Russia and China: Who’s the Boss in the Relationship Now?

Russia’s invasion of Crimea has been condemned by most countries in the world. The United States and Germany are leading an international effort to impose economic sanctions on Russian government officials, oligarchs and companies.

As is typical in such situations, China’s voice has been absent from the chorus of condemnation. Moreover, China’s reaction to the change of government in Kiev has been sharply negative. Beijing’s leaders are deeply suspicious of anything that reminds them of the events on Tiananmen Square in 1989, and the Ukrainian revolution resembled them very closely.

The Chinese also like to have Russia as an ally and a partner. It does so for two main reasons: First, because Russia is a key supplier of oil and gas to the Chinese economy and second, because the two countries can join forces in opposing what they see as U.S. domination of the world political system.

Some Chinese newspapers, including the party’s People’s Daily, strongly supported Russia’s actions, even though the official government position in Beijing has been non-committal.

For many jingoistic Russians, this was more than enough proof that China was squarely in Russia’s corner. They believe China will go to bat for Moscow on the economic and financial front.

In that context, an article has been circulating on Russian-language sites claiming that Beijing would demand that the United States pay back its debt to China in gold if Washington persists in imposing economic sanctions on Russia.

Russia’s delusional pipedreams

Coupled with a threat from Sergei Glazyev, economic advisor to President Vladimir Putin, to undermine the dollar-based financial system, Russian readers are now treated to a brave new world.

In fact, they are now inclined to see any sanctions against Russia spelling the demise of the U.S. dollar as a global reserve currency. And they joyfully anticipate the rise of the new Holy Alliance between the Russian ruble and the Chinese yuan.

The Russian article also declared that China has warned Turkey not to allow any NATO ships into the Black Sea. Since Turkey is itself a member of NATO, this claim should have raised all kinds of red flags as to the article’s veracity. And, indeed, all of it is complete balderdash.

As anyone who knows anything about economics could have told those enthusiastic Russian patriots, while China holds some $1.3 trillion in U.S. Treasury bonds, it certainly can’t demand that the U.S. Treasury redeem any of them before its maturity date, much less get paid in gold.

It may be news to Russian analysts and opinionators, hailing as they do from a country where the rule of law remains complete fiction, but bondholders’ rights are limited. As long as the issuer pays interest and principal in full and on time, as stipulated in legal documents related to the bond issue, there are no other claims a bondholder has.

Russia – liberated from economic logic once more

China could certainly sell those bonds in the open market, pushing yields on those bonds higher, but it will only punish itself: Once it starts selling off its bond holdings, bond prices will drop and the value of China’s remaining trove will be diminished.

And after liquidating all those bonds, what will China then do with hundreds of billions of dollars? It will still need to invest them into something, and that won’t be easy. The U.S. Treasuries market is the world’s largest, safest and most liquid market for financial instruments, which is why the world’s central banks hold U.S. bonds in the first place.

China is unlikely to do anything to provide tangible aid to Russia. By invading another sovereign state and taking over a portion of its territory, Moscow proclaimed that it doesn’t intend to obey international laws.

Actually, it’s even worse. Since Russia also disavowed its troops in Crimea, sending them without any identifying insignia, it not only flouted international rules, but did much to subvert them.

While such behavior used to be commonplace for the Soviet Union and its allies during the Cold War, things are very different now. Russia is no longer a leader of a hostile empire, but a full-fledged member of the global economic system.

It is behaving itself as a musician in a symphony orchestra who tells the conductor to go to hell and decides to play whatever notes he wants at the time of his own choosing.

Just as in an orchestra, such behavior disrupts the normal functioning of the entire global economic system. But the country who suffers by far the most from all this is none other than Russia itself.

Sanctions don’t matter to pariahs

Since Russia put itself outside the system, in the long run it doesn’t really matter whether the United States and its European allies decide to impose sanctions on it or not. If they do, Russia will be thrown out of this system promptly. If they don’t, it will become isolated gradually.

A country that refuses to play by the global rules will get no foreign investment, will see its access to credit restricted and will find it hard to sign commercial contracts with legitimate partners.

Russia — or at least Putin — may no longer care whether or not Russia is part of the global economic system. But not China. It may not see eye to eye with the United States on many issues, but it is a very responsible member of the global economic community.

China puts much emphasis on international rules and laws. It is one of the greatest defenders of global stability. It also has no interest in getting rid of the dollar as a reserve currency.

After all, unlike Russia, China has been able to develop so rapidly and build up its manufacturing base precisely because the United States has been willing to export dollars and to run huge trade deficits with the country.

China continues to subsidize U.S. demand for its goods by buying and holding U.S. debt securities. If Russia succeeds in undermining the global economic system, China will be one of the greatest losers — and leaders in Beijing know it full well.

By maintaining a neutral stance, China actually stands to win much. If Russia responds tit for tat to Western sanctions, it risks total isolation. Markets for its oil and natural gas, which together account for more than two thirds of its exports and 20% of its GDP, may become restricted.

Similarly, Russia may find it hard to continue importing some $500 billion in goods and services annually.

Uncle Joe and Chairman Mao

China already has contracts with Russia that allow it to buy Eastern Siberian oil at highly favorable prices. It could take even more of Russian oil and natural gas off its hands — if the price is right. And Chinese companies will be only too glad to replace European and American exporters in the Russian market.

There is thus a prospect that the two nations will grow close once more. This may reawaken fond memories in the Russian people’s soul of the late 1940s, when Chinese communists came to power and Stalin and Mao were close friends.

The Russian tyrant acted the older brother to his younger Chinese counterpart, who was happy to learn at his feet. Mao seemed genuinely fond of Stalin.

While Russians dream of getting closer to China once more, there is a brutal difference this time around. Now, it is very much China that is be the richer older brother in this relationship. There cannot be a clearer signal of how Russia has let down itself collectively than that it must now stomach such a dramatic reversal of fortunes at the table of global power.

The former understudy has been a top dog, and Russia is a supplicant once again, only this time to an Eastern power.