the alliance is some kind of Christian club working to suppress Islam in the Middle East. And it is also important because of its geographic location close to hot spots where the American military is currently engaged. If the U.S. heeds Trump’s call to cut back on involvement in the region, Turkey will become less valuable, but currently, access to the Incirlik Airbase, near Adana and the Syrian border, is vital.

Indeed, Incirlik has become one of the flashpoints in the argument with Washington. Last week, a group of lawyers connected politically to Erdogan initiated legal action against U.S. officers at Incirlik over claimed ties to “terrorists” linked to Gulen. The “Association for Social Justice and Aid” has called for a temporary halt to all operations at the base to permit a search for evidence. The attorneys are asking for the detention of seven named American Colonels and Lieutenant Colonels. General Joseph Votel, head of U.S. Central Command based in Germany is also cited. If the lawyers are successful in court, it will mean a major conflict as Washington asserts the rights of the officers under the Status of Forces Agreement, while Turkey will no doubt insist that the Americans are criminals and have no protection.

Another trial balloon being floated by Erdogan is even more frightening in terms of the demons that it could be unleashing. Abdurrahman Dilipak, an Islamist columnist writing in the pro-government newspaper Yeni Atik, has suggested that there might well be a second terrorist attack on the United States like 9/11. Dilipak threatened that if Trump does nothing to reduce tension “…some people will teach him [to do] that. It must be seen that if internal tensions with the United States continue like this that a September 11 is no unlikely possibility.” Dilipak also warned that presumed Gulenist “U.S. collaborators” inside Turkey would be severely punished if they dared to go out into the streets to protest in support of Washington.

If recent developments in Turkey deteriorate further it might well suggest that Donald Trump’s instinct to disengage from the Middle East was the right call, though it could equally be seen as a rejection of the tactic being employed, i.e. using heavy-handed sanctions and tariffs to compel obedience from governments disinclined to follow Washington’s leadership. Either way, the Turkish-American relationship is in trouble and increasingly a liability for both sides, yet another indication that the NATO alliance forged in 1949 against the Soviet Union is today largely irrelevant.

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Is This The Most Important Geopolitical Deal Of 2018?

After more than 20 years of fraught diplomatic efforts, the five littoral Caspian nations agreed upon a legal framework for sharing the world’s largest inland body of water.

The Duran

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Authored by Olgu Okumus via Oilprice.com:


The two-decade-long dispute on the statute of the Caspian Sea, the world largest water reserve, came to an end last Sunday when five littoral states (Russia, Iran, Turkmenistan, Kazakhstan and Azerbaijan) agreed to give it a special legal status – it is now neither a sea, nor a lake. Before the final agreement became public, the BBC wrote that all littoral states will have the freedom of access beyond their territorial waters, but natural resources will be divided up. Russia, for its part, has guaranteed a military presence in the entire basin and won’t accept any NATO forces in the Caspian.

Russian energy companies can explore the Caspian’s 50 billion barrels of oil and its 8.4 trillion cubic meters of natural gas reserves, Turkmenistan can finally start considering linking its gas to the Turkish-Azeri joint project TANAP through a trans-Caspian pipeline, while Iran has gained increased energy supplies for its largest cities in the north of the country (Tehran, Tabriz, and Mashhad) – however, Iran has also put itself under the shadow of Russian ships. This controversy makes one wonder to what degree U.S. sanctions made Iran vulnerable enough to accept what it has always avoided – and how much these U.S. sanctions actually served NATO’s interests.

If the seabed, rich in oil and gas, is divided this means more wealth and energy for the region. From 1970 until the dissolution of the Soviet Union (USSR) in 1991, the Caspian Sea was divided into subsectors for Azerbaijan, Russia, Kazakhstan and Turkmenistan – all constituent republics of the USSR. The division was implemented on the basis of the internationally-accepted median line.

After the dissolution of the Soviet Union, the new order required new regulations. The question was over whether the Caspian was a sea or a lake? If it was treated as a sea, then it would have to be covered by international maritime law, namely the United Nations Law of the Sea. But if it is defined as a lake, then it could be divided equally between all five countries. The so-called “lake or sea” dispute revolved over the sovereignty of states, but also touched on some key global issues – exploiting oil and gas reserves in the Caspian Basin, freedom of access, the right to build beyond territorial waters, access to fishing and (last but not least) managing maritime pollution.

The IEA concluded in World Energy Outlook (WEO) 2017 that offshore energy has a promising future. More than a quarter of today’s oil and gas supply is produced offshore, and integrated offshore thinking will extend this beyond traditional sources onwards to renewables and more. Caspian offshore hydrocarbon reserves are around 50 billion barrels of oil equivalent (equivalent to one third of Iraq’s total oil reserves) and 8.4 trillion cubic meters of gas (almost equivalent to the U.S.’ entire proven gas reserves). As if these quantities were not themselves enough to rebalance Eurasian energy demand equations, the agreement will also allow Turkmenistan to build the Trans-Caspian pipeline, connecting Turkmenistan’s resources to the Azeri-Turkish joint project TANAP, and onwards to Europe – this could easily become a counter-balance factor to the growing LNG business in Europe.

Even though we still don’t have firm and total details on the agreement, Iran seems to have gained much less than its neighbors, as it has shortest border on the Caspian. From an energy perspective, Iran would be a natural market for the Caspian basin’s oil and gas, as Iran’s major cities (Tehran, Tabriz, and Mashhad) are closer to the Caspian than they are to Iran’s major oil and gas fields. Purchasing energy from the Caspian would also allow Iran to export more of its own oil and gas, making the country a transit route from the Caspian basin to world markets. For instance, for Turkmenistan (who would like to sell gas to Pakistan) Iran provides a convenient geography. Iran could earn fees for swap arrangements or for providing a transit route and justify its trade with Turkey and Turkmenistan as the swap deal is allowed under the Iran-Libya Sanctions Act (ILSA, or the D’Amato Act).

If the surface water will be in common usage, all littoral states will have access beyond their territorial waters. In practical terms, this represents an increasingly engaged Russian presence in the Basin. It also reduces any room for a NATO presence, as it seems to be understood that only the five littoral states will have a right to military presence in the Caspian. Considering the fact that Russia has already used its warships in the Caspian to launch missile attacks on targets within Syria, this increased Russian presence could potentially turn into a security threat for Iran.

Many questions can now be asked on what Tehran might have received in the swap but one piece of evidence for what might have pushed Iran into agreement in its vulnerable position in the face of increased U.S. sanctions. Given that the result of those sanctions seems to be Iran agreeing to a Caspian deal that allows Russia to place warships on its borders, remove NATO from the Caspian basin equation, and increase non-Western based energy supplies (themselves either directly or indirectly within Russia’s sphere of geopolitical influence) it makes one wonder whose interests those sanctions actually served?

By Olgu Okumus for Oilprice.com

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