Picture: Chinese President Xi Jinping and Russian President Vladimir Putin attend the ceremony of presenting Xi Jinping with a degree from the St. Petersburg State University at the St. Petersburg International Economic Forum in St. Petersburg, Russia, June 6, 2019.
By Abel Semosa
After World War 2, the US emerged as the new dominant economic power as it had not experienced any war on its soil and benefited enormously from the war economy. The European Community (EC) was created to turn Europe into a US market via the Marshall plan. The special military operation conducted by Russia in 2022 marked a new era in which resulted the US and EU slapping Russia with heavy sanctions and excluding Russia for international financial institutions and banning the imports and exports of goods including oil. This paper aims to find out whether Russia’s economy can survive without western countries by creating a parallel system of economy with China and other anti-US imperialistic nations. A Power Transitions Theory (PTT) has been selected as the analytic framework tool.
Russia and Ukraine have a long history together. In 1991, Ukraine gained its independence from Russia following the collapse of Soviet Union . Russian’s military operation in Ukraine has triggered the international community to take decisive actions Russia regarding the invasion. The conflict between Russia and Ukraine goes way back to 2014 when Crimea was annexed by Russia and became part of Russian Federation. Russian President Vladimir Putin justified Crimea’s annexation by protecting ethnic Russian from extremists who wanted to overthrow President Viktor Yanukovych. Former president Yanukovych was declared by the protester in Crimea as the pro-Russian. The far-right extremists’ protesters goal was to agitate for warm relations with European Union (EU) and North Atlantic Treaty Organisation (NATO). Former president Yanukovych in 2013 rejected the notion of forming close ties with the EU by refusing to sign an association agreement at the summit in Vilnius, Lithuanian. Amid the protest by angry citizens for refusing to join EU, Yanukovych he fled the country. Even though the annexation was declared illegal by US and EU, a referendum votes were conducted, and majority of Crimea citizens wanted to be part of Russia.
The annexation of Crimea was condemned by US and EU countries. Sanctions were imposed on Russia after the annexation. Despite that, that did not stop President Putin from prioritising Russia’s national security. Putin has always been against Ukraine becoming a member of western institutions such as NATO and EU. After the annexation, Deputy foreign Minister of Russia Sergei Riyabkov said” “For us, it’s absolutely mandatory to ensure Ukraine never, ever becomes a member of NATO”. In 2019 the Ukrainian government under President Zelensky amended the constitution and making easy for the country to join organisations such as NATO and EU. Ukraine has been having meetings with NATO member states regarding the membership and it is reported that in the mid-January 2022, the US was intending to make a Ukraine a NATO member. This move has fuelled the invasion. To add, in 2008 when President Putin was still Prime Minister, he indicated that Russia would invade Ukraine if Joined NATO.
On 24 February 2022, President Putin launched what he called “Special Military Operation” in Ukraine as part of demilitarisation and denazification. Putin accused the western countries and NATO for ignoring his concerns of not wanting Ukraine to join NATO. For this invasion, the US and EU imposed further sanctions on Russia calling for immediate withdrawal of troops in Ukraine. These sanctions were imposed on financial institutions, import/exports of goods including oil targeting Russian banks and elites that are said to be closed to President. Despite western sanctions against Russia, China still considers Moscow as the significant strategic partner. China has not condemned or condoned Russia’s special military operation in Ukraine but had pleaded with both sides to resort to diplomatic talks to end the conflict. China is also one of the 34 states that abstained from voting on a United Nations (UN) resolution condemning Russia’s invasion. Both Russia and China are against NATO expansion and Beijing on the other hand has justified Russian invasion as a legitimate security concerns. Russia and China share similarities, with Beijing eyeing for Taiwan.
This paper will reveal whether the US and EU sanctions towards Russia amid invasion can create new parallel system of economy. China as the second biggest economy poses a threat to the US. The US trade war with China can be used as an advantage by President Putin to move closer to Beijing and create a parallel system of economy with anti-US states that have been imposed by sanctions and de-dollarise trade transactions of imports and exports.
EU and the US sanctions against Russia
Sanctions imposed by the US and EU against Russia during “Special Military Operation” in Ukraine are not of the first. In 2014, the US and EU imposed sanctions against Russia when annexed Crimea following the protest in Ukraine. They regarded the annexation of Crimea as illegal. The sanctions targeted individuals in Ukraine and Russia who were linked to the unrest in Crimea. Former President Barack Obama threatened more sanctions towards Russia if they continued interfering in Ukraine. According to the EU ministers, Russian officials and politicians who were said to be involved the breakaway of Crimea their assets had been frozen and travel bans were imposed on them. The 2014 EU sanctions against Russia after annexation of Crimea were said to be the harshest since end of Cold War. The sanctions targeted stated-owned banks, imposing arms embargo, and restricted the sales of sensitive technology and export of country’s oil industry but that did not stop Russia from backing the separists in Eastern Ukraine.
In 2022, after Russia carried out its special military operation in Ukraine the international community mainly the US and EU slapped Russia with heavy sanctions. The EU countries and the US have imposed financial sanctions on Russia’s big financial institutions including state-owned bank and companies. Russian financial institutions have been banned from using Society for Worldwide Interbank Financial Telecommunications (SWIFT) and Visa and Mastercard have suspended their services to Russia’s banks. Without SWIFT and Visa and Mastercard, it is difficult for Russia’s businesses and the government to make international payment transactions and trade with other nations.
China’s position on sanctions against Russia
China has continuously refused to be part of what they called “illegal and unilateral sanctions”. Russia and China relations have grown closer in the past years including as trade partners. Chinese government refer to Moscow as significant strategic partner and their trade partnership accounts $150 billion. Both countries are oppositions of US hegemony. Russia and china has decided appear to have decided that, to do better advance their own interests they need to knock Washington down Washington down a peg or two. Their common goal is challenging the US hegemony hence they do not like the world order how it is. China has condemned the sanctions against Russia. Chinese Foreign Ministry spokesperson Wang Wenbin indicated that Beijing will continue trading with Russia despite western sanctions.
Wang Wenbin said: “China and Russia will continue to conduct normal trade cooperation in the spirit of Mutual respect, quality and mutual benefit. The country’s top banking regulator asserted China will not participate in such sanctions”
The Chinese government have been neutral in the Ukraine-Russia conflict. On the 4th of February 2022, Russia and China signed an agreement to enhance Russia’s shipments of crude oil into China. China for its manufacturing export sectors requires fuel to meet its production. As indicated by Beijing, Russia is the second largest crude oil supplier to China in the year 2021 and making up of 15.5% of its supply from abroad. The western countries sanctions against have pushed Russia to be more dependent on China for economic relieve. Beijing was not the first time abstaining from UNSC draft resolution to condemn Russia from carrying its military operation against Ukraine. China also abstained from voting in the UNSC draft-resolution aimed at ridiculing the Crimea annexation referendum.
Russia has become more reliant on the East aftermath of annexation of Crimea in 2014 and has created an invisible conflict among western countries and Russia. Russia alone has no power to challenge the global dominance of the western countries but with Russia-China alliance they can increase the completion with the West.
China and Russia’s parallel system of economy – A new world order
An article titled “China opposes sanctions and has a reputation for busting them” by Areddy (2022) states that the sanctions against Russia may result to be less effective if China offers access to markets. The latter statement is accurate and can be verified with the move made after Visa and Mastercard suspended its services to Russia’s financial institutions amid the Ukraine’s invasion. Visa and Mastercard are the largest payment processing networks in the world. After Visa and Mastercard suspended for Russia’s financial institutions, Beijing stepped in and assisted with their cross-border interbank payment system. Russia’s financial institutions switched to China’s card payment system called Uniopay system for global and 90 per cent of ATMs in Russia are compatible with its cards. In 2021, over 3 million cards were issued. The system allowed Russia’s ATMs to make cards for their public and also be able to make payments overseas. The Uniopay system operates in more 180 countries.
The Chinese government have introduced their Cross-Border Interbank Payment system (CIPS) in 2015 to increase the use of Yuan for global transactions. The West’s ban of SWIFT can accelerate China’s CIPS. The latter statement of parallel system is out to be created due to the EU and the US sanctions against Russia. Countries that wish to continue trading cooperation with China and Russia have to use the Beijing Yuan currency through CIPS instead of dollar for global transactions. The sanctions against Russia are meant to hurt economy but instead are creating new parallel system that no longer relies on western countries. This can mark for the beginning of de-dollarization and end of the US hegemony. Due to China –US trade war and Russia’s exclusion from SWIFT; CIPS could reduce reliance on western countries and ensure financial security. Sanctions on both Iran and Russia as the most important oil producers in the world could accelerate the decline of the petrodollar system and facilitate Yuan currency.
Russia has also developed an alternative system to SWIFT. System for Transfer of Financial Messages (SPFS) its equivalent to the SWIFT and it was developed in 2014 after the US has threatened to take off Russia from SWIFT. This system was developed by Central bank of Russia as an alternative if it happens that the western countries cut ties with Russia in global transactions. The SPFS can be cheaper than SWIFT. Russia has been in talks with several countries regarding extending their system abroad. There have been plans to integrate SPFS with China’s CIPS and extend them to countries such as Iran, Turkey, India and as well as within the Eurasian Economic Union (EAEU). The disadvantages of Russia’s SPFS are that it operates only during weekdays whereas SWIFT operates 24/7. In 2020, more than 20 banks internationally have connected with SPFS.
Devonshire-Ellis, (2021) states that:
“……..For the US to instigate a divided world spells the end for globalisation and the end of US influence over large areas of the planet that would feel abandoned – such as Asia”
Most countries that do not follow the US global policies and being rejected by western countries have resorted to using SPFS and CIPS for global transactions. Countries such as Iran, Russia, Venezuela and other several countries have been banned from using SWIFT global payments as means of damaging their ability to trade. When the US sanctioned Iran and cut it off the service of SWIFT, President Putin confirmed that they have been working on other method of payments to assist countries that have been discriminated by the US and EU countries. It is also said that BRICS countries as it stands for Brazil, Russia, India, China, and South Africa (BRICS) has considered of creating a BRICSpay system that will no longer be reliant on SWIFT and avoid the use of dollar in global transactions.
Russia and China’s bilateral trade have involved in the use of their own local currencies. They have prepared to reduce their dependence on dollar. In the first quarter of 2020, the dollar shares of trade dropped below 50 per cent for the first in record between Russia and China. The de-dollarisation has been a priority for both China and Russia in 2014 amid Russia annexation of Crimea. The abandoning of dollar for trade transactions was necessity for Moscow to avoid the US sanctions. According to Dmitri Dolgin, ING’s Bank’s chief stated that” any wire transaction that takes place in the world involving US dollars is at some point cleared through US bank. That means that the US government can tell that bank to freeze certain transactions”. In 2014 China and Russia signed a three-year currency swap deal that strengthened that de-dollarisation project. In 2019 they also signed a deal to replace dollar with their national currencies for international settlements between them.
Amid the Russian-Ukraine conflict, the US has been lacking support from Middle East. Saudi Arabia as the biggest trade partner in the Middle East has refused to make new deals over the surge of oil prices amid the Ukraine’s invasion. Countries that have been backed by the US in the Middle East were unwilling to denounce Russia for its actions. A day before the invasion, UAE foreign Minister had a phone call with Russian President Vladimir Putin as efforts to increase their bilateral cooperation. The United Arab Emirates (UAE) ambassador to the UN Security Council (UNSC) Lana Nusseibeh abstained from the US backed resolution vote to reprimand Russia for its military operation towards Ukraine. The ambassador argued that Ukraine’s move in the region’s threatened peace and security. Both leaders Saudi Crown Prince Mohammed Bin Salman and the UAE’s Sheikh Mohammed Bin Zayed have declined a call from the US president Joe Biden. The US has also approached Venezuela to increase oil suppliers. The UAE and Saudi Arabia said they will not produce more oil than agreed on by the Organisation of the Petroleum exporting Countries (OPEC).
Despite the on-going Russia’s special military operation, Saudi Arabia’s leader Crown Prince Mohammed Bin Salman has invited President Xi Jin Ping for a state visit. According to an article published by The Wall Street Journal titled “Saudi Arabia considers accepting Yuan instead of Dollars for Chinese oil sales” (2022) mentioned that Saudi Arabia was in talks with Beijing over the use of oil in exporting its oil to Beijing. This move by Saudi Arabia will boost Yuan currency and challenges the US petrodollar hegemony. The two countries have been in talks over this for six years, the recent developments have been successful due to the US’s turn back on Saudi Arabia and halted assistance in Yemen. The relationship between Saudi Arabia and China has grown more closer over the years with Saudi supplying China with 1.76 million barrels of oil in a day for the year 2021. The latter statement shows that the dominance of US petrodollar could be coming to end. About 80% of global oil sales are transacted in dollars.
With the rise of Yuan currency as the global alternative to the dollar, sanctions against countries such Iran, Venezuela and Russia could be less effective and also serves as blessings for the Chinese. Cutting off Countries on international financial systems as part of the sanctions increases the use of Yuan, especially with biggest exporters of oil in the world. Russia and China before the Ukraine’s invasion they have already being using ruble-yuan deals to avoid US dollars and local curren.cies in international trade. The Russia’s Foreign Ministry has called on both China and Russia to be less reliant on Dollar for transactions and western payments such as SWIFT.
Iran is the first oil producer that had to accept Yuan as the based oil sales because US had sanctions imposed on them in 2017. This was followed by Venezuela in 2017. Even Russia in 2015 Russia agreed to trade in Yuan. A decreased reliant on dollar for global transactions will weaken the US’s capacity to wage an economic war against any country that has abandoned the US dollar for trade transactions.The replacement of petrodollar will allow for countries that are economically sanctioned to operate and continue to trade effectively regardless of the economic war waged against them by the US. Beijing opposes sanctions because its companies have been targeted by western countries mainly by US in their trade war. This has given China and Russia a platform to mobilise countries that have been sanctioned to work together and enhance their trade cooperation. Sanctioned trade partners of China are as follows: North Korea, Venezuela and Iran, Russia and several more countries.
The US and EU sanctions against Russia could be less effective. Seems like President Putin have been prepared for the sanctions since 2014 after the annexation of Crimea. The sanctions against Russia are creating a parallel system of economy that could lead to the US losing its hegemony because of the emerging parallel system of economy that is not reliant on the US and the EU economies. The introductions of Petro-Yuan could serve as the end of US petrodollar dominance and create a new parallel system of economy comprising of two economies in the world – the eastern bloc led by China and the Western bloc led by the US. Russia and China by introducing new global transaction payments for trade has been a wish for them. They have been seeking to de-dollarise their trade because the US has been using global payments systems for trade and sanctions weapons to punish countries that resist their imperialistic and bully around the world. A country that resists or rejects the US hegemony and do not align to their western ideological agenda becomes adversaries.
Dollar hegemony is under threat. China and Saudi Arabia are in talks planning to use yuan in the import/export of oil. Russia and India are in talks to revive a rupee-ruble in their bilateral trade. Russia’s stance of selling its natural gas in rubes towards countries that are considered unfriendly nations is one step towards de-dollarising their markets and Russia’s national curreny will be in demand because 40% EU natural gas is exported by Russia. We are currently emerging in a new world order. A new parallel system of economy between China and Russia could make the US and EU policies of sanctioning other countries to be less effective. More efforts to pull back from the dollar have emerged.
Rubles as the main currency for exchange rates in importing Russia’s natural gas could compromise euro and dollar’s dominance in the global system. The less demand for the currency means a weakened position in the global basket of reserve currencies. The increasing demand of rubles in the international trade would strengthen the Russia’s currency. Western countries will be forced to buy rubles at Central Bank of Russia and this will make their sanctions against Russia to be futile.
Russia is busy creating its trade hub with certain countries with China and India being the main strategic partners. With Russia being banned from SWIFT, India has been seeking other alternatives it can use to continue their bilateral trade with Russia. India and Russia have considered rupee-ruble trade pact which allows both countries to trade each other irrespective of their currencies. Russia and India’s bilateral trade it is very strategic of importance due to India’s import of military hardware. Both China and India allow Russia to trade using their local currency. The western sanction against Russia becomes irrelevant on bilateral trade.
Semosa is an MA student in Political science at the University of Limpopo.