Washington’s Geopolitical Nightmare: China and Russia boost economic cooperation

As the Chinese proverb has it, we indeed live in “interesting times.” Just when it seemed Moscow was moving closer to Washington under President Medvedev, agreeing to cancel Russian sale of a controversial S-300 missile defense system to Iran and moving to cooperate with Washington on NATO issues including possibly missile defense, Moscow and Beijing have agreed a series of measures which could have major geopolitical implications, not the least for the future of Germany and the European Union space.

During highest level talks recently in St. Petersburg, China’s Premier Wen Jiabao and his Russian counterpart, Vladimir Putin made a series of announcements which got relatively little notice in Western mainstream media which at the moment is obsessed with the dubious Wikileaks scandals. It was the seventh time leaders of the two countries have met this year, indicating something of some significance.

To date there has not been much Chinese investment in the Russian market and what there is mainly comes in the form of loans. Direct and portfolio investment in real projects remains insignificant. Russian investment in China is also not significant. That is aimed to now change. Several Russian companies are already listed on the Hong Kong Stock Exchange and there are a number of Russian-Chinese investment projects in high technology related to the creation of joint technology parks both in Russia and China.

Dropping the dollar

The two prime ministers announced among other things that they had reached agreement to renounce the US dollar in their bilateral trade and use their own currencies. As well both reached potentially far-reaching agreements on energy and on trade and economic modernization of remote regions of the vast Eurasian space of the Russian Far East.

Chinese sources told Russian press that the move reflected closer relations between Beijing and Moscow and is not aimed at challenging the dollar. Putin blithely announced “About trade settlement, we have decided to use our own currencies." The Chinese yuan has now started trading against the Russian rouble in the Chinese interbank market, while the Chinese renminbi which until recently has been only a domestic Chinese currency and not convertible will soon be allowed to trade against the rouble in Russia, Putin said.

Until now all trade between the two countries had been settled in US dollars. With outbreak of the US financial crisis in 2007 and the extreme volatility of both the dollar and of the Euro, both countries have been exploring ways to avoid dollar trade settlement. This is potentially major in terms of the future of the dollar. To optimize their trade structure and change the mode of trade development, the two governments have set up the Sino-Russian Chamber of Commerce of Machinery and Electronic Products. The Greenwood World Trade Center in Moscow, being built by a Chinese company, will be open in 2011 as an exhibition and trade center for Chinese products in Russia and serve as a platform to upgrade of Sino-Russian non-governmental trade.

At present Sino-Russian bilateral trade is growing rapidly. In the first 10 months of this year, bilateral trade volume reached almost €35 billion, a year-on-year increase of 45 percent. And the total for the whole of this year is expected to be more than €45 billion, near the pre-financial crisis level. Both sides intend to expand the trade volume significantly in the years ahead and some Russians believe it could almost double in the next three years. Avoiding the dollar is thus not a minor issue and, if followed by more states in the Shanghai Cooperation Organization, the group of six Eurasian countries established by China and Russia in 2001 it could lessen the role of the US dollar as world reserve currency.

Since the Bretton Woods Treaty of 1944 established the dollar at the center of the global trade system, US hegemony has been based on two indispensable pillars: US dominance in military power combined with the exclusive role of the US dollar as world reserve currency. The combination of military might and the reserve role of the dollar for all trade in oil, other essential commodities and in finance has allowed Washington in effect to finance its wars for global domination with “other peoples’ money.”

Energy cooperation

Interesting agreements were also signed in bilateral energy cooperation. Now clearly the two Eurasian giants—Russia and China plan to expand bilateral trade outside the dollar in interesting ways, including in significantly energy, where China has huge deficits and Russia huge surplus not only in oil and gas.

The two will expand nuclear power energy cooperation starting with Russia’s assistance in Chinese nuclear power plant construction and Russian-Chinese joint projects to enrich uranium in line with IAEA standards, to produce uranium in third countries and as well to build and develop a network of oil refineries in China. The first project, Tianjin, is already in place. One deal covers purchase of two nuclear reactors from Russia by China’s Tianwan nuclear power plant, the most advanced nuclear power complex in China.
As well coal export from Russia to China is expected to exceed 12 million tons in 2010 and will also increase.

Chinese oil companies will also provide needed investment to upgrade Russian oil and gas projects for exploration, development and processing in joint ventures with Russian state-owned and private companies. As well, a Sino- Russian pipeline is to go into operation by the end of 2010.
A major point to still be settled is price agreements on Russian gas to China. Agreement is expected in the next few months. Russia asks a price for Gazprom gas deliveries equal to that charged European customers and Beijing wants a discount.

Major industrial development projects

As well there will be intense mutual industrial investment in the remote regions along the 4200 km mutual borders of the two especially between Russia’s Siberia and Far East and China’s Dungbei where in the 1950s and 1960s, before the split in Soviet-Chinese relations, the Soviet Union built hundreds of light and heavy industry facilities in the area. They have been modernized and packed with new Chinese or imported technology, but the solid Soviet-era industrial foundation is still there. This will lend to regional cooperation on a higher technological level, especially between the Khabarovsk and Primorye territories, the Chita and Irkutsk regions, the Trans-Baikal Territory and the whole of Siberia and China’s Heilongjiang and other neighboring provinces according to Russian analysts.

As well in 2009 China and Russia signed a program for the co-development of Russia’s Siberia and the Far East and China’s northeastern provinces until 2018, with a clear action plan that includes dozens of cooperation projects between specific regions to develop 158 facilities in Russian and Chinese border areas in the timber industry, chemicals, road construction, social infrastructure, agriculture, and several energy export projects.

Wen’s trip follows Russian President Dmitry Medvedev’s three-day visit to China in September, during which he and President Hu Jintao launched the long-discussed cross-border pipeline from Skovorodino in eastern Siberia to Daqing in north-eastern China. By end of 2010 Russian oil will start flowing to China, at 300,000 barrels per day for the next two decades under a €20 billion loan-for-oil agreement made last year.

Russia is seeking to expand into the fast growing Asian and especially Chinese energy market and Beijing wants to improve its energy security by diversifying sources and supply routes. The pipeline will double Russian oil exports to China, now transported mainly via a slow and expensive railway route, and make Russia one of China’s top-three crude-oil suppliers alongside Saudi Arabia and Angola, a geopolitical gain of significance for both.

Chinese Premier Wen said at the St Petersburg press conference that the partnership between Beijing and Moscow has "reached an unprecedented level" and pledged the two countries will "never become each other’s enemy." Since the Sino-Soviet split during the Cold War Washington geopolitics has sought to drive a deep wedge between the two countries to leverage their influence over the vast Eurasian domain.

As I have stated before, the only power on the planet which even conceivably could offer a credible nuclear deterrent to Washington is Russia, as many economic problems as the country has. The Chinese military capacity is still years away from that as it was developed primarily for self-defense. The only economic power able to pose a challenge to a declining US economic giant is China. The complimentarity of the two seems to have been clearly recognized. Perhaps the next Wikileaks leak will “discover” embarrassing details about that cooperation convenient for the Washington geopolitical agenda. For the moment, however, the Sino-Russian expanding economic cooperation is Washington’s worst geopolitical nightmare at a time when Washington’s global influence is clearly seen to be on the wane.