Why Is Russia Backing Syria?

Several pundits have recently attempted to answer the burning question in many American’s minds: Why is Russia backing Syria? First off,  let’s explore a sample of those opinions. An article on 9/12/13 by NBC News[1] cites Russia’s Naval base in Tartus and the ongoing arms trade as two major reasons. Both of those are great clues but neither suffices as a reason for the Russian Federation to back the ruthless and criminal government in the face of a weak threat to act on a vowed red line by an old but resilient foe. Another expert’s breakdown proposed that Russia and Putin has a deep concern over stability in the region that could spread to their own country. That analysis follows closely Putin’s recent statements on the ordeal and does not fully explain the bond. The answer is much more simplistic. History.

During the Cold War, Russia constructed a naval base in the Syrian port, Tartus. This was the result of a 1971 agreement with the tumultuous country. Bashar al-Assad’s father, Hafez, was a major factor in this agreement happening. Prior to Hafez’s rule in 1970, the country was plagued with constant leadership change. Coup after coup. Once this stability was found, Hafez ruled for thirty years prior to his death and subsequent son’s succession. Russia understands something we have failed to grasp as of late…a stable dictator is easier to deal with than an unstable and tumultuous nation, see Egypt. Especially a nation that your country has done business with for over 40 years.

Military sales from Russia are pretty insignificant. Syria is Russia’s seventh greatest military “customer”. They could do without Syria’s arms business. There is something to be said about Russia losing more and more military business in the region (see Iran for example) but even factoring that in, the loss of the current contracts would not cripple the Federation. These armament contracts are in the neighborhood of $4-$5 billion. Current non-military contracts are currently around $20 billion. “Private sector” businesses stand to lose more than the government if al-Assad is unseated and war breaks out. That would not be popular in Russia’s homeland. Another consideration is Russia would ultimately be forced between supporting a longtime ally and pushing back against any US efforts, regardless of how limited. Cold War 2.0? As arrogant as Putin is, he is not rooting to revisit that saga. Definitely not at this time.

Simply stated, Russia-Syrian relations have been in motion for 40+ years. Surely our skilled president was thinking of that when he impetuously set our “red line” a year ago.


The German Gold Rush

It was announced this week that the German Federal Bank (Deutsche Bundesbank) will repatriate 674 metric tons of its own gold by the year 2020. Germany transported its gold to internationally secure locations during the Cold War to keep it out of the reach of the Soviets. Germany’s current reserves are located as follows: Germany = 31%; NY Fed = 45%; Bank of England = 13%; Banque de France = 11%. Germany plans to bring 50% of its reserves home by the year 2020. These reserves, in 2020, will be located as follows: Germany = 50%; NY Fed = 37%; Bank of England = 13%; Banque de France = 0%. The complete repatriation from France might have more to do with their mutual Euro currency than it does with Germany’s distrust of the Banque. They are not as reliant on France as a diversified international reserve currency as they can be and are with the U.S. dollar or British Pound. Diversification is the key word here and is always when speaking about strong financial positions. Germany has the largest gold reserves as a nation, right behind the U.S.

Conspiracy theories have abounded this week. I’m not as concerned over the 8% drop in Germany’s U.S. gold storage by the year 2020 as others I’ve heard this week are. The greatest red flag in my mind is: Why is Germany keeping 100% of its foreign reserves in England untouched and reducing their U.S. holdings by 8%? The New York Fed and the Banque de France both store gold for other central banks for free. The New York Fed does charge a small fee for transport into and out of their vaults. The Bank of England charges storage fees that are roughly 500,000-550,000 Euros/year. Bundesbank has to pay to store the gold in their own vaults as well vs. NY or France. So, based on that, why keep 100% of current reserves in London and bring 19% home from the U.S. and France? Why keep the 13% in London? France, in addition to not offering any currency diversification, does not offer the same level of bullion liquidity as the U.S. and England do. London, similar to New York and Zurich, is a center for physical bullion trade. It’s a similar philosophy as oil being physically traded in areas like the middle east. There is an advantage to location when it comes to commodities. That still doesn’t fully answer why Germany is pulling 8% from the U.S. and 0% from England.

Fiscal pessimists will say that this is the beginning of the end for the U.S. dollar. Optimists will say this is a move any nation in Germany’s shoes would make.  I happen to believe it’s somewhere in-between. Outside of Bundesbank, no one knows exactly what the fees are for transfer. Perhaps England’s fees made it more palatable to pull all from France and some from the U.S. Perhaps it was a calculated long-term decision based on current national fiscal positions. Some German politicians are promoting the thought that Germany should bring all of its reserves back home. Taking that into consideration, overall this is likely a move to diversify Germany’s fiscal stance, while growing confidence in its own national economy.

While something can be said for the amount of trust the Bundesbank has in the U.S. Fed, something can also be said for the amount of gold Germany will keep in the U.S. We will still outweigh England 37% to 13% when the transfers are complete by 2020. This tells me that Germany believes the U.S. will maintain its strength at least through that span of time. There are several concerns with these moves but overall, I take it as a positive sign for the U.S. economy through at least the next 7-10 years. If Germany had a legitimate fear of the U.S. dollar collapsing, it would likely pull 100% of its reserves from the U.S.