Bloc Trade: Russia, China, and the Limits of Globalization
National Review Online, March 12, 2022
Another week, and more bloodshed in Ukraine. How the Russian invasion will play out remains anyone’s guess, but one result seems increasingly likely. What began as an imperial gambit may well end up with the imperialist transformed into the junior partner, or even satellite, of a greater superpower still on the rise.
China is considering buying or increasing stakes in Russian energy and commodities companies, such as gas giant Gazprom PJSC and aluminum producer United Co. Rusal International PJSC, according to people familiar with the matter.
Beijing is in talks with its state-owned firms, including China National Petroleum Corp., China Petrochemical Corp., Aluminum Corp. of China and China Minmetals Corp., on any opportunities for potential investments in Russian companies or assets, the people said. Any deal would be to bolster China’s imports as it intensifies its focus on energy and food security — not as a show of support for Russia’s invasion in Ukraine — the people said.
Yes and no, I’d say. Displaying indifference to the invasion is itself a form of support. That said, this mainly looks like an attempt to exploit the isolation in which Russia now finds itself. As China’s economic policy (and not just its economic policy) moves closer to the classic fascist model, self-sufficiency has become a key objective for Beijing. Where China cannot make or grow something for itself, it wants to develop secure supply lines unlikely to be disturbed by political or economic rivalry or, for that matter, disapproval of its domestic policies. Resource-rich Russia, a country with which China shares a long border and, which now, like many of the other countries with which the Beijing regime is establishing long-term trading arrangements, is going to be short of capital (in Russia’s case, due, among other factors, to sanctions, a future lack of Western investment, and complications arising out of its upcoming default), fits the bill.
These investments in Russian companies are by no means done (the discussions are described as being at an early stage), but they are a pointer to the ever closer collaboration that lies ahead. In 2019, China was the largest single destination for Russian exports, of which it accounted for 13.5 percent. That’s only going to increase, not least because China has no interest in supporting the sanctions being imposed on Moscow. Just three weeks before the Russian invasion of Ukraine, Russia (already China’s third largest supplier of natural gas) agreed to a 30-year contract to supply up to 10 billion cubic meters per year of gas to China via a new pipeline. This deal should be worth some $37.5 billion over twenty-five years. Meanwhile, Rosneft, a Russian oil giant, agreed to sell China $80 billion worth of oil over ten years, an extension of a previous arrangement.
Moreover, in case anyone didn’t get the message, China relaxed phytosanitary restrictions on imports of Russian wheat at the same time, choosing to announce that change after the invasion had begun.
Back in early February, Xi and Putin had also declared that the friendship between Russia and China “has no limits. There are no ‘forbidden’ areas of cooperation.”
That same statement, the Wall Street Journal reported, also included:
[talk] of knitting together signature economic initiatives — Mr. Xi’s Belt and Road infrastructure drive and Mr. Putin’s Eurasian Economic Union — to forge stronger links across much of the Eurasian continent and with developing nations. The two sides said they would cooperate on Arctic sea passages for shipping and on international technological standards — areas where the U.S. has been wary of China’s ambitions.
And then, later still (via Bloomberg, February 28) (my emphasis added):
Gazprom PJSC took a new step toward potentially its biggest-ever natural gas supply deal with China as nations around the world sever economic and political ties with Russia over the country’s invasion of Ukraine.
The Russian gas giant signed a contract to design the Soyuz Vostok pipeline across Mongolia toward China, Gazprom said in a statement. If Russia reaches a new supply agreement with China, Soyuz Vostok will carry as much as 50 billion cubic meters of natural gas per year to the Asian nation.
A new supply deal with China would also enable Gazprom to build an interconnector between its west- and eastbound pipeline systems, effectively allowing Russia to redirect gas toward China from fields that now only feed Europe. That could ease Gazprom’s reliance on the European continent, currently the single-largest buyer of Russian gas.
It would be wrong to assume that the expanded trading relationship between Russia and China will only cover raw materials. In the course of an article on the plight now facing Russia’s aviation industry, Jon Sindreu noted this in the Wall Street Journal:
Beijing’s determination to build up domestic industries in precisely the areas covered by Western export sanctions on Russia, such as aircraft and complex semiconductors, shouldn’t be underestimated, even if it has so far failed. Just like weaponizing the monetary system against Moscow, shutting Russia off from high-tech components may entrench the world’s partition into two economic blocs. The coincidence of wants between Russia’s technology base and China’s captive market may prove hard to resist.
Spoiler: It won’t be resisted. Given the increasingly strong technological challenge posed by China to the U.S., that is not a reassuring prospect.
Note, too, Sindreu’s reference to the weaponization of money. I’d strongly recommend reading the article to which he links (which is also by him), and which I discussed in last week’s Capital Letter.
It had already been looking probable that the growing geopolitical contest between the U.S. and China would, in time, open major fissures in our globalized financial and economic system (the cracks are already there). But that process will undoubtedly be accelerated by the nature of the financial and economic sanctions now being imposed on Russia, something to which Beijing will have paid a great deal of attention. These sanctions derive much of their force from the way that Russia’s participation in the arrangements underpinning what was, in many respects, a shared international financial system has now been turned against it, whether it’s a matter of where Russia parks its foreign exchange reserves, Russia’s participation in certain banking payment systems or its de facto acceptance of the dollar as the world’s reserve currency.
The West wants the damage caused by those sanctions to persuade Putin to change course over Ukraine. That’s to be hoped for. But these sanctions could well come with indirect costs on top of the obvious burden (higher energy costs and so on) they will place on the countries imposing them, for they risk undermining trust in international financial structures that are a valuable, if tacit, source of Western and, more specifically, U.S. power. If risk becomes reality and countries strong enough to do so (or countries with friends that are strong enough to do so) build alternative structures of their own, that will represent a major strategic reversal.
A related danger may well arise out of America’s increasing weaponization of the dollar. The more the U.S. weaponizes the dollar, the more it undercuts the attraction of the dollar as a reserve currency. This is not going to make much of a difference for now. The euro, a frenemy currency, only accounted for around 20 percent of global foreign exchange reserves in early 2020, and the renminbi could only manage 2 percent. Nevertheless, America’s rivals have now been given a strong incentive to diversify away from the greenback, and that, in time could mean trouble. The dollar’s status as the world’s preferred reserve currency (it accounted for 62 percent of reserves) gives the U.S. an enormous edge (not least because of the way it enables the U.S. to finance itself). That’s an advantage that the U.S. should try to retain. The dollar’s reserve role is a function of the strength and size of the U.S. economy, of American hard power and also of America’s institutional reliability, a reliability that didn’t work for Russia. That’s a lesson that won’t be lost on Beijing.
It was worth noting that payment for gas delivered to China through the first of the new pipelines will, Reuters reports, be made in euros, an arrangement clearly designed to help bypass American financial sanctions, now or in the future.
Meanwhile, the West is also clearly reappraising the wisdom of a globalization that has allowed certain Western countries to slip into a dangerous dependency in a number of key areas (Europe’s reliance on Russian gas is only one example) of its economies on either Russia or China — although there the reappraisal has much further to go. And this is aside from concerns, whether justified or not, of the impact of globalization domestically, concerns that appeal to a significant section of the Western electorate.
Much of what happens next will, of course, be determined by the outcome in Ukraine. Nevertheless, it is easy to envisage a future in which the fissures within today’s globalized order continue to widen. In the end, that may indeed leave much of the world divided into two economic blocs. And that division will be sharpened by political difference and geopolitical rivalry.
Where that will lead is anyone’s guess, but it is worth noting this passage from an article by Thomas Meaney in the New York Times:
Of the 10 most-populous countries in the world, only one — the United States — supports major economic sanctions against Russia. Indonesia, Nigeria, India and Brazil have all condemned the Russian invasion, but they do not seem prepared to follow the West in its preferred countermeasures.
Food for thought.
Note: this is an extract from NR’s Capital Letter, published on March 12, 2022