Wednesday, November 24, 2010
Russia And China Quit The Dollar
The Russians and Chinese have agreed to stop pegging their bi-lateral trade in dollars and use their own currencies.
The yuan has now started trading against the Russian ruble in the Chinese interbank market, while the renminbi will soon be allowed to trade against the ruble in Russia, according to a statement made by Vladimir Putin after a meeting with Chinese Premier Wen Jiabao.
This is arrangement between China, the world's chief manufacturing economy and Russia, whose economy is based on selling natural resources (particularly energy) has some interesting implications.
In spite of all the commotion in the West and the handshakes and expressions of good will between Russia and China, there's actually only a few points of common ground here.
Russia, with a declining population and a state controlled economy cannot provide the two things China really needs, an alternative market to America for its cheaply produced consumer goods and investment of its capital. On the other hand, China is unlikely to want to pay the prices Russia is demanding for its fossil fuel energy.And unlike the EU, they are not locked in to dealing with the Russians because of issues of pipeline control.
Things Russia has to offer that China definitely wants include military and nuclear technology, and in fact the Russians have already made a deal with the Chinese to build two nuclear reactors for China's Tianwan nuclear power plant. But given the centuries-old antagonism between the two countries and their long border,it remains to be seen what the Russians are actually willing to supply to China.
The chief impact, of course, is psychological. Countries that delineate their commodities trade in dollars, like the members of OPEC have in effect been importing US inflation into their own economies for years. Two major economic powers abandoning the dollar for their bi-lateral trade could give other countries similar ideas..especially oil and gas producers.
Meanwhile, the US continues to deliberately let our own vast gas, oil and coal resources go unused and fallow instead of using them to achieve energy independence and create wealth and prosperity.