“China, Russia abandon dollar” said the headline in late November.
Many meanings can be read into this, from a renewal of the old Chinese-Russian communist alliance to a minor commercial agreement. Let’s examine what the actual impact is or could be.
This will fall in three areas: first, what the agreement means in practice; second, how it impacts the dollar; third, whether it could foreshadow an anti-American understanding between the two powers.
China has attempted to forge similar agreements with other trade partners, but all suffer from the same shortcoming: while the Russian ruble and the U.S. dollar are freely convertible into other currencies, the Chinese yuan is not. Its exchange value is set arbitrarily by the Chinese government, using the dollar as a yardstick, so as to provide Chinese exporters with a decisive price advantage.
The dollar or rubles can be used to buy anything anywhere; Chinese yuans pay only for goods purchased from China. For this agreement to work the market value of the merchandise exchanged must first be determined in some reference currency, such as the euro or dollar. It must be translated into a yuan price, providing Russia with credit to buy Chinese goods.
The deal is a glorified barter agreement, a primitive form of trade used in the absence of a generally acceptable currency.
Does it present a threat to the dollar?
It could be a minor one. But the overwhelming issue for the U.S. currency lies in the enormous trade and budget deficits we allow ourselves, together with the arbitrary creation of money by the Federal Reserve. These currently flood the world with trillions of extra dollars annually, raising the risk of dollar depreciation, and eventually that of a dollar crash. This leads other countries to take preventive measures.
Russian exports are mainly commodities, such as oil, gas and metals, which the Chinese economy consumes in large amounts. Concluding a dollar deal with China presents for Russia the risk of being one day paid in depreciated dollars. For the Chinese there is a parallel risk of being charged a wheelbarrow-full of dollars for one barrel of oil.
The barter deal, however clumsy, negates these dangers. As long as trade between the two countries is in relative balance it provides both with insurance against American fiscal and trade deficits. In other words it is, in the economic realm, a defensive rather than offensive agreement.
An agreement it is nevertheless, binding two former U.S. adversaries in a small but significant way. It thus presents our policy makers with a challenge: will we ignore it because it is a minor issue, or do we need to take a longer view?
Here it is critical to observe the changes that occurred since 1991, when the Cold War officially ended.
Russia has liquidated the communist state and installed instead a modicum of democracy with relatively free markets. It has withdrawn its military forces from Eastern Europe and Central Asia, signed arms limitation treaties with the U.S. and cooperated with us in space ventures. It has provided assistance in both Iraq and Afghanistan and, in critical situations, has often supported U.S. policy.
China, on the other hand, has engineered a trade policy which cost the U.S. millions of jobs. It has vastly expanded its armed forces and is rapidly building a Pacific high seas fleet. It retains an authoritarian government with a hard police state core, and has been ruthless in its treatment of ethnic minorities. It supports rogue regimes such as Venezuela, Iran and North Korea, and has long been active in the underground export of nuclear weapons technology.
Using dollars gained from its massive trade surplus with the U.S. it scours the world for energy and mineral resources. This includes the vast riches of Russian Siberia and of the former Soviet Union, providing a great source of anxiety for Moscow.
Russia may have once been our enemy, but China is an emerging rival, both in the present and the foreseeable future.
It behooves us to carefully consider our national interests in this matter, and to realign our policies accordingly. A better understanding with Russia would go a long way towards a more favorable strategic balance, and would do much to reduce China’s ability to threaten our interests.