China and Russia want to weaken American hegemony and the greenbacks. The tragic invasion of Ukraine seems to be just one step in a long process.
Almost to this day, 50 years ago, US President Nixon returned from a week-long diplomatic visit to China. The success is unequivocal: he convinced his Chinese counterpart to move away from the Soviet circuit and help America spy on the USSR. Nixon is then re-elected. The stage is set for China’s possible integration into the global economy.
Today, the world has changed. China’s place in the international system has assumed far greater proportions than Nixon had imagined. And on the Chinese side, President Xi Jinping makes no secret of his view that America is a fading superpower that will do anything to block China’s relentless progress toward global supremacy. Donald Trump had started a crucial turning point by imposing tariffs on Chinese products. Today, President Biden, who has united Europe, Australia and Japan in his fight against autocracy and the promotion of democracy around the world, represents a more complex issue for Xi Jinping.
But when the Biden administration talks about a struggle between the “free world” and dictatorships, he risks pulling Russia and China together in what some call a “new axis of autocracy.” This approach could prove to be one of the most important geopolitical developments in decades, in a way the opposite of what Nixon was trying to introduce in the 1970s.
Putin and Xi have many common interests.
Russia and China are not natural allies. And Chinese leaders have long advocated for a world without formal military alliances that avoids getting entangled in other countries’ military conflicts. But Putin and Xi have many common interests. Both men were deeply shocked by the collapse of the Soviet Union. Both have cracked down on dissent or circumvented the president’s term limits, which should allow them to remain in power indefinitely. But above all, they share the same vision – the one about the end of American hegemony – as they strive to restore the role of great power in their respective countries with the ultimate goal of regaining territories that they consider to have been lost. : Ukraine, in the case of Russia and Taiwan, in the case of China.
A few hours before the opening night of the Winter Olympics in Beijing, a major event went almost unnoticed. Putin and Xi Ping issued an extraordinary joint statement promising that their cooperation would be “superior” to that forged between the two countries during the Cold War. Including in relation to armaments and defense policy. China now supports Russia’s demand to halt NATO enlargement. As for Russia, it supports China’s claim to Taiwan.
But their joint statement is also a manifesto calling on the United States to recognize that it is no longer the world policeman. The world has changed, they say. Russia and China should be respected as “world powers” that can dictate what happens in their lap.
This confrontation with the Western world – and above all the United States – is not just geopolitical. In fact, the two ad hoc allies have engaged in an economic war with the United States through control of the global supply chain and energy prices. By accumulating gold and issuing US government bonds, they are trying to deprive the dollar of its status as a reserve currency.
As a reminder, Bretton Woods monetary system was organized around the US dollar, associated with the dominant raw material which was oil. More than a multilateral monetary system, Bretton Woods was related to a military, political and economic, but also energy dominance of the United States. The end of the Bretton Woods system in the early 1970s did not change the situation. It will even allow the emergence of the dollar standard, as the dollar replaces gold as a guarantee of stability and therefore as the first world reserve currency.
The fact that the dollar has this status allows the United States to be exempted from building up foreign exchange reserves in other countries’ currencies and, above all, from financing their balance of payments deficits thanks to their power to create money. The extra issuance of dollars actually makes it possible to finance the US debt at a lower price, as the US Treasury Department’s bonds are valued by the other states to build up their reserves.
The dollar now faces a double challenge: the rise of the yuan (RMB) and the withdrawal of the US military.
However, the US government abused its privilege, took on massive debt, created violent post-COVID inflation and repaid its creditors in devalued dollars. At the same time, the dollar now faces a double challenge: first, the rise of the yuan (RMB). But also the US withdrawal at the military level.
The U.S. military is actually withdrawing, a trend that began under Trump but continues under Biden with the withdrawal of troops from Afghanistan. Once a policeman in the world, Bidens America has become a pure observer of the Russian invasion of Ukraine. A windfall that Putin apparently exploited.
With this withdrawal of the US military from combat scenes, does the petrodollar monetary reserve system still have a place? Moreover, given the continuing depreciation of the real value of the dollar, why should trading partners continue to settle their transactions in dollars?
The Sino-Russian pair have seized this opportunity perfectly and have the ability to amplify American weakness. First, by contributing to inflationary pressures. In recent months, Joe Biden has seen his popularity plunge, especially due to the decline in purchasing power due to an inflation rate at its highest in 40 years. Although this inflation is mainly driven by ultra-expansive fiscal and monetary policy, the behavior of Russia and China play an important role. In fact, Russia is one of the largest energy exporters in the world, and the runaway Ukrainian crisis in recent months has contributed to further pressure on the energy market, which has put further pressure on inflation. On the other hand, China, as the world’s factory, has played a major role in slowing down global supply chains during the covid crisis. China also has a tendency to stockpile basic necessities (especially agricultural goods) through export restrictions, which helps drive up commodity prices. Russia and China are facing rising inflationary pressures, a dynamic that weakens the Biden administration’s ability to govern domestically. However, when the domestic situation becomes complicated, leaders generally have less leeway to act at foreign and military policy level.
Another unfavorable dynamic in the US: the fact that global commodity transactions are less and less denominated in US dollars. A movement that is greatly encouraged by China, which is working tirelessly to settle its transactions with commodities – and especially oil – in RMB or gold. This trend has been in place for several years now, and the Sino-Russian alliance is only reinforcing it. With a heavy consequence for the US: As the dollar is used less and less in trade, it becomes less necessary for foreign countries to hold government bonds in reserve. Ultimately, this new paradigm could increase the cost of borrowing for the U.S. government and de facto reduce Uncle Sam’s ability to finance his weapons programs. A context that would leave the field open to the dreams of territorial reconquest of Russians and Chinese.
The Russians and Chinese are even able to accelerate the rise in US debt rates and strengthen the attractiveness of gold by using their very large foreign exchange reserves. Example of the graph below, which summarizes the opposite flows observed in Russia: the line in yellow, which represents the amounts in US government bonds, has literally collapsed over the past two years. The purple line – the quantities of gold – literally exploded upwards.
According to UBS, the dollar’s share of Russia’s foreign exchange reserves, which currently stands at $ 640 billion, fell to 16% in 2021 from 46% in 2017. By comparison, the yuan share rose to 13% from less than 3%. Sanctions should further reinforce this trend. The Chinese equivalent of SWIFT – Cross-Border Inter-Bank Payments System (CIPS) – seems to be a payment option between Russians and Chinese. Another development related to the conflict in Ukraine: India, which has a very great need for fertilizer from Russia, plans to circumvent the sanctions by paying for its purchases in Indian rupees rather than in US dollars.
The meeting between Mr Xi and Putin, which preceded the Winter Games, could therefore mark a turning point. The two leaders seem to have decided that the time has come to speed up their dedollarization strategy. They see a weakened US state suffering from massive inflation and withdrawing militarily abroad. This leaves them with a window of opportunity to carry out major military operations.
Is the world really changing? Yes, but with a number of caveats. First, let us not forget that it is Russia that is currently facing an unprecedented banking crisis and a collapse of the ruble – not the West. We should also remember that Russia remains an economic “dwarf”, as the West remains by far the most important pole. Admittedly, the economic weight of the United States and Europe is declining in relative terms, but it is a consequence of the growth of the emerging countries and not of a decline in Europe and the United States economically and geopolitically. In terms of defense policy, it also seems that the war in Ukraine is stimulating the West, as countries like Germany have just announced that they intend to increase their arms spending budget. Finally, the strength of the relationship between China and Russia is relative and will certainly undergo a very important test in the coming weeks. In fact, the West remains the most important commercial outlet for the Chinese. It is therefore unlikely that China will sacrifice the enormous opportunities it has at its disposal for the benefit of its Russian partner.
As Lenin said, “There are decades where nothing happens; and there are weeks where decades happen.” Between the Fed’s monetary tightening cycle, the war in Ukraine, and new tensions between China and Taiwan, the world is really in full swing.