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© Matt Kenyon
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Continuing on with the topic of my most recent Swamp Notes,
I want to explore the impact the war in Ukraine might have on
deglobalisation and economic decoupling between the west and
Russia/China.
As I argue in my column today,
there’s a strong case to be made that this is a real pivot point for
the global financial system. Sanctions against Russia, although
completely necessary, will make that country more dependent on China,
which will look to settle more and more energy transactions in renminbi.
Witness in the past few days gas deals between the two countries and a
lifting of a Chinese export ban on Russian wheat. Commodity hoarding and
economic nationalism is just getting started.
All
of this is part of a long-term strategy by China to reduce its
dependency on the dollar; both Russia and China have been increasing
gold reserves in recent years as part of this effort. We won’t move to a
post-dollar world anytime soon (the dollar is 60 per cent of global
reserves), but I wouldn’t be surprised to see the renminbi play a much
bigger role in the global financial system within, say, the next decade.
I also expect China to speed up its selling of US Treasury bills in
2022, which is going to raise a very tricky issue for the Federal
Reserve, which is starting its own programme of quantitative tightening
(more on that in a future note).
In
the US, one immediate question is whether war in Ukraine makes America
double down on more economic self-sufficiency (or protectionism,
depending on your point of view), or whether inflationary pressures
actually push businesses (to the extent that they still can) to source
more from China and other countries where supplies are still cheap.
As
I noted a few months back, the Covid-related fears of personal
protective equipment shortages didn’t stop various US states from going
right back to buying cheap Chinese masks
as soon as they were available. As you might remember, China hoarded
them at the start of the coronavirus outbreak for obvious reasons.
Businesses worried about keeping margins up in the wake of already
spiralling inflation may be inclined to try and source as cheaply as
they can, wherever they can. Certainly, they are lobbying to keep the
loopholes that allow them to do so.
But, as I argued
in a column last week, that may no longer be politically possible.
Countries worried about conflict are likely to try and build as much
self-sufficiency as possible, looking to bolster national or regional
supply chains and to find new sources for raw materials. Witness Germany
pulling the plug on Nord Stream 2 (it’s about time) and European
politicians starting to talk about speeding up the transition to clean
energy in order to reduce dependence on Russia once and for all. See
also the semiconductor chip wars that are at the heart of the new Great Power conflict between the US and China, with Europe somewhere in between as per usual.
In
the short term, though, nobody can go it alone. In an ideal world, US
energy could fill the gap for Europe, but Americans are already
exporting about as much as they can to the continent (indeed, the lack
of additional US shale energy for export is a cudgel that Republicans
are now using to try and undermine Joe Biden’s investment in green
energy). I’m expecting energy prices to rise and for US shale oil to
become very important once again.
Meanwhile, Russia and China are drawing closer to Iran.
To
me, this would be an ideal time for the US and Europe to come together
and war game a new energy security strategy to buffer European
vulnerabilities in the short term, and a longer-term agreement about how
to approach climate change (how wonderful would it be if the two
regions together took the lead on cutting-edge clean technology such as
green batteries, rather than ceding that territory to China). I also
think that they need a strategy not only for de-dollarisation but
de-euroisation, as Russian energy no longer flows to the continent.
I
may be desperately hoping for upside here, but perhaps Russia’s actions
have the potential to strengthen transatlantic ties and turn what
seemed to be a tripolar world with the US, Europe and China heading in
different directions, into a more bipolar one. That would probably be a
more stable world. Gideon would you agree? And, to put the question you
asked me last week back to you, what am I getting wrong about the
European world view?
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