We are in an economic war with Russia. Vladimir Putin’s invasion of Ukraine has ushered in an era repeated throughout history –where power politics becomes an existential battle due to instability in the current world old.
So, what is driving global affairs to change so quickly?
Throughout history, the global order has shown to swing back and forth, demanding a balance of power between powerful countries. Winners of the new order define the parameters of global interdependence, using a combination of force and institutional power to create new norms, laws, and regimes.
From around the 1980s to today, Washington has used its hegemony to promote globalization, making trade more interconnected and governments more intertwined with each other’s economic fate. The need for a financial order built on integration, openness, and mutual benefits was seen as the only way to build a political order where the likelihood of conflict would reduce due to shared economic interests.
But today we find ourselves in a regression. The enthusiasm for global integration came at a time when Washington was at its peak unipolar moment and other nations did not have the political or economic ability to compete with the U.S.
This is not the case today.
China’s entry into the World Trade Organization, the rule-setting global trade institution, is a pivotal moment in world affairs. Although not understood at the time, China’s 2001 admission to the rules-based Western order had given Beijing leverage to benefit from economic integration while still retaining protectionist policies. The West thought inviting China would democratize, or tame, Beijing and legitimize the prime authority of Western institutions, helping to impart its norms on the rest of the world. But Beijing’s economic gains helped cement one party rule of the Chinese Communist Party, giving the party more opportunity to ideologically rival and dismiss Western democratic norms.
Today, Beijing is an economic powerhouse that seeks to push American power out of its regional sphere of influence.
And with Washington’s power steadily declining since the early 2000s, this can be more easily accomplished.
In 2001, everyone believed the clash of civilizations between Islam and the West would be the implacable driver of political change. Although an important ideological battle, it remained just that – a battle of ideas. It was not enough to upend the liberal international order or American power.
And in 2008, the Great Recession left a scar on the global financial system, severing trust in the Western-dominated financial order and diminishing its institutional prestige.
These crises were only the start of Washington’s relative decline, where debt levels, lost growth, and foreign wars steadily eroded the ability to address threats from emerging powers. But they were not enough to undermine American hegemony. For that to happen, other countries would need to see the benefit of an alternative financial system.
Both China and Russia know the better way to reduce Washington’s power is by challenging the global economic order and utilizing efforts to dethrone the dollar as the world reserve currency.
The war in Ukraine might be used as a vehicle to make this happen.
Putin’s de-dollarization end game
Russia has been developing its ‘war chest’ of gold and foreign exchange reserves – with $630 billion in value – a growth of 41 percent since 2018. Since the invasion of Ukraine, Washington has sought to block dollar assets of Russia’s central bank and its Direct Investment Fund, freezing Moscow out of a large portion of its own money. Most of Moscow’s commercial and investment banks are now cut out of the global financial system, but Washington has spared Sberbank and Gazprombank since they are the main channels for Russian oil and gas payments.
And because Washington is issuer of the major global reserve currency, it has a tremendous power over the world economic system. So, Moscow has been looking for ways to delegitimize American power and reduce Washington’s ability to use the strength of the dollar to fuel its political and military aspirations.
Welcome the petro-ruble? Or petro-yuan…Yes, seems unlikely, but Moscow wants to weaken the reliability of the dollar, thereby making oil transactions in the ruble seem easier and less risky. Moscow can try and leverage its power as one of the world’s largest gas exporters by building an economic strategy to squeeze U.S power out of their areas of control, mainly Eurasia, by weakening the value of the dollar. One way Putin can threaten the supremacy of the dollar is if he convinces Saudi Arabia to price oil sales to China in yuan.
Russia and China seek to carve out a new space in the global economy
On March 30-31, 2022, Russian and Chinese ministers came together for discussions on various topics – none more important than their collective agreement to creating a ‘new, fair, multipolar world order.’
These meetings highlight the re-molding of a new global geopolitical order.
It is important to note this is a soft re-alignment of Moscow and Beijing’s economic power and not necessarily a concrete political bloc. The statement from China’s foreign ministry that Moscow and Beijing will ‘advance the democratization of international relations’ does not mean American style democracy building, but the revival of multiple nation-states working in concert to balance the international order. Countries will seek policies that prioritize national interests, only using collective action when a majority believes concerted efforts can correct bad actors.
After the high-level talks, China declared to play a constructive role in ensuring regional and global peace, with a specific focus strengthening its power within and throughout the Asia-Pacific. Beijing also put a spotlight on its ability to stabilize Afghanistan, highlighting efforts made to create inroads with the Taliban in order extend its China-Pakistan Economic Corridor (CPEC) to secure strategic economic routes within Afghanistan.
Additionally, the Eurasian Economic Union and China have agreed to design a mechanism for an independent international monetary and financial system that is based on a new international currency, most likely using the yuan as reference. The long-term goal of this project is to get enough countries in the Eurasian region, possibly some in the Middle East as well, to join this new system and become a serious alternative to the US dollar. Greater economic alignment throughout Eurasia and the Middle East can potentially challenge American hegemony.
Russia has been trying to get countries, notably India, to pay for gas in rubles and not dollars. Moscow has stated that it will stop gas shipments to countries who do not get on board with the ruble, but it is not currently known how countries plan to respond to Russian demands.
Moscow has also banned certain exports – telecom, tech equipment, and agricultural – that do not directly affect the U.S but will deeply impact many other countries, including those that rely on Russia for wheat imports.
Europe is also feeling the pain of over-reliance on Russian gas. Moscow cut off the energy flow to major hubs in Europe, forcing them to calculate how much they can allow their populations to be burdened with higher costs of gas.
Will all this economic pain result in the official decoupling of the global economy into Chinese and Western portions?
Has the war in Ukraine put into motion the legitimacy of Russian and Chinese alternatives to the American dominated SWIFT?
A major consequence of Western sanctions on Russian banks, oil and gas imports, and Russian government and business elites will be the emergence of a stronger Moscow-Beijing alliance. China has been carefully cooperating with Russia to divide American attention and resources, making it harder for Washington to focus on China’s activities. The more Washington is entrenched in Europe and the war in Ukraine, the quicker China can accelerate its military power throughout the Pacific. The ongoing war and sanctions on Russia have also caused gas prices and inflation to skyrocket in America, where the longer inflation is out of control the more the value of the dollar will decrease.
Since the outbreak of the Ukraine war, Moscow has made attempts to coerce other countries, notably India, to use the Russian ruble to make oil payments.
Moscow and New Delhi have a historic strategic partnership and have increased bilateral trade in recent years. New Delhi already developed a rupee-ruble exchange mechanism to bypass sanctions on Russian weapons and is exploring more ways to enhance this trade arrangement.
But many countries do not trust using the Russian-based System for Transfer of Financial Messages (SPFS).
If the goal is to initiate large-scale de-dollarization, it will take a systematic effort on the part of Moscow and Beijing to create a long-term plan that will promote regional trust in trading with other currencies. With rising inflation levels across the globe, countries like Brazil, South Africa, and India will be looking to find ways around the effects of sanctions on Russian oil and may seek to barter trade in their own currencies. This is because in the developing world, it is much harder to manage the effects of inflation.
How can Moscow and Beijing take advantage of rising inflation?
To start, they each have their own nascent financial messaging system.
Russia’s SPFS and China’s Cross-Border Interbank Payment System (CIPS), created in 2015, could manage trade using either their own currencies or have rotating currencies that can be used to help developing countries easily access much needed markets of goods.
Russian businesses are also seeking to develop options for alternative payment methods. Large corporations want to have strong protection against future sanctions, aiding in de-dollarization efforts.
To strengthen efforts against further financial isolation, Moscow has put focus on using the Chinese renminbi for international exchange, especially when the ruble is not practical. Russia’s SPFS was created after the 2014 Crimea invasion as a response to Western sanctions, with Moscow planning on adding to the already 400 banks (mostly domestic) operating within the network. Moscow and Beijing plan on integrating its systems to counteract Western financial power and develop an international exchange system large enough to connect to Eurasia and the developing world.
Beijing produces the largest number of imports and exports to Moscow, with bilateral trade increasing by more than 50 percent since 2014. Chinese renminbi-based trade accounted for about 28 percent of exports to Moscow in early 2021, showing a large increase from past reports. To increase the usage of the renminbi, Moscow can reinforce the Chinese currency’s strength and convertibility with its high number of renminbi foreign reserves along with a very detailed bilateral swap agreement with China.
For a new Moscow-Beijing SWIFT to become a counterweight to the American dominated international trade system, further internationalization of the renminbi will need to occur.
Ditching the dollar is already at play. What is needed now is time and a politically opportune moment of Washington receding into protectionism and Trump-style isolationism to truly reshape the international order.