In
a symbolic blow to U.S. global financial hegemony, Russia and China
took a small step toward undercutting the domination of the U.S. dollar
as the international reserve currency on Tuesday when Russia’s second
biggest financial institution, VTB, signed a deal with the Bank of China
to bypass the dollar and pay each other in domestic currencies.
The
so-called Agreement on Cooperation — signed in the presence of Chinese
President Xi Jinping and Russian President Vladimir Putin, who is on a
visit to Shanghai — was followed by the long-awaited announcement on
Wednesday of a massive natural gas deal 10 years in the making.
“Our
countries have done a huge job to reach a new historic landmark,” Putin
said on Tuesday, making note of the $100 billion in annual trade that
has been achieved between the two countries.
Demand for the
dollar, which has long served as a safe and reliable reserve currency in
international
transactions, has allowed the U.S. to borrow almost
unlimited cash and spend well beyond its means, which some economists
say has afforded the United States an outsize influence on world
affairs.
But the BRICS countries — Brazil, Russia, India, China
and South Africa, a bloc of the world’s five major emerging economies —
have long sought to diminish their dependence on the dollar as a means
of reshaping the world financial and geopolitical order. In the absence
of a viable alternative, however, replacing it has proved difficult.
For
its part, “China sees the dominance of the dollar in international
trade transactions as a remnant of American global dominance, which they
hope to overthrow in the years ahead,” said Michael Klare, a professor
of peace and world security studies at Hampshire College. “This is a
small step in that direction, to reduce the primacy of the dollar in
international trade.”
Some have been tempted to view Tuesday's
deal in the context of Putin's showdown with the West over the crisis in
Ukraine. After the U.S. and Europe imposed sanctions on Moscow for its
annexation of Ukraine's Crimean peninsula, Putin may have finally made
good on promised retaliation against what he views as Western hegemony
in Russia's near abroad.
“Breaking the dominance of the U.S.
dollar in international trade between the BRICS is something that the
group has been talking about for some time,” said Chris Weafer, a
founding partner of Macro-Advisory, a consultancy in Moscow. “The
Ukraine crisis and the threats voiced by the U.S. administration may
well provide the catalyst for that to start happening.”
To be
sure, the Russia-China bank deal is mostly a symbolic step. Liza
Ermolenko, an emerging markets economist at Capital Economics in London,
said that the deal was still “a very small one, in the grand scale of
things,” and that it wouldn’t change Russia’s reliance on the dollar
“overnight.” Most of Russia’s export contracts in the oil and gas
markets are still priced in dollars, she noted, and on a wider scale,
replacing the dollar with the ruble is much too risky to even consider.
Likewise,
even though China has agreed to the gas deal, which could see over $450
billion of Russian natural gas flow from eastern Siberia into China
over the next 30 years, Russia is not in a position to abandon its ties
with Europe.
"From the commercial standpoint, Europe is the most
profitable market for Gazprom,” said Mikhail Korchemkin, the founder of
Eastern European Gas Analysis, who has consulted for Gazprom, the
Russian state-owned gas company. "Exports to China can generate a small
profit, [but] only if the government makes it free of taxes and duties.”
But
the bank deal is another indicator that Russia and China are in the
middle of a wider rapprochement, which analysts say is premised not on
ideological alignment but on a mutual desire to undercut the U.S. in
their respective spheres of influence.
Both countries are wary of
President Barack Obama’s “pivot east,” a recalibration of U.S. foreign
policy away from decades of war in the Middle East and toward the
fast-growing economies of the East. Cynical observers have interpreted
the shift as an effort to contain China.
"This is a marriage of
mutual strategic interests, not a marriage of love," said Klare. “China
wants energy and weapons from Russia, and Russia wants diplomatic
backing and cash. It’s a quid pro quo.”
Yet even if China feels threatened by U.S. encroachment, it is Russia that is desperately pursuing closer ties with China.
Putin
may have gotten the better of the Western powers in the showdown over
Crimea, but at the cost of growing geopolitical isolation. Under intense
pressure to demonstrate Russia's avowed independence from the West, he
has repeatedly threatened that he could simply shut off its natural gas
pipelines to Europe and find new markets for Russian energy exports.
Separate
from that political posturing, the Russian imperative to find new
markets for its energy exports is nonetheless very real. Energy demands
in Europe have plateaued and may even decline in the long term because
of stringent environmental regulations.
“If Russia wants to
continue to be a petrostate, it has to shift marketing of its exports to
Asia," said Klare, who noted that Western energy conglomerates like
ExxonMobil have begun doing the same.
“We don’t want to push
this too far and see it as a formation of a new, global anti-American
bloc that is starting a new Cold War,” he added. "This is market-driven
more than it’s political."
