So far, the Russia-Ukraine war and the West’s response have been evaluated as a gift to China.

The successive sanctions that the West and the United States have targeted against Russia have isolated the country’s financial system from the EU. Russia needs a solution for the financial sector. This is creating a special opportunity to help China improve the position of the yuan in global trade. In other words, this war has given the CCP and Moscow a golden opportunity to realize what they have wanted for years.

Opportunity for China

Sanctioning Russia is not as simple as punishing Iran or North Korea. Russia is a major producer and exporter of crude oil, gas, wheat, diamonds, and other minerals.

With sanctions on Russia, the global commodity market is currently fragmented. For example, non-Russian oil has skyrocketed in price while Russian oil has fewer selling options and can be purchased at significantly cheaper prices.

Global sanctions have frozen most of Russia’s foreign exchange reserves. In other words, Moscow no longer has access to its foreign currency reserves. This raises an important question for China and other countries with few ties to the U.S. and Europe: If they come into conflict with the West, will their accounts also be frozen? And given this risk, should they diversify some of their reserves away from the dollar? Should they shake hands with China and reserve the yuan?

China has promoted the use of the yuan in international trade with little success, even after years of pursuing the Belt and Road Initiative. The EU and the U.S. imposing sanctions on Russian oil, for a neutral third country, the commodity market is broken and they are forced to switch to buying oil at a discount from China rather than pay a high price for oil that is not from Russia. This scenario could be the beginning of a new global order and is everything China has aspired to when creating its digital yuan.

Financial magazine Barron‘s recently pointed out that the ongoing Russia-Ukraine war is “one of the few times that investors have fled riskier assets for the yuan.”

Opportunity for Russia to challenge US petrodollar system

On March 28, President Vladimir Putin supposedly issued an “ultimatum” to “unfriendly countries” to switch to gas payments to Russian rubles by March 31. This tough reaction shows that Russia is completely serious about excluding the dollar from oil sales contracts. Does this mean the gradual death of the petrodollar system?

Today, the world consumes nearly 100 million barrels of oil per day, and so whoever controls the oil supply controls the global economy.

From 1944 to 1971, the dollar was measured in terms of the gold standard. After the collapse of the Bretton Woods system in 1971, the United States signed an agreement with Saudi Arabia in June 1974. The United States provided technical and military aid to the country in exchange for Saudi Arabia only accepting dollars as currency in crude oil trading. After Saudi Arabia, in turn, Arab countries in the Middle East used dollars to pay for oil and gas contracts.

Simply put, before you would use dollars to exchange for gold, now you can almost only use dollars to buy oil. Thus, oil resources – the largest and most important raw material market in the world have been paid for entirely in dollars.

It is the petrodollar system that has raised the dollar to the status of the world’s reserve currency and is one of the many factors that has helped the U.S. become the No. 1 economic power. The petrodollar system also gives U.S. financial markets liquidity and foreign capital flows through petrodollar rotation.

In fact, the power to print money does not belong to the U.S. government but to the Private Central Bank and the U.S. Federal Reserve (Fed). This organization is ironically a private organization owned by many organizations, individuals, and not under the U.S. government’s control.

To manage the large and global money printing scheme, in 1973 the U.S. and Western Europe established the Society for Worldwide Interbank Financial Telecommunication (SWIFT) – a messaging system connecting all banks worldwide and transfers billions of dollars every day.

The U.S. government itself must borrow money from the Fed in the form of government bonds. As long as there is a certain amount of collateral, the Fed will have the right to print money and lend it to both the government and the American people, but what is the collateral? Again, it’s government bonds.

With Putin asking “unfriendly” countries to Russia to pay for gas in rubles, it is likely to create a direct confrontation between Russia and the most powerful oligarch: the Fed.

Some observers said that this is a risky and dangerous challenge for Russia, because history has witnessed that every time a country dares to challenge the position of the dollar, it has to accept the not-so-good outcome. So what did Russia do? One of Russia’s most important moves was to shake hands with China.

Russia shakes hands with China

Twenty days before Russia fired missiles to start the invasion of Ukraine, Putin was solemnly received by Xi Jinping in Beijing. The result of this meeting was a $117.5 billion oil and gas deal that Russia sold to China.

The key point in the Sino-Russian Joint Declaration is that oil and gas sales contracts are settled in yuan and rubles. This is clearly in response to the order to expel Russian banks from SWIFT, and help Russia “evade” Western sanctions.

Of course, both Russia and China have a “contemplation” plan that can provide an alternative to SWIFT: It is China’s Cross-Border Interbank Payment System (CIPS), with about 80 member financial institutions by the end of 2021.

In fact, what could be better for China when the Russian economy is completely isolated by the West? All natural gas instead of flowing to the West (Europe) will flow to the East – where China is starving for energy. Many minerals in Siberia that needed Western capital and technology will now be reserved for China.

In addition, the Biden administration’s revocation of the license for the Keystone XL pipeline has devastated the U.S. fossil fuel industry, transforming the U.S. from the largest exporter to become the largest importer. This decision also makes European allies and U.S. partners more dependent on Russian energy, and helps Russia’s economy – which is dependent on oil exports.

In addition, the Biden administration issued a ban on Russian oil imports into the U.S., which pushed up world gas prices. The danger is, Europe is about to enter a cold winter, the United States is struggling with inflation, all of which make all U.S. and allied sanctions at this time no longer effective against Russia.

On May 25, 2021, in a phone call with Yang Jiechi, a member of the Political Bureau of the Central Committee of the Communist Party, Putin said Russia is committed to promoting the development of a comprehensive strategic cooperative partnership with China at a high level. He added that relations between the two countries are at the “best period in history”.

According to Jefferies Group global strategist Sean Darby, Russia appears to have been preparing to price the ruble against the yuan since last year in an attempt to de-dollarize.

And it’s not just Russia, Saudi Arabia – whose relationship with the U.S. has cooled in recent years – is said to be considering accepting the yuan instead of the dollar to buy oil from China.

Zoltan Pozsar, Credit Suisse’s interest rate strategist, takes this a step further. In a note to clients in early March titled “Bretton Woods III,” Pozsar suggested that this is the beginning of a new global monetary order established by Asian currencies.

War and Western sanctions against Russia will cause China to buy and hoard goods, thereby strengthening the yuan and destabilizing the dollar, while exacerbating the inflation crisis in the West. In essence, it will seriously damage the U.S. and European economies.

A new world order, with Russia and China at the center, seems to have been formed.

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