Russia and China leading eastern economies away from troubled West

Dr. Theodore Karasik
The events of recent months, including the US withdrawal from the Iran nuclear deal and resulting sanctions from the Trump administration, has created a new geopolitical environment where key countries such as Russia, China, India and Iran, plus others, are moving away from the Western finance system in a political move. This tactic includes operating outside of SWIFT, the use of currency swaps, and gearing deals toward the Chinese yuan. Again, these decisions are political in nature and are the result of an ongoing bifurcation between, loosely, West and East, in a rejectionist front against America’s sanctions weapon and other similar tools.
 
A global bifurcation is occurring in the core of today’s primary geopolitical crisis: A string of countries that are now linked by a desire to conduct their economic relations in a political way outside of US purview. This phenomenon is splitting the global economy into two halves, with the will to use business as a political statement expressed through sovereignty and other associated rights in the new international order.
What we are witnessing is a new political atmosphere much different than in the Cold War, and it is likely to become worse because of US-Russian relations and US attitudes toward North Korea and Iran, combined with a US domestic situation that is prompting foreign hedge fund managers to ask themselves what the investment risks in America are.
 
The East-West split is beyond religious or cultural differences and more about Russia — along with China — creating a sphere of influence that counters the West through moving away from the world’s biggest economy. Other countries see Russia and China as useful partners and moderators in the conflicts and other strategic problems that are happening now. Middle East states are developing ties with Russia because they see Moscow — not the West — as the future arbiter of governments and maps, drawing borders in the region, with China providing the transregional economic linkages across sometimes contested lands. Absorbing these countries into this group is now ongoing.
 
Importantly, the BRICS countries, regional groups such as the Shanghai Cooperation Organisation, and banks such as the Asian Infrastructure Investment Bank act as political tools to expand this eastern side of the bifurcation. Innovation away from the dollar peg is the goal of these organizations.
 

Global bifurcation is becoming more pronounced as an East led by Russia and China sees the West in deep trouble and doesn’t want to be pulled down by any future surprises or shocks.

Dr. Theodore Karasik

 

For this emerging East, an evolution to a multicurrency system reduces the pressure on a single reserve currency issuer and allows countries to diversify their foreign exchange holdings. As geopolitics occurs, monies are sheltered away from the West as a gesture of political independence. Such activity builds confidence in the expansion of China’s Belt and Road Initiative. China’s ability to negotiate economic deals with political goals in Djibouti, Kyrgyzstan, Laos, Maldives, Montenegro, Mongolia, and Sri Lanka has landed Beijing an important political tool: Property rights. Cryptocurrencies are another political tool to hide transaction history from prying Western algorithms. Russia, China, Iran and Venezuela are moving in that direction. These countries are increasingly bonding together and bringing along with them other countries throughout Eurasia.

Importantly, Russia is taking active steps to protect itself against being cut off from the global financial system. Moscow began developing its own domestic version of SWIFT in 2013. China is going to get access to the Russian SWIFT system, along with the other parties that were involved in the formation of the New Development Bank. While Russia has not yet been cut off from SWIFT, thus making this system unnecessary, it does reduce its dependency on the current dollar-dominated system and thus represents yet another strike against the dollar as the reserve currency. This is politics at work.

In March, the Shanghai Futures Exchange launched its first futures contract to foreign investors. This contract — a yuan-denominated oil future — was a political spear against the dollar because the move allowed such benchmarks to work against dollar-dominated contracts. The launch went well and is now becoming a more common means of financial exchange with political overtones. China is negotiating the purchase of oil with yuan instead of US dollars with some of its trade partners. Russia and Angola, two of the largest producers of oil in the world, are seeking to break the US dollar’s dominance, as are other African states, which are increasingly entering into political relationships with Moscow.

And then there is gold. Russia has overtaken China as the fifth largest sovereign holder of gold, allowing it to diversify its foreign currency holdings amid its deepening rift with the US. While Russia has increased its holdings every month since March 2015, China is now buying gold too, as are other countries within this emerging zone of economic activity based on geopolitical requirements. Only three countries in the top 10 have increased their holdings materially in recent years, with Turkey being the third. America is still the largest owner of gold and Germany is the second largest. Next is the International Monetary Fund. Gold is thus increasingly becoming important among many of the eastern nations.

Overall, the global bifurcation is becoming more pronounced as time passes. As geopolitics heightens the divide, the impact on global relations will need to be rethought, not like the Cold War in terms of good and evil, but an East led by Russia and China that sees the West in deep trouble and doesn’t want to be pulled down by any future surprises or shocks.

 
  • Dr. Theodore Karasik is a senior adviser to Gulf State Analytics in Washington, D.C. He is a former RAND Corporation Senior Political Scientist who lived in the UAE for 10 years, focusing on security issues. Twitter: @tkarasik