By Anders Corr
February 14, 2023 Updated: February 14, 2023
Russian President
Vladimir Putin and Chinese leader Xi Jinping during their meeting in Beijing on
Feb. 4, 2022. (Alexei Druzhinin/Sputnik/AFP via Getty Images)
Commentary
Moscow on Feb. 9 announced plans to exclude Europe’s currency from Russia’s sovereign
wealth fund. Starting this year, China’s yuan and gold will apparently take the
euro’s place. According to Russia’s TASS state media, the yuan may now compose
up to 60 percent of the country’s currency funds and gold up to 40 percent.
Moscow’s National Wealth
Fund (NWF) holds $148 billion in
assets, originally meant to service its pension obligations. However, the fund
is now being used to make up for the Russian deficit, down $38 billion in just
a single month, between December and January.
Europe banned Russian
oil, and much of the rest of the world is abiding by a $60 per barrel price
cap, or buying at even lower market rates. Increasing war expenses and the drop
in oil revenues are thus eating away at the future of Russia’s elderly.
The shift of the NWF
from euros to yuan and gold is part of more
generalized efforts on the part of Russia, China, and their partners to
decouple from the powerful currencies of democracies, including most
predominantly the U.S. dollar, but also the euro, Japanese yen, and British
pound.
Countries that transgress
international law can be penalized by having their foreign reserves in these
currencies frozen, as happened to Russia after it most recently invaded
Ukraine.
Rogue regimes see gold
and China’s yuan, on the other hand, as sanction-proof, though these
alternatives are relatively illiquid on global markets, putting downward
pressure on their value.
That the yuan is not
freely traded raises additional questions about whether it is fit for purpose
as an international reserve currency. Yuan dependency, if it develops over
time, will give Beijing even more economic influence globally, especially with
the world’s poorest countries.
The dollar, on the other hand, has reigned supreme
since World War II, from which the U.S. economy emerged as the world’s economic
powerhouse. The United States used its economic power to promote democracy,
market economies, and human rights around the world, with more or less success
in different countries.
In 2022, the world’s
central banks still had 59.8 percent of
their foreign exchange reserves in dollars, 19.7 percent in euros, 5.3 percent
in yen, 4.6 percent in pound sterling, and just 2.8 percent in yuan.
However, over the last
year, the quantity of dollars held as international reserves fell from $7.1 trillion in
2021 to $6.4 trillion in 2022. That puts upward pressure on U.S. inflation,
which Beijing cites as one of many economic problems in the United States,
shaking confidence in the dollar.
The Chinese Communist
Party (CCP) clearly hopes for the U.S. economy and
the dollar to spiral downward together in a self-defeating cycle.
Beijing sees a weakening
U.S. dollar as an opening, but its own currency weakness is even more
pronounced, and a sore point for its self-image as an up-and-coming global
hegemon.
The regime’s dollar reserves
are self-defeating for the CCP, as they are part of the global stability of the
dollar, though Beijing has wound them down from $4 trillion in 2014
to $3 trillion today.
That $3 trillion still
entails liabilities, given the increasing animosity between the two nations and
the U.S. government’s ability to freeze the dollar assets of its adversaries.
Yet it is hard for China and Russia to escape the gravitational pull of the
U.S. and European economies when they account for approximately 32 percent and 25
percent of global wealth, respectively. China accounts for just 18 percent.
If China’s military
invaded Taiwan, for example, the U.S. government would likely freeze Beijing’s
dollar reserves as one of many economic sanctions imposed on the country. This
freeze would parallel that imposed on Russia.
If Moscow and Beijing
could succeed at de-dollarizing the global economy—perhaps with the help
of Saudi Arabia, which
prices oil exclusively in dollars—they would help protect themselves from
sanctions. They would also seek to increase global demand for yuan and rubles,
allowing the two countries to print substantial amounts of currency without
inflating the yuan and ruble. Meanwhile, de-dollarization would decrease
international demand for dollars, putting them onto the market and increasing
U.S. inflation yet further.
A similar logic applies
to Moscow’s divestment from the euro, and move toward yuan and gold reserves.
However, Moscow’s increasing reliance on the yuan ultimately puts Russia’s
economy in jeopardy just as much, as Beijing will ultimately attempt to use
that reliance as leverage for its own purposes.
That Moscow is moving
quickly toward the yuan as a foreign exchange reserve, without a similar move
by Beijing toward the ruble, is yet more evidence that Beijing is now the
dominant partner in the relationship.
The Chinese regime is
territorially expansionist, and if strong U.S. alliances block its expansion in
Asia, it could eventually turn toward Russia’s Far East. From a realist
perspective, Moscow’s stalled invasion of Ukraine looks particularly foolhardy,
as it is not only rapidly expending its military materiel, manpower, and
reserves for few territorial gains, but creating an enemy of the West,
dependency on the East, and leaving its eastern flank vulnerable.
In effect encouraging
that dependency, China’s state media, the Global Times, quoted several analysts
who welcomed Russia’s shift away from the euro and toward the yuan.
One analyst claimed that
geopolitical competition has accelerated a global trend of de-dollarization.
“The role of the U.S.
dollar in the international financial market is not as strong as it used to be,
and the U.S. government has been increasing its control over the dollar, making
many countries look for alternative currencies,” he said.
If the United States does
not do more to stop communist China’s rise, he may be right.
Sanctions on regimes in
Russia, Iran, Burma (Myanmar), North Korea, Cuba, and Venezuela, without equal
or stronger sanctions on China, simply center the Middle Kingdom between the
democracies and the rogues, and increase the world’s trade dependency on
Beijing as a go-between and source of foreign exchange. That puts all of us at
Beijing’s mercy, and gives yet more power to the CCP.
Views expressed in this article are the opinions of the author and
do not necessarily reflect the views of The Epoch Times.
https://www.theepochtimes.com/russia-empowers-china-by-dumping-euros-for-yuan_5051780.html
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