The Syrian reality show
Russia is the biggest geopolitical winner, and US deployment of financial power to pressure Moscow is likely to backfire in the long run
Syrian President Basher al-Assad has killed more than half a million of his own countrymen and driven another 10 million from their homes. In alliance with Iran, he plans to shift Syria’s ethnic and religious balance by driving out Sunni Arabs and replacing them with Shi’ite settlers from Lebanon to Pakistan. For all intents and purposes he has won the seven-year Syrian civil war, now that Turkey has limited its support for anti-regime Sunni rebels in return for a free hand to suppress Kurdish territorial ambitions in Syria’s north. When Russian President Putin, Iranian President Rouhani and Turkish President Erdogan met in Istanbul April 4, and President Trump declared that the US planned to leave Syria “to the others,” Syria’s fate was settled. The three powers will continue to wrangle among themselves and their proxies will still kill each other, but the big issues have been decided without input from Washington.
Meanwhile 70 civilians are reported dead in the Syrian town of Douma, and an additional 500 show symptoms of exposure to toxic chemicals. The poison gas employed in the attack probably was a mixture of chlorine and sarin. Chlorine is an irritant and sarin is a nerve agent. It is unclear why Assad should have deployed chemical weapons while he is winning. Both gases are easy to manufacture and allegedly have been employed by Syrian Islamist rebels or ISIS in the past. Sarin was first used in 1995 by terrorists in Japan.
Whatever actually occurred, the gas attack gives President Trump the opportunity to dominate the television news cycle. President Trump’s Twitter warning to Russia to “get ready” for “nice and new” cruise missiles flying towards Syria doesn’t worry Moscow, unless, of course, some of its 5,000 military personnel in Syria are in the way.
Russia, meanwhile, warned that it will shoot down any US missiles fired at Syria. It has the capability to do so; cruise missiles are well within the capability of Russia’s S-400 air defense system. Nonetheless, it is very unlikely that the Russians will destroy incoming US cruise missiles, unless Russian lives are at risk. If Russia destroyed all or most of an American missile barrage, it would expose America’s weakness in the region and provoke a strong American response. To date the Pentagon has done little to invest in countermeasures against the S-400, and a full demonstration of its capabilities might change that. It would also humiliate President Trump, whom Moscow considers “unpredictable.”
Russia doesn’t particularly care how many Syrian targets the Americans might destroy. As uncertainty rises in the region and oil prices rise in response, Russia emerges as the biggest winner.
American sanctions against Russian companies, which provoked an 11% fall in the ruble exchange rate vs the US dollar, are an irritant to Moscow, but no more. Russia presently runs a current account surplus of about 2% of GDP, which means that it is a net lender to the rest of the world. Foreign investors owned between 30% and 40% of the float of ruble-denominated Russian government debt prior to the imposition of sanctions last week, drawn by yields above 7%, and the liquidation of these positions forced a steep fall in the Russian currency. But Russia does not require foreign financing and can do perfectly well without it. Its internal budget deficit is about 2% of GDP (vs about 5% for the United States).
The new sanctions restrict the access of some Russian companies to the dollar-based banking system. The aluminum producer Rusal, which accounts for about 6% of world supply, will probably fail to make a US$13 million bond payment this week for lack of access to banking facilities. That is disruptive but not deadly for the Russian economy. In the medium term, it will push Russia to find alternative clearing arrangements in combination with China. The US still controls the clearing mechanism for dollar-based payments, and has the ability to shut targeted companies or countries out of the banking system. But that is a dangerous weapon to use, because it increases the incentive for other countries to find alternative payment mechanisms.
There has been considerable speculation about the use of the Chinese yuan as a reserve currency to compete with the dollar, complete with alternative clearing mechanisms. In practice, a reserve currency requires a large, diverse and free capital market, and China will require years of patient experimentation to create such a market. Washington’s use of the dollar-based banking system for political reasons gives China and Russia reason to move faster. And if the dollar faces serious competition as a reserve instrument, the US government will pay a great deal more to borrow money. With a US$1 trillion annual federal borrowing requirement during the next several years, the US itself is overstretched, and the deployment of financial power for political reasons may backfire.