Ukraine-Russia War: Chinese Momentum To Become The Global Power And Renminbi The Global Reserve Currency
In his book "On War," the Prussian General Carl Von Clausewitz surmised that "Peace is maintained by the equilibrium of forces and will continue just as long as this equilibrium exists, and no longer." By invading Ukraine on February 24, 2022, Russia brought that truth home to Europe. The Russian invasion exposes the weakness of Europe's strategic policies pursued since the fall of the Berlin Wall. Concurrently, it allows China to put the foundations of Western global hegemony in check, using Russia as a delusional pawn on the international chessboard.
Origins of China providing tacit support to Russia
February 24, 2022 will find its way into the history books next to November 9, 1989, the fall of the Berlin Wall, and the September 11, 2001 attacks. More interestingly is the link with another date, September 15, 2008, the day of the demise of Lehman Brothers and the onset of the Great Financial Crisis.
The 2008 financial meltdown resulted from an unbridled U.S. financial system, which refused to regulate derivatives (a policy endorsed by Larry Summers and Hank Paulson), was unable to contain the insatiable risk appetite of the banks, and which left insufficient capital buffers and highly leveraged positions unattended. The undoing started under the Clinton and Rubin administration with the promulgation of the 1999 Gramm-Leach-Bliley act, which dismantled the foundational 1934 Glass-Steagall Act. The Glass-Steagall Act ensured stable segregation between predictable retail banking and more risk-prone investment banking.
The crisis triggered a global housing price bubble burst, brought on by too lenient global monetary policies, irresponsible U.S. banking practice, outright fraud, and unsustainable global financial leverage.
Part of the global fault line was reflected in the substantial trade imbalance between China and the U.S. China benefited enormously from the globalization trend triggered by the fall of the Berlin Wall and the relocation of global production capacity towards its lower cost base. China became the global production house. This position was further bolstered by China joining the World Trade Organization (WTO) in December 2011. However, China was left unchallenged in managing its exchange rate, which is usually a "quid pro quo" for WTO membership. China recycled its excess U.S. dollars by building up a $1 Tr position of Treasury Securities. The move allowed China to keep its cost base (artificially) low by not selling the export generated $ revenue on the foreign exchange rate market.
The 2008 financial crisis revealed to China the vulnerability of the U.S. financial system. China saw the "safe haven" status of its abundant Treasury position unravel during the 2008 crisis. After an animated meeting between U.S. Treasury Secretary Hank Paulson and his Chinese counterpart during the 2008 Peking Summer Olympics China started taking its fate into its own hands: first through seeking global dominance, to be followed by the global reserve currency status.
Since the Ukraine invasion, China has been silent about sanctions (as was India), and it abstained at the March 2 U.N. General Assembly vote denouncing the attack. Remarkably, half of the 35 nations, representing 4 billion citizens overall, which abstained were African (amongst others Mozambique, Senegal, Uganda, South Africa, Zimbabwe,...). It would be insightful to review if the Mozambique U.N. vote was directed by the Chinese write-off of its debt in March 2021? Would there be similar U.N. voting patterns in relation to African sovereign debt extended or restructured by China?
The invasion and its broader ramifications were probably discussed during Putin's visit to China's Winter Olympics, where the "No Limits" partnership was inaugurated on February 4. Under the partnership, both countries announced mutual support over standoffs on Ukraine and Taiwan. Furthermore, both countries committed to collaborate more against the West on issues as diverse as climate change, artificial intelligence, and space.
Artyom Lukin, Professor of International Relations at the Far Eastern and Federal University in Vladivostok, explains that the China-Russia relationship is part of a "Post-West" world construct several years in the making. Ukraine seems to have been an opportunity too good to miss for both countries.
"The decision-makers in Moscow understand that without Chinese assistance, without the backing of China, Russia would be unable to withstand confrontation with the West."
Russia has been for many years an ardent and reliable ally supporting China's global ambitions to erode the Western world's power base. The Russian invasion is, in fact, part of a string of proxy wars between the U.S. and China. The aim is for China to take over world hegemony.
Russia's performance on the world scene (2008 – 2022)
Early in the first decade of this century, the Russian invasions of Georgia (2008) and Crimea (2014) tested NATO's response mode and resolve. The July 2014 shooting down of Malaysia Airlines flight 17 over Ukraine, killing 297, mostly Dutch passengers, was perpetrated by Russian soldiers in the Donbas region also tested NATO's willpower.
In September 2015, the sudden appearance of Russian troops in Syria at the request of the Syrian regime jolted Russia back onto the global power scene. Russian airpower proved critical in preventing the collapse of the Iranian-backed Assad regime. Assad, a member of the Shia minority, is still in power today. Through this intervention, Russia proved its mettle by strategically positioning itself in the Middle East. Its position has an even greater pull in the face of a potential U.S. withdrawal from the region.
In February 2022, President Macron's decided to withdraw French troops from Mali after they had encountered severe backlash, including from the private Wagner military group sponsored by Russia. Significantly, Mali is the third-largest producer of gold and has considerable uranium supplies.
The French troops had been deployed since 2013 as part of Operation Barkhane, the code name for the anti-jihadist operation covering Mali, Burkina Faso, and Niger. The efforts are now centered around Niger. As the sixth global producer of uranium, Niger is a critical purveyor of uranium to France, running 56 nuclear power plants. Ukraine is the ninth largest global producer of uranium.
These transgressions, all to seek influence and access to essential primary resources, occurred with no hard-hitting price to be paid by Russia. Russia had only green lights. Russia performed tasks that benefited China for which the payback is, at minimum, tacit support and, at best, from the Russian point of view, accommodation and compensation through the Chinese barter and financial system.
Europe, the indulgent facilitator
Since 1989, Europe has misread Putin's and his KGB entourage's intent to reinstall the grandeur of the Russian empire. In the eyes of a despotic Putin, Europe didn't deserve the expansion it was afforded at the expense of the lost Russian imperial eminence. Europe shuffled along on at least five strategic axes: energy policy, defense spending, cyber-security, illicit political party financing, and financial regulation.
1. Energy policy and the flawed decarbonization imperative
Nowhere has Europe positioned itself so vulnerably as in its energy policy.
Since the first oil crisis hit Europe in 1973, Europe has reduced its fossil fuel dependency by only a paltry amount, generating only 11% of its overall energy needs from renewables and a similar amount from nuclear energy. As of 2022, Europe is still reliant for almost 75% of its primary energy sources on fossil-based oil (39%), gas (25%), and coal (11%). Regarding natural gas dependency, Germany relies on Russia for 50% of its natural gas, Italy for 33%, and the Netherlands for 25%.
Combined with the urgent climate change adaptation recommendations articulated in the latest IPCC report, Europe no longer has an excuse to delay the geostrategic imperative to decarbonize 75% of its primary energy resources into renewables.
The behind-the-scenes pressures exercised by Gazprom and other energy lobbyists to classify natural gas as a green energy source during the E.U. Green Taxonomy review should be made public. Pressure from the E.U. commission to modify the E.U. Green Taxonomy should also be brought into the limelight. The Gazprom-managed Nordstrom P2 pipeline aims to delay the essential decarbonization process and, geo-politically, is nothing else than a Trojan horse.
2. Defense spending
Europe has been betting for too long on the peace dividend emanating from the fall of the Berlin Wall. Military spending as a percentage of GDP dropped from 2.4% in 1989 to 1.5% in 2020. (Germany reversed this trend by announcing on February 27, 2022, a surge in military spending of Euro 100 bn ($112 bn) bringing their expenditure to 2% of their GDP.) Earlier indications floated by the Trump administration of a less U.S. dominant NATO alliance also projected fissures within the Western front. Low defense spending in Europe and the diminished U.S. support for NATO under Trump let Putin believe that rebuke and resolve would be weak in case of another incursion.
3. Cyber-intelligence
A cyberattack in February 2022, disrupting several European oil refining hubs within the Amsterdam-Rotterdam-Antwerp (ARA) area, was only the latest of a string of ransomware strikes aimed at impairing crucial infrastructure and supply chain architecture.
The attacks exposed the need to secure legacy systems, especially in the energy and communications sectors, which have been outpaced in design due to accelerated digitalization and vulnerable connectivity to the internet. This is a major challenge both for Europe and the U.S.
Through the Digital Europe Programme, Europe decided to invest €1.6 billion into cybersecurity capacity for the period 2021-2027. This wholly inadequate amount is testimony to the seriously flawed understanding of this strategic military challenge.
4. Illicit political party financing
Russia has secretly funded European political parties with a staunch anti-EU stance. Russia is indiscriminate about financing parties both from the left and the right of the electoral spectrum, so long as they promote an anti-EU narrative. One example: In June 2020, the French far-right National Front party settled a controversial $10 MM loan dispute with a Russian aircraft parts company.
Furthermore, there are suspicions that Russia, through hacking and disinformation, meddled in the 2014 Scottish Independence referendum and the 2016 Brexit referendum. The U.K. leaving the European Union caused a severe dent in the Western bloc.
Similar tactics were deployed when Russian operatives leaked internal emails from Democrats during the 2016 U.S. election. The 2019 Mueller report provides precise detail of Russian interference in U.S. politics.
Ingenious fiscal constructions make it more difficult to "follow the money." According to the Tax Justice Network, the Netherlands ranks fourth in locations that facilitate tax evasion by multinational corporations, behind the British Virgin Islands, Cayman Islands, and Bermuda.
Such fiscal structures, in the slipstream, benefit oligarchs and despots from around the world.
Which are the financial institutions facilitating these transactions, and on whose behalf? Under which regulatory regime do they operate? And who in Europe is controlling these hidden money flows?
5. Financial regulation
The E.U. is only as strong as its weakest links. Since joining the European Union in 2007, Malta and Cyprus have offered E.U. citizenship for foreign cash.
This policy allows foreigners to gain E.U. passports and access to visa-free travel across the E.U. In the case of Cyprus, total bank deposits ($58 bn) are now a multiple of its Gross Domestic Product ($24 bn).
On the day of the Ukraine invasion, the Russian state-owned VTB Bank, which faced both European and U.S. sanctions, transferred its stake in Cyprus' Russian Commercial Bank to the two remaining shareholders, both of which are companies registered in Cyprus.
How are the Cyprus Central Bank and the European Central Bank overseeing these developments?
In addition, far too accommodating listing requirements have offered Russian companies straight access to primary markets in Europe.
There are 23 Russian companies listed on the London Stock Exchange, even after the suspension of VTB capital. The German stock exchange hosts 61 listed Russian companies. However, the operator of Deutsche Börse's Qontigo indices, Stoxx, decided to ax all Russian companies from its indices as of March 18.
Both NYSE and NASDAQ have now halted trading of about ten Russia-based companies.
The recent data leak at Credit Suisse exposed the hidden wealth of clients involved in torture, drug trafficking, money laundering, corruption, and other serious crimes. The 30,000 accounts represent $105bn of hidden assets. Switzerland has abandoned its neutrality and joined the E.U. sanctions against Russia with the invasion.
Can we rest assured that no other European and American financial institutions are abetting similar clients even after years of anti-money laundering and know-your-customer practices?
What is next?
The slew of sanctions imposed on Russia has led to severe financial damage:
- The Ruble declined to 102 from 80 against the Dollar.
- The Russian Central Bank doubled interest rates to about 20%.
- The same Central Bank is precluded from accessing $630 billion in mostly dollar reserves.
In contrast, two major sources of export revenue are skyrocketing. Oil is quoted at $110 per barrel, and the Dutch April gas contract hit a new record high of €185 per megawatt-hour. Though SWIFT banned Russian banks from its messaging system, European and U.S. banks are still clearing Euro and $ denominated payments as part of sanction exemptions. This represents about $550 MM in daily revenue for Russia's state-controlled energy companies.
At current rates, oil and gas generate about $200 bn in annual revenue. Russia spent about $70 bn on its military capacity in 2021.
Europe has received a tragic wake-up call. Now it needs the resolve to tackle its main strategic challenges. The immediate priority for Europe should be to reduce the reliance on Russian energy and fossil fuel altogether.
Diplomatically and militarily, Europe should remember that the current "axis of evil" is run by Putin and some 50 of his acolytes. The post-Putin era should be envisioned with a Moscow alternative power base in mind which could quickly take over the reins. Ultimately, a decarbonized industrial and military alliance ranging from San Francisco to Vladivostok could be mapped. It would be a formidable bloc to balance out the global ambitions of China.
In the meantime, the critical question remains, what role is China playing behind the scenes?
Will BP's sale of its 20% Rosneft stake, at a loss of $25 bn, end up in the hands of Sinopec on the cheap? Will China National Offshore Oil Corporation take over Shell's LNG Sakhalin joint venture position with Gazprom?
What are the State Administration of Foreign Exchange (SAFE) and the People's Bank of China facilitating on behalf of Russia during this crisis? Are they supporting the Ruble, as one would expect, given that the Ruble should have fallen much further because of the magnitude of sanctions applied? Will People's Bank of China intermediate any gold sale residing on the Russian Central Bank balance sheet to the tune of about 20% of its reserves?
Given the potential of Chinese intervention behind the scenes, China can also influence the reach of Putin's military moves.
Jimmy Carter famously remarked that China, since its 1979 Vietnam invasion, has been at peace with its neighbors and the world. Over and above crimes committed against its Uyghurs minority population, China knows exceptionally well how to entice other nations to engage on the battlefield on its behalf.
The time has come to call out China and end the human tragedy in Ukraine, as Russia overplayed its hand under China's watch. Yet, it will demand some astute chess play as China still sits on $1 Tr of Treasury securities, which could find their way on the market some day on a most inopportune moment for Western markets. It would be just another Chinese steppingstone, next to its Central Bank digital currency initiative, it its bid for global dominance and Renminbi to become the global reserve currency.
I acquired more than 30 years of global senior executive experience within the corporate finance and capital markets fields at Fortis and BNPP.
At Middlebury College, I teach as Professor of the Practice “Capital Markets”, “Investment Management”, “Carbonomics and Renewable Energy” and “Introduction to Finance”. I mentor through our entrepreneurial program and act as faculty advisor to the Student Investment Committee.
I also board advise early-stage companies and NGOs on the nexus of sustainable development and fintech. In 2020, I co-established the Sustainable Finance Unconference series, a quarterly platform where prominent sustainable finance peers present their recent contributions in the space.
