Our Biggest Miscalculation

Eurointelligence has an interesting article on Our Biggest Miscalculation. Let's tune in.

The biggest geopolitical error of our decade has been the west's attempt to isolate Russia and China at the same time, or to rephrase an old joke about Europe – to keep Russia out, and China down. The result of this error is that the China-Russia relationship is on course to become globally the most consequential alliance between any two powers – at a time when the western alliance is weakening.

The deepening China-Russia relationship does not show up with a bang, but it came in small steps: China delivering dual-use goods to Russia; China allowing grey market transactions in critical raw materials; the Brics payments system; last week's summit at the Shanghai Cooperation Council, in which President Xi Jinping went out of his way to demonstrate China's strategic alliance with Russia and North Korea. Joe Biden's high-performance semiconductor ban has led to a burgeoning chip industry in China. China's Cross-Border Interbank Payment System is nowadays used by 54% by Chinese companies, now outnumbering those that use the dollar-based Swift system, which is based on telegram communication, which is slower and carries much higher transaction charges.

The FT has a story that China is now opening its bond market to Russian energy companies that will now have access to so-called panda-bonds. US and European sanctions closed off Russia's access to global capital markets in 2022. Initially, Chinese banks pulled rank, fearing secondary sanctions. But this has changed now, as China is well on the way to extricate itself from its dependency on US-dollar markets.

We have been warning about the side-effects of an overuse of financial sanctions, a mechanism we don't think is fully understood by those who use them. US foreign policy makers discovered the use of dollar-based sanctions mechanisms, and turned them into a primary foreign policy tool. But they underestimated other country's ability to create alternative infrastructures over time. We read a lot of comments from foreign policy experts, trying to belittle those efforts.