Historic Sino-Russia Deal Bypasses US Dollar By Farooque Chowdhury

Historic Sino-Russia Deal Bypasses US Dollar

By Farooque Chowdhury

22 May, 2014
Countercurrents.org

In a symbolic, but historic blow to the hegemony of US dollar, China and Russia have concluded an agreement with far-reaching significance.

The deal bypasses US dollar in part of the two emerging powers’ trade. According to the agreement, two financial institutions of the two countries will pay each other in domestic currencies.

However, major western news agencies and media outlets have ignored the news.

It will not be surprising if any south Asian country enters into similar agreement in future with either of the two powers.

Moreover, there are indications that China is going to widen security dialogue and cooperation in Asia. The approach carries possibilities of alternative to the US approach in the Asia-Pacific region. The widening possibility carries bargaining space for geographically smaller countries like Bangladesh.

At the same time, there is suggestion from academic circle that the US should accept the rise of China.

An Al-Jazeera report (May 20, 2014) by Michael Pizzi said:

“In a symbolic blow to US global financial hegemony, Russia and China took a small step toward undercutting the domination of the US dollar as the international reserve currency on [May 20, 2014] 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 [May 21, 2014] 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 [May 20, 2014], making note of the $100 billion in annual trade that has been achieved between the two countries.”

The report said:

“Demand for the dollar, which has long served as a safe and reliable reserve currency in international transactions, has allowed the US 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.”

The report headlined “Russia, China sign deal to bypass U.S. dollar” said:

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.”

The report cited Michael Klare, a professor of peace and world security studies at Hampshire College: “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. This is a small step in that direction, to reduce the primacy of the dollar in international trade.”

The report cited Chris Weafer, a founding partner of Macro-Advisory, a consultancy in Moscow: “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. The Ukraine crisis and the threats voiced by the U.S. administration may well provide the catalyst for that to start happening.”

The deal is a symbolic step.

Citing Liza Ermolenko, an emerging markets economist at Capital Economics in London, the report said:

The deal was still “a very small one, in the grand scale of things”. It wouldn’t change Russia’s reliance on the dollar “overnight.”

Russia’s most oil and gas export contracts are still priced in dollars, Liza Ermolenko noted, and “on a wider scale, replacing the dollar with the ruble is much too risky to even consider.”

The report added:

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 US in their respective spheres of influence.

“Both countries are wary of president Barack Obama’s “pivot east,” a recalibration of US 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.’”

China, Russia’s biggest trading partner, has already concluded similar dollar-bypassing deals with a number of economies in Asia and Europe.

On May 21, 2014, China, the world’s second-largest economy, signed a landmark deal to buy Russian natural gas worth about $400 billion, a figure greater than the GDP of South Africa, giving a boost to Russia president Vladimir Putin and expanding Moscow's ties with Asia. Gas is due to begin flowing to China by 2018.

Only hours before the signing of the Sino-Russian gas deal a number of famous western news outlets amazingly reported that Putin has failed to make the deal.

Russian government-controlled Gazprom will supply state-owned China National Petroleum Corp. with 38 billion cubic meters of gas annually. The quantity would represent about a quarter of China’s current annual gas consumption of nearly 150 billion cubic meters.

Under the agreement, Russia will invest $55 billion while China will invest $22 billion.

There are plans for building a pipeline to link China’s northeast to a line that carries gas from western Siberia to the Pacific port of Vladivostok. The development of a gas center on the Pacific will allow Russia to export to prosperous markets in Japan and South Korea.

Alexander Lukin, a deputy head of the Russian Diplomatic Academy under Russian foreign ministry, was quoted by the Russia’s RIA Novosti news agency. “We will be able to show to Europe that we have other customers”, Lukin said.

Alexei Pushkov, head of the international affairs committee of the Russian parliament’s lower house, said on Twitter: “The 30-year gas contract with China is of strategic significance. Obama should give up the policy of isolating Russia: It will not work.”

The Sino-Russian partnership is strategic in the perspective of US-EU-Japan global dominance.

Putin was in Shanghai for an Asian security conference.

In the conference, China’s president called for a new model of Asian security cooperation based on a regional group that includes Russia and Iran and excludes the US.

Meanwhile, Chinese president Xi Jinping has sent a veiled warning to Washington.

“To beef up a military alliance targeting a third party is not conducive to regional common security”, Xi said without mentioning the US while delivering a keynote speech at a regional security forum in Shanghai on May 21, 2014.

Provocation and escalation of tensions for selfish interests should be opposed, he told participants at the fourth Summit of the Conference on Interaction and Confidence Building Measures in Asia (CICA).

China is actually suggesting the US to get used to China’s rise.

Citing a Kazakh proverb Xi said: “Someone who tries to blow out another’s oil lamp will set his beard on fire”.

The US provocative role in the Asia-Pacific region is a disturbing development in the region.

Pang Zhongying, professor of international affairs at Renmin University of China, said: “It is time to tell the US it is not justified in interfering in Asia’s affairs, which have nothing to do with the country.”

The comment is a reflection of attitude towards the Empire, which is experiencing a decline in its global influence and power.

China’s president Xi also said: “No country should attempt to dominate regional security affairs or infringe upon the legitimate rights and interests of other countries.”

He said: Security problems in Asia should be solved by Asians themselves.

The Chinese president said: If Asian countries speak with a common voice they have the capacity to solve Asian problems themselves.

The statement shows China’s desire to have a collective approach in Asia.

Xi was speaking to reporters with president of Kazakhstan Nursultan Nazarbayev and Turkish Foreign Minister Ahmet Davutoglu after a summit of CICA.

"Asian countries must collaborate with each other and work together," Xi said. Asian nations have the capacity to realize security in Asia by cooperating among themselves, he added.

The summit was a gathering of representatives from 47 countries and international organizations, mainly from Asia, concluded on May 21, 2014.

Xi said countries must “completely abandon” the old security concepts, while advocating a new one pursuing cooperative and sustainable features, to create a security cooperation pattern of openness, equality and transparency.

The idea China is highlighting is a challenge to the US approach to the Asia-Pacific region, which is maintaining and strengthening of its dominance.

The Chinese president said: “China and Russia jointly initiated an Asia-Pacific security and cooperation initiative”.

Already the US has experienced unexpected developments in Europe. Moscow’s response to US meddling in Ukraine is strong, which the US has not expected. It’s natural that US standing is making its appearance as unreliable ally to its European partners. Probably, the Empire is going to face a situation spread over two fronts: Europe, and its much-desired Asia-Pacific. It, the possible “two fronts” reality, will be difficult for the Empire.

Xi has indicated that China is going to take “steps to strengthen security dialogue and cooperation with other parties, and jointly explore the formulation of a code of conduct for regional security and an Asian security partnership program”.

China’s tone to its neighbors is still not “do it”, which a number of Asian countries have experienced from the Empire. The Empire often “forgets” the concept of mutual respect.

With a win-win approach China has already indicated that it is willing to discuss with regional countries the creation of an Asian forum for security cooperation in law enforcement and an Asian security emergency response center.

Beijing is getting involved in regional cooperation processes that include SAARC and ASEAN. China is also trying to play a role to ensure development and security in Asia.

China, the emerging global power, plans to develop an economic belt along the Silk Road and a 21st Century maritime silk road. The country has already initiated the Asian Infrastructure Investment Bank, an alternative to the Asian Development Bank. Countries like Afghanistan, Bangladesh, Nepal can benefit from these initiatives. These will also provide the countries vital space for cooperation and expansion in the areas of economy, finance, diplomacy, security and the all inclusive politics.

Farooque Chowdhury is Dhaka-based freelancer.