SPECIAL: Three Possible Outcomes for Russia
China’s continued economic IV drip should keep Russia alive just enough to keep everyone in line.
We would not be surprised if China “rescues” things. Then upon that event, demand a bigger slice of the IMF SDRs, add commodities to the basket, and advance its agenda of moving the pricing mechanisms of global trade to the East in GoldenYuan terms.
Last week we wrote about Zoltan Pozsar’s collateral analysis and how it could facilitate a hand-off Dollar-to-Yuan as reserve currency in a Crisis of Commodities. Today we write about how the Russian-Ukraine war factors into that calculus from China’s perspective and decision analysis.
China can and will keep the Russian economy on life support via goods trade. So begins a truthful report by Christopher Granville for TS Lombard describing the increasing influence of China on the outcome of the Russo-Ukraine war raging right now.
The upside of that truth? Russia is less likely to commit (more) desperate acts to survive Western sanctions. The less obvious downside of it? China becomes the king-maker in a conflict between Europe and Russia as preventer of those desperate acts.
China Decides Who Wins the War
At first glance, China’s stated neutral stance may not seem a very powerful position. Politically this is largely correct. Not lending overt weapon-support or mediating on Russia’s behalf hardly seem like power plays on China’s part, right? But economically the picture is much smarter for them to remain neutral. As the report states:
China’s do-nothing approach could prove important in keeping the Russian economy on life support.
And this is the brilliance of China’s strategic neutrality. Their keeping the Russian economy barely alive serves as a backstop preventing escalation into global conflict. The West knows this and must deal with it. Without China’s demand, the West’s sanctions are a declaration of World War on Russia.
Conversely, Russia knows that without Chinese demand; Their economy is screwed. Putin would risk civil war. He would then either escalate hostilities or capitulate to Western sanctions.
Three Possible Outcomes for Russia
Who benefits? China does, of course. The longer this goes on, the more they bleed Russia and gouge the west1. For China, slow play is rewarding play.
Paths for Russia…
Taken together, China’s thumb-on-the-scale global “neutrality” increases the likelihood of a chronic economically depressive process (stagflation); even as chances of an acute, escalating war subside. Russia and Europe wear each other out while China gets stronger.
Russia and US Both Lose, China Wins
From Russia China gets to buy oil at a severe discount to global prices, as low as $30 under global indexes. They can buy up Russian debt for pennies on the Yuan. They can, for all intents and purposes, bail-in Russia as a (very ornery) vassal state.