Russia and china sign deal to bypass U.S dollar

In a symbolic blow to U.S. global financial
hegemony, Russia and China took a small step
toward undercutting the domination of the U.S.
dollar as the international reserve currency on
Tuesday 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 Wednesday 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 Tuesday,
making note of the $100 billion in annual trade
that has been achieved between the two
countries.
Demand for the dollar, which has long served as a
safe and reliable reserve currency in international
transactions, has allowed the U.S. 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.
But 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.
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,” said
Michael Klare, a professor of peace and world
security studies at Hampshire College. “This is a
small step in that direction, to reduce the primacy
of the dollar in international trade.”
Some have been tempted to view Tuesday's deal
in the context of Putin's showdown with the West
over the crisis in Ukraine. After the U.S. and
Europe imposed sanctions on Moscow for its
annexation of Ukraine's Crimean peninsula, Putin
may have finally made good on promised
retaliation against what he views as Western
hegemony in Russia's near abroad.
“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,” said Chris Weafer, a founding
partner of Macro-Advisory, a consultancy in
Moscow. “The Ukraine crisis and the threats
voiced by the U.S. administration may well
provide the catalyst for that to start happening.”
To be sure, the Russia-China bank deal is mostly
a symbolic step. Liza Ermolenko, an emerging
markets economist at Capital Economics in
London, said that the deal was still “a very small
one, in the grand scale of things,” and that it
wouldn’t change Russia’s reliance on the dollar
“overnight.” Most of Russia’s export contracts in
the oil and gas markets are still priced in dollars,
she noted, and on a wider scale, replacing the
dollar with the ruble is much too risky to even
consider.
Likewise, even though China has agreed to the
gas deal, which could see over $450 billion of
Russian natural gas flow from eastern Siberia
into China over the next 30 years, Russia is not in
a position to abandon its ties with Europe.
"From the commercial standpoint, Europe is the
most profitable market for Gazprom,” said Mikhail
Korchemkin, the founder of Eastern European Gas
Analysis, who has consulted for Gazprom, the
Russian state-owned gas company. "Exports to
China can generate a small profit, [but] only if the
government makes it free of taxes and duties.”
But 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 U.S. in their respective
spheres of influence.
Both countries are wary of President Barack
Obama’s “pivot east,” a recalibration of U.S.
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.”
Yet even if China feels threatened by U.S.
encroachment, it is Russia that is desperately
pursuing closer ties with China.
Putin may have gotten the better of the Western
powers in the showdown over Crimea, but at the
cost of growing geopolitical isolation. Under
intense pressure to demonstrate Russia's avowed
independence from the West, he has repeatedly
threatened that he could simply shut off its
natural gas pipelines to Europe and find new
markets for Russian energy exports.
Separate from that political posturing, the
Russian imperative to find new markets for its
energy exports is nonetheless very real. Energy
demands in Europe have plateaued and may even
decline in the long term because of stringent
environmental regulations.
“If Russia wants to continue to be a petrostate, it
has to shift marketing of its exports to Asia," said
Klare, who noted that Western energy
conglomerates like ExxonMobil have begun doing
the same.
“We don’t want to push this too far and see it as
a formation of a new, global anti-American bloc
that is starting a new Cold War,” he added. "This
is market-driven more than it’s political."