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Ukraine conflict heightens global economic split


The conflict in the Ukraine has attracted a great deal of attention for its geo-strategic implications. The face off between the world's two military superpowers, the United States and Russia, has revived memories of the Cold War, with all its unthinkable implications.

Less noticed have been the economic implications. The sanctions placed on Russia have forced Russia to become even closer to China, and the alliance between a military superpower and an economic superpower is beginning to split the global economy into two: broadly, East versus West.

It may well come to represent the biggest geo-economic and geo-political shift of the first half of this century, defining much of the future landscape.

Australia, whose interests lie in Asia but whose military allegiances are with America and the West, is at risk of being caught in the middle. The about face on the Asian Infrastructure Investment Bank — the Abbott Government initially bowed to American pressure and refused to be a founder member, only to hastily rush in at the last minute after the Europeans joined — is a sign of the tensions to come.

The military implications of the situation in the Ukraine are difficult to interpret. It is war, and, as ever, truth has become the first casualty — on all sides. Some facts are not in dispute. The ousted president Viktor Yanukovych was a legitimately elected leader, making his removal the equivalent of a coup. Even as pro-American a source as the intelligence group STRAFOR has described it as the 'most blatant military coup in history' (a questionable exaggeration). 

There is also little doubt that America was deeply involved in the creation of the replacement Ukrainian government, as the above phone recording demonstrates. Whether this was American opportunism or something more sinister is not clear.

On the other side, Russia took over the Crimea, formerly part of the Ukraine, no doubt because of its importance as a port and military base. No matter how 'democratic' the subsequent Crimean election was, this was the illegitimate acquisition of the sovereign territory of another nation. Neither side has clean hands.

The economic manoeuvres are easier to interpret. Russia has done large deals with China for its gas, which will more than replace its lost markets in Europe. It is set to provide a fifth of China's gas needs by the end of the decade.

The country abandoned its $40 billion South Stream project which would have passed under the Black Sea to Bulgaria and carried up to 63 billion cubic metres of gas annually to Europe. Instead, Gazprom announced in January it planned to build an undersea gas pipeline with the same capacity to the Turkish-Greek border by the end of next year, saying the rest was Europe's problem.

A number of economic alliances have been formed, or are being formed, that underline the growing divide. China has established the Shanghai Co-operation Organisation with Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. 

The country is proposing to build what it calls a New Silk Road and a New Maritime Road. The former will run from central China to northern Europe, and the latter will connect South East Asia, India, East Africa and southern Europe (connecting with the Silk Road). The stated aim is to have an 'economic cooperation area' that stretches from the Western Pacific to the Baltic Sea. 

Russia, apart from linking more closely with China, is part of the newly formed Eurasian Economic Union which spans a population of 176 million people and a GDP of over $US4 trillion.

America, meanwhile, is looking to 'pivot towards Asia' with its establishment of a Trans-Pacific Partnership (TPP). This is currently being fast tracked by Congress and is clearly intended to counterbalance China's growing economic influence in the Pacific. The countries involved will be mostly those with strong links to America or with a history of tension with China: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

Europe is being wedged between America and Russia, a point Putin may have been underlining in his recent meeting with Greek Prime Minister Alexis Tsipras. Russia is not rich enough to help Greece with its EU debt, but there does seem to be an active exploration by the Kremlin of cracks in European unity. The negotiating of a deal giving the Russian navy access to a port in Cyprus is a similar development.

That is the shifting economic landscape. Some even more interesting things are occurring in the financial system. The 'collapse' of the ruble is only of significance if Russia holds large amounts of US debt, which it does not. In 2014 the country began selling hydrocarbons in rubles and in the local currencies of the trading partners: China and the BRICS countries. Increasingly, Russia is dealing in gold: the ruble is now largely backed by the precious metal.

Meanwhile, the yuan, which is fixed to the greenback to avoid unwanted volatility affecting the Chinese economy, is set to become stronger. At the end of this year the Society for Worldwide Interbank Financial Telecommunications (SWIFT), the network for global finance, will have a competitor: the China International Payments System (CIPS).

Reuters comments that: 'CIPS will remove one of the biggest hurdles to internationalising the yuan and should greatly increase global usage of the Chinese currency by cutting transaction costs and processing times.' Rather than take on the greenback directly, the Chinese are going to undermine its power by creating a new system, a lateral approach.

The new battle lines are becoming clear. America is intent on maintaining its uni-polar moment in the face of the continuing rise of China. That means maintaining a heavy military presence in Central Asia, probably as part of an encirclement strategy. Russia has now been drawn into that battle, and has responded by intensifying its alliance with China, bringing together an economic and a military superpower.

China, meanwhile, is increasing its connections with the developing world, which includes its moves with the Asian Infrastructure Development Bank. Small wonder that America has objected, because it will reduce the influence of the International Monetary Fund and the World Bank, both of which have been American-dominated. Moreover, with the establishment of CIPS, China will start to chip away at the real lynchpin of American power: the domination of the American dollar, which has allowed the United States to rule the world for decades.

It is likely that the era of American domination is coming to an end. Hopefully we are not heading back to a new Cold War, but we are looking at a more multi-polar world, dominated by two giants, China and America. This emerging East-West division is likely to shape economic and military events for decades.

David JamesDavid James is a business journalist with a PhD in English literature. He edits Personal Super Investor.


Topic tags: David James, economics, Ukraine, Russia, America, Crimea



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Anyone who doubts the value of a PhD in the Humanities only has to read David James to realise they need to rethink. He is the most lucid writer on economic matters I have ever read.

Ian Fraser | 28 April 2015  

Thank you for this excellent and thought-provoking analysis. David James sees elephants in the room that others fail to see because they do not fit in the conventional frame of reference. . One comment - I don't think either Russia or China is opting as their first choice for Eurasian continental autarky and economic isolation from the rest of the world. China wants to remain a leading world trading nation, and Russia wants to preserve and nourish as much as it can of its many-faceted (and deeply rooted in Russia's history and culture) relationship with the EU countries.. But what both great nations are saying now - quite successfully, it seems to me and it seems David James - to the US and its camp followers is: 'if you try to bully and threaten us with sanctions and economic isolation, we can cope without you'. That is the importance of this moment in history. It is a shame the American global power complex, and the media that rely on its intellectual frames, still do not get it. Over time, they will. .Meanwhile, I find reading 'Russia Today' and 'Moscow Times' online useful balances to Western media analysis of international relations. .

tony kevin | 28 April 2015