Russia and China Discuss Abandonment of the Dollar as Putin Visits Germany - December, 2010

The overwhelming power and influence Washington has had over the financial, political and cultural life of this world in the post-Soviet era is a bit difficult for the average human to grasp let alone fully appreciate it's enormity. Nonetheless, Washington's global supremacy is slowly coming to an end. The US is no longer the undisputed leader of the so-called "free world" nor it is the economic powerhouse it once was. And despite what some may want to believe, there is also no turning back from its historic decent.

The geopolitical shifts currently occurring are irreversible. It will take some time before it hits rock bottom, but the American empire is definitely on its downward slide. 

We are currently witnessing some of the separation anxieties and growing pains the global community is feeling as it attempts to create a "multipolar" political paradigm. As the superficially imposed US Dollar commodity is gradually forced to relinquish its global clout, other currencies as well as traditional commodities such as gold and silver are making a strong come back. International calls to abandon the US Dollar continues unabated, and the effort in question seems to be pulling together the top two Eurasian powers - Russia and China

Russian Prime Minister Vladimir Putin once again highlighted this matter last November when he met with Chinese and German leaders. Considering how deeply the US Dollar is entrenched in the world, however, tinkering with it will be easier said than done.  Nevertheless, merely discussing the matter is in itself a very fundamentally important and courageous first step, and many nations around the world have begun doing just that. Such a discussion would have been unheard of just several years ago. The writing is now clearly on the wall and the US Dollar's global death-grip may be finally coming to an end.

On a related note, some financial analysts argue that the recent weakening of the Euro via the financial debacle in Greece was orchestrated by Wall Street to ultimately undermine the growing clout of the Euro. Although somewhat whitewashed, the New York Times article posted below this commentary discusses this matter.



Sino-Russian Abandonment of the Dollar

Putin ditches dollar, backs Euro on trip to Germany (RT video): 

Max Keiser: Teutonic Genie out of bottle, America punches itself in face (RT video):

China and Russia, who have been agitating internationally for several years now for alternatives to the U.S. dollar as the world’s reserve currency, have announced that they will no longer rely on the dollar in bilateral trade. Instead, the two Asian giants, whose respective economies have boomed in recent years and whose cross-border trade has swelled proportionately, will now use each another’s currencies for cross-border commerce. On November 23 in St. Petersburg, visiting Chinese premier Wen Jiabao and Russian Prime Minister Vladimir Putin announced the new measure. Prior to the global financial crisis, the Russians and the Chinese used dollars and sometimes other “hard” currencies to trade with each another, but with the looming global currency crisis — precipitated in no small measure by the inflationary policies of the Federal Reserve — the Chinese and Russians have decided to put their money where their mouth is. Rubles have begun trading against the yuan in Chinese money markets, and the Chinese currency is poised to do the same in Moscow.

Nor is the change in exchange currencies the only sign of the growing Sino-Russian friendship. The St. Petersburg summit produced 12 different agreements ranging from intellectual property protection to energy production. China has agreed to purchase two advanced nuclear reactors from Russia, while Russia is working to negotiate a price for sale of more natural gas to the Chinese. Wen expressed satisfaction with the outcome of the latest summit, which followed a September visit by Russian President Dmitri Medvedev to China. At the press conference, Wen praised the “unprecedented level” of Sino-Russian cooperation and promised that the two countries will “never become each other's enemy.” He also stated that “China will firmly follow the path of peaceful development and support the renaissance of Russia as a great power. The modernization of China will not affect other countries' interests, while a solid and strong Sino-Russian relationship is in line with the fundamental interests of both countries.”

While no one should begrudge the Chinese and Russians their mutual admiration society, the unspoken subtext of such announcements is the determination to diminish the influence of the United States in global affairs. For the nonce, China and Russia are content with newly-allied currencies. In the longer run, however, stronger military ties are a likelihood, given the military rivalry between both countries and the American superpower: Russia, over NATO’s eastward expansion, and China, over Taiwan, the Korean peninsula, and naval dominance in the Pacific region in general. For now, it is enough that the U.S. dollar is losing ground across the world, and that China and Russia in concert are the first major powers to openly repudiate it.


China-Russia currency agreement further threatens U.S. dollar

China and Russia have agreed to allow their currencies to trade against each other in spot inter-bank markets. The motive is to "promote the bilateral trade between China and Russia, facilitate the cross-border trade settlement of [the yuan], and meet the needs of economic entities to reduce the conversion cost," according to Chinese officials. This latest move -- a continuation in a series of efforts by both countries to move away from U.S. dollar usage in international trade -- further threatens the dollar's reserve currency status. The dollar has this status because it is currently the currency of international trade.

For example, when Malaysia and Germany exchange goods, the transaction is often denominated in dollars. In particular, oil -- something that all modern economies need -- is denominated in U.S. dollars, so the currency is almost as indispensable as oil itself. The dollar reserve currency status allows the U.S. to run up high deficits and have its debt be denominated in the U.S. dollar, which in turn enables it to print unlimited dollars and inflate its way out of debt. America, understandably, wants to protect these privileges. In fact, some allege that the U.S. wants to protect this status so badly that it invaded Iraq because the country began selling oil in euros instead of dollars. Now, the U.S. is allegedly threatening Iran because of the country's desire to use euros or Russian rubles in oil transactions.

Meanwhile, China and Russia are gradually revolting against the U.S. dollar. This latest move to shift bilateral trade away from it is significant in itself because China-Russian trade -- previously denominated in dollars -- is currently around $40 billion per year. For Russia, trade with China is larger than trade with the U.S. Moreover, as this policy extends to Russian exports of oil and natural gas to China, it threatens the global "petro-currency" status of the U.S. dollar. According to the International Energy Agency, China is already the largest consumer of energy, although the U.S. is still the largest consumer of oil. However, China, now the largest automobile market in the world, is expected to rapidly increase oil consumption.

Russia is already the second biggest oil exporter and the biggest natural gas exporter in the world. In other words, the growing importance of Russia and China in the global energy picture -- and their phasing out of dollar usage for trading energy commodities -- would marginalize the status of the dollar. Russian ambitions against the dollar for energy exports go back to 2006. That year, former President Vladimir Putin made plans to set up a ruble-denominated oil and natural gas stock exchange in Russia. "The ruble must become a more widespread means of international transactions. To this end, we need to open a stock exchange in Russia to trade in oil, gas, and other goods to be paid for with rubles…Our goods are traded on global markets. Why are they not traded in Russia," said Putin, according to RIA Novosti.

For China, it is promoting the use of yuan as a trade settlement currency in Asia. Recently, it allowed its currency to trade against the Malaysian ringgit. Just like the deal with Russia, the purpose of that agreement was to "promote bilateral trade between China and Malaysia and facilitate using the yuan to settle cross-border trade." Trade is the major reason for the demand of foreign currencies in the first place. So as countries like China and Russia phase out the usage of U.S. dollars for international trade -- including but not limited to oil trade -- its status as the world's reserve currency will continue to slide.

Putin: Russia Will Join The Euro One Day

Putin: Russia will join the euro one day

Vladimir Putin said it is "quite possible" that Russia will one day join the eurozone and create a currency that would eclipse the US dollar as the global reserve standard. Speaking at a conference in Germany the Russian prime minister, who is in the country for talks with Chancellor Angela Merkel, said he was convinced the euro would stabilise and strengthen despite the current sovereign debt crisis. He said: "Yes, there are problems. But the economic policy of the European Central Bank and of the governments of leading European economies ... convinces me that the stability of the euro will be ensured." He added: "We know there are problems in Portugal, Greece, Ireland and the euro is wobbling a bit. On the whole it is a solid, good currency and it should take its place, its role as a reserve currency."

Asked about Russia's role in the eurozone in the future, Mr Putin said: "Can it be supposed that one day Russia will be in some joint currency zone with Europe? Yes, quite possible." Speaking at the same event, Josef Ackermann, chief executive of Deutsche Bank, echoed Mr Putin and said he could imagine Russia joining a common European currency. Mr Putin said that for the past decade there has been a reliance on the dollar that needs to be rebalanced as it makes the world economy vulnerable. "We should move away from the excessive monopoly of the dollar as the only global reserve currency," he said. But the Russian prime minister was critical of European laws intended to improve transparency in energy supply and distribution. He claimed the "Third Energy Package", aimed at liberalising the market, will hinder investment and amounts to uncivilised "robbery". Moscow claims that the measures devalue the European assets of Gazprom, the state-controlled gas giant.

Mr Putin said: "We often hear from our partners in Europe and North America: 'If you want to be members of a global family of civilised nations, you should behave in a civilised way.' What is this then? Have our colleagues forgotten the basic principles?" Meanwhile, Russia's finance minister, Alexei Kudrin, has said the country's banks may buy stakes in the UK's "large" financial companies. He claimed that VTB Group, Russia’s second-biggest lender, is among the banks interested in acquisitions in the UK. During Vince Cable's trade mission to Moscow, the Business Secretary said he would “welcome” Russian investors.


Putin in Germany to Talk Up Free Trade

Russian Prime Minister Vladimir Putin on Thursday arrived in Berlin for talks with German Chancellor Angela Merkel, floating a bold idea of a free-trade zone across the European continent. Ahead of his visit to Germany, Putin, who meets Merkel today, said Russia and Europe could work together to form a free-trade economic zone spanning the entire European continent "from Lisbon to Vladivostok." Merkel, who developed an agreeable working relationship with Putin, a KGB agent in former East Germany, poured cold water on Putin's idea, not least because of a plan championed by the Russian premier to create a joint customs bloc with ex-Soviet Belarus and Kazakhstan. "The steps Russia has taken recently do not point in that direction," Merkel said.

Putin also criticized the European Union for its efforts to liberalize the gas market and promote competition there. For all its good intentions, the plan "undermines a desire by investors to commit funds to new projects," Putin said. Putin and Merkel are expected to discuss the fate of E. ON Ruhrgas' $4.5-billion stake in Gazprom, the world's largest gas producer. A Russian newspaper said E. ON wanted to sell its 3.5 per cent stake in the gas giant to Vnesheconombank, the state economic development bank.


Germany attacks US economic policy

Germany has put itself on a collision course with the US over the global economy, after its finance minister launched an extraordinary attack on policies being pursued in Washington. Wolfgang Schäuble accused the US of undermining its policymaking credibility, increasing global economic uncertainty and of hypocrisy over exchange rates. The US economic growth model was in a "deep crisis," he also warned over the weekend. His comments set the stage for acrimonious talks at the G20 summit in Seoul starting on Thursday. Germany has been irritated at US proposals that it should make more effort to reduce its current account surplus. But Berlin policymakers were also alarmed by last week's US Federal Reserve decision to pump an extra $600bn into financial markets in an attempt to revive US economic prospects through "quantitative easing".

On Friday, Mr Schäuble described US policy as "clueless". In a Der Spiegel magazine interview, to be published on Monday, he expanded his criticism further, saying decisions taken by the Fed "increase the insecurity in the world economy". " They make a reasonable balance between industrial and developing countries more difficult and they undermine the credibility of the US in finance policymaking." Mr Schäuble added: "It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of their [central bank's] printing press." Germany's export success, he argued, was not based on "exchange rate tricks" but on increased competitiveness. "In contrast, the American growth model is in a deep crisis. The Americans have lived for too long on credit, overblown their financial sector and neglected their industrial base. There are lots of reasons for the US problems -- German export surpluses are not part of them."

There was also "considerable doubt" as to whether pumping endless money into markets made sense, Mr Schäuble argued. "The US economy is not lacking liquidity." On the future of the eurozone, Mr Schäuble confirmed in the same interview that Berlin will push for a greater private investor involvement in future bail-outs. To ensure German taxpayers faced the smallest possible burden it was important to have the possibility of an orderly debt restructuring with the participation of private creditors, he said. Germany's proposals for a planned new rescue mechanism have run into resistance from the European Central Bank, which fears they will add to investor uncertainty at a crucial time for Europe's 12-year old monetary union. Mr Schäuble said the new mechanism would apply only to new eurozone debt but argued the European Union "was not founded to enrich financial investors".
Mr Schäuble envisaged a two-stage process in a future crisis. The EU would put in place the same sort of saving and rescue programme as imposed this year on Greece. In a first stage, the term structure of government debt could be extended. If that did not work, then in a second stage, private creditors would have to take a discount on their holdings. In return, the value of the remainder would be guaranteed, Mr Schäuble said.

Germany Criticizes Fed Move

German officials, concerned that Washington could be pushing the global economy into a downward spiral, have launched an unusually open critique of U.S. economic policy and vowed to make their frustration known at this week's Group of 20 summit. Leading the attack is Finance Minister Wolfgang Schäuble, who said the U.S. Federal Reserve's decision last week to pump an additional $600 billion into government securities won't help the U.S. economy or its global partners. The Fed's decisions are "undermining the credibility of U.S. financial policy," Mr. Schäuble said in an interview with Der Spiegel magazine published over the weekend, referring to the Fed's move, known as "quantitative easing" and designed to spur demand and keep interest rates low. "It doesn't add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank's printing presses, artificially lower the value of the dollar."

At an economics conference in Berlin Friday, Mr. Schäuble said the Fed's action shows U.S. policy makers are "at a loss about what to do." Berlin's eagerness to scold the U.S. appears driven in part by a desire for payback after suffering persistent criticism this year for the German economy's reliance on exports. German officials have been on the defensive since French Finance Minister Christine Lagarde suggested in March that German trade surpluses were hurting the competitiveness of weaker euro-zone members and contributing to the bloc's debt crisis. That argument was reinforced as German gross domestic product surged an annualized 9% in the second quarter on improved demand for its manufactured goods abroad. The government now believes the economy will grow 3.4% this year.

Mr. Schäuble hit back at critics in the Der Spiegel interview. "Germany's exporting success is based on the increased competitiveness of our companies, not on some sort of currency sleight-of-hand. The American growth model, by comparison, is stuck in a deep crisis," he said. "The USA lived off credit for too long, inflated its financial sector massively and neglected its industrial base. There are many reasons for America's problems—German export surpluses aren't one of them." Pressure continued at the G-20 finance ministers' meeting last month in Gyeongju, South Korea, where U.S. Treasury Secretary Timothy Geithner urged countries to commit to keeping their current-account imbalances below 4% of gross domestic product over the next few years.

The measure was aimed at China as part of U.S. attempts to nudge Beijing to let the yuan rise, but Germany, whose current-account surplus is about 6% of GDP according to the International Monetary Fund, also vehemently opposed the plan. The result was a general commitment among G-20 members to keep trade balances at "sustainable levels" and to avoid a cascade of competitive currency devaluations. "Germany's reliance on exports rather than domestic demand may be a successful short-run strategy, but it is very hard on its trading partners and shortsighted," said Christina Romer, a professor of economics at the University of California, Berkeley, and until recently the head of President Barack Obama's Council of Economic Advisers. "It is in Germany's interest for its neighbors to prosper because of the interconnectedness of their economies and, especially, their banks."

The Fed's most recent round of quantitative easing also offends German officials' commitment to sound public finances and low inflation. As the global recovery took hold this year, German Chancellor Angela Merkel introduced €80 billion in budget cuts and urged other major economies to undertake their own fiscal consolidation. Mr. Schäuble said last week that he doubted the U.S. would live up to a commitment world leaders made this summer at a G-20 summit in Toronto to halve government deficits by 2013. The aggressive monetary policy in the U.S. runs counter to the strategy of the European Central Bank, whose institutional thinking reflects a German abhorrence of high inflation that goes back to the country's financial ruin in the depression of the 1930s. The rancor from Berlin has left U.S. officials wondering whether the Germans are going to push their frustrations into the heart of the summit discussions in Seoul or whether their objections are largely posturing.

In Washington, the German rhetoric seems particularly shrill at a time when the euro is trading at a lower level against the dollar than it was a year ago—though the euro has risen in value in recent months. U.S. officials are expecting complaints from emerging markets, which are dealing with a flood of money from investors in the U.S. and Europe in search of higher yields. Interest rates in Europe and the U.S. are much lower than in emerging markets, which creates an incentive for investors in both Germany and the U.S. to turn their attention overseas.

Mr. Schäuble, who will accompany Ms. Merkel to the G-20 summit Thursday and Friday in Seoul, South Korea, may have his own motivations for making bold statements and policy proposals that will keep him in the spotlight. Confined to a wheelchair since he was shot in an assassination attempt 20 years ago, Mr. Schäuble, 68, has been in and out of hospital care this year after a routine operation in February related to his paralysis left him with a wound that failed to heal. He missed key meetings last spring as European governments fought to keep Greece out of insolvency, prompting persistent questions over whether he was wealthy enough to represent Germany at a crucial time.

After spending three weeks at a clinic for treatment. Mr. Schäuble made a cantankerous return to German public discourse late last month. In addition to spearheading the government's hard line against U.S. monetary policy, he publicly reprimanded a spokesman for fumbling the release of tax-revenue estimates to reporters—an episode that became a popular Internet video. In Berlin on Friday, Mr. Schäuble said his focus on his job had never flagged. "From a hospital, you can make telephone calls perfectly well," he said.


Wall St. Helped to Mask Debt Fueling Europe’s Crisis

Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts. As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels. Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November — three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting.

The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards. It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means. Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight of its debts and with its richer neighbors vowing to come to its aid, the deals over the last decade are raising questions about Wall Street’s role in the world’s latest financial drama.

As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere. In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come. Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities. Some of the Greek deals were named after figures in Greek mythology. One of them, for instance, was called Aeolos, after the god of the winds.

The crisis in Greece poses the most significant challenge yet to Europe’s common currency, the euro, and the Continent’s goal of economic unity. The country is, in the argot of banking, too big to be allowed to fail. Greece owes the world $300 billion, and major banks are on the hook for much of that debt. A default would reverberate around the globe.

A spokeswoman for the Greek finance ministry said the government had met with many banks in recent months and had not committed to any bank’s offers. All debt financings “are conducted in an effort of transparency,” she said. Goldman and JPMorgan declined to comment. While Wall Street’s handiwork in Europe has received little attention on this side of the Atlantic, it has been sharply criticized in Greece and in magazines like Der Spiegel in Germany. “Politicians want to pass the ball forward, and if a banker can show them a way to pass a problem to the future, they will fall for it,” said Gikas A. Hardouvelis, an economist and former government official who helped write a recent report on Greece’s accounting policies.

Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt — the Wall Street term for loans to governments — is as unfettered as it is vast. “If a government wants to cheat, it can cheat,” said Garry Schinasi, a veteran of the International Monetary Fund’s capital markets surveillance unit, which monitors vulnerability in global capital markets. Banks eagerly exploited what was, for them, a highly lucrative symbiosis with free-spending governments. While Greece did not take advantage of Goldman’s proposal in November 2009, it had paid the bank about $300 million in fees for arranging the 2001 transaction, according to several bankers familiar with the deal.

Such derivatives, which are not openly documented or disclosed, add to the uncertainty over how deep the troubles go in Greece and which other governments might have used similar off-balance sheet accounting. The tide of fear is now washing over other economically troubled countries on the periphery of Europe, making it more expensive for Italy, Spain and Portugal to borrow. For all the benefits of uniting Europe with one currency, the birth of the euro came with an original sin: countries like Italy and Greece entered the monetary union with bigger deficits than the ones permitted under the treaty that created the currency. Rather than raise taxes or reduce spending, however, these governments artificially reduced their deficits with derivatives.

Derivatives do not have to be sinister. The 2001 transaction involved a type of derivative known as a swap. One such instrument, called an interest-rate swap, can help companies and countries cope with swings in their borrowing costs by exchanging fixed-rate payments for floating-rate ones, or vice versa. Another kind, a currency swap, can minimize the impact of volatile foreign exchange rates. But with the help of JPMorgan, Italy was able to do more than that. Despite persistently high deficits, a 1996 derivative helped bring Italy’s budget into line by swapping currency with JPMorgan at a favorable exchange rate, effectively putting more money in the government’s hands. In return, Italy committed to future payments that were not booked as liabilities. “Derivatives are a very useful instrument,” said Gustavo Piga, an economics professor who wrote a report for the Council on Foreign Relations on the Italian transaction. “They just become bad if they’re used to window-dress accounts.”

In Greece, the financial wizardry went even further. In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money. Aeolos, a legal entity created in 2001, helped Greece reduce the debt on its balance sheet that year. As part of the deal, Greece got cash upfront in return for pledging future landing fees at the country’s airports. A similar deal in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans, despite doubts by many critics. These kinds of deals have been controversial within government circles for years. As far back as 2000, European finance ministers fiercely debated whether derivative deals used for creative accounting should be disclosed. The answer was no. But in 2002, accounting disclosure was required for many entities like Aeolos and Ariadne that did not appear on nations’ balance sheets, prompting governments to restate such deals as loans rather than sales.

Still, as recently as 2008, Eurostat, the European Union’s statistics agency, reported that “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.” While such accounting gimmicks may be beneficial in the short run, over time they can prove disastrous. George Alogoskoufis, who became Greece’s finance minister in a political party shift after the Goldman deal, criticized the transaction in the Parliament in 2005. The deal, Mr. Alogoskoufis argued, would saddle the government with big payments to Goldman until 2019. Mr. Alogoskoufis, who stepped down a year ago, said in an e-mail message last week that Goldman later agreed to reconfigure the deal “to restore its good will with the republic.” He said the new design was better for Greece than the old one.

In 2005, Goldman sold the interest rate swap to the National Bank of Greece, the country’s largest bank, according to two people briefed on the transaction. In 2008, Goldman helped the bank put the swap into a legal entity called Titlos. But the bank retained the bonds that Titlos issued, according to Dealogic, a financial research firm, for use as collateral to borrow even more from the European Central Bank. Edward Manchester, a senior vice president at the Moody’s credit rating agency, said the deal would ultimately be a money-loser for Greece because of its long-term payment obligations. Referring to the Titlos swap with the government of Greece, he said: “This swap is always going to be unprofitable for the Greek government.”


Related information from the recent past:

China Argues to Replace US Dollar

China's central bank has reiterated its call for a new reserve currency to replace the US dollar.
The report from the People's Bank of China (PBOC) said a "super-sovereign" currency should take its place. Central bank chief Zhou Xiaochuan has loudly led calls for the dollar to be replaced during the financial crisis. The bank report called for more regulation of the countries that issue currencies that underpin the global financial system. "An international monetary system dominated by a single sovereign currency has intensified the concentration of risk and the spread of the crisis," the Chinese central bank said. The dollar fell after the report was released. The US currency dropped 1% against the euro to $1.4088, and declined 0.8% versus the British pound to $1.6848.


Mr Zhou caused a stir earlier this year when he said the dollar could eventually be replaced as the world's main reserve currency by the Special Drawing Right (SDR), which was created as a unit of account by the IMF in 1969.

  • Foreign currency held by a government or a central bank
  • Used to pay foreign debt obligations or influence exchange rates
  • The dollar is viewed as the world's reserve currency as the vast majority of reserves are held in the US currency
  • Smaller amounts are held in euros, pounds and yen
The PBOC said in the report that not only should the world adopt the SDR, but that the IMF should be entrusted with managing a portion of its member countries' foreign currency reserves. "To avoid intrinsic shortcomings in using a sovereign currency as a reserve currency, we need to create an international reserve currency that is divorced from sovereign states and can maintain a stable value over the long term," the PBOC report said. It also issued some veiled criticism of the US policies, saying that one of the major issues was that it was difficult to balance the needs of domestic politics with the requirements of being the world's reserve currency. "The economic development model of debt-based consumption is most difficult to sustain," the PBOC said. Russian President Dmitry Medvedev recently joined Mr Zhou in saying it was time to consider an alternative benchmark currency for international debt. But Russian finance minister Alexei Kudrin then said "it's too early to speak of an alternative".


The Demise of the Dollar
Max Keiser: Dollar to be buried way before 2018:

US dollar to die out in oil deals?

Robert Fisk on the Gulf 'ditching the dollar' in oil trade:
In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar. Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars. The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region's conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East. China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq – blocked by the US until this year – and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.

Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China's growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China's reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro.

Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America's trading partners have been left to cope with the impact of Washington's control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency. The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. "The Russians will eventually bring in the rouble to the basket of currencies," a prominent Hong Kong broker told The Independent. "The Brits are stuck in the middle and will come into the euro. They have no choice because they won't be able to use the US dollar."

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years' time. The current deadline for the currency transition is 2018. The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets. "These plans will change the face of international financial transactions," one Chinese banker said. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.
Report: Secret Plot Against Dollar

A report published Tuesday by a British newspaper sent shockwaves across the world. The Independent story, entitled "The demise of the dollar," claimed that several key governments around the world were conspiring in secret meetings to stop trading oil in U.S. federal reserve notes. Calling it a “graphic illustration of the new world order,” the paper reported that Arab governments, China, Russia and even France and Japan would drop the dollar and start pricing oil with a basket of currencies — the Japanese yen, Chinese yuan, the euro and a new currency being created for members of the Gulf Co-operation Council that includes Saudi Arabia, Kuwait, and Qatar. The report was mostly based on unnamed Arab and Chinese banking sources.

According to The Independent, the secret meetings between finance ministers and central bankers have already been held. The transition should be complete following a nine-year timeline, with a deadline of 2018. And American officials know of the plan and the meetings, though not the details, the paper reported. "These plans will change the face of international financial transactions," an anonymous Chinese banker told The Independent. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."

Immediately after the news broke, representatives from at least Kuwait and Saudi Arabia claimed that the report was inaccurate. "At our level, no," said Kuwait’s oil minister, Sheik Ahmed Al Abdullah Al Sabah, according to an Associated Press report entitled ‘Officials deny UK media report on move from dollar.’ "I didn't even dream about it." Gold hit a record high at over $1,040 an ounce amidst the news, while the dollar fell sharply against world currencies. A Reuters analysis of the report about the secret meetings claimed it was “a potentially major sign of the greenback's fading status.” The research director from called it “another chapter in the plot against the dollar as the world’s most dominant reserve currency.”

This would certainly not be the first call to end the dominance of U.S. currency in world trade. The United Nations recently called for creating a new global monetary system, while Russia and China have both called for an end to dollar hegemony. Officials around the world have also expressed deep concern about the Federal Reserve’s inflationary policies and artificially low interest rates. The Independent article also highlighted an alleged potential for military and economic confrontations between the United States and China, citing statements made by government officials. "Bilateral quarrels and clashes are unavoidable," China’s former special envoy to the Middle East told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."

Diversifying away from the dollar will be a tricky undertaking for countries like China, Japan, and the Gulf Arab states. They hold trillions of dollars in reserves, and if they started selling rapidly, the price would tank, eroding a significant part of the value of their reserves. But it is not impossible, or even unthinkable. If and when the world does ultimately abandon the dollar, it will be bad news for the American economy. Faced with the prospect of rising prices for imports and a manufacturing base that has been shipped abroad, consumers will find themselves increasingly strapped for purchasing power. But with the Federal Reserve printing debt-money like it’s going out of style, can anyone really blame other countries for wanting to get out?


Moscow Says U.S. Leadership Era Is Ending

Perhaps inevitably for a country often lectured by the United States about its own economy, Russia is using the occasion of the American financial crisis to do some lecturing of its own. President Dmitri A. Medvedev has blamed what he called financial “egoism” for the crisis and said it should be taken as a sign that America’s global economic leadership was drawing to a close. Along with some European leaders, Mr. Medvedev has called for greater multilateralism in financial regulation, echoing a Russian position on international relations generally. “The times when one economy and one country dominated are gone for good,” he said Thursday at St. Petersburg State University during the eighth annual Petersburger Dialog, a forum devoted to developing relations with Germany. After the American banking collapses, he said, the world does not want America as a “megaregulator.”

Chancellor Angela Merkel of Germany, in Russia for the forum, said Germany, too, would “always support a multilateral approach” to market regulation. Along with the Germans and others, Russian leaders contend that poorly regulated American markets caused the current crisis. While it is hardly a new sentiment, in Russia there is a gloating quality, as the American crisis deepens. There has been a drumbeat of pronouncements in recent days on this theme. Prime Minister Vladimir V. Putin made a speech about what he called American financial “irresponsibility” on Wednesday, blaming non-Russian causes for Russia’s stock plunge of more than 50 percent. Of the financial crisis, he said, “This is not the irresponsibility of some people but the irresponsibility of the system, which as it is known, claimed to be the leader.” In contrast to the Europeans who have also criticized lax American regulation, however, Russians are facing a financial system that has been in such chaos that regulators suspended trading on the stock market three times last month. The global credit crisis could trim about 1 percent from Russian growth next year, said the finance minister, Aleksei L. Kudrin.

As in other emerging markets, investors are pulling money out of Russia and depositing it in United States Treasury securities because they are considered the safest place to park money. By the time Mr. Medvedev spoke on Thursday, investors had pulled about $52 billion in net private capital out of Russia since the second week of August, when the war in Georgia and political tension with the West heightened concern about political risk here. The criticism of American finance coincided with a rise in Russian military bluster that has been viewed by some in the West as a resurgence of the Kremlin’s cold-war mentality. On Thursday, Russian generals announced plans for the largest air force exercise since the collapse of the Soviet Union, called Stability 2008, to be held next week. Also on Thursday, the deputy commander of Russia’s navy said the country would build eight new nuclear submarines before 2015.


After Financial Crisis, Uncertainty and Lectures From Abroad

As America’s financial crisis was gathering speed, Brazil’s president seemed dismissive, almost gleeful, about the troubles up north. “What crisis?” said the president, Luiz Inácio Lula da Silva, when asked last month about the financial maelstrom. “Go ask Bush about that.” Like a number of South American countries, Brazil had been flashing a newfound confidence, one born of a deliberate push to decrease political and economic reliance on the United States. But on Monday, shortly after Congress rejected a proposed $700 billion bailout package, Mr. da Silva struck a very different tone, saying in his weekly radio address that Brazil was not immune from the spreading woes after all. “A recessionary crisis in a country like the United States,” he explained to Brazilians, “can bring problems to all countries.” In only a few days, Latin American leaders have gone from schadenfreude to fear. Despite strong economic growth this decade and some aggressive efforts to break free of the American orbit, there is a growing nervousness that once again Latin America cannot escape the globalized connections in the financial sector that run through the United States. After seeming to revel in the collapse of Lehman Brothers, Hugo Chávez, Venezuela’s president, skipped the opening of the United Nations General Assembly last week to visit China instead, saying that Beijing was now much more relevant than New York.

But by Tuesday, after the American stock market plunged nearly 778 points, dragging down Latin American exchanges with it, New York, and Wall Street in particular, had suddenly become relevant once more, with Mr. Chávez saying at a summit meeting in Brazil that the financial crisis would have the force of “one hundred hurricanes.” A number of governments in the region have been working for the past decade to reduce their dependence on the American economy. They have diversified trade with the rest of the world, while also making efforts to save tens, and sometimes hundreds, of billions of dollars for times when international conditions turn sour. As their economies strengthened and their political cooperation took off, it seemed the United States was being rapidly pushed out of the picture. Latin American leaders were standing up to America with growing bravado. In the past month, both Venezuela and Bolivia expelled the American ambassadors to their countries. Not only did Brazil, thought to be among America’s strongest allies in the region, support the expulsion by Bolivia, a major source of natural gas, but Mr. da Silva also railed against an American naval presence in the region, warning that his nation needed to put its own warships on alert in response.

Such anti-American sentiment reflects a longstanding bitterness over Washington’s economic prescriptions for Latin America, policies that some countries in the region blame for undercutting them. As Wall Street itself started to unravel, some leaders seemed to feel vindicated by the collapse. “We are witnessing the First World, which at one point had been painted as a mecca we should strive to reach, popping like a bubble,” Cristina Fernández de Kirchner, Argentina’s president, said two weeks ago. But the financial crisis has exploded far beyond Wall Street. Whipsawing global markets are already having a ripple effect across Latin America. As nervous investors pulled money out of emerging markets, Brazil’s currency, the real, plunged 16 percent against the dollar last month, resulting in hundreds of millions of dollars in losses at large food and eucalyptus-pulp exporters that placed bad bets on the direction of the real. In Mexico, falling remittances from the United States are also raising concern, with Finance Minister Augustín Carstens warning that money sent home from across the border could decline by $2.8 billion, or 8 percent, this year. In Venezuela, a sharp drop in the value of the country’s bonds in the last two weeks reflects fears about plunging oil prices, especially since the United States remains by far the largest buyer of Venezuelan oil despite the deterioration of relations between the countries.

The issue, economists say, is largely about access to credit, which is needed to keep Latin America’s export-oriented economies humming along. “The credit crunch and the liquidity constraints we are seeing are going to affect everyone in the world,” said Alfredo Coutiño, a senior economist at Moody’s, the credit-rating agency. “That means that the cost for Latin American companies, particularly for those with the need for external funds, is going to be higher.” Plummeting commodity prices could also hamper growth in countries like Argentina and Ecuador, while the psychological effect of a crash in the United States is already reverberating through Latin American stock exchanges. That could lead to a reining in of household spending, which has driven much of the recent growth in Brazil’s economy, especially, economists said. Some governments are also directly tied to the American institutions they have derided, as in Venezuela, where the government has lost about $300 million in Lehman-related investments. Ricardo Sanguino, director of the finance committee in Venezuela’s National Assembly, said the losses were minor compared with the Central Bank’s reserves of more than $30 billion and previous decisions to shift some of those reserves into gold and out of American investment banks into Swiss banks. “The crisis affects us because we’re not a completely closed economy, but the impact won’t be disastrous,” Mr. Sanguino said.

With increased fiscal discipline, some countries have built up stabilization funds that should help them weather the fallout from the Wall Street mess, economists said. Brazil’s government has directed its national development bank, the BNDES, to extend $2.5 billion in credit to agricultural exporters for the next harvest to try to prevent a major slowdown. Other countries in the region may struggle more. Before the crisis, foreign investment had already dwindled in Bolivia and Ecuador, where governments flush with revenues before commodities prices began declining had nationalized foreign companies and clashed with multinationals. Argentina, still weighed down by debt, saved much less than Brazil or Chile during its economic expansion. Now it faces declining commodity prices, especially for soybeans, its main export, and will have less flexibility to infuse cash into its industries, analysts said. In recent weeks, the Argentine government, realizing it may face a fiscal shortfall, has been focused on international investors to gain new funds, and has leaned on Venezuela to refinance billions of dollars in debts. But with oil prices plummeting, Venezuela may impose harsher conditions on lending to Argentina. Even before the Wall Street meltdown, the region’s Achilles’ heel — high inflation — was rearing its head in several countries, notably in Venezuela, Bolivia and Argentina. Economists had been warning for months that Argentina could be headed toward a financial crisis of its own if it could not get rising inflation under control.

One silver lining for some countries could be China, which has become a strong export partner for South American soybeans, oil and other commodities. If China’s growth remains robust, the country will continue to lean on Brazil and Argentina for the crop. By traveling to China last month to sign a deal aimed at tripling oil exports to the country, Mr. Chávez may end up reducing his country’s dependence on the American market. “The world will never be the same after this crisis,” Mr. Chávez told reporters in Brazil. “A new world has to emerge, and it is a multipolar world. We are decoupling from the wagon of death.” Other leaders, like Mr. da Silva, have gone from being dismissive of the crisis to outright incensed at Wall Street and Washington for it. “We did what we were supposed to do to get our house in order,” an angry Mr. da Silva said Monday. “They spent years telling us what to do and they themselves didn’t do it.”


Merkel Calls U.S. Irresponsible

The U.S. government was irresponsible in regard to world markets when it allowed its largest banks and financial institutions to operate without sufficient oversight, German Chancellor Angela Merkel said at a meeting of conservative leaders in Linz, Austria, the Associated Press reports. "Anyone who makes a real product knows how it is supposed to look and what standards are expected. In financial markets you also need to know what is being traded. Otherwise, things happen that we all end up paying for," Merkel said. Somewhat earlier, in an interview with German media, Merkel said that she sympathizes with people who wonder if the world economy is “fair.” Problems on the mortgage market and interbank crediting practically paralyzed the U.S. financial system earlier this year and caused a number of large companies to close. Federal authorities closed the IndyMac bank, with assets of $32 billion, in July. On September 15, Lehmann Brothers, one of the oldest American investment banks, filed for bankruptcy. The U.S. government nationalized major mortgage companies Fannie Mae and Freddie Mac to avoid the collapse of credit markets. Along with the bad news in the United States, a series of painful collapses began around the world. The Russian stock market was rescued from danger by massive financial support from the government and Central Bank.


China, Russia Renounce the Dollar?

The recent meeting between Russian Prime Minister Vladimir Putin and his Chinese counterpart, Wen Jiabao, created a financial sensation. Wen said that the two nations could withstand the global financial crisis if they joined forces; Putin urged him to go farther and stop using U.S. dollars in Russian-Chinese settlements. This idea is nothing new. Russia and China reached a "framework" agreement in November 2007, which was followed by China's similar agreement with Belarus. Earlier this year, Iranian President Mahmoud Ahmadinejad and Venezuelan leader Hugo Chavez turned against the dollar as well when they asked their OPEC partners to stop using the dollar for oil settlements. They argued that the "green" currency was no longer reliable and it was high time they look for a more stable and predictable alternative. Curiously, unlike the Ahmadinejad and Chavez appeal, Putin's proposal came as the dollar was on the rebound and even began pushing the euro.

Economists even started talking in terms of a reversal of the global currency trends, rather than the temporary appreciation of the dollar. Analysts predict that the dollar will regain its value in the next few months. They do not see anything which could hinder its steady growth. Yet, Putin proposed that Russia and China stop using it as a settlement instrument. What is it - lack of confidence in the dollar's prospects or a political move? Experts differ on this count. Igor Nikolayev, chief strategic analyst at FBK private auditing firm, sounded skeptical: "I think it was a political statement rather than an economic decision. There is a dominant public sentiment that the United States is the source of all evil, so let's stop using the dollar," he explained. One has to bear in mind, though, that some other currency will need to be found to replace the dollar for international settlements. China is unlikely to use the ruble, and Russia would be equally reluctant to accept the yuan. "They could opt for the euro, but its future is uncertain, especially considering current developments on global financial markets. It is also unclear whether China would be happy to start using the euro while most of its international reserves are held in dollars," he added. There are more questions than answers here, Nikolayev concluded. To be objective, one has to admit that other analysts are not as skeptical about the possibility of using other currency units between Russian and Chinese companies. Andrei Marinchenko, director general of the Kalita-Finance company, said the idea was quite realistic. Moreover, he thinks that the ruble stands a good chance of being selected as a reserve currency, primarily because the Chinese are disappointed in the dollar but aren't yet accustomed to the euro.

Only time will show who is right. But to stop using the dollar in Russian-Chinese settlements is too important a decision to make for purely political reasons - that much is obvious. Suppose we do it; what will be the implications for Russian businesses, how will the new financial and political reality affect their incomes and savings? Marinchenko is convinced of a beneficial impact. According to Marinchenko, once the ruble is recognized as a settlement unit, it will enjoy growing demand with Chinese companies and individuals. The Russian currency will consequently grow stronger and more influential globally. Russia will also become immune to many shocks from stock market meltdowns and won't have to fear future devaluation or revaluation of the ruble. It will happen because the role of the U.S. dollar, which has earned a reputation as an unstable and unreliable currency lately, will be much less important.


Russia Seeks to Trade Oil for Loans From China

As credit streams from troubled Western banks dry up in the financial crisis, Russian oil companies are negotiating multibillion-dollar loans from a more reliable source: the cash-rich Chinese government. Under a proposed loans-for-oil deal, reported by Reuters on Monday, Russian oil companies would borrow $20 billion to $30 billion from Beijing. In return, they would export about two billion barrels of oil to China over the next 20 years. The Chinese prime minister, Wen Jiabao, was in Moscow on Tuesday for talks with Prime Minister Vladimir V. Putin, but there was no indication that the deal had been signed. The agreement would commit Russian companies to redirect some of their energy exports to the East at a time when Russian and Chinese leaders have been saying they would like to see greater integration of their economies, and Russia’s relations with the West are at a low point. It would also offer a prime example of the way the financial crisis is realigning global commerce, directing it away from reliance on Wall Street lending and toward China and Japan, with their enormous cash reserves. It was unclear how close Russia and China were to an agreement.

A planned pipeline to China, a spur of a trans-Siberian pipeline that is under construction, would be capable of carrying about 300,000 barrels of oil a day. On Tuesday, the countries agreed only to build the spur, from the Russian town of Skovorodino to the Chinese border, at a cost of about $800 million. How much oil will flow through the pipeline, and at what cost per barrel, have been matters of contention for some time and have yet to be resolved. There is little doubt that the crushing cash needs of the Russian oil companies helped narrow the differences. Much of the companies’ revenue during the recent spike in oil prices went to taxes. As a result, the state oil company Rosneft owes about $21 billion to Western banks and has already been confronted with demands from creditors for early repayment. China, after years of piling up trade surpluses with the United States, is awash in cash, with currency reserves of $1.9 trillion, the largest in the world. The Russian government, which also has a healthy cash reserve, has pledged $9 billion in loans to its country’s oil companies, but that does not begin to cover their cash needs, which include the enormous sums needed to expand into the more expensive and remote fields in Siberia.

Mr. Wen and Mr. Putin also discussed relying on rubles and yuan in bilateral trade, rather than on dollars. Mr. Putin is an advocate of reducing the dollar’s role in international commerce. “At the moment the world, which is based on the dollar, is suffering serious problems,” he said.


Erdogan and the Decline of the Turks? December, 2011

Watching Turkey and Israel, two genocidal partner-states in their respective neighborhoods, at each other's throats recently has been an absolute pleasure. Just read the rantings of a Zionist (and a former Turkophile) in the following New York Times article. Since Ankara has decided not to play ball with Tel Aviv and Washington, they are all of a sudden the bad guys in the neighborhood, a nation on the verge of collapse... Despite what these shameless Zionists would like you to believe, however, the fact of the matter is that Turkey has been going through a golden age during the past ten years when Turkey's increasingly Islam oriented government began transforming Ankara's political and economic character. With their farsighted politics, their good work ethics, their discipline, their fierce love towards their nation and with their unwavering obedience to their nation's leaders, Turkey today has in essence transformed itself into Europe's China. Turkey's industrial sector is very large and growing. Turkey also continues to be a major transportation hub and a nation with one of the highest number of billionaires in the world. Despite what its former friends want to believe, Turkey's economic and social progress is real and it won't be going away anytime soon.

For understandable reasons we Armenians tend to approach matters pertaining to the Turkish nation very emotionally, which translates - irrationally. The most dangerous thing we as a nation can do is to underestimate our competitors and/or our enemies, or delve into paranoia based fears or inaction. Barring any major future clash between Turkey and regional major powers such as Russia, Turkey will continue to be a powerful nation at our doorstep, a nation that we Armenians simply have to learn to deal with. With the Arab world hopelessly in disarray and the specter of a major war looming over Iran, Turkey is poised to become a leader in the Muslim world once again. The long-term fear for a nation like Armenia is a well organized pan-Islamic militant movement evolving in the region. [militant Islam today is very weak and fragmented and at its highest levels, controlled by Western intelligence and their proxies in the Middle East]

Although we are some time away from a well organized and independent pan-Islamic movement taking hold in the region, there are nevertheless some contemporary signs of its presence. The Middle East's increasing pressure under the combined weight of Washington, London and Tel Aviv, coupled with the impotence, complicity and duplicity of various Western backed Arab governments, the region's distraught Muslim populations have been forced to seek a savior, a new Salahadin. A secular form of nationalism that had appeared in the Middle East and Iran during the middle of the twentieth century was crushed by the West during the 1960s, 1970s and more recently in Iraq. With the region's secular nationalists all but crushed, a void had been created. As a result, a leaderless form of pan-Islamic militancy has been evolving in the region to fill this major political void. As in Ottoman times, Turkey today is in essence competing with Iran to fill this void and to represent the region's Islamic world. And armed with one of the most dynamic economies in the world today, Turkey may be wining its competition with a more backward and embattled Iran.

Israel or no Israel, when the West is done exploiting every last drop of the region's energy resources (which actually seems to be within sight), have no doubt - it will move on to greener pastures. Their job in the Middle East will be done and they will no longer give the area political or economic priority. And that's when we can expect widespread chaos throughout the region as one Western backed dictator after another is deposed and replaced with Islamic nationalists. I personally have no doubt that the region's Muslim world will eventually unite to cooperate against what they deem to be foreigners on their soil. While the West and the rest can simply pull back to their respective corners of the world, like in past times, Armenia will be left in the middle of the volatile mess.

A pan-Islamic unity, one that will no doubt be reinforced by a strong sense of vengeance, is my fundamental concern for the region. When European Crusaders entered the Near-East during the middle ages, it took the region's Muslim population over a hundred years to get their act together and begin driving out the Frankish invaders. There is a strong probability today that the region's tri-ethnic Muslims will again come to a general understanding or cooperation, if not total unity. Looking at their utterly pathetic state today one would have a hard time forecasting such a thing. However, we need to realize that what we have been seeing in the Middle East during the past century or so is somewhat misleading. The sense of Muslim disunity in the Middle East is given off by the region's handpicked dictators who happen to be on CIA pay roles.

Nevertheless, a hundred years, historically speaking, is a very short time span. I have no doubt that the Arab street, as well as the Turkish and Iranian streets will begin seeking their new Salahadin and they will eventually find him - because history has a curious habit of repeating itself. Needless to say, Western actions in the region during the past century, including the recent invasions of Iraq and Afghanistan, and the upcoming violation of Iran's sovereignty is accelerating the inevitable. We may actually be reliving the 12-13 centuries; where Western forces as well as the Western backed Zionist state of Israel are the Crusader fortresses in the Muslim heartland.

If we Armenians don't get our act straight we may again end up suffering the same fate our Cilician kingdom suffered in 1375 - abandonment, destruction, isolation, subjugation. By saying getting our act straight, I mean keeping as close to the Russian Federation as possible, keeping the United States at an arms-length, all the while genuinely and proactively engaging our Turkish and Iranian neighbors in a dialogue - without forsaking our national interests. Armenia needs farsighted leaders who are not afraid of breaking away from the old modus operandi. We need leaders who can look ahead, we don't need leaders that still resides in the Ottoman era or the Soviet era. Despite what many of our emotionally handicapped and politically shortsighted people think these days, president Serj Sargsyan has been a leader with such foresight. By firmly entrenching Armenia in the Russian camp, by maintaining good relations with Iran, by keeping the West at an arms length and by starting to engage Ankara in a dialogue, the current administration in Yerevan may have actually safeguarded Armenia's very existence in the twenty-first century. We need our future leaders not only to simply follow this strategic path but to build on it.



Erdogan and the Decline of the Turks

Israeli special forces and their commanders were apparently shocked to find their boarding attempt on the Mavi ("Blue") Marmara met with violence. They should not have been. I have no doubt that the Turkish "peace activists" aboard the ship regarded Israeli troops as something akin to the second coming of Hitler's SS. To follow Turkish discourse in recent years has been to follow a national decline into madness. Imagine 80 million or so people sitting at the crossroads between Europe and Asia. They don't speak an Indo-European language and perhaps hundreds of thousands of them have meaningful access to any outside media. What information most of them get is filtered through a secular press that makes Italian communists look right wing by comparison and an increasing number of state (i.e., Islamist) influenced outfits. Topics A and B (or B and A, it doesn't really matter) have been the malign influence on the world of Israel and the United States.

For example, while there was much hand-wringing in our own media about "Who lost Turkey?" when U.S. forces were denied entry to Iraq from the north in 2003, no such introspection was evident in Ankara and Istanbul. Instead, Turks were fed a steady diet of imagined atrocities perpetrated by U.S. forces in Iraq, often with the implication that they were acting as muscle for the Jews. The newspaper Yeni Safak, Prime Minister Tayyip Erdogan's daily read, claimed that Americans were tossing so many Iraqi bodies into the Euphrates that local mullahs had issued a fatwa ordering residents not to eat the fish. The same paper repeatedly claimed that the U.S. used chemical weapons in Fallujah. And it reported that Israeli soldiers had been deployed alongside U.S. forces in Iraq and that U.S. forces were harvesting the innards of dead Iraqis for sale on the U.S. "organ market."

The secular Hurriyet newspaper, meanwhile, accused Israeli soldiers of assassinating Turkish security personnel in Mosul and said the U.S. was starting an occupation of (Muslim) Indonesia under the guise of humanitarian assistance. Then U.S. ambassador to Turkey Eric Edelman actually felt the need to organize a conference call to explain to the Turkish media that secret U.S. nuclear testing did not cause the 2004 Indian Ocean tsunami. One of the craziest theories circulating in Ankara was that the U.S. was colonizing the Middle East because its scientists were aware of an impending asteroid strike on North America.

The Mosul and organ harvesting stories were soon brought together in a hit Turkish movie called "Valley of the Wolves," which I saw in 2006 at a mall in Ankara. My poor Turkish was little barrier to understanding. The body parts of dead Iraqis could be clearly seen being placed into crates marked New York and Tel Aviv. It is no exaggeration to say that such anti-Semitic fare had not been played to mass audiences in Europe since the Third Reich. When I interviewed Prime Minister Erdogan (one of several encounters) in 2006, he was unabashed about the narrative.

Erdogan: "I believe the people who made this movie took media reports as their basis . . . for example, Abu Ghraib prison—we have seen this on TV, and now we are watching Guantanamo Bay in the world media, and of course it could be that this movie was prepared under these influences."

Me: "But do you believe that many Turks have such a view of America, that we're the kind of people who'd go to Iraq and kill people to take their or gans?"Erdogan: "These kind of things happen in the world. If it's not happening in Iraq, then its happening in other countries." Me: "Which kind of things? Killing people to take their organs?"

Erdogan: "I'm not saying they are being killed. . . . There are people in poverty who use this as a means to get money."

I was somewhat taken aback that the prime minister could not bring himself to condemn a fictional blood libel. I should not have been. He and his party have traded on America and Israel hatred ever since. There can be little doubt the Turkish flotilla that challenged the Israeli-Egyptian blockade of Gaza was organized with his approval, if not encouragement. Mr. Erodogan's foreign minister, Ahmet Davutoglu, is a proponent of a philosophy which calls on Turkey to loosen Western ties to the U.S., NATO and the European Union and seek its own sphere of influence to the east. Turkey's recent deal to help Iran enrich uranium should come as no surprise.

Sadly, Turkey has had no credible opposition since its corrupt secular parties lost to Mr. Erdogan in 2002. The Ataturk-inspired People's Republican Party has just thrown off one leader who was constantly railing about CIA plots for another who wants to expand state spending as government coffers collapse everywhere else in the word. What's more, Turks remain blind to their manifest hypocrisies. Ask how they would feel if other countries arranged an "aid" convoy (akin to the Gaza flotilla) for their own Kurdish minority and you'll be met with dumb stares. Turkey's blind spot on the Kurdish issue is especially striking when you recall that Turkey nearly invaded Syria in 1998 for sponsoring Kurdish terrorism. Kurdish separatist leader Abdullah Ocalan then bounced around the capitals of Europe, only to be captured in Kenya and handed over to the Turks by the CIA. Turkey's antiterror alliance with Israel and the U.S. couldn't have been more natural.

Yet Prime Minister Erdogan was one of the first world leaders to recognize the legitimacy of the Hamas government in Gaza. And now he is upping the rhetoric after provoking Israel on Hamas's behalf. It is Israel, he says, that has shocked "the conscience of humanity." Foreign Minister Davutoglu is challenging the U.S: "We expect full solidarity with us. It should not seem like a choice between Turkey and Israel. It should be a choice between right and wrong." Please. Good leaders work to defuse tensions in situations like this, not to escalate them. No American should be deceived as to the true motives of these men: They are demagogues appealing to the worst elements in their own country and the broader Middle East. The obvious answer to the question of "Who lost Turkey?"—the Western-oriented Turkey, that is—is the Turks did. The outstanding question is how much damage they'll do to regional peace going forward.


Turks Pass Constitutional Changes


Turks voted to amend the nation's constitution by a wide margin Sunday, according to unofficial results, delivering a surprise boost to Prime Minister Recep Tayyip Erdogan and his Islamic-leaning government ahead of elections next year. The referendum on a package of 26 constitutional amendments has been touted as a key battle in the struggle to determine Turkey's future by both sides: the country's secular establishment and a rising conservative elite that Mr. Erdogan represents. On Sunday, Mr. Erdogan appeared to win convincingly.

State television channel TRT1 reported that the amendment package won approval with a vote of 58% to 42%, with a turnout of about 78%. Most opinion polls had predicted a much tighter margin. The results aren't final. "Once more it has been seen that transformation is possible within democracy," Mr. Erdogan said in an hour-long victory speech to party faithful in Istanbul on Sunday night. "Today, tonight the mind-set of those enthusiastic for coups has lost."

Opponents of the changes, which include a transformation of the country's top judicial bodies, warned they would remove essential checks on the government. In campaign rallies across the country, Mr. Erdogan said the changes would instead strengthen the rule of law, ending an era in which generals and judges held ultimate power, toppling four governments since 1960, and blocking legislation they considered too Islamic. U.S. President Barack Obama "acknowledged the vibrancy of Turkey's democracy" shown by the high turnout, in a telephone call to Mr. Erdogan, according to a White House statement reported by news agencies. Mr. Obama was calling ahead of the World Basketball Championship final between the U.S. and Turkey. Turkey lost 81-64. The European Union, meanwhile, called the amendments "a step in the right direction" for Turkey's bid to join the bloc, though it called for further reforms to ensure freedoms of speech and religion.

The constitutional amendments include much that is widely supported, including improvements to individual rights such as privacy, gender equality and the right to strike. Also popular are amendments to submit military officers who commit crimes to civilian courts and to remove immunity from leaders of the 1980 coup that produced the current constitution. But two changes have proved controversial. One expands membership in the Constitutional Court to 17 from 11, and a second expands the Supreme Board of Judges and Prosecutors to 22 members from seven. Turkey's parliament, where the ruling Justice and Development Party, or AKP, enjoys a majority, and President Abdullah Gul, of the AKP, would play important roles in the appointments.

Both judicial bodies currently are controlled by a small group of self-described secularists. In 2007, the Constitutional Court struck down legislation passed by parliament that would have lifted a ban on wearing headscarves at Turkey's universities. Mr. Erdogan's daughter Sumeyye is among the thousands of daughters of wealthier conservative families who studied abroad rather than take off their headscarves. In 2008. the court came within one vote of banning the AKP as a threat to Turkey's secularist foundations.

The changes to the two bodies worry many Turks concerned by what they see as signs that Mr. Erdogan and his party are interested less in democracy than in securing control over all the levers of power in order to crush opposition. They cite as evidence a series of mass trials against alleged coup plotters, and a massive tax fine against the nation's biggest media group. On the campaign stump and in a letter sent to Brussels ahead of the vote, Kemal Kilicdaroglu, leader of the opposition Republican People's Party warned against the creation of a "civilian dictatorship" in Turkey.

"We need judicial reform, but if implemented with ill will, these amendments could really damage the separation of powers in Turkey, and the separation of powers is key to any democracy," said Sedat Ergin, a senior columnist with Hurriyet newspaper, Turkey's establishment daily, who opposed the changes. Mr. Ergin said the vote had confirmed the fault lines in Turkish society, with the country's more secular coastal regions voting "No," and conservative central Anatolia voting "Yes." Ethnic Kurds, meanwhile, appeared to have mostly boycotted the vote. "Forty-two percent is still a big chunk of society," he added.

Economists and businessmen said investors were likely to welcome the clear vote of support for Mr. Erdogan, as they look for indications that his party will be able to win a third term of stable, single-party government in elections due next summer. "Many were suspicious about the government's intentions, but the markets like stability and this result will contribute to that. ... I hope it will make us richer," said Sinan Eroglu, a 37-year old advertising executive in Istanbul, as he watched Turkey take on the U.S. in basketball. The referendum result should "make the ruling party more comfortable about its popular support, possibly reducing temptation to loosen fiscal policy in the run-up to elections," said Wolgango Piccoli, a director at Eurasia Group, a political-risk consultancy.


Turning East, Turkey Asserts Economic Power

For decades, Turkey has been told it was not ready to join the European Union — that it was too backward economically to qualify for membership in the now 27-nation club. That argument may no longer hold. Today, Turkey is a fast-rising economic power, with a core of internationally competitive companies turning the youthful nation into an entrepreneurial hub, tapping cash-rich export markets in Russia and the Middle East while attracting billions of investment dollars in return. For many in aging and debt-weary Europe, which will be lucky to eke out a little more than 1 percent growth this year, Turkey’s economic renaissance — last week it reported a stunning 11.4 percent expansion for the first quarter, second only to China — poses a completely new question: who needs the other one more — Europe or Turkey?

“The old powers are losing power, both economically and intellectually,” said Vural Ak, 42, the founder and chief executive of Intercity, the largest car leasing company in Turkey. “And Turkey is now strong enough to stand by itself.”

It is an astonishing transformation for an economy that just 10 years ago had a budget deficit of 16 percent of gross domestic product and inflation of 72 percent. It is one that lies at the root of the rise to power of Prime Minister Recep Tayyip Erdogan, who has combined social conservatism with fiscally cautious economic policies to make his Justice and Development Party, or A.K.P., the most dominant political movement in Turkey since the early days of the republic. So complete has this evolution been that Turkey is now closer to fulfilling the criteria for adopting the euro — if it ever does get into the European Union — than most of the troubled economies already in the euro zone. It is well under the 60 percent ceiling on government debt (49 percent of G.D.P.) and could well get its annual budget deficit below the 3 percent benchmark next year. That leaves the reduction of inflation, now running at 8 percent, as the only remaining major policy goal.

“This is a dream world,” said Husnu M. Ozyegin, who became the richest man in Turkey when he sold his bank, Finansbank, to the National Bank of Greece in 2006. Sitting on the rooftop of his five-star Swiss Hotel, he was looking at his BlackBerry, scrolling down the most recent credit-default spreads for euro zone countries. He still could not quite believe what he was seeing. “Greece, 980. Italy, 194 and here is Turkey at 192,” he said with a grunt of satisfaction. “If you had told me 10 years ago that Turkey’s financial risk would equal that of Italy I would have said you were crazy.” Having sold at the top to Greece, Mr. Ozyegin is now putting his money to work in the east. His new bank, Eurocredit, gets 35 percent of its profit from its Russian operations.

Mr. Ozyegin represents the old guard of Turkey’s business elite that has embraced the Erdogan government for its economic successes. Less well known but just as important to Turkey’s future development has been the rapid rise of socially conservative business leaders who, under the A.K.P., have seen their businesses thrive by tapping Turkey’s flourishing consumer and export markets. Mr. Ak, the car leasing executive, exemplifies this new business elite of entrepreneurs. He drives a Ferrari to work, but he is also a practicing Muslim who does not drink and has no qualms in talking about his faith. He is not bound to the 20th-century secular consensus among the business, military and judicial elite that fought long and hard to keep Islam removed from public life. On the wall behind his desk is a framed passage in Arabic from the Koran, and he recently financed an Islamic studies program just outside Washington at George Mason University in Fairfax, Va., where Mr. Erdogan recently spoke.

Whether he is embracing Islam as a set of principles to govern his life or Israeli irrigation technology for his sideline almond and walnut growing business, Mr. Ak represents the flexible dynamism — both social and economic — that has allowed Turkey to expand the commercial ties with Israel, Russia, Saudi Arabia, Iran and Syria that now underpin its ambition to become the dominant political actor in the region. Other prominent members of this newer group of business executives are Mustafa Latif Topbas, the chairman and a founder of the discount-shopping chain BIM, the country’s fastest-growing retail chain, and Murat Ulker, who runs the chocolate and cookie manufacturer Yildiz Holding. With around $11 billion in sales, Yildiz Holding supplies its branded food products not just to the Turkish market but to 110 markets globally. It has set up factories in Kazakhstan, Pakistan, Saudi Arabia and Ukraine and now owns the Godiva brand.

The two billionaires have deep ties to the prime minister — Mr. Erdogan once owned a company that distributed Ulker-branded products, and Mr. Topbas is a close adviser — but the trade opportunities in this part of the world are plentiful enough that a boost from the government is now no longer needed. In June, Turkish exports grew by 13 percent compared with the previous year, with much of the demand coming from countries on Turkey’s border or close to it, like Iraq, Iran and Russia. With their immature manufacturing bases, they are eager buyers of Turkish cookies, automobiles and flat-screen televisions. This year, for example, the country’s flagship carrier, Turkish Airlines, will fly to as many cities in Iraq (three) as it does to France. Some of its fastest growing routes are to Libya, Syria and Russia, Turkey’s largest trading partner, where it flies to seven cities. That is second only to Germany, which has a large population of immigrant Turks.

In Iran, Turkish companies are building fertilizer plants, making diapers and female sanitary products. In Iraq, the Acarsan Group, based in the southeastern town of Gaziantep, just won a bid to build five hospitals. And Turkish construction companies have a collective order book of over $30 billion, second only to China. On the flip side, the Azerbaijani government owns Turkey’s major petrochemicals company and Saudi Arabia has been a big investor in the country’s growing Islamic finance sector. No one here disputes that these trends give Mr. Erdogan the legitimacy — both at home and abroad — to lash out at Israel and to cut deals with Iran over its nuclear energy, moves that have strained ties with its chief ally and longtime supporter, the United States. (Turkey has exported $1.6 billion worth of goods to Iran and Syria this year, $200 million more than to the United States.)

But some worry that the muscle flexing may have gone too far — perhaps the result of tightening election polls at home — and that the aggressive tone with Israel may jeopardize the defining tenet of Turkey’s founder, Mustafa Kemal Ataturk: peace at home, peace in the world. “The foreign policy of Turkey is good if it brings self-pride,” said Ferda Yildiz, the chairman of Basari Holding, a conglomerate that itself is in negotiations with the Syrian government to set up a factory in Syria that would make electricity meters. Even so, he warns that it would be a mistake to become too caught up in an eastward expansion if it comes at the expense of the country’s longstanding inclination to look to the West for innovation and inspiration. “It takes centuries to make relations and minutes to destroy them,” he said.


Syrians’ New Ardor for a Turkey Looking Eastward

Well-heeled Syrians had already been coming to this ancient industrial city, drawn here by Louis Vuitton purses and storefront signs in Arabic. But local shop owners say Israel’s deadly raid on a Turkish-led flotilla to Gaza in May has solidified an already blossoming friendship between Syria and Turkey, the new hero of the Muslim world. “People in Syria love Turkey because the country supports the Arab world, and they are fellow Muslims,” Zakria Shavek, 37, a driver for a Syrian transport company based in Gaziantep, said as he deposited a family of newly arrived shoppers from Aleppo, which competes with Damascus for the title of Syria’s largest city and is about a two-hour drive from here. “Our enemy in the world is Israel, so we also like Turkey because our enemy’s enemy is our friend.”

The monthly pilgrimages of tens of thousands of Syrians to this southeastern Turkish city — which intensified after the two countries removed visa requirements last September — are just the latest manifestation of the growing ties between Turkey and Syria, part of the Turkish government’s efforts to reach out to its neighbors by using economic and cultural links to help it become a regional leader. Turkey’s shift toward the Muslim world — from the recent clash with Israel to Prime Minister Recep Tayyip Erdogan’s description of Iran’s nuclear program as peaceful — has prompted concerns in the United States and Europe that Turkey, an important NATO ally, is turning its back on the West. But in Turkey, where 70 percent of all exports go to Europe, businesspeople insist that the government’s policy of cultivating friendly ties with all neighbors reflects a canny and very Western capitalist impulse to offset dependence on stagnating European markets while cementing Turkey’s position as a vital economic and political bridge between east and west.

Indeed, most Arab states, including Syria, enthusiastically support Turkey’s bid to join the European Union, viewing Turkey as a vital intermediary to Western markets that might otherwise be off limits. At the political level, Turkey’s influence in the Middle East is also deeply enhanced by its strong Western ties — a fact recognized by Syria’s president, Bashar al-Assad, who shocked many in the Turkish capital this month by warning that the latest crisis between Israel and Turkey could undermine Ankara’s role as a mediator in the region. Only 10 years ago, relations between Syria and Turkey were strained, with Turkey accusing Syria of sheltering Kurdish separatists and Syria lashing out at Turkey over water and territorial disputes. Syrians also harbored historical resentments of Ottoman subjugation, while many secular Turks, defined by the Western orientation of Turkey’s founder, Mustafa Kemal Ataturk, saw Syria as autocratic and backward. With the recent elimination of border restrictions, however, Turkish exports of everything from tea to textiles to diapers are booming, along with a newfound ardor. “Today, Arab countries that once resented us want to be like us, even if they are looking to Turks more than we are looking to them,” said Emin Berk, a Turk who is coordinator of the Turkey-Syria Trade Office here.

Trade between Turkey and Syria more than doubled from $795 million in 2006 to $1.6 billion in 2009, and is expected to reach $5 billion in the next three years. Last year the Middle East received nearly 20 percent of Turkey’s exports, about $19.2 billion worth of goods, compared with 12.5 percent in 2004. In Iran, Turkish companies are making products including fertilizer and sanitary products for women. Iran, in turn, is an important source of energy to Turkey. Here in Gaziantep — whose past is so intertwined with Syria’s that it was part of Aleppo Province during the Ottoman Empire — the signs of the new honeymoon between Turkey and Syria are everywhere. Every Friday, several thousand Syrians descend on the center of town. Lured by bargains and Western brands, most head immediately to the Sanko Park shopping mall, the largest in town, where their lavish shopping sprees have made them coveted customers. In the city’s bazaars, pistachio vendors summon passers-by in Arabic, while Arabic courses for Turkish businessmen are flourishing. Marriages between Turks and Syrians have become more common.

In Syria, meanwhile, where the alliance with secular Turkey represents a move away from its courtship with Iran, Turkey’s blend of conservative Islam and cosmopolitan democracy is increasingly viewed as a model in the younger generation. Turkish soap operas and films are attaining cult status, while “Made in Turkey” labels near the cachet of Paris or Milan. On a recent day at the gleaming Sanko Park mall, Mays al-Hindawi Bayrak, a chic 27-year-old Syrian who was buying a Pierre Cardin shirt for her Turkish husband, observed that for Syrians, Turkey had become synonymous with European modernity. After Turkey recently lashed out at Israel, she said, her 21-year-old brother told the family he wanted to apply for Turkish citizenship. “In the past, many Turks thought that all Arab women wear burqas and that all the men drive camels to work,” she said. “Now, we are getting to know each other better.”

Turkish businesspeople here say that regardless of whether the governing party’s politics is driving economics or the other way around, what matters is that the new openness to the east is enhancing the bottom line. Cengiz Akinal, managing director of Akinal Bella, a large shoe manufacturer, said that the Islamic-inspired politics of the governing Justice and Development Party had helped ease relations with Arabic clients. The company, which exports a majority of its shoes to Europe, increased its exports to Syria by 40 percent last year.

Mr. Akinal, whose ancestors imported leather from Syria during the Ottoman Empire and produced shoes for the sultans, recently shifted part of the company’s manufacturing to Aleppo and Damascus, where monthly wages are about half those of Turkey. But he said Syria was still decades behind Turkey when it came to quality standards and technical know-how. “Turkey may be 15 years behind Europe, but Syria is still 30 years behind Turkey,” he said. Indeed, businesspeople say the shift toward the Middle East is forcing them to change the way they do business after decades of trying to cultivate Western European attitudes. Mr. Akinal noted, for example, that negotiations with Arabic corporate clients over price were reminiscent of a Middle Eastern bazaar rather than a boardroom. “With Europeans, you can have a deal in a half an hour,” he said. “With Syrians, I sometimes spend the whole day bargaining.”

While most people here welcome the Syrian invasion, some Turks complained that the Syrians were pushing up the prices of everything from hotels to designer dresses. Others lamented that Syrians’ religious conservatism was out of place in secular Turkey. “We are more liberal than they are, and it can sometimes be uncomfortable when the women arrive covered from head to toe and the men leer at you,” said Deniz, a Turkish teenager in ripped jeans and a T-shirt, who declined to give her last name for fear of antagonizing her Syrian boss.


Is Turkey Still a Western Ally?

I spent part of 2008 in Turkey to figure out whether Ankara could still be considered a Western ally. That it's necessary to raise this question at all is an indication of how far the governing Justice and Development Party (AKP) has isolated the country from its traditional partners. For years Turkish foreign policy was driven by shared Western values, including democracy, membership to institutions like NATO and a sense of common destiny with Europe and the U.S. Since the AKP assumed power in 2002, Turkish foreign policy is increasingly driven by two new factors: religion and money. Over the past year, the neo-Islamist AKP government has hosted a series of anti-Western leaders, including the presidents of Iran and Sudan, with whom Ankara seeks closer relations. At the same time, Turkey has ratcheted up its verbal attacks on its traditional Western allies, especially Israel. While the AKP seems to mirror Western policies toward such countries as Sudan, Iran or Russia, it fosters intimate ties with these governments.

Last July in Istanbul, for example, I witnessed Turkish joy over the capture of Serb leader Radovan Karadzic, the "butcher of Bosnia" who was indicted for genocide at The Hague tribunal. Just days later, however, the AKP welcomed Omar Al-Bashir, the even bigger butcher of Darfur. Ironically, the visit of the Sudanese president to Turkey coincided with The Hague court's prosecutor request that Mr. Al-Bashir be arrested for committing genocide in Darfur. Yet President Al-Bashir received a warm welcome in Turkey, where he alleged that his government "had restored peace to Darfur," and defended the implementation of Shariah law in resolving the Darfur conflict. The AKP, the governing party of a secular state, did not challenge these statements. Instead, it chose to discuss oil investments in Sudan.

Later on in August, the AKP welcomed Iran's president to Istanbul. Turkey officially stands against Iran's nuclear project. But the AKP embraced Mahmoud Ahmadinejad, shutting down Istanbul's busy beltway for his travel comfort. In another favor to Mr. Ahmadinejad, the AKP departed from the tradition of having visiting Muslim heads of state pray in the isolated Dolmabahce Mosque which has served as Istanbul's protocol mosque. Instead, the government allowed him to pray in the central Blue Mosque with thousands of other worshippers, whereupon he put on an anti-American and anti-Israeli show which I had the displeasure of witnessing after attending Friday prayers there.

The Iranian leader left Istanbul happy, with a security cooperation treaty under one arm and a draft treaty for Turkish investments in Iranian gas fields under the other -- the latter in violation of Western financial sanctions against Tehran. Turkish media reported that U.S. pressure prevented the investment treaty from being finalized. Nevertheless, in November Turkey's energy minister visited Tehran for further discussions on energy deals.

The AKP empathizes with the Islamist regime in Sudan -- which it sees as a victim of the West -- and with the mullahs in Iran because it sees Turkey in religious communion with these states. In March 2006, Prime Minister Recep Tayyip Erdogan addressed an Arab League summit in Khartoum, saying, "the West is using terrorism to sell us weapons." It appears that Mr. Erdogan has finally answered the question of where Turkey belongs -- and that in his opinion, it's not with the West. On Iran, Mr. Erdogan told a Washington crowd on Nov. 14 that the AKP's policy is that "countries that oppose Iran's nuclear weapons should themselves not have nuclear weapons."

At the same time, the Iranians know how to exploit Turkey's security concerns. Ankara is upset about insufficient U.S. and European assistance against the terror infrastructure of the Kurdistan Workers Party (PKK) in northern Iraq and Western Europe, respectively. Tehran courts Turkish hearts and minds by bombing PKK camps in Iraq and by providing Turkey with intelligence support against the PKK. Financial instincts cement this religious sympathy. As polls show that Turks increasingly value Iran's friendship, energy and other cooperation projects with Iran will go down well in Turkey.

Energy politics also bring Ankara closer to Moscow. Only days after the U.S. condemned Russia's invasion of Georgia, calling for Moscow's isolation, the AKP invited Russian Foreign Minister Sergei Lavrov to Ankara for consultations. In 2002, Russia was Turkey's sixth-biggest trading partner. Bilateral commerce has skyrocketed since then, turning Russia into Turkey's top trading partner in the first half of 2008. Accordingly, few Turks question the close ties with Moscow, and realists point out that Turkey depends on Russia for two-thirds of its gas.

Last but not least, Israel has become Mr. Erdogan's sandbag while Hamas sits in his heart. Turkey has long had warm ties to the Jewish state, since Turks did not wear ideology or religion on their sleeves in their relationship with Israel. But under the AKP, those relations are getting frostier. The conflict in Gaza has given the AKP an excuse to bring Turkish-Israeli relations to their lowest level in decades. Shortly after Jerusalem launched its offensive, Mr. Erdogan started a disingenuous initiative to "end the war in Gaza," traveling to Saudi Arabia, Jordan, Syria and Egypt -- but not to Israel.

Mr. Erdogan's rhetoric, meanwhile, has reached Islamist fever pitch. Earlier this month he suggested that "Allah would punish Israel" for attacking Hamas, and that Jerusalem's actions would lead to its own "destruction." On Jan. 16, he questioned whether the Jewish state should still be allowed in the U.N. While accusing Israel of deliberately attacking civilians, Mr. Erdogan claimed that "Hamas's rockets are not causing any casualties in Israel." His attacks worked. After Mr. Erdogan bashed Israel almost daily on national TV since the beginning of the operations in Gaza, 200,000 Turks showed up on Jan. 4 in the freezing rain in Istanbul, calling for the "death" of the Jewish state. Pro-AKP papers, meanwhile, question Turkey's military cooperation with Israel.

Now, Turkey's tiny and well-integrated Jewish community feels physically threatened for the first time since 1492, when it found safe haven in the Ottoman Empire after fleeing the Spanish Inquisition. There have been threats of violence against Jews and, even more shocking, banners have been plastered on Jewish-owned businesses, asking people to boycott them. U.S. President-elect Barack Obama and the European Union face a challenge in Turkey. The country's messy foreign policy is a harbinger of things to come. Under the AKP, Turkey will increasingly side with its radical, anti-Western neighbors, even if it remains committed, at least verbally, to the West. I hate to say it, but this is not your mother's Turkey.