The Russia sanctions cul-de-sac
- By Dan Steinbock
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E-mail China.org.cn, September 1, 2014
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[By Yang Yongliang/China.org.cn] |
![[By Yang Yongliang/China.org.cn]](http://images.china.cn/attachement/jpg/site1007/20140901/001ec949c22b156e47a71a.jpg "[By Yang Yongliang/China.org.cn]")
Undermining sanctions objectives
Instead of pushing Russia into a corner, the US-EU sanctions are incentivizing new cooperation between Russia, China and other large emerging economies.
Moscow’s reliance on Chinese loans is likely to blunt the impact of the sanctions. The Treasury Department believes that it has “increased the cost of economic isolation for key Russian firms.” Yet, the proposed isolation does not extend to the Russian energy giants’ reliance on Chinese lending.
The sanctions also banned sales of energy-related equipment to Russia. However, that could boost its domestic oil equipment industry, which is becoming competitive globally, and Chinese companies.
Bilateral strategic collaboration has been precipitated by years of cooperation at international forums, including the Shanghai Cooperation Organization. According to Russian media, Moscow may turn to Beijing for military and aerospace components. Further, Russian efforts to launch large-scale cooperation with Chinese manufacturers could pave the way toward technology alliances among BRICS member states.
The EU ban prohibits dual-use technology exports to Russia that can be used for military purposes. While Moscow will seek to supplant Western dual-use imports through other trade partners, including Beijing, it will need a few years and large investment to develop domestic substitutes for advanced European sensors, lasers and other items.
Meanwhile, America is pricing itself out of the arms export markets, while the quality of Russian exports has improved. Since 2003, the U.S. has dominated arms exports globally, but last year Russian weapons exports surpassed the U.S. by over $2 billion. Today, most buyers come from emerging and developing nations, which are more value-conscious than their Western peers.
Risks to the dollar dominance
As five Russian state-owned banks have been cut off from access to European capital markets, investment and lending in Russia has decreased. As a result, Russian companies, such as MegaFon and Norilks Nickel rushed to snap up Hong Kong dollars, which are not subject to Western regulations and are pegged to the U.S. dollar. By early August, Hong Kong’s monetary authority had spent $9.5 billion to protect its peg for the currency, boosted by the Russian buying binge.
In the long-term, the most serious implication from the sanctions could be an accelerated risk to the dollar dominance.
The dollar’s share of global reserves has shrunk to less than 61 percent since 2001. It has kept its status as a haven currency after the 2008 financial collapse and through several rounds of quantitative easing, which advanced and emerging economies see as debasing of the U.S. currency.
Russia and its BRICS partners are already creating a development bank to serve as an alternative to the West’s International Monetary Fund and the World Bank.
China’s efforts to internationalize the renminbi have intensified as well; particularly through a yuan swap line with the European Central Bank and Switzerland, and yuan-denominated transactions in London and Frankfurt.
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