Economic Note: Russia and China Share a Common Future

Recommended soundtrack: "You Gotta Move" (Sticky Fingers, 1971) - A traditional blues song covered by the Stones.

Russia and China are becoming increasingly intertwined economically, their fates are tied together as Russia turns more to China due to Western sanctions over the Ukraine war.

The shifting currency strategies, with Russia piling up yuan reserves and conducting ruble-yuan swaps with China's central bank, send an explicit signal that the Russian and Chinese elites are coordinating closely on monetary matters. This currency coordination goes hand-in-hand with the joint military drills that Russia and China have been conducting with greater frequency.

For Russia's oligarchs and power brokers, nearly all economic scenarios going forward involve hitching their wagons to their Chinese counterparts, creating a new Moscow-Beijing axis of elite-level cooperation. The exception would be an unlikely direct conflict erupting between the two nations, but barring that, Russia's high class appears to be casting its lot with China's high class for the long haul.

This nascent alliance of undemocratic elites, spanning from the Kremlin to Zhongnanhai, united by a shared interest in undermining the Western-led global order, poses a growing challenge on the world stage. The Russia-China elite entente is a key geopolitical feature of the Ukraine war era, as the Moscow establishment, hemorrhaging under sanctions, grows ever more dependent on Beijing's economic lifelines and political backing.

In essence, Russia has become the junior partner in a new power condominium with China, a realignment that will have far-reaching implications for global economics and geopolitics for years to come. The high-level currency and military coordination is both a symptom and driver of this tectonic shift. How the West responds to the Russia-China axis may determine the shape of the 21st century world order.

Currency

Interesting shifts are occurring as Russia increasingly turns to the Chinese yuan and its own ruble for international trade settlement, due to Western sanctions cutting off access to dollars and euros:

1) The Russian ruble has now overtaken the yuan as Russia's primary currency for settling international trade deals, as both exports and imports get increasingly denominated in rubles. Use of the yuan has also surged since the war began.

2) However, Russia's central bank said it sees no real alternative to building up yuan reserves, as the financial instruments of other friendly nations are seen as carrying too many risks. Already, a third of Russia's currency reserves are now held in yuan.

3) To facilitate growing ruble-yuan trade, Russia and China have been implementing currency swap lines between their central banks. In March, Russia's central bank said it lent 2.5 billion yuan to Russian banks under these swap operations.

4) Inside Russia, authorities want to reduce use of the dollar and euro. Major Russian bank Gazprombank announced it will stop dealing with banknotes in those currencies.

Ramoan Steinway

P.S.

Postscript on Chile:

It's worth noting that Chile's economy is significantly influenced by its trade relationships with China and, to a lesser extent, Russia. As China's largest trading partner in South America, Chile is economically vulnerable to shifts in Chinese demand for its exports, particularly copper. Additionally, Chile's trade with Europe, accounting for a substantial portion of its shipping economy, could be indirectly impacted by Russian energy policy and its effect on European economic conditions. While it would be an overstatement to say that China and Russia "control" Chile, the Chilean economy is certainly not insulated from the geopolitical and economic ripple effects of these two major powers. This underscores the complex interdependencies in the global economy and the far-reaching impacts of the actions of countries like China and Russia.