Daniel W. Drezner

Russia and the United States, eighteen months later

Blake Hounshell highlights a tidbit from Henry Paulson’s new memoir that caught my attention as well.  According to Paulson, in the summer of 2008 Russia approached China to sell off their Fannie Mae and Freddie Mac debt.  This merited stories from Bloomberg and the Financial Times.  According to the FT: Russia proposed to China that the two ...

Blake Hounshell highlights a tidbit from Henry Paulson’s new memoir that caught my attention as well.  According to Paulson, in the summer of 2008 Russia approached China to sell off their Fannie Mae and Freddie Mac debt.  This merited stories from Bloomberg and the Financial Times.  According to the FT:

Russia proposed to China that the two nations should sell Fannie Mae and Freddie Mac bonds in 2008 to force the US government to bail out the giant mortgage-finance companies, former US Treasury secretary Hank Paulson has claimed….

Mr Paulson said that he was told about the Russian plan when he was in Beijing for the Olympics in August 2008. Russia had gone to war with Georgia, a US ally, on August 8.

“Russian officials had made a top-level approach to the Chinese, suggesting that together they might sell big chunks of their GSE holdings to force the US to use its emergency authorities to prop up these companies,” he said.

Fannie and Freddie are known as GSEs or government sponsored enterprises.

“The Chinese had declined to go along with the disruptive scheme, but the report was deeply troubling,” he said. A senior Russian official told the Financial Times that he could not comment on the allegation.

The Russians deny the story in the Bloomberg story, but Ashby Monk points out the possible implications

Paulson’s report is pretty amazing. If true, it would appear that Russia was plotting economic warfare against the US during the summer of 2008; I don’t really know what else to call it. Their intention was to use their sovereign wealth to purposely weaken and damage the US economy. The fact that all this apparently occurred around the same time that Russia was engaged in a traditional war with Georgia, a US ally, lends some credibility to the idea.

This revelation–while unconfirmed–will not comfort those in the West that fear SWFs; it doesn’t help anybody if these funds are seen to be potential weapons of economic destruction…

Let’s assume this is true for the sake of making life interesting.  There’s still a few more pieces of data I’d like to have before drawing conclusions. 

Monk assumes that the Russians did this for geopoltical reasons. If memory serves, however, China and Russia were both concerned about protecting the value of their GSE debt.  Forcing the U.S. government to intervene would have helped protect their remaining holdings.  So this might have been an entirely commercial gambit. 

Second, this really isn’t about sovereign wealth funds per se but about official holdings of U.S. debt and equities.  Some people think this is a real problem — others don’t.  Readers should provide their thoughts in the comments.

Third, the fact that the Russians thought the Chinese would go along with them on this says a lot about the delusions Russian leaders had during the Russian-Georgian conflict.  They really seem to have believed that China, other members of the Shanghai Cooperation Organization, and the rest of the Collective Security Treaty Organization  would be perfectly cool with Russia recognizing the independence of two secessionist states — just because it would be an affront to the U.S.A.  Whoops.

This raises my provocative but closing point — that the Russian-Georgian war might have been the best thing that could have happened for the bilateral relationship.  Despite all the doomsaying at the time, the conflict — combined with Great Recession — had a modest humbling effect on Russian ambitions.  The commodity bubble – which had fuelled Russia’s economic growth and self-confidence for the past decade – popped in the summer of 2008.  The recognition of Abkhazia and South Ossetia abetted a capital outflow that had begun in reaction to the Russian government’s heavy-handedness in picking winners and losers in the domestic economy.  These trends, if nothing else, likely highlighted the opportunity costs of continued bellicosity to Russian elites and Russian policymakers. 

At the same time, the invasion itself provided a moment of clarity to U.S. policymakers about the precise limits of their influence when dealing with balky republics in the Caucasus.  Even as a candidate, Obama articulated a "realist internationalist" position towards the Russian Federation.  This approach recognizes Russia’s great power status and the utility of a great power concert in dealing with global trouble spots.  Rather than prioritizing human rights, democratization, or even economic interests in the bilateral relationship, this policy position prioritizes great power cooperation on matters of high politics, such as nuclear nonproliferation and the containment of rogue states that transgress global norms.

You can argue about the priorities, but on the whole I think this policy has worked.  The war allowed both sides to confront the costs of continuing down a very negative trajectory.  They both stepped away from the brink.

This is worth thinking about whem mulling over a different bilateral relationship that’s had a bad few months.

 Twitter: @dandrezner

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