“China, Russia ditch the dollar,” read the headline in late November.
You can read many meanings in this, from a renewal of the old Sino-Russian communist alliance to a minor trade deal. Let’s examine what the actual impact is or could be.
This will be divided into three areas: first, what the agreement means in practice; second, how the dollar impacts; third, whether it could herald an anti-American understanding between the two powers.
China has tried to forge similar deals with other trading partners, but they all suffer from the same shortcoming: while the Russian ruble and the US dollar can be freely converted into other currencies, the Chinese yuan is not. Its exchange value is arbitrarily set by the Chinese government, using the dollar as the yardstick, to provide Chinese exporters with a decisive price advantage.
The dollar or rubles can be used to buy anything anywhere; Chinese yuan only pay for products purchased in China. For this contract to work, the market value of the merchandise traded must first be determined in some reference currency, such as the euro or the dollar. It should be translated into a price in yuan, providing Russia with credit to buy Chinese goods.
The deal is a glorified barter agreement, a primitive form of commerce used in the absence of a generally acceptable currency.
Does it pose a threat to the dollar?
It could be a minor one. But the overwhelming problem for the US currency lies in the huge trade and budget deficits that we allow ourselves, along with the arbitrary creation of money by the Federal Reserve. These currently flood the world with additional trillions of dollars a year, increasing the risk of a depreciation of the dollar and, ultimately, that of a fall in the dollar. This leads other countries to take preventive measures.
Russian exports are mainly raw materials, such as oil, gas and metals, that the Chinese economy consumes in large quantities. The conclusion of a dollar deal with China presents Russia with the risk that it will one day be paid in depreciated dollars. For the Chinese there is a parallel risk of being charged a wheelbarrow full of dollars for a barrel of oil.
The barter deal, however clumsy, negates these dangers. As long as trade between the two countries remains in relative equilibrium, they both insure against US fiscal and trade deficits. In other words, it is, economically, a defensive rather than an offensive deal.
Nonetheless, it is a deal that ties two former US adversaries together in a small but significant way. So it presents a challenge to our policy makers: will we ignore it because it is less of a problem or do we need to take a bigger picture?
Here it is essential to observe the changes that have occurred since 1991, when the Cold War officially ended.
Russia has liquidated the communist state and instead installed a modicum of democracy with relatively free markets. It withdrew its military forces from Eastern Europe and Central Asia, signed arms limitation treaties with the United States, and cooperated with us in space ventures. It has provided assistance in both Iraq and Afghanistan and, in critical situations, has often supported US policy.
China, on the other hand, has designed a trade policy that cost the United States millions of jobs. It has vastly expanded its armed forces and is rapidly building an offshore fleet in the Pacific. It maintains an authoritarian government with a tough core police state and has been ruthless in its treatment of ethnic minorities. It supports rogue regimes like Venezuela, Iran, and North Korea, and has long been active in the clandestine export of nuclear weapons technology.
Using the dollars obtained from his huge trade surplus with the United States, he travels the world in search of energy and mineral resources. This includes the vast riches of Russian Siberia and the former Soviet Union, which is a great source of anxiety for Moscow.
Russia may once have been our enemy, but China is an emerging rival, both now and for the foreseeable future.
It behooves us to carefully consider our national interests in this matter and adjust our policies accordingly. A better understanding with Russia would go a long way toward achieving a more favorable strategic balance and would do much to reduce China’s ability to threaten our interests.