The XXth century was an example of the unequivocal dominance of the USA. For the last 100 years, many countries tried to liberate themselves from the auspices of the US. They were losing either financially or militarily. What we know from history is that every empire collapses under its own weight and the United States of America is no exception here.
For years, the US governments patched the system through ever growing surveillance and control both internally and abroad. The empire required more liquidity as it grew more expensive. For this, new strata of society and other nations were given the bill. The emancipation of women was very helpful here. Higher labour participation means more taxes. The petrodollar was created with the cooperation of Saudi Arabia. Right after Nixon resigned from the gold standard in 1971 an artificial demand for the dollar emerged.
Being an empire requires an increasing amount of funds and after Saudis, China was next on the list. None other than Bush senior helped to open isolated, communist economy. The US could now print money to buy cheap production from the East. The consequences of that move are huge.
China, being helped by the US, entered the path which ultimately created a rival. Rival stronger than Japan defeated 20 years ago. After cautiously observing neighbours being attacked financially, China successfully guarded their own market against economic extortion.
Beijing understood that infrastructure or trade development is not enough to take the crown for themselves. To win with the global hegemony you need friends. Friends allowing and helping the development of trade routes and new markets. All this with a hostile stance of the US. Russia was chosen as a natural opponent of the US and Europe, also one of the key trading partner of things ‘made in China’.
Washington knew that German-Russian-Chinese alliance combining technology, resources and production capabilities is a deadly concoction. The US is doing everything it can to conflict aforementioned countries aiming to end the status quo. Taking Berlin out of the equation was easy as Germans are woven strongly in the NATO and EU structures. Breaking up the Kremlin-Beijing link was not successful.
Geopolitics in the service of the economy
The key to killing a fast development of China was the Middle-Eastern oil. Russia blocked an attempt to take over Syria by the US and this complicated the plan. To defeat China, Russia must first be aligned to the American cause – a regime must be changed in Kremlin. A difficult task, but as history shows, possible to accomplish. Just like against the USSR – the economy was supposed to be the weapon of choice. Lowering oil price to hurt the budget of which significant share is coming from the sale of hydrocarbons. The same strategy as 30 years ago. The burden of debt also fuels oil price crisis making it even worse than before. While the USSR was dependent on Western credit and technology, today’s Russia has evolved. Low public debt at 18% of the GDP, currency reserves worth 387 billion USD gave enough options for Kremlin to still stand fast and diversify revenue streams after the hit.
Apart from crude price, being also cut thanks to the new technology of hydraulic fracturing and Saudi's oversupply, the US tried to utilise sanctions against Russia in connection with the Ukrainian coup. The Ukrainian crisis was aimed at cutting Russia from the access to the Black Sea and Crimean naval base which was leased by Russia from Ukraine. Putin and his imperial ambitions fell into the trap of the West - he annexed Crimea - and sanctions were easy to lobby through.
Russia without access to the Black Sea would face a difficult task of defending Syria and Russian naval base in Tartus. The US forced the EU to introduce sanctions against Russia due to Putin’s grab of Ukrainians territory. Soon after ruble experienced heavy losses, Kremlin’s credit rating was lowered and the headlines were prophesying the fall of the Russian regime.
Putin has experienced advisors. He kept his cool and did what was nearly impossible task for other leaders to consent to. He let the ruble lose 50% of its purchasing parity vis-à-vis dollar. It was done without the sell-off of the currency reserves. The solution was pretty simple indeed. Putin used anti-Kremlin propaganda to show Russians that they are attacked by rotten neocons who pillage Ukrainian territory and kill true Ukrainians. A patriotic society solidarized with the government.
Without losing public acceptance, public’s anti-west attitude was used to let ruble fall by 50%. Another round of currency wars won by Putin. This enabled Moscow to receive more revenues from sold barrels thanks to cheaper currency, lower costs of labour and a big advantage in international trade – all without riots on the streets.
Russia boasting vast natural resources, now could mine, process and use those riches also in its own production. Cheap goods are very competitive and can be exported with success while Moscow with sensible fiscal policy gained time to reorganise and diversify national production.
The US plan to cut Russia from the world failed nonetheless EU sanctions. Russia with BRICS, and especially China's support, is doing just fine. Of course, there are some negative consequences. Selling oil fields to Indian corporations, allowing Chinese capital into the banking sector are news big enough to make it to headlines. Russian currency reserves stocked by the Russian central bank are growing since 2015. Moscow is also investing in gold as one of the top buyers in the world. The public debt increased to 166 bn USD but this amounts to less than half of the official currency reserves.
The Russian economy is well and this makes Kremlin not only defend but actively fight for its interests against the US and its allies in the Middle East. This fight also has an economic dimension. Recently the first Russian rating agency has been established – ACRA. Moscow will soon deliver the equivalent of SWIFT payment system. Bigger trade deals are settled in local currencies instead of USD.
Today, the biggest ally of Russia in the fight against the US is China. Those two countries tighten their economic relations much more than what is shown in the news.
The importance of cooperation between China and Russia grows due to the common threat and picks up speed as a result of the global recession and Western sanctions. Trade relations are fostered by compatibility of both economies. Russia, a vast country with low population density, rich in natural resources supplies China - a country more production-oriented. Big currency reserves of China is what Russians can envy Beijing as they need it for the economic stabilisation.
Authorities of both countries realised how big of a danger is the US to them. They both understand that alone China and Russia are weak. Collaboration must not stop on export and import but it has to encompass defence, military technologies, education, social integration and foreign policy coordination.
Cooperation is already seen in many sectors: health, energy, military, finance, banking, higher education, IT, electronics, chemical industry, water, agriculture, transport, infrastructure and even space exploration with launching satellites into orbit. To present such complex connection of both countries I will talk about projects which have already started.
Gas – Two big projects: the first one is called the Power of Siberia, the second one is the Altai. Former creates a connection between Vladivostok and China.
The link will span over 4000 km through which 6.1 bn m3 of gas will flow each year. The deal was signed in 2014 for 30 years.
The Altai pipeline is going to be built in the north part of Siberia. The northern part of Russia will be connected through pipes 2 600 km long with China. After crossing the border fuel can ultimately end up on the east coast of China. Maximum flow of 30 bn m3 each year is worth (in today’s prices) 6 bn USD. According to research, before 2020 China may need 300-400 bn m3 each year – potential for development is huge.
Both projects are enormous and looking at the tense situation in the Middle East, Russian pipelines can be a very good source of diversification of energy resources. What is more, Beijing pre-paid 25 bn USD to help finance the project.
Oil – China gave a loan to Rosneft for the acquisition of TNB, third largest oil production company in Russia, previously controlled by BP. Thanks to capital flow from Asian banks Rosneft became a business partner of China National Petroleum Corporation and they both have plans to cooperate during oil fields exploitation from Crimean region and the Arctic.
Coal – Rostec and Shenhua Group joined their forces to exploit coal from Siberia and the Far East. The operation is worth 10 bn USD and apart from infrastructure itself, the project will build coal power plants. They are going to bring energy not only to Russia and China but the electricity can be sold further to neighbouring Asian countries. Some of the black gold is planned to be transported to Vera sea port and sold further to clients in the Pacific region. It is estimated that amount of coal sold can reach 20 million tonnes per annum.
Nuclear energy – Rosatom is building 4 nuclear power plants in Tianwan. Before Beijing turned to Russians, American Westinghouse was the contractor. The contract contained an obligation to build 26 power plants but dark clouds are gathering due to the political situation. Fuel for power plants seems to be the main problem. Fuel elements of Westinghouse and Rosatom are different. We know from European examples that reactors can work on both but Chinese authorities have now a great pretext to put the project on hold.
Satellites – Both Russia and China have their own GPS - GLONASS and BEIDOU. GLONASS is an older, already tested system and it covers the whole globe. BEIDOU has a limited coverage, lower accuracy and still needs upgrading. Cooperation here gives China global GPS thanks to Moscow building stations on the ground across the Red Dragon's territory. This technology can enable better defence capabilities of Beijing and missile guidance for the counter-engagement system. GPS cooperation does not end with military use – it will also improve air and maritime transport.
Space – Here Russian rocket engines will be produced in Chinese factories. Countries are talking about sharing access to expertise regarding land and space R&D. This is connected to creating an answer for the US doctrine which talks about space as the next stage of the battlefield.
Aircraft industry and military projects – Rostec and Aviation Industry Corp China signed a memorandum of cooperation in the aviation sector. Production and distribution of components, engines, helicopters and planes in Russia, China and other countries. Thanks to synergy heavy helicopter basing on Mi-26 and Chinese equivalent of Airbus will be build.
China is buying 6 battalions of the S400 air defence system for 3 bn USD. The agreement also talks about cooperation during deployment of the S500 systems which is still under development. This system is going to be a part of the anti-air defence of China but also in the future it should protect the New Silk Road.
Russia and China are building a new generation of silent submarines, likes of Amur 1650. They are a part of the MAD program - a weapon used for a nuclear counterattack with payload carried by Bulava ICBM. China can bring to the table MIRVed rockets which can attack many targets at once. Project plans four submarines in total, two for each country.
IT and microelectronics – Russia buys electronic components for their missiles and defence systems from China, an alternative from the US supplier used before. The deal is worth 1 bn USD equal to 50% of imports from the US. Thanks to this program Moscow plans to stop importing any electronic components from across the Pacific.
Technology parks – Both countries want to create two technology parks with the help of Russian Direct Investment Fund and Chinese Investment Corporation. One in Xixian Fendong spanning 4km2, the second one in Moscow in Skolkovo Innovation Center with space of 0.2km2. Both parks will also have their affiliate subdivisions in other cities. Initiative fosters technological exchange between participants.
Cybersecurity – Russia and China want to defend against the CIA and the NSA also in the field of cyberspace. This is another step after signing a Cyber Nonaggression Pact.
Education – In summer this year a program of 100 000 student exchange and internships starts in both countries: Far Eastern Federal University and Beijing University of Technology.
Banking – Russia and China agreed between their central banks on swaps valid since 2014. Thanks to them corporations have more liquidity and trade can be done in other currencies than USD. Apart from central banks also commercial ones opened credit lines in Chinese institutions as a security of liquidity and defence against sanctions on Russia. Additionally, Kremlin allowed acquisitions of few entities in Russian banking sector by Chinese capital.
Credit Cards – China UnionPay, Chinese credit card system replaced Mastercard and Visa in both countries. After sanctions against Russia were fully implemented Kremlin started working on its own – MIR – system.
Automotive industry – Chinese Great Wall Motors is building one of its factories in Russia. Production is aimed at 150 000 vehicles and should commence in 2017.
Petrochemical industry – In Shanghai, a new factory of rubber is erected thanks to the participation of Sibur and Sinopec. Before both companies built a similar venture in Krasnoyarsk.
Development and infrastructure – Chinese companies started building high-speed rail connecting Moscow and Kazan and later also Beijing. The first link is 770 km long. Trains should achieve up to 400 km/h there. Chinese further develop Moscow’s subway, roads and bridges along borders of both countries. On top of that, Putin started a big housing program – 460 000 houses are going to be built by Chinese.
Shanghai Cooperation Organization (SCO) – this is an answer for the threat of colourful revolutions and proxy wars. The SCO is definitely not an Eastern NATO; it is rather a platform for agencies and military information sharing of member states. China and Russia are natural leaders while Kazakhstan, Kirgizstan, Tajikistan, and Uzbekistan. India and Pakistan are already undergoing accession talks. What is interesting is the fact that Turkey is one of the dialogue partner (states sharing similar values and goals with the SCO). After shooting down Russian plane over Syria, relations between those countries are very cold.
Thanks to Sino-Russian cooperation authorities of both countries responsible for economy and military meet very often. What is being said is unknown. Agendas and transcripts are confidential but type and degree of cooperation in military-oriented projects are definitely being consulted. Having a natural opponent of NATO, a subject of defence capabilities has to be paramount for both regional superpowers.
End of Part I
Independent Trader Team