Russia & China Draft Pact To Undermine Dollar

Flag of the People's Republic of China. Image by 古水.

According to the South China Morning Post, the paper-of-record in Hong Kong, Russia and China have drafted an economic pact designed to undermine the strength of the United States Dollar in international trade.

The move is being made in direct response to the economic sanctions being threatened by the United States.  

There have been suggestions of such a trade deal for months.  It was discussed as a theoretical construct in the Chinese news agency Xinhua in July; the notion was discussed – and dismissed – in Forbes in August; and Business Insider gave a warning in the beginning of this month.

Arguing against the notion was precedent.  There have been threats for decades of other nations attempting to bypass the United States Dollar as a trade currency, both from adversarial nations and by friendly ones.   None have come to fruition. 

The Russian Prime Minister spoke on the matter during his visit to China in November, which was what flagged Business Insider:

Medvedev made clear the payment system initiative was an attempt to move away from the current dollar-dominated financial system.

“No one currency should dominate the market, because this makes all of us dependent on the economic situation in the country that issues this reserve currency, even when we are talking about a strong economy such as the United States,” Medvedev said.

“I want to say something that may raise a few eyebrows, but I think some of these [US] sanctions are good or useful because they forced us to do what we should have done 10 years ago,” he said.

South China Morning Post

The Dollar is buoyed dramatically by its use as the world’s primary reserve currency.  It, like the Euro, is seen as a stable benchmark against which to measure other currencies and in so being it is a primary trade agent.  This allows the United States to exert economic pressure on other countries by threatening to exclude them from trade agreements.

When two countries are attempting to engage in trade, but they have to use American currency to do so, it gives America a voice in the transaction.  By using a direct currency transaction, like China and Russia are arranging, it undercuts the power of the United States dollar, and simultaneously it lowers any need for that country to keep large amounts of dollars on hand in their reserves.

This has a threefold effect; it shifts some power to the Russian and Chinese stock markets away from the United States; it gives both of those countries a threat to trigger massive inflation of the United States Dollar by releasing some of their reserves; and it gives them a means by which to ignore any economic sanctions imposed by the US or other national and international bodies.

The proposed deal would allow China and Russia to use direct currency payment of the Yuan and the Rouble for both national and international trade; it would also tie their credit systems.  This would immediately extend sanction protection to not just those two countries but any country to which they were willing to extend credit… such as Crimea.

What has historically kept such deals from occurring have been the combination of the stability of the United States currency and the massive footprint that the American consumers and producers have on the world stage.  By triggering trade wars on multiple fronts simultaneously while China has been attempting to press its image as a free-market economy, the second protection has been diminished, if not entirely stripped away.  If this deal is concluded, and it currently seems to be on track for a successful completion, it will be at best a threat and at worst a devastating attack upon our stock markets, our currency and our overall economy.

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About AlienMotives 1897 Articles
Ex-Navy Reactor Operator turned bookseller. Father of an amazing girl and husband to an amazing wife. Tired of willful political blindness, but never tired of politics. Hopeful for the future.