13/03/2022

Russia’s invasion of Ukraine is clearly a watershed moment for the worlds commercial and security relationships, but as of today it is not clear why.

Recent events in Ukraine have thrown the grand narrative of China’s unstoppable rise into the air, leaving analysts scrambling to see how the lay of the land will change once the dust settles. China is Russia’s closest ally, a fact affirmed by a meeting between Xi and Putin on February 4th, where they declared a ‘no limits partnership.’ As well as the usual diplomatic posturing, this meeting included a commitment to boost bilateral trade to 200 billion dollars by 2024, following an already staggering 35.9% increase in 2021 (to 146.9 billion).

The recent history of this interdependence is rooted in the need for financial, technological and agricultural self reliance, which has been of critical importance to both nations in the hostile international environment of the last five years. After sanctions against Russia in 2014 and the 2018 China-US trade war, both nations have been slowly weaning themselves off a dependence on American currency, technology and food. Speaking to Reuters, Deng Kaiyun, head of Zhejiang’s chamber of commerce, pointed out that “yuan-rouble settlement has become a normal business transaction nowadays… we business people are already accustomed to that.’ Rather than a complete scramble then, the move away from the dollar has been in the works for some time, and the fault lines in the global financial system have been growing more unstable along with it.

Staying with the natural disaster analogy, the invasion of Ukraine is a 9.5 magnitude earthquake. The unprecedented sanctions levelled by a surprisingly united west, have severed the bulk of Russia’s economy from the majority of its world trade. While few predicted a full scale invasion of a sovereign nation would be the catalyst for major ‘de-dollarization,’ the speed of Russia’s ousting from SWIFT and western business more generally mean Putin has little choice but to accelerate the process.

Russian businesses have been left scrambling to open Chinese bank accounts, with analysts arguing Russia could use its Yuan reserves and China’s SWIFT competitor ‘CIPS’ to mitigate the sanctions damage. Some, such as Dang Congyu of Founder Securities have a startling confidence in the long term affects of this shift on China’s economy: ‘The SWIFT sanctions against Russia are a “milestone event that will accelerate the process of de-dollarization… although its hard to replace SWIFT in the short term, this incident is very beneficial to yuan’s globalisation over the long run.”

Yet Dang’s assessment is not widely accepted. China cannot afford to absorb the shock of a collapsing Russian economy by itself, and simply using Yuan will not stop the shot term damage inflicted on the Rouble. The unprecedented nature of these sanctions has left people who five years ago were certain the world was destined to continue a slow march towards Chinese dominance, uncertain whether the dollar will remain king, or this crisis will be the shock therapy the rapidly developing east needs to realign the global economy in its favour.

To answer this question, it’s important to know whether China had any advanced knowledge of the invasion. Is this the next masterstroke in an IR chess game, or a desperately ill informed overreach that reveals just how isolated Xi and Putin are? Some believe China knew more than it has let on, its actions in the build up to the invasion demonstrating calculated support for a form of military action Xi also intends to launch on Taiwan. The timing of the February 4th ‘No limits partnership’ meeting, and the dramatic rise in bilateral trade commitments last year, are both strong indicators that Beijing and Moscow have been preparing to weather the storm they knew would hit them when Russian tanks rolled west. Joe Biden has also cited intelligence reports that claim senior Chinese officials asked their Russian counterparts in early February not to invade Ukraine before the end of the winter Olympics.

However, Russia-China analyst Yun Sun believes there is evidence to suggest the relationship between the two is more distant and pragmatic than their commitments to friendship would have us assume. Practically this is demonstrated by the majority of Chinese analysts and policy figures insisting there would be no war, as well as the non existent attempts to evacuate Chinese citizens in Ukraine prior to the invasion, leading to a mad scramble to do so after. Longterm, China also had very little to gain and quite a bit to loose from a Russian invasion of Ukraine. Even if Putin assured Xi that it would be swift, the sanctions incited by an invasion of a sovereign nation were bound to have ramifications for Russia’s closest ally. Furthermore, the idea that China is involved in a sudden synchronised attempt to speed up the decoupling of the financial system from the dollar, or is using Ukraine to test the waters for an eventual assault on Taiwan, is diametrically opposed to its historic prioritising of long-term stability over everything else.

In my view, rather than revealing weaknesses or strengths in either the U.S. or Chinese position, the Ukraine crisis reveals a dependency our predictive models still have on an Anglo centric ‘rules based order.’ Since the fall of the Berlin wall, an interdependent globalised financial system has been a powerful incentive for states to abide by the rules of U.S. hegemony and has largely shaped our outlook on which direction the world is heading in. It has been a brutal neo-colonial system, and has decimated many developing nations, but for the worlds largest economies it has provided stability and predictability. However, in the wake of Russia’s invasion of Ukraine, sanctions have caused the most dramatic decoupling of a major world power from this global system since the Cold War, and now makes it incredibly difficult to predict the short or long term trajectory of international relations.

A year ago no one thought Russia would invade Ukraine, 3 weeks ago no one though Russia would be booted from SWIFT. We are moving beyond a time in which political disagreements among the worlds most powerful nations could be largely separated from, and mitigated by, trade and commerce. This means we are also moving beyond a time when we could use these metrics to predict the long or short term future of their relationships.