Historians are quick to recognize struggles among national powers, but they usually neglect the power of organized international finance, which has aims above and beyond those of its host countries. In fact, during the Belle Époque, great powers such as Britain and France were simply the workhorses of the financial elite. The same can be said for Russia—both then and now. And then as now, Iran has been a tool of the financiers to manipulate Russia and acquire her assets.
In the 1870’s, international banking was colonizing Iran through the British, a situation that was detrimental to Russian interests in the Middle East. The first financial emissary, Baron Julius de Reu-ters, was the scion of a Göttingen banking family who enjoyed a meteoric rise to wealth peddling information between the London and Paris stock exchanges. Despite the Russians’ best efforts, he won the charter for Iran’s central bank (the Imperial Bank of Persia) in 1898. The bank was floated in London, and David Sassoon took a controlling interest in the monopoly created by this arrangement. The Russian government tried to counteract this influence with their own (less successful) bank in Iran, the Russian Loan and Development Bank. During the ensuing struggle, Russia backed the interests of the shahdom with loans and troops, while British bankers focused on establishing economic monopolies at the expense of political stability in Iran.
Merchants and “liberals” began to revolt against the shah, and “secret societies” sprang up to erode his power. These anarchists undermined cooperation between the Russians and the shah by way of assassination and “spontaneous revolts” in the name of “freedom.” Azeri and Kurdish minorities began to agitate violently for independence. Eventually, Shah Muhammad Ali sought asylum in Russia.
The upheaval in Iran played into the bankers’ hands and undermined their European rival, so that, by 1918, international banking was the only real power left in Iran. The country fell into famine and did not recover until a new ruler, the secular Iranian nationalist Reza Shah, revoked the Imperial Bank of Persia’s charter to issue money and broke the hold of foreign loans by increasing tax revenues—including those from the Anglo-Persian Oil Company.
Russia’s battles with the financiers did not begin in Iran. By the end of the 19th century, Russia’s international power was declining, mostly because of her failure to develop economically after the manner of Britain or France. Unlike Britain and France, Russia’s finances had not been dominated by the merchant-banking syndicate. Instead, Russian Finance Minister Sergei Witte thought that he could use loans from the bankers to develop Russia without compromising national sovereignty.
To understand 19th-century European politics, it is necessary to understand how European governments were financed. Loans were organized through a consortium of private bankers who would then hold the national debt or sell it on to other investors. These private bankers could be based in London, Paris, Frankfurt (later, Berlin), or Amsterdam but still maintain their connections—through a close-knit community of families and partnerships. Major banking families would send their sons to allies in different cities so the boys could learn the finer points of international banking.
These banks could compete with one another, but cooperation generally ruled the day. National governments could switch between, for instance, the Paris and London markets to raise funds; but the reason for switching would be to utilize a different set of local political contacts in the bargaining process. Consequently, these banks developed a privileged understanding of European politics and economics.
On the other hand, Russian society was more agrarian, which meant Russia was not closely integrated into the financial networks that sponsored the Industrial Revolution and enabled both massive military campaigns and the spread of empire. While this kept power in the Russian government, it was also a liability: Russia was in competition with better-armed countries and needed to protect valuable natural resources. By the 1890’s, it was obvious that Russia had to modernize quickly.
To obtain the capital it so desperately needed, the Russian government attempted to raise money in the French markets. This was a dicey game: The major French banking houses had extensive oil interests in the Caspian oil region, and the French government was obsessed with building railways through Russia to protect strategic interests in Asia. Financiers understood the difficulty that Russia faced and used her weakness to their advantage.
In 1894, the French government began to restrict Russia’s access to French capital markets. At the same time, the French press began a smear campaign targeting Russian securities. These two events coincided perfectly to allow a group of French financiers who had lost money on Turkish investments to blackmail the Russian government: Either buy our Turkish interests, or the trouble for Russian securities will continue. Finance Minister Witte would not allow this deal to go though, but, in order to stop it, he had to buy off the French press.
That shady dealing left a bad impression on Witte. He tried to raise funds in England and the United States, but to no avail, so the stormy relationship with France continued: In 1901, Witte worked with the Parisian Rothschilds to organize another loan to Russia on the condition that the Russian government would not take out any other loans that year. At the 11th hour, the French finance minister refused access to the market unless Russia gave special privileges to French financiers and businessmen. Witte was able to derail this ultimatum: Presciently, he had insisted on written assurances of a loan from the French government one year before. Attacks from the French press began anew, and, once again, they were subdued for a short time with more Russian money.
The Russo-Japanese war forced Russia to take out a whole new series of loans from the French, but with strings attached: Russia was required to purchase French-manufactured war goods at highly inflated prices. Naturally, these obligations were supported by the French press. (The Japanese side of this war was financed by the Schiffs of Frankfurt am Main, using American money.) In January 1905, the banking firm of Mendelssohn & Co. initiated a German loan to Russia. Russia was in dire straits by this time: The country was falling into revolution, and the hounds were circling.
In February 1905, representatives of BNP Paribas went to St. Petersburg to threaten the Russian government with a fall in the price of Russian securities on the Paris Stock Exchange and to demand more money for the French press. The French government insisted on “liberal” reforms in Russia if the czar wanted French support to continue. German creditors began to demand payments in gold, and huge amounts of it flowed out of the Russian State Bank’s reserves.
Russia had grown so dependent on the French financial system that her foreign policy was being dictated by the French establishment. French-dominated banking groups sprang up in Russia and the Balkans, and the old Russian banks were “restructured” under French guidance. By 1917, the Russian government had been changed completely.
Today’s furor over Iranian WMDs is designed to manipulate Russia through Iran; and the manipulation serves the same purpose that it did in 1898. This time, however, Washington is the protagonist: Britain and France are exhausted. The first thrust for Russian assets yielded the chaos of the Yeltsin years; now, the “threat” of Iranian WMDs is providing an excuse for war—a more direct approach.
The Yeltsin administration let foreign bankers systematically loot Russia. The inequitable sale of natural resources to private companies, such as Yukos, has ties to the old financial interests. The fraud scandal involving Harvard’s Institute for International Development and USAID is testimony to the corruption surrounding U.S. involvement with Russia after the fall of the Soviet Union.
Perhaps the most blatant abuse of lending power came in 1997, when the Paris Club, a U.S.-led organization of governments that lend to other governments, used very unorthodox accounting methods to overvalue Russia’s assets. This allowed foreign banks to make massive loans to their Russian counterparts. On top of that, commercial banks in Russia accumulated huge amounts of off-balance-sheet forward contracts (high-risk investments) with overseas financial institutions (valued at six billion dollars by early 1998). Restrictions on nonresident ownership of government debt were removed, and swaths of it went abroad.
The Russian government had difficulty collecting tax revenue to pay back these debts—a situation that was not helped by the corruption surrounding the Yeltsin-led privatization scheme. Then came the speculative attacks on the ruble, which further drained Russia’s assets. And, while the country was being squeezed to penury, her lenders didn’t think Russia would dare default, for fear of being denied credit in the future. The Russian government saw things differently, and relations with the financial community turned sour: Commercial banks got their fingers burned when Russian loan repayments were suspended. Moscow lightened the debt burden by defaulting—a more desperate course of action than Reza Shah’s. Once the financial chaos had dissipated, Russia began seven years (and counting) of impressive economic growth.
Enter the Iranian “weapons of mass destruction.”
The U.S. law prohibiting WMD exports to Iran includes a plan for using money to influence Russian foreign policy. If Russia sells arms to the Islamic republic, the United States can withhold capital for the International Space Station. (The details explaining how Washington can wiggle its way out of space-station payments take up almost 50 percent of the text of the Iran Nonproliferation Act of 2000.)
But now Washington wants to arm Iran—so they brought China in to do it. The existence of Iranian missiles that could be topped with nuclear material from Tehran’s energy programs will be the excuse for war, and the plans are in motion. On April 9, the U.S. Treasury Department blocked the assets of three Iranian energy companies. On April 17, the State Department placed arms-export sanctions on three Chinese companies for contributing to the spread of WMDs to Iran and Syria. These sanctions come less than a month after WMD-related import bans on Beijing were permanently lifted.
Meanwhile, the United States has continued to arm complicit Middle Eastern powers: On April 20, the U.S. Navy announced its intention to sell Turkey torpedoes, and the U.S. Air Force wants to sell Israel bombs for her aircraft-combat systems. America is also rearming Norway and trying to worm her way into Russian missile defenses.
An independent Iran is the only buffer between Russia’s Caspian oil and U.S.-run Iraq. Israel needs to control the transport of Caspian oil to be financially independent of the United States. America needs that cheap oil to keep the electorate satisfied.
Once again, Russia’s economic prosperity is attracting investment banks. Deutsche Bank has been busy there for some time. Société Générale is expanding through its Vostok retail bank and Rosbank. Goldman Sachs made a direct appeal to President Putin to help expand contacts with the Russian government. Lehman Brothers has hired the brother of Boris Jordan (the founder of Renaissance Capital, a firm that benefited greatly from the corrupt sale of Russian state assets) to smooth their entry.
As Washington pushes its plans to gain control of Russian assets, the financial interests are working a strategy of their own: Apply pressure to Iran, become creditor to Moscow, then squeeze. They can sit back and watch the political chaos that our policy is producing and anticipate the lucrative opportunities that will follow. And, if American arms don’t deliver for them, the bankers can always turn to their Chinese partners later.