22 Dec 2021 10:43 pm
Last week, Russian President Vladimir Putin had intensive talks with his Chinese counterpart Xi Jinping – also about agreeing plans for a framework for realigning common international financial issues.
A comment from Glenn These
China and Russia have been moving towards agreement on these issues since the 2008 global financial crisis exposed the risks of over-reliance on US financial structures. In addition, the economic sanctions imposed by the USA on both countries in Moscow and Beijing have stimulated the search for alternatives.
The American central financial architecture is an immense source of power. The majority of international trade is carried out in US dollars, and payments are made through the SWIFT transaction system, in which the USA plays a major role. Financing is handled by US-run investment banks, debts are rated by US rating agencies – even the most widely used credit cards are US products. These economic instruments of power make it possible to lead an empire from Washington, DC – it can manage huge trade deficits, collect economic data on competition, give allied countries preferential treatment, and penalize unfriendly states.
However, the US financial architecture is no longer sustainable. The White House has lost control of the US trade deficit, the debt spiral is spiraling faster and faster, and rampant inflation is destroying the currency. What makes matters worse is that Washington is using its financial architecture as a foreign policy tool to impose economic sanctions on uncomfortable countries. The US security strategy confirms that China and Russia are in Washington’s crosshairs, making it imperative for Moscow and Beijing to build an alternative financial architecture that is decoupled from the US.
Decoupling from the dollar
Decoupling from the dollar, reducing dependency on the US dollar as a reserve and transaction currency, is immensely challenging, as the dominant role of the US dollar has determined the international financial system for over 75 years. The dollar was able to maintain its strong position for three main reasons: the sheer size of the American economy, the dollar’s value, which was supported by low inflation, and an open and liquid financial market. With the US economy in relative decline, inflation is out of control and its financial markets are being used as weapons – the fundamentals of the dollar’s enduring role are eroding faster and faster.
A financial partnership between China and Russia, the world’s largest energy importer and the world’s largest energy exporter, is an indispensable instrument for dethroning the “petrodollar”. In 2015, around 90 percent of trade between Russia and China was carried out in US dollars, while in 2020 trade between the two Eurasian giants had already been cut in half, at 46 percent. Russia has also mined a significant portion of US dollars from its foreign reserves.
The mechanisms for decoupling trade between China and Russia from the US dollar will also come into play to end the use of the greenback in places like Latin America, Turkey, Iran, India and elsewhere. The US has been pumping its dollars around the world for decades, but at some point the tide will turn when the tide of dollars of increasingly lesser value slosh back home.
The international SWIFT system for financial transactions between banks was previously the only system for transnational payment transactions. This central role of SWIFT began to erode when the US began to abuse this system as a political weapon. The USA initially threw Iran and North Korea out of the system, and in 2014 Washington began – in the wake of the Ukraine crisis – to threaten Russia too with being kicked out of the system. And in the past few weeks these threats to use SWIFT as a weapon against Russia have been intensified significantly.
China responded by creating the CIPS system, and Russia’s developed the SPFS system – both systems are alternatives to the SWIFT system. Even several European countries have teamed up on an experimental basis for an alternative to SWIFT in order to contain Washington’s extra-territorial jurisdiction and to be able to continue trading with Iran. A new Sino-Russian financial architecture should integrate CIPS and SPFS and make them accessible to third parties. And should Russia be kicked out of the SWIFT system, the decoupling of SWIFT will only accelerate worldwide.
The US-dominated International Monetary Fund (IMF), the World Bank and the Asian Development Bank are renowned instruments of US economic power. The introduction of the Chinese-run Asian Investment Bank for Infrastructure (AIIB) led to a turning point in the global financial architecture in 2015, as all of the USA’s key allies (except Japan) joined the AIIB in spite of American pressure attempts. This new development bank, formerly known as the BRICS development bank, was another step in decoupling from the US-led development banks. The Eurasian Development Bank and the future SCO Development Bank are further nails on the coffin of the US development banks. China and Russia have also developed their own rating agencies, replacing the dominant position of Visa and Mastercard credit card companies in their countries.
This new financial architecture is complemented with a component in the energy partnership and in the technological partnership, since neither China nor Russia want to depend on American high-tech industries as they stand on the cusp of the fourth industrial revolution. In addition, both countries are trying to avoid US-dominated transportation corridors. China has invested trillions of dollars in its Belt and Road Initiative (BRI), while Russia has a similar, but more modest, program of developing the Arctic for the Northeast Passage maritime route in partnership with China. Financing and administration of these investment programs and the transport corridors will also have positive synergy effects for the further development of a new international financial architecture.
The US can still impose more sanctions to oppose the development of a multipolar international financial architecture. But continued economic pressure will only increase the demand for even faster decoupling from the US. The first rule of sanctions says that those countries that are permanently sanctioned will at some point learn to live without this belligerent world power. What began as an effort Washington sought to weaken and isolate its opponents eventually ends in isolating the United States itself.
RT DE strives for a wide range of opinions. Guest contributions and opinion articles do not have to reflect the editorial team’s point of view.
Translated from the English.
Glenn These is a professor at the University of Southeast Norway and editor of the journal Russia in Global Affairs. You can follow him on Twitter at @glenn_diesen.
More on the subject – Central banks want to increase the share of Chinese currency and reduce stocks of US dollars