Bipolar Vortex

March 31, 2023

At the outset of the Ukraine war, it appeared to me that the one party that stood to benefit most was China. In fact, I suspected that Beijing might well have encouraged Russian president Vladimir Putin to invade Ukraine, with the Chinese expecting to benefit from an inevitable conflict between Europe and the United States on one side and Russia on the other. China would get more Russian oil, and at a lower price because Western sanctions would greatly reduce Russia’s bargaining power.

Regardless of whether that was Beijing’s plan, China is certainly benefiting from the West’s moralistic and simultaneously ham-fisted and halfhearted response to the Russia-Ukraine war. In distinct contrast with what our governments and media told us to expect, the world has not aligned in universal opposition to Russia, harsh words notwithstanding.

On the contrary, a bipolar world is emerging, with largely resource-consuming nations on one side and resource-producing places on the other. The United States, Europe, Japan, and a few other countries are the consumers, and the BRICS nations—Brazil, Russia, India, China, and South Africa—are leading the coalescence of producer nations into a global power alliance. Financial analyst John Rubino reports on his Substack page:

Whether due to the pandemic’s supply chain disruptions, heavy-handed sanctions imposed by US-led NATO during the Russia-Ukraine war, or just the fact that de-dollarization was an idea whose time had finally come, the BRICS alliance has suddenly become the hottest ticket in town. In just the past year, Argentina, Indonesia, Saudi Arabia, Iran, Mexico, Turkey, the United Arab Emirates (UAE), and Egypt have either applied to join or expressed an interest in doing so. And new bilateral trade deals that bypass the dollar are being discussed all over the place.

Combine the land mass, population, and natural resources of the BRICS countries with those of the potential new members and the result is more or less half the world.

Saudi Arabia has just announced that it will join an economic, political, and security bloc led by China and Russia, and other Middle East nations are likely to follow, ZeroHedge reports:

Saudi Arabia will join the Shanghai Cooperation Organization with the initial status of a "dialogue partner." Formed in 2001, the SCO's full members are China, Russia, India, Pakistan, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan.

Iran is expected to become a full member later this year, while other dialogue partners include two more countries that have traditionally been in the U.S. sphere of influence: Qatar and Egypt.

China is emerging as the undisputed leader of this developing alliance. Beijing has been working with Saudi Arabia, Iran, and Syria to iron out differences between them, which may encourage them to supply China with more oil—leaving less for Europe. That will have the additional benefit, in Beijing’s view, of further eroding Europe’s economy and geopolitical power. If Europe cannot get oil from the BRICs, there are not many alternatives other than windmills and nuclear. With much of the continent moving away from nuclear power, Europe is voluntarily turning back its technological clock to the eighteenth century. That is certainly not a path to geopolitical power.

India, meanwhile, is buying more oil from Russia, which has become the subcontinent’s largest source of oil imports, according to Rubino. The Biden administration has declared itself powerless to do anything about it, asking only that India not use Western tankers or insurance companies in obtaining Russian oil. Those are some powerful sanctions. India will pay with rupees, reducing the use of the dollar as an international reserve currency.

In addition to all that, Brazil and Argentina are creating a common currency for trade between the two nations, another case of “de-dollarization.” Even more significantly, Brazil and China will now bypass the dollar in their transactions. ZeroHedge reports:

According to the Brazilian government, China and Brazil have reached a deal to trade in their own currencies, ditching the United States dollar as an intermediary entirely, AFP reported.

The deal, Beijing’s latest salvo against the almighty greenback, will enable China, the top rival to US economic hegemony, and Brazil, the biggest economy in Latin America, to conduct their massive trade which amounts to $150 billion per year, and financial transactions directly, exchanging yuan for reais and vice versa instead of going through the US dollar. In doing so China extends its bilateral, USD-exempting currency arrangements beyond countries such as Russia, Pakistan and Saudi Arabia to now include the Latin American exporting powerhouse. …

China is Brazil’s biggest trading partner, with a record US$150.5 billion (S$200 billion) in bilateral trade last year.

The decline in the use of the U.S. dollar as the world’s primary reserve currency—money that countries all around the world use to make international transactions and investments—will greatly reduce the demand for dollars and erode U.S. power. It will have several knock-on effects in the United States, Rubino notes:

·        If the BRICS have the commodities and the US and its allies are left with finance, pricing power for crucial things like oil and gold will shift to Russia, China, and the Middle East.

·        Falling demand for dollar-denominated bonds as reserve assets will send trillions of dollars now outside the US back home, raising domestic prices (which is to say lowering the dollar’s purchasing power and exchange rate).

·        The loss of its weaponized reserve currency will lessen the US’ ability to impose its will on the rest of the world (witness China as Middle-East peacemaker and India buying Russian oil with rupees).

These outcomes, especially the first two, will create financial instability and enormous pressure for price inflation in the United States. If we manage to avoid a nuclear war in Ukraine, it appears that the United States will nonetheless suffer severe and lasting economic damage from our decision to drive Russia into the arms of the Chinese and encourage the BRICs to expand into a global power led by Beijing.