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The Bear and Dragon Chronicles - Western Myopia

Carnegie publishes a textbook case of getting the whole thing wrong. Out come the bear's (and dragon's) claws, shredding it piece by piece...

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This post first appeared on Russia Insider

The attentive reader will have noted an odd transformation in the Western narrative regarding Russia-China relations - the Bear and Dragon story which the current author has been arguing for over the past 15 years:

Six months ago, the Western media were in unison, laughing off the suggestion that the Bear and Dragon could find an entente – much less a true alliance. The two countries were divided by a difficult history, unbridgeable cultural differences, and divergent economic geostrategic interests. 

The gas deal had been postponed ad nauseum for a decade; China, we were told, had failed to support Russia in Crimea, and would never sacrifice its vital relationship with the West to defend renegade Russia. Indeed, no two countries could be more different than Russia and China (n.b. there ARE clearly two countries more different than Russia and China: America and Japan - which has not prevented them from entering into an “alliance” which has seen Japanese foreign policy become totally subservient), glossing over the imperative Chinese need for a safe and peaceful Northern border, as well as a reliable source of resources/energy not susceptible to American naval blockade.

What a difference six months makes!

With new deals now announced almost daily – not just in the energy/resources sector but also in finance, technology and agriculture, and China again Russia’s largest source of investment capital, the previous discourse has become simply untenable. China and Russia are stepping up cooperation at the UN, the SCO,  while creating new alternatives to the World Bank and IMF, and overtly supporting each other’s domestic and foreign policies – obvious to anyone bothering to read the original sources (e.g. China Daily) rather than the Western renditions of Beijing’s positions.  

Something had to be done to rescue the imperilled narrative! A new discourse has thus been trotted out to explain away the egregious own-goal scored by Western diplomacy; after some initial hesitation, the new Party Line is that yes, Russia and China are drawing closer together, but it will be Russia who pays a terrible price by being subsumed into an unequal alliance as a junior partner. 

Needless to say, these same commentators would never imagine that Russia could (or should) be treated as an equal by Washington – but that is different – American domination is considered to be a healthy thing for Russia (tacit the terrible Yeltsin years).  

The most hysterical commentators note that a teeming China abuts upon an empty Siberia (demonstrating a comical ignorance of geography - Chinese population is heavily concentrated in the East/South East, with North-Western China almost as sparsely populated as is Siberia) which they would soon overrun.  For reasons best known to the authors (or those who pay their salaries) when Europe imports Russian gas, Europe becomes dangerously dependent upon Russia – but when Russia sells its gas instead to China, then it is Russia who becomes dependent…

Chin - chin ...

Rhetoric aside, much work still needs to go into building a durable relationship, and Russia will benefit only if the current reorientation is accompanied by major and much-needed reform – corporate governance, capital markets, and de-offshorisation/anticorruption. Success is by no means assured, however Russia minds have been focused on the simple reality – that their integration with the West is a one-way street, leaving them dangerously exposed to the threat of economic blackmail for political gain.

We are of the Realist camp - both China and Russia seek to further their own interests – not to bring gifts, however from the Russian standpoint, there is a vital difference between China and the US:  unlike Washington, China shows benign indifference to the domestic affairs of its partners, and would never dream of  soliciting their advice regarding its own. Thus, no “colour revolutions” – no “democracy support” – no sponsorship of coups in Russia’s neighbourhood. 

Chinese diplomacy’s motive forces are commercial – not ideological. This is as it should be, indeed, those who truly believe in the current liberal orthodoxy that good business relations based upon enlightened self-interest are conducive to international peace and prosperity can only applaud the Chinese approach.

Declining at least in relative terms, the West is undergoing a difficult transformation, and is faced with myriad dangers - in particular, a danger arising from its systematically triumphalist discourse – a form of wishful thinking that has taken the place of rational analysis and objective debate. As an example, we dissect a recent paper by Carnegie – characteristic of what currently passes for learned analysis of the Eurasian relations.

For Russia, Asia Is No Substitute for the West, by Akio Kawato. (Former Japanese diplomat and blogger)   October 16, 2014

"Facing Western sanctions, some Russian pundits are rushing to find an easy way out through increased cooperation with Asia. But their expectations are built on an illusion.

Firstly, neither China nor Japan possesses the technology needed for exploitation of non-conventional oil and natural gas. Japan has a monopoly on gas liquefaction technology, but that is another matter, because, if new sources of natural gas are not developed, liquefaction plants will be of no use. China may be able to provide huge advance payments for oil and gas from Siberia, but Russia will not be able to find any other suppliers of long-term credit in Asia."

The assertion that China and Russia – which can launch manned rockets into space and build the world’s most extensive high speed rail system cannot master the relatively simply and now widespread technology behind non-conventional oil and gas is laughable.  There are tens of thousands of trained engineers from numerous countries, and the technology has been widely applied in Russia. The notion that someone could not simply copy the machinery suggests a large dose of wishful thinking.

"Secondly, Siberia and the Russian Far East are too economically feeble to become a dynamic member of the East Asian economy. Industrial products made in European Russia face high transportation costs en route to Asia, and the natural resource wealth to the east of the Urals needs money and time to be further developed."

Transportation costs, though high, form a negligible component of the cost of industrial products – unlike Russian raw materials, which despite higher transportation costs - are moving en masse toward Asian markets. The New Silk Road promoted by China will certainly ease whatever bottlenecks still exist. Indeed, the relative weakness of Siberia and the Russian Far East are precisely the reason they need to become more integrated with Asia.

"Tensions with the United States have led Russia to look inwards and eastwards, imperiling its own position in the global economy."

Russia is looking Eastwards – not inwards. Not coincidentally, the world’s largest and by far its most dynamic economy (with 5x the GDP growth of the US – not to mention recessionary Europe) happens to be located on Russia’s Eastern border.

"Contrary to Russian conventional wisdom, the United States does not always “impose its terms” on other countries; many countries benefit politically, economically, and militarily from their relations with Washington."

Some have – many have not. Anyone travelling around America’s backyard – Mexico and Central America, will be struck by the misery and chaos – which has sent hundreds of thousands of unaccompanied children – many as young as 9, fleeing across the border to America – from whence they are now being deported. The supine diplomacy of Japan and some of the European countries having the most to lose from to a break with Russia demonstrates the degree of dominance of Washington.

"The U.S. dollar remains the international reserve currency because it is the most reliable, universal, and convenient currency for business."

The US dollar remains the global reserve currency as a hangover of the post WWII economic order when the US alone accounted for slightly more than 50% of global GDP, as well as the fact that all commodities are still priced in dollars. As a first step, the de-dollarization of trade between the BRICs means that the US dollar will increasingly be used as an accountancy unit, without actual dollars changing hands.  As the US share of global production drops towards 20%, and it is overshadowed by China as the world’s largest trading nation and the source of virtually all global economic growth, the financial mechanisms will inevitably evolve towards a multi-currency system.

"The global free market that arose after World War II has given countries like Japan the opportunity to achieve rapid growth. Negotiations over the TPP (Transpacific Partnership) and the TTIP (Transatlantic Trade and Investment Partnership) are stalled for now, but not because Japan and Europe have chosen to stand up to U.S. pressure; Japan, for example, is simply unsure whether the agreements will be ratified by the U.S. Congress without amendments. Otherwise, the industrially developed countries see serious advantages to promote free trade."

The TPP and TTIP have been described by Hillary Clinton as “an economic NATO” – they are nothing more than an attempt to castle out of check – which is not allowed by the rules of chess.

China is the new global source of capital and of markets – witness the frantic diplomatic efforts of Europe in the direction of Beijing. Any attempt to freeze out the Dragon will obviously be stillborn.

"The ruble and the renminbi are used in international transactions, but only on a limited scale as mere accounting units in bilateral payments. In this way, they remind us of the “transferable ruble” used by the socialist “COMECON” countries during the Cold War; the currency existed on paper but did not contribute to an expansion of trade."

Obvious nonsense. While the ruble is not likely to become a major basis for international settlements,  the RMB is on its way to becoming a global trading currency rivaling the dollar, while the aggressive policies of the US have accelerated the perceived need of the emerging markets – which now account for 60% of global GDP – to escape from the dollar cage.

"Some Russian pundits lay vain hope on the “increasingly independent” policies of Germany and Japan in relation to the United States. However, this independence has its own limits. Neither country intends to discard its cozy “dependence” on U.S. military might."

Probably true – with disastrous demographics (and, at least in the case of Japan) unsustainable fiscal numbers, together they account for a relatively modest and declining fraction of global GDP. They will clearly remain part of the American bloc…perhaps to their ultimate chagrin. What is in play is the rest of the world – especially the emerging markets.

"Therefore, nothing can replace the West for Russia."

Nothing more than a statement of personal preferences.

"The best way out for Russia is to go back to the basics: Moscow must reconcile with the West by finding a modus vivendi in Ukraine. Former Ukrainian President Viktor Yanukovych played the West and Russia against one another to gain financial assistance, but was overthrown by the unexpected rise of the rightist elements of the opposition."

The Yanukovich government was overthrown in a coup d’etat largely organized by Washington and which has now gone horribly wrong. To expect fundamental reform by a government of oligarchs backed by a militant and heavily-armed fascist faction, is obvious nonsense. Much like the recent US adventures in Iraq, Afghanistan, Libya and  Syria – it will be the local people who will be left to pay a crushing price.

"The “middle way” would have been and continues to be the most pragmatic way forward: to promote gradual reforms in both Russia and Ukraine without attempts to forcibly change the political framework of either country."

Numerous countries – not least the United States, but also Europe, Russia and Ukraine – are badly in need of reform. Russia has not attempted to sponsor coloured revolutions in Berlin or Washington, and the clumsy attempts of the Americans to do so here have been an egregious failure – witness Mr Putin’s latest poll result: 86% favourable (note that there is only one country where he polls higher than in Russia: the People’s Republic of China, with 92%)

"The devaluation of the ruble has inflated Russian state revenues, creating a false sense of confidence that Russia can outlast the storm of western sanctions. But such a course will mean a desperate race with growing inflation."

Again, wishful thinking. Inflation has ticked up by about one-half percent. It is troublesome, and will require further hikes in domestic interest rates contributing to a decrease in already-anemic growth (like the remainder of the former G8 which is growing no more) – counterbalancing this, the fall of the rouble will continue to strongly stimulate domestic import substitution (and tourism) while starving the Southern European countries which have become more dependent upon Russia markets and tourists.

"It is time for Russia to come to terms with reality and stop dreaming about a Shangri-La in Asia."

It is indeed time to stop dreaming – it is time to make it a reality!

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