Tuesday, 11 August 2015
The Birth of the Eurasian Dragon
By Victoria Kelly-Clark
Since the Global Financial Crisis (GFC) in 2008, America’s global leadership has been under fire. Many countries, including China and Russia, have expressed their belief that the prolonged global dominance of the United States through the International Monetary Fund (IMF) and the World Bank is not acceptable.
This has made the Unites States understandably nervous. For in the current foreign policy climate, America is far too entrenched in the Middle East to effectively deal with threats to its financial dominance. This has given China and Russia the opportunity they need to lay the groundwork for a new economic order where they can operate on equal terms with America.
Bretton Woods the Chinese Way?
This has previously been impossible thanks to the 1943 Bretton Woods agreement. Essentially this deal allowed the US dollar to be used as the global reserve currency from the end of World War II onwards. For the United States this has ensured longevity to its role as the global superpower because the world cannot do without its currency as long as nations wish to trade internationally. Challenging the American led system is a very difficult challenge; however, China appears to have found a way.
The Chinese, already frustrated with the failure of the international order to accommodate its rising wealth and economic needs, have reached out to its ‘frenemy’ Russia. Russia, hit with disciplinary economic sanctions after the 2014 involvement in the Ukrainian crisis and after the huge drop in the price of oil, has seen its economy faltering dramatically. Rapid loss of profits from its hydrocarbon trading programs, thanks to an increase in American oil supply, and the dramatic plunge of the rouble have caused the Russian economy to implode.
China, observing this in 2014, saw an opportunity to create a new international monetary system based around the Yuan via an economic bloc formed with the Russians..China decided to provide its ‘big brother’ with as much aid as Russia needs. China and Russia started to bypass the dollar in all hydrocarbon exchanges, developing their own system that traded in their own currencies. In doing this China took a step toward creating a new system for international exchanges. As argued by Russian President Putin at APEC, ‘Switching to settlements in domestic currencies can largely contribute to balancing the global economy by reducing the impact of the dollar on the world financial and energy markets.’
The success of this Eurasian hydrocarbon trading scheme has meant trade between the two countries has increased dramatically according to Lin Zhi, head of the Europe and Central Asia Department of the Chinese Ministry of Economic Development. According to RT.com, Mr. Lin argued that the use of the Yuan in trading settlements increased ninefold in 2014 from 2013 when it was at 2%.
The Rise of the Eurasian Dragon
Building on this successful economic integration, Russia and China have forged ahead developing their vision for a Eurasian Economic Union which will be linked by a single currency like the Euro. Furthering this union is the Chinese establishment of the Silk Road Belt Economic Initiative which will establish infrastructure to link China with Europe across Central Asia. Argued to be Central Asia’s version of the Marshall Plan, it appears that China is trying to create a Eurasian Dragon state that can rival Europe and America.
Backed by China’s New Development Bank with its BRICS partners Brazil, Russia, India and South Africa and its 100 billion dollar alternative to the World Bank, the Asian Infrastructure Investment Bank or AIIB, China has set a course for changing the international monetary community. With this financial clout, China and its closest partners, like those in an Eurasian Union, will become financially powerful entities on the back of the Yuan, thus turning Eurasia into a new global hegemon.
China is in an ideal position for this challenge as it is flush with the world’s largest reserve of foreign currencies and it must find a way to utilise it. However, China is clearly doing more than just angling for a bigger share of the global financial pie.
Take, for example, China’s recent expansionist moves in the South Pacific. Utilising every means possible China is expanding its maritime claims in the oil rich South China Sea. According to the Commander of the United States Pacific Fleet, Admiral Harry Harris, China is even going to the extent of dredging sand over reefs and then concreting over the newly formed land so it can build military structures on them to protect its interests in the region. At present it is estimated that they have create 4 kilometres of extra Chinese coastline. Arguing that China is “creating a great wall of sand with dredges and bulldozers” Admiral Harris highlighted how concerned the United States is over this recent behaviour.
America’s Predicament: To Ignore or To Engage?
The United States now faces the question of how to deal with this rapidly developing Chinese led power. Certainly the United States must maintain its presence in the Middle East as it continues to referee the latest Sunni-Shiite rivalry and hinder the rise of the Islamic State. However, it cannot afford to ignore the nascent Eurasian Dragon that is on its door step. As Gordon Chang recently argued in Global Affairs, “if this challenge is not checked the world will again be divided into spheres of influence and this will create the optimum environment for conflicts”.
Maintaining economic pressure on Russia will certainly go a long way to contain China’s development of a Eurasian Union. China, although currently cashed up, will not wish to hitch their wagon to a failing Russian economy that it needs to prop up. Likewise, engaging with China in the AIIB will enable the US to provide a guiding hand in its development.