This week, the North Korean cyber attack on the US via Sony Pictures, as well as the collapse of the Russian rouble, reveal to us just how the world has changed and how the threats to countries’ interests and stability can come from strange, unpredictable places. It also underscores quite how inter-related the world has become.
In both cases, it laid bare the inadequacies of old power. Both Russia and the US spend billions of dollars on their nuclear arsenal. This demands massive resources and infrastructure and is supposed to make the countries secure, yet both the cyber warrior and the foreign exchange speculator only need a laptop and a decent internet connection to wreak havoc.
In both cases, the retaliation of the large countries has been ineffective and raises the stakes for further developments that larger, more powerful countries are bound to lose.
In Russia’s case, hiking interest rates to 17pc damages the economy and makes speculative attacks on the currency more likely. In terms of the cyber attack by North Korea, the US retaliation appears to have been the shutting down of the country’s internet. However, in a country where only a handful have access to the internet, does the US retaliation hurt? And while US hackers can turn the lights out in Pyongyang, what does that prove? If, in contrast, North Korean hackers can turn the lights out in New York City with another successful attack, I suspect there’s only one winner in that scrap . . . and it’s the odd dictator with the funny haircut!
In only a few days we have seen that much of what we regarded as powerful – the hard stuff of armies and weaponry – is less important than before. Today, the soft links of money and technology are what binds the world together and makes it vulnerable.
If you want to see what these links look like, consider possibly the most important international speech made in recent years, delivered yesterday by Ali al-Naimi, the Saudi oil minister, who said that he would not cut production if the oil price fell to $20.
He went on the say: “We want to tell the world that high-efficiency producing countries are the ones that deserve market share” and “if the price falls, others will be harmed greatly before we feel any pain.”
This is an extraordinary statement, because what he is saying is that the high-cost oil producers like the US with its fracking and shale, Russia with its expensive Siberian fields and Iran with its outdated machinery, may not survive as oil players.
This shows another weapon of diplomacy being deployed: energy.
The Persian Iranians and the Arab Saudis have been foes for years, not only because of sectarian Sunni and Shia differences, but also because of geo-strategic rivalry in Iraq, Syria, Egypt and Lebanon.
Saudi Arabia has wanted to torpedo Russia and its ally in the Gulf, Iran, for years. As long as the US was treating Iran as a pariah, Saudi was happy to let the Yanks do its bidding.
Now that the US is making overtures to Iran while Russia and Iran’s ally, Assad, is still in power in Syria, Saudi has decided to act by expanding oil supply. This has caused oil prices to halve in a matter of weeks. Oil prices are now at $40 a barrel and Saudi is still competitive at $10 a barrel.
The collapse in the oil price destroys the Russian economy, as it is a massively inefficient but huge oil producer. The Saudi move prompted the ruble’s slide and Russia, for all the might of its military and resources, is quite powerless in the face of a speculative attack on its currency.
As all these geo-political developments are playing out, what does it mean for us economically?
The first issue is whether an escalation of the US/North Korean spat impacts on US business confidence. This is crucial for Ireland, because the US is our biggest trading partner. It is growing at 5pc, which is phenomenal, and the dollar is rising.
We do well when the US is growing and the dollar is rising because a rising dollar makes Ireland’s cost base more attractive for dollar investors, like the multinationals.
It is unlikely that things will escalate so much between Uncle Sam and Pyongyang as to scupper the US growth rate, however, the drop in the oil price might have a negative impact on the US due to the possible default on energy-related company debt.
Remember, the shale gas and fracking boom was based on high energy prices, which led to massive investment, all financed by debt; if the Saudis keep oil prices down, that debt bubble goes up.
In the longer-term, lower oil prices benefit US consumers massively because they use so much energy.
Similarly here, lower oil prices have an unambiguously positive impact on people’s spending power.
Interestingly, a crisis in Russia could similarly have a positive effect on this country through the impact on European interest rates.
It is sometimes overlooked that there are 6,000 German companies registered in Russia with a combined turnover of €40bn and employment of around 270,000 people.
In Germany, 350,000 jobs are estimated to depend on business with Russia. German firms that have invested in excess of €22bn in Russia are household names, with Siemens, Volkswagen, BASF, Metro and Henkel among the leading players.
A crisis in Russia would mean German business confidence falls. This will make the weak EU economy weaker and will keep eurozone interest rates at zero for a long, long time.
This is positive for Ireland because we are still hugely indebted and lower mortgage rates can only help indebted homeowners. In addition, the weaker euro makes us more competitive against our major trading partners the US and the UK.
It is a measure of how interconnected the world is that people’s disposable income here is affected by America’s cosying up to Iran; or that the crisis in the ruble could have a materially positive impact on the average person’s debt burden here.
But this is how the new world works and the combination of technology and money will make this level of connectivity more, not less, intense.
But as the North Korean cyber-attack indicates, the consequences of the nexus of technology and money is not always healthy, nor desirable.
Proxy Power with Hard Support Russia will not allow the oil price remain at $20 as this would eat into the annual national surplus of the country and drain on the remaining dollar reserves that would eventually deplete everything Russia owns .Then Russia will be doomed and their people power cannot not save it . Russia’s enemy now is Saudi Arabia .With all their friends in the middle east they can be used as proxies to defeat Sunni Saudi and this means supporting the Shias wherever they are .Their agenda will be to destroy oil supply hardware . Saudi only… Read more »
Happy Christmas David … enjoyed your articles through 2014 & I look forward to reading your thoughts in 2015 …
T
Not a great topic to be reading during a peaceful Xmas period but we have been confronted by sheer modern world reality of the new wars in the last week.
Meanwhile some old fashion war instruments have been showcased in Indonesia.
http://asia.nikkei.com/magazine/20141218-MORE-MONEY-MORE-GUNS/Cover-Story/Indonesia-busy-playing-catch-up
What’s the conclusion in relation to Ireland?
As far as I’m reading Ireland can’t lose either way, which barely seems credible
Fact is we have no leverage or influence over any of this kind of stuff so we just have to try to put our own house in order – which is unlikely if not impossible.
I watched “The Interview” last night here in San Diego. It is a very funny movie. But what is even funnier is the way the world has been “honey-potted” by Sony Pictures into believing that they suffered a real life cyber attack by North Korea. This elaborate hoax will probably go down in movie history as the greatest publicity stunt ever. The Sony marketing team must be peeing their pants with laughter. It worked! Their unlikely zany PR stunt outdid the movie’s zany story. It is now part of Hollywood lore. They even managed to get the real-life POTUS (President… Read more »
To be honest I stopped lining up in a queue up for the latest show, from Hollywood, years ago. Since the invasion of Iraq actually. Specifically, the jeering which Michael Moore got treated over Fahrenheit 9/11, made me alert to the fact that Hollywood was in the business of an agenda. He even got the Saudi connection to the top correct. 10 years on, and it is bang on the money. Another interesting production was the Hunger Games. And there is a fascinating analysis of the deeper themes in the Hunger Games, in which certain undercurrents are explored. Likewise the… Read more »
Christmas Card Children David wrote a book ‘ the Pope’s Children’ . On Christmas Eve I noticed all the cards for ‘wives’ were completely sold out the day before in all the main card shops and many husbands were doe eyed scanning the displays very disappointed and in vain .Never before in recent years has this happened .Perhaps this the sign of a Buzz renewal in the nations once more . Strangely I visited Lydle and ….not one card to wives was sold ….their racks were completely full . This is all strange evidence and an omen to the immediate… Read more »
Hi all, I hope you all had a peaceful and happy Christmas. “The first issue is whether an escalation of the US/North Korean spat impacts on US business confidence’ I would think that the first issue is whether the spat between Saudi and the US is more important. I’d say Saudi’s action is aimed at putting manners on Obama for kissing Iranian ass. The article hints at concerns in the US with defaults on debt related to fracking which is very insightful because whoever is holding the county part risk for the hedges in a fall in the price of… Read more »
It is true that Russia is hurting from the sanctions and fall in oil prices. But many respected commentators are saying that the fall in oil prices is not real but is being manipulated by the financial markets and Saudi Arabia working in concert. The oversupply was only 1% above demand anyway which hardly merits such a huge fall in price. Saudi Arabia may have said that it can cope with $20 oil but it expects oil to be at $80 in 2015. This is a short sharp shock not a new era in low energy prices. Also the instability… Read more »
“This week, the North Korean cyber attack on the US via Sony Pictures” this is echo journalism based opinion but presented as fact and not an opinion. Abusing reserve currency status – an 1944 agreement -and using it as an act of aggression against others countries will ultimately result in the removal of that status. Russia has now recently made its intention public: the Yuan and possibly further along the Rupee will be part of a multi polar reserve currency, there is little the USA can do about it once all the pieces are in place -at present Russia does… Read more »
I think that will 2015 will have a second “Gulf of Tonkin” / “Sinking of the USS Maine” / MH370 type incident. One was not enough. The Western banking and economic policy was bankrupt in 2008. Now, foreign policy is being proven morally bankrupt. We as a societal concept are sliding one step at a time into the abyss. Rights are being rolled back. The concept of community is under continual attack, with values of consumerism and status obsession. Wage-earners are being sucked dry with taxes, and levies. We are being monitored like lab rats. 2014, was the year of… Read more »
What is happening in this soon to be multi-polar world will affect Ireland more that most – our dependence on the debt ridden USA will sink us, it is time we went east. Germany will go east and engage with Russia and China. China while building infrastructure will be expanding its market in Asia to partly compensate for oncoming a loss of market in the USA the Asian market is the only “growth” market – 4 billion peoples!- and Germany has allot to offer it. If Germany hangs out much longer in Europe it will sink like the rest of… Read more »