Crippling the Kremlin with Russian Sanctions

landscape of the kremlin in Moscow, Russia

The Trump administration’s sanctions on Russia’s energy sector are proving to be more substantive than the other policies we’ve seen.

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Transcript

Hey, all. Peter Zeihan here. Coming to you from Colorado. Today we’re talking about the sanctions that the Trump administration has put on the Russian energy sector, most notably on Rosneft, which is a state oil monopoly near monopoly, and Lukoil, which is the largest technically private company, but is really indirectly run by the state as well. A couple weeks back, the Trump administration put punitive tariffs on the two companies, saying that, no one can deal with them at all. 

And, if they do, they can’t deal with the United States or access the US dollar. And since all, crude traded internationally, well, well over 99.9% of it is exchanged in the US dollar. That basically means being shut off from global finance, among other things. We’ve had a few developments. First, a minor one with Hungary, Hungary’s president, Viktor Orban, who is, well, it’s kind of a weird cat anyway. 

He is an anti European anti-American pro Russian stooge, is the very short and to be perfectly honest, not particularly biased view. He’s been, working to sabotage sanctions on all things Russia and embargoes on all things Russian ever since the Ukraine war started, and has actually said that, if the Russian troops were in Kiev, they’d probably be better for Hungary because Hungary wants a piece of Ukraine as well. 

Anyway, he was in the white House and managed to, Sweet talk his way into getting an exemption from the sanctions. Hungary has been basically using and gorging upon Russian crude for the entirety of the Ukraine war and has been trading, exemptions to European sanctions and tariffs and such, in order to maintain access in exchange for letting the Europeans do what they want more broadly with the Ukraine question. 

And he was able to repeat that feat with Donald Trump this past week. I wouldn’t count on that lasting because no country that borders Hungary has a similar exception. So now that the sanctions are in place, there won’t be Russian oil or natural gas flowing through Ukraine to Hungary and even things like nuclear fuel are gonna have to be flown direct, but they’re going to have to be flown around the war zone that is Ukraine. 

And if you have radioactive material in your plane that trigger some other issues anyway. So, the Ukrainians are saying it’s a permanent exemption, that the Trump administration is saying it’s a 12 month exemption. The, the disconnect between the two is pretty typical for Trump’s deals on anything, and how the Hungarians are going to be squeezed out of this. 

It’s not a real problem. There is no alternate infrastructures that comes in through Slovakia or especially through Croatia. So they’re going to be fine. So it’s temporary issue. The broader issue is that Lukoil is actually an international company, whereas Rosneft’s holdings are all domestic. And for Lukoil, who holds assets in the United States, a lot of fuel stations. Or oil fields in Iraq. You’re actually talking about a substantial amount of production and financially viable assets that they’re going to have to now dump. Now, they were planning on selling them to a trading company based in Switzerland called governor. Now, governor was this is kind of funny. It’s a shell game. 

Back in 2014, the first time the Russians invaded Ukraine, governor was set up by a Russian who was affiliated with Lukoil. And then he immediately sold all of his shares to his Swedish partner because he knew he was going to be sanctioned. And it’s been operating as an independent, independent trading, platform ever since. The whole time it’s basically been a front for the Kremlin. 

And so the feeling was that governor was just going to buy all the assets. The Trump administration still hasn’t staffed up. Almost a year into its administration. And if you want to actually have a sanctions regime that is meaningful, you have to have a staff on it full time to deal with all the loopholes that will pop up. 

That’s been a big one. Well, the Treasury Department under Treasury Secretary percent, figure that all do all by themselves or with some help. I don’t really care how. And have already said that they oppose the sale to governor. So the assets are going to have to be split up on a national basis and sold more viably to get away from Russian influence, which is, you know, great. 

This is the first time in any sort of economic policy out of this administration that there seems to have been any awareness of some of the political and economic realities at the ground level. Normally we get a big broad tariff policy and then countries figure out how to get around it. The Chinese certainly have done that over and over and over again. 

But at least on this one point, the Russians have not. And that is absolutely worth noting. And giving credit where credit is due. Let’s see. There was one more. Oh, yeah. Rosneft has is a state monopoly. It’s technically incompetent. It really has very few petroleum engineers, and it’s gotten to where it is as being the biggest company in Russia by absorbing the assets of other people who have, from time to time fallen a foul of the Kremlin. 

Maybe that’s Yukos, which was run by a one time Russian oligarch. Maybe that’s T and CPP, which was a partnership that was part owned by British Petroleum. They just call themselves BP now. Anyway, it’s expansion through government thuggery rather than the traditional methods. Well, that that’s now reached its peak because there are a number of projects that Rosneft is involved in and is technically the operator that it can’t operate. 

It can only run the projects with foreign partners who are doing most of the technical lifting. And the biggest and most important of those is something called Sakhalin. Now that’s an island off in the Russian Far East, just north of Japan, that produces some of the world’s most difficult to produce crude oil in league with a company called Exxon, and which produces liquefied natural gas with a couple of Japanese companies, Mitsu and Mitsubishi. 

Well, now that the sanctions are in place, the Russians are going to have to run Sakhalin themselves, and they don’t know how to do offshore, and they don’t know how to do liquefied natural gas. And they certainly can’t operate in the Sakhalin environment. So here we’ve got a project that is the single largest dollar item of foreign investment into Russia ever. 

That’s probably going to shut down over the next few months because the Russians can’t operate it themselves. Unless, of course, there’s something that weird goes on where Exxon, for example, gets an exemption to the sanctions, which I don’t find likely. Anyway, that’s the money. Russia, most of which is pretty good for Ukraine and honestly, broadly positive for the United States as well. 

So, you know, mazel tov.

Markets Drop After Fed Rate Cut

Stock market chart declining

The Fed just cut interest rates by 0.25%. Instead of the desired boost to a slowing US economy, we ended up with a market drop.

The economy is losing steam, and there’s no one at the helm to correct course. Job market stress is on the rise, manufacturing is shrinking, constant tariff changes have stalled investments, and there’s no relief in sight. With capital from the baby boomers leaving the system, foreign capital is the next place to turn; however, strained trade relations make this risky.

Unless the Fed wants to go full Venezuela and start printing money, we’re going to be heading into uncharted economic territory. And with the current administration, who knows what that could mean.

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Transcript

Hey, everybody. Peter Zeihan here coming to you from Colorado. And the news is the Federal Reserve has just dropped interest rates by one quarter of 1%. 

That means it’s a little bit cheaper now to borrow money. And the idea is it’s supposed to, like, boost the economy. But instead the markets have dropped, because the, well, we’re in shutdown, so most government statistics are offline. 

The Federal Reserve has its own system that is self-funded. Totally different topic there. And they seem concerned enough that they’ve decided to do a what’s, historically speaking, a relatively large cut. So what’s going on? What is it the fed sees? How is it going to impact all that good stuff? So number one, the economy is absolutely slowing. 

We’ve got a lot of stress in the job market. And most importantly, manufacturing has been dropping. One of the many impacts of the Trump’s tariffs is kind of generated, this, background of ambient chaos. We’ve had over 540 policy changes on tariffs since January 20th, and they keep stacking up. And so businesses don’t know what the rules are going to be tomorrow, much less a year from now. 

And that tends to discourage investment decisions. And we’ve certainly seen that in the data until the point that the, the shut down, shut off the data. We also have an administration in the Congress that really seems in no hurry to get things back on line. And so we’re going to have to wait until we have something very bad that happens, whether that is for example, many, many, many people stranded, during the Thanksgiving holidays or a general problem with, health care, because we have, announcements on the 1st of November as to what everyone’s premiums are going to be. 

Lots of things are going to get worse before there’s any chance of them getting better. And that is now reflecting in the general ambient chaos that is policymaking out of Washington and specifically out of this administration. So that’s kind of baked in. The bigger problem, much bigger than that, is what’s going on with capital supplies. You see, as a rule, most private capital is generated by people who are in their 50s and early 60s, when their kids have moved out and they’re preparing for retirement or the height of their earnings, but their expenses have gone down and that surplus is put into the retirement accounts. 

It’s about 70% of total private capital. And for the American baby boomer cadre, that’s about trillion, a lot of cash. Well, when you retire, you go into a more conservative portfolio with more cash and more property and more T-bills and less stocks and bonds. 

There’s a thousand ways that’s wrong. But all collectively, they’re like very, very small. 

That’s just the general trend. This is what people do as they get older and retire. 80% of America’s baby boomers have now retired, so about 80% of those finances have been turned into more conservative investments. And we’re moving into an environment where things like goosing interest rates down in order to increase lending doesn’t work because the money just isn’t available. 

And the only other sources of money that are available are, number one, foreign money. Where other countries have been dealing with this faster than the United States has. So it’s seeking someplace it’s more productive. You can only take that so far, especially in a high tariff environment where your economy is actively discouraging the mobilization of capital. And the second issue is if the Federal Reserve just massively expands the money supply, which is massively inflationary. 

So the concern in the mid-term is we might get the worst of all worlds, you might get lower interest rates, you might get a little bit more consumption from that. But in an environment where supply is being constrained because of a lack of business investment, very inflationary, which would force the fed to go the other direction. Now, I don’t mean that as a specific forecast, because we’re entering in kind of the unknown here. 

We’ve never had a demographic transformation like we’re seeing on a global basis or an American basis in modern history, certainly not in the digital age. And so we’re going to be living through this in real time for the first time. But what we understand of macroeconomic laws is that seems to be where we’re headed right now. And barring a significant change in capital availability or government policy, that’s kind of hard wired in at this moment. 

So the fed is in a bit of a box. The white House is part of the problem, and the baby boomers are no longer part of the solution. And that leaves the rest of us in an environment where investment is difficult, where consumption is expensive, and where inflation is rising.

Regime Change for Venezuela

The Flag of Venezuela

The Trump administration is sending the USS Ford, America’s most powerful supercarrier, to the waters off Venezuela. It’s an unprecedented move that could signal a coming regime change. Let’s break down what this means.

To watch our previous video discussing what a Venezuelan incursion might look like, here is the video link.

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Transcript

Hey, all Peter Zeihan I’m here coming to you from Colorado. And it looks like the Americans about to knock off a government. The Trump administration has just ordered the USS Ford Super carrier to the waters off of Venezuela, from where it currently is in the Mediterranean. The ford is probably 60%, 100% more powerful than the Nimitz super carriers that have been the backbone of American power for the last 50 years. 

It hasn’t been bloodied in a real fight yet. So this is going to be interesting from any number of angles, but, you don’t send a super carrier somewhere in the Western Hemisphere unless you really have something important to do. The last time an American super carrier was involved in an operation in the Western hemisphere was in 1983, the Grenada operation, where I would argue it was overkill. 

That was an old forester, Forrestal class. This one is much, much, much, much, much bigger. Before that, I mean, let’s see, carriers were involved in the Cuban Missile crisis, but nobody ever shot at anyone there. And, and that’s it. So unprecedented by any number of matters. You could make the argument. Maybe the Trump administration is just trying to intimidate the government of Venezuela, which is led by President Nicolas Maduro. 

There are a lot better sticks for that, I would argue. Keep in mind that over the last few weeks, the United States has not just been going after what the, government of the United States says are drug boats, but is also said publicly that the CIA has kind of been let loose to carry out operations in the country. 

There is already, the USS Iwo Jima, which is a wasp class amphibious assault vessel, which in any other part of the world would be called a supercarrier. But for the United States, these are smaller carriers that also just happened to carry a few thousand Marines. So if you have a supercarrier in order to do strategic overwatch and air bombings, and you have the Marine Expeditionary Unit based on the EO jima, that is going to do, land incursions, this is how you knock off a Latin American government in a weekend, and it probably will only take that amount of time. 

Now, whether this is a good idea or not, push that to the side. Whether Congress is going to be notified, push that to the side. There’s a lot of details here that under normal circumstances, the American political system would be debating and discussing. We are not going to see that this time around because Donald Trump, at least at the moment, still has a lock on the Republican Party in Congress. 

And I really don’t see Congress doing anything unless and until we actually see American soldiers and body bags and this sort of operation. This should not be hard. The government of Nicolas Maduro is really just a couple of dozen dudes, and getting rid of them should be very, very easy. With the assets that seem to be steaming into the region, does that mean the next day will be pretty? 

No. This will probably trigger some sort of civil war and state collapse. The few thousand Marines that are on, I mean, you are nowhere near enough to impose a reality on the ground in Caracas, much less the wider world. We did a video a couple of weeks ago about what it be like to be to impose rule on Venezuela. 

We will share that video again. You don’t want to get involved with that. So this seems like a bomb it and forget it situation. Keep in mind that the Maduro government is so incompetent that they mismanaged selling crude to get dollars to buy food, to feed their people to such a degree that the average Venezuelan a few years ago lost 20 pounds in oil in a year, full on famine. 

You remove the government. That’s probably the only way you could make something worse. So last time that encouraged almost one third of the Venezuelan population to flee the country to avoid famine. We’ll probably see something on that scale again in the months to come. Should this be what the Trump administration has planned?

Bonus Video – Russia: Trump Pulls the Trigger

A Russia and Ukraine button on top of a Ukraine flag

After months of being played by the Russians, it seems US President Donald Trump has had enough. On 23 October the United States has fully sanctioned Russia’s largest oil firms, barring interactions with US firms and corporations. Here’s what it means, what’s at stake, and what’s next.

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Transcript

Hey all. Peter Zeihan here coming to you from Winona Terrace in Madison, Wisconsin. Just had some fried cheese curds for breakfast because, duh. Today, it’s the 23rd of October, and we have to talk about what just went down between the Trump administration and the Russians. Trump has been trying to force the Russians into a peace deal. 

It’s not going to happen. The Russians, see the war in Ukraine as the start of a broader geopolitical offensive that they need in order to survive through the century. The right, basically, it’s a border issue and a demographic issue. They didn’t do the Ukraine war on a whim. They didn’t do it to satisfy someone’s ego. 

They did it because they think they need it to survive. Anyway. 

Trump is attempting to put a stop to the conflict. And so the Russians have been stringing him along, making him look like a fool and then going back on everything they agree on. Anyway, Trump has had enough of it, apparently. 

And today Trump put sanctions on the two largest oil companies in the country. One of them is Rosneft, which is the state owned monopoly or near monopoly. And the other one is Lukoil, which is technically a private firm but takes its cues from the government. 

Full sanctions, which basically means that any American national cannot do business with any of these companies. The impact on the United States is going to be limited to Lukoil at the moment. Lukoil has a number of gas stations, service stations throughout the country, about 150, and supplies crude and gasoline to the U.S. market in a limited way. Rosneft is different. Rosneft is does all of its business in Russia. It’s not particularly sophisticated company. 

It just happens to be large and it’s absorbed pretty much all of the activity in the former Soviet Union that it could, So direct impacts on, Rosneft are somewhat limited. There are some projects that Rosneft and Lukoil have with American firms in the former Soviet Union, however, not Russia proper, primarily in Kazakhstan. There’s a super field called Crouch Cannot that does natural gas, oil and condensate. 

And then there’s the super field of Tengiz, which is on the shore of the Caspian that ExxonMobil is very involved in. If these actually get shut down, you’re talking about multiple billions of dollars of loss for American companies. In the case of Lukoil, they’ve put over $20 billion of investment in this thing over the last 30 years. Now, I would argue that all of this was going to go down anyway sooner or later. the Kazakh crude that was coming out of Kazakhstan was always going to go away. The route is just to secure this, you have to go through, not just difficult parts of Kazakhstan, but then through Russia to get to the Black Sea, to load on a shuttle tanker, to get out to sea, Istanbul. 

Eventually you get to the Mediterranean, we can get on a bigger tanker and eventually go around Africa or through Suez and eventually get around India. You know, it’s just it’s a crazy route. It only works in a fully globalized, safe world, and that’s not where we are anymore. So this was all going to fail anyway. But at some point you rip off the scab and it looks like we might be there now. 

This is not enough to even remotely make the Russians consider changing their point of view. The only thing that might, might, might get their attention is a full embargo by the United States and the Europeans that prevents any crude and any natural gas from leaving Russia whatsoever. That’s going to require a lot more than just this. But it is the first time that the Trump administration has done anything that isn’t even marginally inconvenient for the Putin government, and it’s going to be interesting to see how the Russians respond to that the next stage, because I don’t think this is going to generate the effect that Trump wants is to look at something called secondary sanctions, which is something that the United States kind of has a bad rap of with the wider world. Basically, we don’t like you, so we’re going to sanction anyone who does anything with you. Iran has always been the key target of that. And secondary sanctions have often targeted a few, European companies here and there. Well, the Europeans really don’t like the Russians right now. 

So if we get secondary sanctions, they’re probably going to go against countries like India and China. And then we’re in a very different environment. We’re not there yet. But this result is, from the Russian point of view, relatively minor. And it’s not enough to seriously get their attention. And so if Trump is serious about pressuring the Putin government, that is the next step. 

The question, of course, is whether Trump’s cabinet and institutions can handle that. We still haven’t seen Trump build out the government. It’s still be cleared out. The entire government. When he came in, he still hasn’t replaced most of those positions. And implementing the secondary sanctions requires a lot of legwork in a lot of places. Unless you just want to say, I’m sanctioning everything in China, which would be, you know, notable. 

So he’s probably gonna have to find some sort of hybrid approach, and he’s probably gonna have to create it from scratch with minimal input from a team that largely doesn’t exist. So we’re seeing in real time some of the weaknesses of the Trump administration’s ability to implement policy. But again, we’re not there yet. That’s probably a challenge for next week.

Trump and Petro Revive the Colombian Cocaine Industry

Trump just cut off military and economic aid to Columbia, because of…you guessed it…a political clash with President Petro. Bonus points if you guessed that this move would have some adverse effects, like reviving the Colombian cocaine trade.

Colombia’s geography is divided between the fertile lowlands (ideal for coca cultivation) and the populated highlands. Naturally, a divide between the two formed; that fueled a civil war, until the US stepped in to help defeat the militias and fund new programs to replace coca, with coffee, flowers, and cocoa.

President Petro—a former M-19 guerrilla member turned political malcontent—has been alienating allies and as US support fades, these once successful programs will collapse. Leaving coca as one of the few alternatives available to these farmers. And it just so happens that the US is likely to see a shift away from fentanyl and back to more traditional drugs…like cocaine.

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Transcript

Hey all, Peter Zeihan here. Coming to you from Madison, Wisconsin. And I thought this would be a great backdrop to talk about cocaine. For those of you who have been following the increasing drama that we’re having in American foreign relations with Latin America, Colombia is the new country that is in the Trump administration’s crosshairs. Specifically the president of Colombia. 

Petro and Trump have had a personal and professional falling out, and the United States is now withdrawing military support as well as economic aid. And I think it’s good to put this into context so you can see what’s coming. The reason that two thirds of the world’s cocaine comes from Colombia is really straightforward. It’s got the climate for it. 

Colombia is basically a series of lowland tropical zones, either on the Pacific or in the, Amazonian basin, separated by a couple of really high mountain ranges. Now, people not liking it too hot or humid tend to live in the middle of those ranges. So below the tundra line, but above the tropic line at high elevations, not too hot. 

That way the heat gets cut. The humidity gets cut. Cocaine doesn’t like it there. Cocaine doesn’t like frost. It likes to be lower down more in the foothills between like 1000ft. Maybe 7000ft. It likes a lot of sun 12 hours, a sunny day would be great. It likes a lot of humidity, but it doesn’t like a lot of wet. 

So growing on the sides of mountains where there’s a degree of fertility, further down is what it’s after. And once warmth, but not too much heat. What humidity, but not too much wet. Never never, never once cold. Well, if you put an illicit narcotic with a preferred geography in one part of a country, and you put the people with a preferred climate in geography in a different part of the country, what you get is a parallel economic system, one based on smuggling and drug production and one based on more normal things. 

So it’s a perfect recipe for a civil war. And basically, starting about a century ago, we got one in Colombia, eventually the lowlands, the Midlands, where the cocaine could grow, developed an illicit economy that was based on narcotics smuggling, whereas the uplands where most of the Colombians actually live, where most of the mineral economic activity was, when a different direction and these two zones clash and in time, eventually ideology played a part with international leftism being more powerful in the coca producing regions. 

And more laissez faire, semi capitalist, conservatism and normal economic activity playing a higher role in the higher lands. Now, by the time we get to the 2000s, the 80s were behind us. Miami Vice is behind us. United States realizes that cooking’s a real problem, and the 

Colombian cartels were a real national security threat. So the United States engaged in a $30 billion program of partnership with the Colombians to build out their military to basically win the Civil War. And by the time we got to the early 20 tens, that basically how things had played out far had been broken. They had been reduced to a much smaller footprint. And by the time you get to about 2015, they were basically spent as a military and a political force. 

But the cocaine didn’t go away because cocaine had a very different geography than where most Colombians lived. And so you had new forces that rose up to take place, specifically, the more right wing paramilitaries that were formed near and partnered with the government to fight before they all of a sudden moved into the old dark zones and started trafficking the cocaine themselves. 

So as often happens in a war, the victors then split and now we have a different problem. So the US government shifted tact because this was no longer a civil war in the traditional sense. The U.S. started to invest in economic programs in Colombia so that the small farm holders would have an option for their own economic wherewithal that was not dependent on narcotics. 

That’s flowers. That’s coco for chocolate, that’s coffee. Colombia still produces some of the world’s best coffee. Those three things together supplied by American Aid to help with infrastructure and development and planting and financing for farmers, was wildly successful. Until four years ago, we had a split in the Colombian political establishment. You see, until that point, pretty much all of the presidents of Colombia came from that kind of center, right? 

Laissez faire economics, strong national security point of view, because they had been in this civil war for so long. Well, four years ago we got a new guy by the name of Petro, who had a different view and had more political loyalties in some of these more outlying regions that had been somewhat disadvantaged by the civil war in the transition since, Petro is not the greatest politician, he calls himself a center left, as he calls himself, sometimes a socialist. 

A lot of people call him things that are worse, but really, he’s a populist. He believes that the institutions of Colombia are dead set against him and trying to, disrupt his presidency. He’s not a very good leader. He hasn’t selected very good people to be on his cabinet. He thinks that tariffs are a great economic policy to encourage domestic industrial development. 

He’s not really big, big fan of a rule of law, because it’s often on the opposite side of what he wants to do. And he focuses on his personal charisma to drive things through instead of building coalitions to get policies adopted. Does any of this sound familiar? I mean, he’s basically the Colombian version of Trump, just with some different political coloring. 

Anyway, as you might guess, you get two charisma forward non technocrats who, are very larger than life and bombastic with their personal politics. And the two of them have not got a lot. Trump and Petro. So we had a falling out very recently because Trump’s policies a little bit further to the east, have been blowing up ships outside of Venezuela. 

Colombia is a neighbor, Colombia. In Venezuela, they have never really gotten along. It’s not like the rallies or anything like that, but it has gotten a little bit too close to home. And Petro said that the last vessel that got blown up was actually Colombian fishermen. Now, no one on either side has provided any data or proof to their claims or their counterclaims.  

Was it Venezuelan drug smugglers don’t know us, hasn’t provided the US hasn’t provided any information. Was it Colombian fishermen? Don’t know. The Colombian government hasn’t provided any information, but it provided the spark that caused this current blowup between the two countries. And so the Trump administration has ended all military assistance and is in the process of ending all economic assistance. 

Now, whether this is a good or bad idea for foreign relations, I’ll let you decide that for yourself. But I can tell you exactly what it’s going to mean for cocaine without the military assistance. It’s arguable that the Colombian government doesn’t have the ability to impose rule of law through the coca growing regions, and without that economic system, it’s absolutely impossible for farmers in an outlined Highland area like this to economically viably grow things like the basics for chocolate and coffee and flowers. 

And so they’re going to turn back to growing coca to make cocaine. So is Petro a good leader? No. Absolutely not. And we’ve got elections next year. Hopefully he’ll be gone. But in the meantime, the Trump administration established the perfect environment to make sure that cocaine acreage explodes. And now that Americans seem to finally be turning away from fentanyl to more normal drugs, cocaine is there to fill the gap.

A $20 Billion Band-Aid for Argentina

Band aid on a crack in the street

The US just committed roughly $20 billion in a currency-swap with Argentina. That’s a whole lot of pesos. So, why did the US extend this lifeline, and will it save Argentina from itself?

The currency swap can buy Argentina some time by backstopping the peso. However, given the fundamentally flawed economic and political situation in Argentina (and the track record of defaults and currency collapses), this swap is just a band-aid.

The US is taking on a whole lot of risk, and I’m not seeing the upside here. Unless Argentina attracts real investment, undergoes massive reforms, and uses those God-given resources to their full potential…the US is just betting on a losing horse.

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Transcript

Hey all, Peter Zeihan here coming to you from Colorado. And today we’re going to talk about the American bailout of Argentina. So far, $20 billion has been committed to what’s called a currency swap agreement. That money is already in play. And there is discussion, of doubling that in the next couple of weeks. So what is a currency swap agreement? 

Why does, Argentina need it? And where’s this likely to go? So first currency swap. Basically that says is we are holding a certain amount of cash and reserve. You’re holding a certain amount of cash in reserve. And we will swap currency, in order to defend our respective, currency bands so that our currencies don’t crash. 

Now, with the United States having an economy that’s, like 20 times the size of Argentina, actually probably a lot more than that. It’s smaller than Wisconsin, I think. Obviously this is a one way benefit. The logic is that when the Argentinian currency starts to wobble, they sell, Argentinian pesos to the United States to increase demand, which drives the currency up. And in exchange, they get U.S. dollars. 

A lot of countries have these swap agreements to stabilize trading bands. And generally works, if the underlying economic fundamentals of your system are sound. So when I see countries like Korea and Japan and Vietnam and Thailand engaging in currency swap agreements like, yeah, no big deal. It’s basically a group insurance policy. 

When I see Argentina doing it, no, Argentina has defaulted on its debt 39 times last century or something like that. Lots. And all of those defaults has been preceded by a currency collapse, which is what they’re risking right now. And so the IMF is really a stickler that when the IMF lends you money, they don’t want to use it to defend your currency. 

If you can get a swap, agree. If you can fool a country and give you a swap agreement so that it’s their currency backing it, great. And that’s exactly what’s happened with the Trump administration. Trump considers the president of Argentina, , to be an ideological ally. I would point out the  does not think that reverse is true. 

And he’s basically milked the United States government for $20 billion, because if the currency falls by 80%, then the United States is holding Argentine pesos that are now worth $0.20 on the dollar. And judging by black market rates, we’ll probably see that in the next few months. Now, granted, if the Trump administration keeps handing over tens of billions of dollars at a time to defend the currency in Argentina, it might take longer. 

Dollars means something, but they’re not available in limited supply. The Treasury. What’s going wrong in Argentina? Argentina has had a series of just horrifically bad decision makers over the top. I wouldn’t say that a is one of them. 

in most regards, that have basically destroyed the state. They’ve eroded rule of law. They’ve taken policies that pushed the state in the middle of economic decision making for companies. 

They’ve put into place a really, tough tariff regime to, penalize imports. But then, because of the lack of rule of law and the erratic nature of those tariffs, nobody wants to invest money, in building out the industrial plant to build up the productive capacity in Argentina. Sound familiar to anyone? Anyway, as a result of years, decades of this, the Argentinean industrial plant has basically hollowed out the standard of living, has stagnated or fallen for over a century, and they keep borrowing to the tune of five 6% of GDP just to kind of make the numbers work, which just leaves them with more debt. 

And then when the currency does drop, they can’t service the debt. So they they default on everything. And we’re now seeing the current iteration of this. There had been some hope that under  it might be different this time. I think that was always overblown. Milei has shown. Yes. Shown results in getting government spending under control, but he hasn’t been able to get investment going without investment. 

The economy will never really be able to grow again. And so you’re just kind of marking time until the next collapse. And the next collapse is almost here. And this time it will take down quite a bit of U.S. money, taxpayer money in the meantime. Okay. How did we get here? Well, the key thing to remember about the Trump administration, there’s a lot of things to remember. 

The key thing is that, while Donald Trump was out of office between his first term and his second term, he took over the Republican Party and gutted its policy. It’s basically fired everybody. So when he came in, he no longer had a pool of skilled technocrats that he could draw upon to fill out the government. 

In fact, when he did come in, he fired the top six standard positions. And still now more than six months in, hasn’t showed them all because he doesn’t have enough people to fill them. And he surrounded himself at the cabinet level with people who would basically lie to him in order to make him feel better. I’d always counted Treasury Secretary descent as one of the rare ones who actually has the work experience justified for his position. 

But if there’s anything that they teach you like freshman economics is never, never, never, never, never fun to bail out for Argentina. So definitely knows that this is a horrible idea. And he’s already done the first bailout anyway, and is now putting the finishing touches on the second bailout. So my respect for him has dropped. 

Where does this lead? Well, so many people have been burned so many times by Argentina’s fiscal and monetary and debt collapses over the years that really no one will put money in the country anymore except the IMF. And only with very specific carve outs for what can be done. 

The IMF on many occasions has considered washing their hands of the situation and leaving Argentina just to die. But Argentina is by far their biggest customer, to the tune of like $41 billion of loans. 

So as long as there’s some degree of support in the United States for the Argentinian government, some degree of fiscal drip will continue. As for the United States. I have always, always, always, always held up Argentina as a potential warning for us. 

The United States is a powerful country, largely because of its geography. It’s got amazing chunks of arable land interspersed with navigable waterways, like the Mississippi. In the Ohio movie, Things by Water is about 1/12 the cost of moving them by land. And so during the pioneer era, we basically had five generations of uninterrupted economic growth, which set the stage for the U.S. becoming the global power that it is. 

In addition, oceans on both sides. I mean, it’s really hard to invade the United States. You put that together. Of course, the United States is the most powerful country in the world. And it’s really hard to screw it up. But Argentina has the second best geography in the world. Large chunk of flat arable land overlaid with the second densest concentration of navigable waterways in the world. 

Ocean on one side, mountains on the other, the Andes, and a series of physical breaks between them and Brazil to the north. 

Once again, it’s hard to screw up. But Argentina has proven that if you get up every day for decades and try to figure out how can I make it a little bit worse, you can overpower geography. 

Food for thought.

Qatar Bribes Its Way into Idaho

Flag of Qatar

Let’s first establish that Qatar is not building a new base in the US. They are funding an expansion of an existing US facility used to train F-15 pilots. And second, Qatar isn’t interested in those Idaho potatoes, they’re looking for something a bit more nuanced.

Qatar and the US don’t see eye-to-eye on most things, but both countries are willing to overlook those differences in favor of what they could gain from the relationship. The US maintains basing rights in Qatar for CENTCOM. Qatar gets some sweet and tasty leverage.

Washington, once again, finds itself in a political and ethical gray zone with another misaligned country in the Middle East.

Prefer to read the transcript? Click here

Transcript

Hey all, Peter Zeihan here, coming to you from Colorado. Today we’re going to take a question from the Patreon page. And it’s about this new military base that supposedly the Qatari government is building in Idaho. So, first let me clear up what’s going on and then give you an idea of what to expect. First of all, it’s not a fundamentally new military base. 

It’s an existing facility that is already used for training foreign forces, most notably the Singaporeans. And it’s going to be training Katari, F-15 pilots just like it does in Singapore. F-15 pilots. What’s different is that the Qatar are investing a huge amount of money to expand the facility. Normally, when foreign forces are training with the United States, we either do it there or if they do come here, they come to a preexisting facility. 

It remains under American control. It’s not going to be a Katari base, but it is definitely in the gray area. Because the Qatari are up front paying for the expansion. That’s not something that has ever happened, ever in American history. But to say that Qatari law is going to hold in Idaho, that is also not correct. 

So there’s a lot of misinformation out there on all sides. What we do need to discuss, however, is the Qatari. Qatar is a country in the Middle East. It’s that thumb that has under a million citizens. I think it’s like 400,000 citizens. And it sits on arguably the world’s largest natural gas field that has extraction infrastructure. 

There might be a couple in Russia that are bigger, but they’re untapped. And that means that the Qatari are just stupidly rich. By most measures, Qatar is the richest country in the world on a per capita basis. And as a result, Qatar has been using that money to basically carve out an independent foreign policy for itself. This includes a significant amount of terrorist financing. 

They like the Taliban. They like the Muslim Brotherhood in, Egypt. They used to be a big fan of Hamas until that became politically unpalatable, in Gaza. They’re backing probably the wrong side of the civil war in Libya. And, and, and and and the United States has its Centcom headquarters in Qatar and did so through the entire war on terror. 

And if that sounds weird to you, that’s because it is, the US military realized it needed a large footprint to coordinate its operations in Afghanistan, Iraq and the rest. And when it looked around for possibilities, it really didn’t find many. Obviously, it wasn’t going to put it in Iran. Obviously it wasn’t going to put it in Iraq, because that was a war zone was going to put in Saudi Arabia because Saudi Arabia said, no, we weren’t going to put it in, Kuwait because that was too vulnerable compared to what was going on in Iraq. 

Oman was neutral and wasn’t interested in that, really just left Qatar. And, the Qatari, while they were in all meaningful ways on the opposite side of the equation from the US military on every military issue that mattered, really wanted the Americans there as a geopolitical counterweight to the local powers in the area, most notably Saudi Arabian Iran. 

So whenever you’re doing anything in the Middle East, keep in mind that you’re going to be having some very strange bedfellows. And that is no different here than anything else. 

What is different is that the Qatari are completely shameless when it comes to seeking out people who are craven and are just desperate to be corrupted, and they try to spread their influence by using flat out cash. 

So if you remember the disgraced and I think now imprisoned, former Democratic congressperson, Bob Menendez, yes. There we go. From Jersey. He’s the guy who was found with, literally gold bars in his home because he was basically pimping his services for foreign governments. That was Qatar money. The Qatari basically bribed him. 

And so now what? We have the Qatari paying for infrastructure for the US military. We should view that in the same light. It is a bribe. This is also the same government that gave a, jet to the Trump administration. That’s basically to call it Air Force One. But when, Trump is out of the white House, it goes with him. 

That is also called a bribe. And they really don’t care who they bribe. Their goal is to get other countries to take policy decisions that back their position, because they’re a small state and in a straight up fight, they wouldn’t do very well. So they spread the money on thick. And if you’re going to condemn people on one side, like the new Jersey congressperson for taking gold bars to sell out his country, then you have to consider that everyone else who is taking money also maybe isn’t the most ethical person. 

But before you go around condemning everybody, keep in mind that we have had a base in Qatar for almost 25 years, and it is a ridiculous, but that is the cost of being a great power, apparently.

Venezuela and the War Powers Act

Photo of a US Naval Carrier

The Trump administration’s campaign against alleged Venezuelan drug smuggling is raising some eyebrows. Let’s unpack the War Powers Act and how it applies to this.

The goal of this piece of legislation was to limit unilateral action; it requires presidents to brief Congress within 48 hours of deploying and withdraw them within 60 days unless an extension was approved. But with every president calling this Act unconstitutional since it was put in place (and the fact that Congress hasn’t had the gumption to challenge a president since it was established), this move will most likely go unchecked.

So, Trump has free rein unless Congress decides to step up after 50+ years of silence. Meaning the current operation involving warships, bombers, and 10,000+ US personnel targeting Venezuelan ships will continue with limited transparency.

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Transcript

Hey, all, Peter Zeihan here coming to you from Colorado. And today we’re gonna talk about what is going on in the southern Caribbean, specifically the Trump administration’s, targeting of alleged drug smuggling vessels coming out of Venezuela. A lot of people have written them asking me for a comment on the legality of this. And the best I can give you is that this is a gray area, no matter really how you look at it. 

According to the Constitution, the US president has the authority over the armed forces, and that is largely without restriction, unless in case of war, in which case Congress by a two thirds majority, needs to declare war. But Congress hasn’t declared a war since World War two, leaving all military policy basically in the hands of the president unless and until Congress says otherwise. 

Now, in 1973, Congress did say otherwise, and they passed something called the War Powers Act that says within 48 hours of any commitment of American forces into a combat situation, the president has to brief Congress on the details and then withdraw all forces within 60 days unless the president applies and is approved, for an extension. Anything beyond that requires the two thirds majorities by Congress to actually declare a military conflict. 

Now, since then, every single president, including Trump, won and Trump, too, has said that the War Powers Act is unconstitutional. But the War Powers Act was passed by a veto proof majority over the objections of the president at the time. And so you have this conflict between the executive branch and the legislative branch, and it really means that the president still can do whatever he wants so long as Congress does not act. 

And since 1973, we have not had a situation where two thirds of the Congress has been willing to oppose the president on military affairs. And that is where we remain today. So that leaves the president the ability to do whatever he wants. Now, under Trump administration, notification of Congress is something that has become very weak under the best of circumstances, and military affairs are no difference. 

There have been times in the past where the Trump administration has done something militarily and said that when it hit the news that was notification of Congress, which I don’t think any court back up. But again, Congress has not gotten together and had two thirds of its members say otherwise, which is what would be necessary in the current situation. 

Members of the House Military Affairs Committees and the intelligence committees had basically been furious with the Trump administration, not just the Democrats, especially the Republicans, because the Trump people who have come in to brief them have basically provided no information and no proof that any of these, ships were carrying drugs. Does that mean, I think that the Trump administration is just blowing up random ships? 

No, because there’s there’s quite an operation going on down there. Now. We have over 10,000 American service people that are involved in this operation. And at any given time, at least eight warships. We also are flying bombers, off the coast of Venezuela. So something is afoot. And the Trump administration is not sharing very many details with anyone, especially with Congress. 

And that leaves all of us kind of grasping at straws. All I can tell you for certain is that unless and until Congress starts acting like Congress, the Trump administration has full leave to do whatever it wants legally, where that takes us. I don’t have enough information to say right now.

Congressional Midterms: Electoral Bloodbath or More of the Same?

There has been plenty of public frustration over Trump’s policies and actions, but that doesn’t necessarily translate to political momentum. With only one-third of Senate seats even contested, a major shift isn’t going to happen. Both parties are stuck in a dysfunctional cycle, so we’re likely going to see more of the same rather than an electoral bloodbath.

On a longer timeline, we’re very clearly heading towards an entire political system reset. Just remember that we’ve got a lot of a runway in front of us…

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Transcript

Hey all, Peter Zeihan here, coming to you from Colorado today. We’re taking a question from the Patreon crowd. And specifically, are we going to have an electoral bloodbath in the midterms? 

Let me go with a partial no. And a big I don’t know. First the partial no. Keep in mind that if you want to change the math on the big issues, like, say, impeachment, it’s not the House of Representatives that matters. 

It’s the Senate. And only one third of senatorial seats are up for election every two years. So even if we have just a swing massively in the direction of the Democrats, it doesn’t necessarily mean that Donald Trump is facing a third impeachment attempt. That, or I guess would be the first one to be successful. Third time’s a drama, whatever you want to call it. 

Anyway. So unlikely. Second and far more importantly. 

The Democrats are a mess. Let me put a few things into context. If you are not just a Democrat, but an independent like me, or maybe a moderate Republican or an old school Republican on national defense and business issues, there’s a lot going on right now for you to be more than a little annoyed with, we basically have a breakdown in the military in terms of its functionality because of, the Defense Secretary’s purges. 

We have a Russian agent in the white House that’s running the intelligence system. We have a a guy at the FBI who’s basically destroying domestic law enforcement. We have a guy of health and Human services which is breaking down the vaccine system, which keeps us all safe and healthy. And we have a policy that has basically been in and out and in and out and in and out of terrorists and trade wars ever since day one of this administration, especially since April 2nd. 

And so our expansion of our industrial plant has come to a screeching halt, and we’re seeing attacks on higher education that are basically shutting down the pipeline for skilled labor into the country that comes from that used to draw the best and the brightest from the world over. And we’re in the early stages of seeing significant rises in labor costs, which are making the construction of things like new homes almost impossible. 

And we have 50% tariffs on copper and aluminum and steel, which are the things you need if you want to build housing or industrial plant more generally. And we’re setting up for a significant economic downturn over the course of the next year in an environment where we should be experiencing boom, boom, boom, boom, boom. There’s a lot for a lot of people to be angry about. 

And yet none of it is resonated politically. Trump’s not like dominating the polls or anything, but he’s hanging in there and he’s continuing to do things that piss off a lot of people and facing absolutely no meaningful blowback in that sort of environment. Only one issue has risen to the point that it actually seems to concern him. And that’s the Epstein scandal. 

This seems to be the only issue that the Democrats are getting any traction on. And if this is as good as it gets for them, it is difficult for me to imagine, in a world 18 months from now, where we have a significant shift in political views in this country now, Americans are fickle in their politics. I don’t consider this, a forecast, but all of the normal things that we have seen during my entire life of watching politics just don’t seem to apply right now. 

The Democrats are rudderless. They’re leaderless. They’re unable to mobilize anything in Congress, despite the fact that we almost have a 5050 split in both houses. And even at the state level, we just don’t see anyone rising to the occasion. Now, if you’ve been following me for a while, you know, I’ve been talking about the disintegration of both political parties for some time. 

The Republicans have basically degraded into a one man cult of personality, of which the business community, the national security community and the law enforcement are not part of. And the Democrats have basically just become a circus without a tent, in that sort of environment, 

The opportunity for a broad reset of the American political system is inevitable, but inevitable does not mean imminent. And building parties in the United States takes time. The way the Constitution reads is each of the 50 states has their own party that can, in coalition form, a national party. We haven’t started to build an alternative. 

Today’s Trump Republicans or today’s chaos Democrats. And until that process happens, the midterms will be basically a redux of what we’ve seen the last three election cycles, which is very, very, so electoral bloodbath. I don’t see it broad electoral reset over the remainder of the decade. That’s a different question.

So, You Want to Invade Venezuela…

Map of a bay of Venezuela

US military intervention in Venezuela keeps getting floated around, but I’m not sure people fully comprehend how UGLY this would be.

Venezuela is a mess. They have a corrupt leader, who has caused irreparable harm to the nation…but getting rid of him is the easy part. Caracas is the Everest of this endeavor, and it all comes down to geography. Sure, Caracas looks coastal, but it sits on a plateau behind 2 miles of tunnels and steep mountains. Translation: it’s not easy to get to.

We are talking about the US military though, so capturing Caracas wouldn’t be difficult. Holding and sustaining the population afterward is the scary part. We’re talking a multi-year, multi-billion-dollar project, with a population that depends upon imports that travel on fragile transit infrastructure. Think of this is a South American Chechnya.

Before I say this next line, allow me to emphasize that this as a VERY bad idea. But if someone was really gung on invading Venezuela, the western port city of Maracaibo is where I would start.

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Transcript

Peter Zeihan here, coming to you from Colorado. Today we’re talking about Venezuela because relations between the Americans and the Venezuelans are getting pretty nasty, and people are starting to discuss, I wouldn’t say plan, but discuss whether or not there’s going to be a military intervention. At the moment, I don’t have any guidance on that. The Maduro government of Venezuela is obviously horrendously corrupt and obviously is involved in drug trafficking, if not to the degree that the Trump administration asserts. 

Most of the drugs still come from Colombia up through Central America and Mexico and the United States doesn’t mean that there’s not an important vector coming out of Venezuela, but it’s nowhere near the primary one. But the Maduro government is absolutely involved with the smuggling. So, you know, everybody gets a piece for the right, everybody gets a piece where they’re wrong. 

Let’s talk about what a military intervention would look like. The population of Venezuela, most notably the capital, Caracas, is only a few miles from the coast, which makes it sound like it’s ripe for a maritime intervention or an amphibious landing. But you would be wrong, because there’s a very strong coastal uplift with mountains basically paralleling the coast in that entire section of the country. 

So to get to Caracas, you actually have to go up into the mountains and then punch through a couple of tunnels, one of which is about a mile and a third long. The other one’s a little less than a third of a mile, half a mile somewhere in there. In order to get to the plateau where the city is. 

So four lane highway, two tunnels, which collectively are about two miles long, which means knocking off Nicolas Maduro and his government, is not the hard part. The hard part is then keeping the city and the country alive between the incompetence of Maduro. He used to be a bus driver and his predecessor, Hugo Chavez, who was touched. This country has completely destroyed their capacity for growing food and even if you remove the government and everything, all of a sudden remembers how to do it. 

You still have a couple of growing seasons before anything would be back on the sheet. So I strongly encourage you to consider what happened back in Iraq when the United States knocked off the Hussein government. Food production plummeted for a couple of years before eventually gradually recovering. In the meantime, the United States was responsible for keeping the civilians alive. 

But in the Iraq scenario, we could ship things in through northern Iraq because Turkey was an ally and there was infrastructure in place. We could ship things in from the south because Kuwait was an ally, and there was a U.S. military base right there, and there was a port, right at the southern tip of Iraq. So there were a number of ways that things could be brought in. 

You don’t have that with Caracas. The food production regions are more deeply in the interior, and you required billions, if not tens of billions of dollars of reconstruction work to bring online. And you have to ship in everything for the capital through this four lane highway. And this is a place that, based on whose math you’re using, imports somewhere between 70 and 80% of their food, mostly ultimately from the United States. 

But that’s another issue anyway. So tunnels, one that’s over a mile long, even a mild explosive by, say, a TV star who decides he wants to stick it to the Americans, shuts that down, and now you’re forced to use a road that was built before 1950 that goes up and over the mountains, which takes a lot longer now, a lot longer subjective. 

If you use the tunnel system to get in from the coast and there’s really no traffic, this is less than a half hour drive. If you go up and over, it’s maybe an hour and 15 minutes. But if you’re talking about a military occupation where the United States is directly responsible for the security and food distribution over 5 million people, that’s a whole nother problem. 

You’re talking about hours and any number of ways that things can go wrong. One of the advantages we had in Iraq that everything was a flat desert road. Mountains are very, very different. Basically, you’d be working in a tropical Chechnya. It would be ugly. And for those of you think that. Hey, air power. Yeah. No, it takes about a thousand times the energy to move a pound by air that it does by water. 

And maybe 100 times compared to what it takes to move by road. And like the Berlin Airlift, which people like to point to, we were flying things from western Germany to West Berlin, which was less than 100 miles here. The nearest airbase is what Cuba, which we’re not going to be operating from. So you’d have to set up some sort of operation on one of the outlying lines, like, I don’t know, Margarita, and then fly in from there and just. 

No, no, no, there’s no way you support 5 million people that way. So knocking off the top cut of the head off a snake, that’s the easy part. Reconstruction is an ongoing issue that would take years, if not decades, and keeping everyone alive from here to there would be just beyond what the U.S. military could handle. If this is not me saying we should do it this way, but if this were to happen, the more reasonable approach would be to do the invasion via a place called Maracaibo, which, if you look at a map of Venezuela, is this big bay to the west? 

It has no escarpment separating from the water. The major population centers are actually ports. It’d be much easier for U.S. forces to operate it. And two other things to keep in mind. Mark Cabo is a major oil producing region, and it doesn’t particularly like Caracas. It never has. And if there’s ever going to be a secession war in Venezuela, it’s going to be Maracaibo trying to go its own way. 

So the likelihood of the population being hostile is much lower, and the likelihood of being able to keep the population alive is much higher. So if if it’s going to be done, that would be the way to do it. Not me saying that this is a Latin American war. That would be fun. It wouldn’t be. But you don’t have to make it a disaster.