18 MARCH—The intensifying Russo–Ukrainian war will almost certainly end poorly for Ukraine. There has been a huge exodus of Ukrainians into neighboring countries fleeing the war (3 million and counting), and what’s left of the country is likely to be dismembered, as Georgia was when Russia intervened in 2008. The war has also engendered significant economic dislocation in Russia, as the West’s increasingly broad sanctions have come to bite. Thus far, America’s European allies have avoided following the U.S. with a total ban on Russian oil and gas imports, which would just as certainly cripple Europe and send more Russian products east rather than west: a fleck of sanity amid a frenzy of misjudgments. But regardless of how events ultimately play out in Ukraine, it is China that is likely to emerge the long-term winner. Oddly enough, or unexpectedly, the Ukrainian conflict has opened an opportunity for a diplomatic revolution that could position Beijing as a peacemaker—not just in its neighborhood but in Europe as well—a Pax Sinica, if you will. However deep the involvement of China in what is today primarily a Slavic dispute, it is almost certain that the crisis will catalyze an ongoing shift of economic power, evident for some time, from the U.S. to a China-dominated Asia–Pacific. Subtly but steadily, China has assumed a more central role in the crisis. While Beijing has supported Moscow’s intervention in Ukraine from the first, it has also made clear from the first its desire to see a diplomatic solution to a confrontation that turned from cold to hot on 24 February. President Xi has since made this point in still-courteous but ever-plainer terms. China must tread delicately here: Earlier this week, President Biden’s national security adviser, Jake Sullivan, threatened Beijing with “consequences” for any large-scale evasion of U.S. sanctions or support to Russia to backfill them. In response, Foreign Ministry spokesperson Zhao Lijian aggressively refuted Sullivan’s implication that Beijing was working to undermine the sanctions and urged the U.S. “to deeply reflect on the role it has played in the development and evolving of the Ukraine crisis,” reflecting a widespread view held by China (and others) that Russia was provoked by NATO’s expansion and threats to its security. Notwithstanding Sullivan’s bluster, Beijing has signaled repeatedly that it stands ready to play a constructive role in securing a ceasefire, saying it “deplored” the ongoing war, and was “extremely concerned” about the harm to civilians in Ukraine. At the same time, having joined President Putin to sign the much-noted Joint Statement on International Relations Entering a New Era 20 days before Russia made its move, Beijing has no interest in undercutting the import of what the two leaders effectively declared an emerging strategic alliance. Let us not understate the ambition the two leaders expressed in that document. As they made plain, they view this moment as the opening of a new world order based on genuine multipolarity and mutual respect among nations. While the two stressed their statement was not “aimed” at any other nation, if you’re going to stand against unipolar hegemony in the 21st century you have only one nation to talk about. Ukraine, viewed through this frame, is a subset of a much larger dynamic. On Wednesday, indeed, Putin declared that the Ukraine crisis will mark the end of the West’s political and economic dominance. Even before the recent conflict with Ukraine, Russia and China had begun to elaborate a much broader alliance in terms of trade, mutual development assistance, fixed investment, technological cooperation, and the like. This has almost certainly guided Putin’s calculations regarding Ukraine. Absent Beijing’s support, it is highly improbable that the Russian president would have had the confidence to undertake the actions he initiated some three weeks ago. ‘Attempts by the U.S. authorities to politicize or unilaterally shut down access to the SWIFT system to secure U.S. policy objectives risks backfiring as far as preserving dollar hegemony.’There is a financial dimension as well: The emerging Russo–Chinese partnership reflects the growing import of transactions denominated in yuan and rubles. This will undoubtedly increase now that a large number of Russian financial institutions, including the central bank, have been barred from using the U.S.–controlled SWIFT financial-settlement system. The implications of Washington’s attempted weaponization of SWIFT is understood in other capitals as well: India is planning to buy Russian oil and gas regardless of the American sanctions. And as an added protection against Washington, it is considering using the Chinese yuan as a reference currency in an Indian–Russian settlement mechanism, reflecting New Delhi’s growing frustration as it seeks to navigate U.S.–led sanctions against Russia. This is a little-noticed but interesting development in light of Washington’s recent attempt to incorporate New Delhi into the informal group known as the Quadrilateral Security Dialogue, a.k.a. “the Quad,” which has been described as an Asian version of NATO intended to limit China’s rise as a Pacific power. Ever since the dollar replaced gold at the center of the global financial system after the so-called “Nixon shock” in the early 1970s, many countries have railed against the “exorbitant privilege” conferred on the U.S. by virtue of this dollar hegemony. Even before Richard Nixon broke the link between the greenback and gold, Valéry Giscard d’Estaing, France’s finance minister at the time, lamented the centrality of the dollar in the global financial system. Giscard argued that this gave the U.S. unique advantages relative to the rest of the world to support its overextended standard of living. Broadly speaking, “exorbitant privilege” and “dollar hegemony” are used interchangeably as euphemisms for a handful of economic controls the U.S. has on the global economy, notably but not only those deriving from the dollars’ place as the principal currency held as savings by foreign governments, companies, and individuals. Despite its domicile in Belgium, the Society for Worldwide Interbank Financial Telecommunication, SWIFT, has become the central payment system that has cemented the dollar’s central role in global finance. SWIFT is a key component of dollar liquidity, which the U.S. greatly values and relies upon, as it provides the gateway to the Federal Reserve window (the means through which the world’s leading financial institutions borrow money). Although Brussels-based (and ostensibly neutral in a political sense), the board is dominated by U.S. financial institutions, and U.S. federal law gives the American government the capacity to shut down access to the system as part of its arsenal of potential sanctions. The U.S. has done that in the past with countries such as Cuba, Iran, Afghanistan, and now to a degree with leading Russian banks and the Central Bank of Russia, which has now had its $600 billion-plus of foreign exchange reserves frozen by Washington. Don’t think this hasn’t been noticed by other regimes deemed “rogue” by the U.S. government. Here’s the problem with the use Washington makes, by way of a unilateral dispensation, of the SWIFT system: Any attempts by the U.S. authorities to politicize or unilaterally shut down access to the SWIFT system as a means of securing U.S. policy objectives risks backfiring profoundly as far as preserving dollar hegemony. These are the two principal reasons for this: ⁋ The more the U.S. seeks to sanction so-called bad actors by cutting off their access to SWIFT, the less the system itself will be viewed as a neutral international interbank network, rather than an instrument of arbitrary U.S. power subject to the caprices of the U.S. government. ⁋ As more and more countries begin to see SWIFT in these terms, it will inevitably induce moves to create an alternative. This will further diminish dollar liquidity, as well as enhancing liquidity for alternative currencies as they lend their support to this new system. I describe medium– to long-term outcomes. However, the Ukraine crisis and Washington’s extravagant response to it appears greatly to have accelerated a process people active in the markets only recently thought would occur in the course of a lifetime or two. Economic network theorists—yes, there are such people—speak of “positive networking externalities.” These emerge as an increasing number of entities use a given network and therefore enhance its overall benefits to all users. The corollary, “negative externalities,” also applies: The system’s benefits (“marginal utility” in econ-speak) diminish in line with a decreasing number of users. Should these negative externalities begin to afflict SWIFT, this will inevitably reduce dollar liquidity and, hence, worsen the prospects of continued dollar hegemony. This is precisely what is starting to occur as a result of the growing economic collaboration between Moscow and Beijing. If anything, the conflict (and the corresponding weaponization of SWIFT) is accelerating the drive to seek alternative, competing payment systems. It is also worth recalling that even though the E.U. is now moving in lockstep with Washington in regard to Russia, in the past it, too, has explored an alternative payments system separate from the prevailing SWIFT system. Europe might come to revisit that option in the future if and when its interests begin to diverge again from Washington’s dictates. China is the big winner here, however, because China’s Cross-Border International Payments System, its CIPS to the West’s SWIFT, now has poll position to emerge as SWIFT’s likely main competitor. As economist David Goldman noted recently in the Asia Times:
CIPS is fully operational, and the Ukrainian war will expand its use and network capabilities. Note that as the euro and other major currencies have been sliding during the intensifying conflict in Ukraine, the yuan has increasingly been growing as a “safe haven” currency—a role hitherto dominated by King Dollar. Granted, the rise of CIPS risks posing some short-term cost to Beijing if the U.S. chooses to impose sanctions on Chinese banks should they enhance Moscow’s ability to evade the U.S.–led sanctions. Even in the absence of today’s conflict in Ukraine, China’s leadership has every incentive to join Russia’s in searching for alternatives to a U.S.–dominated financial system. Paradoxically, the more the U.S. uses SWIFT as an instrument of economic warfare, the more it will likely weaken SWIFT’s viability as the dominant payments system: As Washington impacts the payments system in a manner that complicates the resolution of debt repayment, the whole money pyramid can become unstuck or, at the very least, unreliable, prompting the search for alternatives, especially when dealing with the world’s largest creditor. As global polarization increases, China will be less likely to submit reflexively to the current dollar-centric monetary system. Hence, SWIFT’s days as a monopoly are coming to a close. While SWIFT manages $400 billion worth of daily transactions to CIPS’ $50 billion, the latter has seen its volume grow rapidly. If anything, the Ukraine conflict, and the accelerating expansion of trade with Russia, will further increase the size of CIPS, which will be a viable alternative to nations who would otherwise be vulnerable to Washington’s dictates. Russia will almost certainly be the junior partner here, given the respective sizes of the Chinese and Russian economies: Russia’s GDP is a tenth of China’s. But Moscow does provide Beijing with wealth of commodities—notably oil, gas, wheat (as of a bilateral agreement struck last month), and the strategic metals required to power alternative investments in the renewable energy space—and that gives it a key position in this emerging alliance from Beijing’s perspective. ‘The idea that China would compromise the unique opportunities now coming its way by attacking Taiwan is no more than projection.’The guarantee of a vast new source of oil, gas, and other strategic commodities from Russia will help to address China’s longstanding comparative disadvantage in these areas relative to the U.S., which has frittered away its unique period of dominance in the immediate aftermath of the Cold War. Pax Americana—the state of relative international peace overseen by the U.S.—might have been more successful had Washington embraced more “pax” and less “Americana” to create new kinds of global structures to end the Cold War once and for all. Add to that the unprecedented diplomatic opportunities now accruing to China. As David Goldman notes, Beijing is “not compromised by the mistakes that led to the crisis, and because it has good relations with the antagonists and a working dialogue with Europe. The odd man out, of course, would be the United States.” There is the Taiwan dimension to all this. Actually, there is no Taiwan dimension to the Ukraine crisis, but as so many emboldened but ill-informed neocons absurdly argue that China will reclaim the island by force in consequence of Russia’s Ukraine intervention, let us consider this non-dimension, if briefly. Alas, there is little worse, as a French legislator said at the time of the 2003 invasion of Iraq, than arrogance and ignorance in combination. The idea that China would compromise the unique opportunities now coming its way by attacking Taiwan is nothing more than projection on the part of those who assume that because America has wasted its unique position of global power and influence through a futile embrace of perpetual warfare, China is likely to do the same. Neocons who make this charge as it relates to Taiwan provide nothing in the way of evidence, much as they dissembled when asserting that Saddam Hussein’s government in Baghdad had a collaborative ongoing relationship with al–Qaeda to justify America’s ill-fated war in Iraq. The only thing likely to provoke such action by China would be Washington moving actively to upgrade diplomatic relations with Taiwan to something akin to the old mutual defense treaty in force prior to Washington’s recognition of Beijing in 1979. Abandoning the highly successful policy of strategic ambiguity with regard to the one sovereign government representing China would almost certainly provoke a more aggressive response from Beijing. It is up to Washington to make such an idiotic choice, as the capital’s population of hawks urges, or refrain. If stupidity prevails, Beijing has made it clear for many decades, every chance it gets, that it will respond—reluctantly but militarily if it judges it has to. At this point, very safe to say, a move on the island is nowhere near any of China’s plans. As to Ukraine, as an emerging strategic ally of Russia and a key trading partner of Ukraine, China is the only world power with strong relationships on both sides of the conflict. The opportunities I am identifying derive in large measure from this position. John F. Kennedy famously declared during his days as a senator, “In the Chinese language, the word ‘crisis’ is composed of two characters, one representing danger and the other, ‘opportunity.’” From the perspective of Beijing, this tragic conflict represents a vivid manifestation of the concept. But over the longer term, the dual meaning of “crisis” does not reside with one party: In reality, the danger largely rests with Washington and Europe, the opportunity with Beijing. |