Russia and China are working on an alternate international financial system

 Russia and China led international financial system will pose serious challenge to American dominated financial system

Russia and China are working together to move away from dollar and to develop alternate international financial system. The move appears to be a response to a series of warnings that Western nations could push to disconnect Russia from the Brussels-based SWIFT financial system as a form of sanctions.

Both Russia and China are said to be increasingly looking to move away from using the US dollar as the main currency of international trade, instead using their own denominations to underpin the booming volume of Moscow-Beijing trade.

Russia and China will develop shared financial structures to enable them to deepen economic ties in a way that foreign states will be unable to influence announced by Russia after talks with Chinese president Xi Jinping.

China and Russia have been gradually moving towards such an arrangement since the Global Financial Crisis of 2008 revealed the risks of excessive reliance on the US. However, American economic sanctions against both Moscow and Beijing appear to have intensified the search for alternatives.

Putin’s foreign policy advisor Yuri Ushakov told Russia Today (RT) that “particular attention was paid to the need to intensify efforts to form an independent financial infrastructure to service trade operations between Russia and China. We mean creating an infrastructure that cannot be influenced by third countries,” the advisor has said.

Last week, US Under Secretary of State Victoria Nuland said that the White House, along with a number of Western European nations, was mulling completely isolating Moscow from the global financial system should Russian troops dare to invade Ukraine.

Just the day before, Bloomberg had suggested that Washington could target the country’s major banks and even disconnect Moscow from the SWIFT network.

The American dominated international financial system is an immense source of power. Most international trade is conducted in US dollars, the transfer of payments goes through the SWIFT transaction system in which the country has immense sway, while financing derives from US-led investment banks, debt is ranked by US rating agencies, and even the main credit cards are American.

These economic instruments of power enable Washington to run an empire.  It can manage huge trade deficits, collect data on its adversaries, give favourable treatment to allies, and crush its adversaries with sanctions. 

The America is using its financial system and control over global financial sector as a foreign policy tool by imposing sanctions against the countries that refused to fall in line with US imperialist foreign policy. The IMF, World Bank and Asian Development Bank are also important financial tools for the America to dictate its terms on the countries that need loans and financial assistance.

The reduced reliance on the US dollar as a reserve and transaction currency is immensely challenging as the dominant role of the US dollar has defined the international financial system for more than 75 years.

The dollar has continued its strong position for three main reasons: the huge size of the US economy, the preservation of the dollar’s value by keeping inflation low, and the open and liquid financial market.

 As the US economy is in relative decline, inflation is out of control, and its financial markets are used as a weapon – the foundations for the enduring role of the dollar are quickly coming to an end.  

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, approximately 90% of trade between Russia and China was settled in dollars, and by 2020, dollar-denominated trade between the two Eurasian giants had almost reduced by half, with only 46% of trade in dollars.

Russia has also been leading the way in cutting the share of US dollars in its foreign reserves. The mechanisms for de-dollarizing China-Russia trade are also used to end the use of the greenback with third parties  with advancements being seen in places such as Latin America, Turkey, Iran, India, etc.

The US has been pumping out dollars to the entire world for decades, and at some point, the tide will change as the sea of dollars return home with increasingly diminished value.

The SWIFT system for financial transactions between banks worldwide was previously the only system for international payments. This central role for SWIFT began to erode when the US used it as a political weapon.

The Americans first expelled Iran and North Korea, and in 2014, Washington began threatening to expel Russia from the system as well. Over the past few weeks, the threat of using SWIFT as a weapon against Russia has intensified.

China has responded by creating CIPS and Russia developed SPFS, both being alternatives to SWIFT. Even several other European countries have banded together with an alternative to SWIFT to curb Washington’s extra-territorial jurisdiction and thus continue trading with Iran.

 A new China-Russia financial architecture should integrate CIPS and SPFS, and make them more available to third parties. If the US expels Russia, then the decoupling from SWIFT would intensify further. 

China and Russia have also developed their own rating agencies and replaced the dominant position of Visa and MasterCard in their respective countries. This new financial architecture is complemented with an energy partnership and a technological partnership as neither China nor Russia wants to be reliant on American high-tech industries as they move into the fourth industrial revolution.

 Furthermore, China and Russia seek to avoid US-dominated transportation corridors. China has invested trillions of dollars into its Belt and Road Initiative for new land- and sea corridors, while Russia has advanced a similar but more modest program that includes developing the Arctic as a maritime route in partnership with China.

Funding and managing these high-tech programs and transportation corridors will have positive synergy effects for the further development of a new international financial architecture. 

                                                                     Glenn Diesen/ Khalid Bhatti                                           

No comments

Note: Only a member of this blog may post a comment.

Powered by Blogger.