Russia’s war in Ukraine, as well as the West’s response so far, has been a gift to China.
The West’s strict sanctions on Russia have isolated the country from much of the world. It needs a financial lifeline.
The war in Ukraine, and the West’s sanctions against Russia, is providing a unique opportunity for China to establish its currency in global trade and in turn destabilize the west. In other words, Beijing could now accomplish what it had wanted but was unable to achieve for years.
Sanctioning Russia isn’t as simple as sanctioning Iran or North Korea. Russia is a major producer and exporter of commodities such as crude oil, gas, wheat, diamonds, and other minerals. Once upon a time, the value of paper money was derived from the commodities backing it.
With the sanctions in place, the global commodities market is now fragmented. For example, we have non-Russian produced oil whose price is skyrocketing while Russian oil has fewer takeout channels and can be bought at a significant discount.
Much of the ongoing discourse has been focused on the question of how much China can and is willing to help Russia. But I believe the question should really be: how far will China go to flout Western sanctions in order to help itself and weaken the United States?
Natural resources is a national security issue, a fact U.S. lawmakers spent years trying to dismiss but with the war in Ukraine, were only recently forced to recognize.
Beijing sees this clearly. China has been trying to secure energy supply for decades. Earlier this year China signed a 30-year gas supply deal with Russia’s Gazprom. In February it reached a deal to increase wheat imports from Russia. Russia’s status as an outcast gives China an opportunity to secure valuable commodities, while making Russia more reliant on China, its currency, and its financial network.
Let’s get the obvious points out of the way. Beijing is under scrutiny, especially around whether its companies would violate “secondary” sanctions imposed by the United States, such as providing materials to sanctioned Russian firms. It’s a legally gray area.
But China has extensive infrastructure in place to circumvent sanctions. Beijing has done it in the past with Iran. Its major international banks and corporations doing business in dollars and euros will not participate, or at least not openly. But the Chinese Communist Party has enough non-dollar-facing financial infrastructure in place and experience in creating off-balance-sheet vehicles to procure Russian commodities.
The bigger picture implications on future global trade are more worrisome.
Global sanctions have effectively frozen Russia’s foreign reserves. In other words, Moscow no longer has access to its foreign currency reserves. This raises a key question for China and other countries less tied to the U.S.-Europe hegemony—if or when they run afoul of the West, would their accounts also be confiscated?
And given this risk, should they diversify some reserves away from the dollar?
Enter China and its currency (gold and bitcoin are other options, but the scope of this column is on China’s currency).
Respected Credit Suisse rates strategist Zoltan Pozsar took this a few steps further. In a March note to clients aptly titled “Bretton Woods III,” Pozsar stated this is the start of a new global monetary order powered by Asian currencies backed by a basket of commodities.
The war and the West’s sanctions on Russia will cause China to buy up and store commodities, in turn strengthening the renminbi (increasingly backed by real assets) and destabilizing the dollar (backed by only credit) while worsening the inflation crisis in the West.
In essence, it would severely hurt U.S. and European economies.