Date: 6/28/2022
Author: Mr. X
Whether by choice or out of desperation, what American officials call the “rules-based international order” has been put at risk. Russia is not responsible. American officials desperate to stop Moscow are.
Russia has just defaulted on its foreign debt for the first time since the Bolshevik Revolution. The grace period ran out for about $100 million worth of interest payments. It’s a strange default – Moscow has the capability to pay. Indeed, it wants to pay. However, the West has essentially cut it out of the world financial system and won’t let it pay in rubles. For this reason, Russian Finance Minister Anton Siluanov has called the situation a farce. Famously blunt Russian spokesman Dmitry Peskov simply said it’s “not our problem.”
One is reminded of the old joke. “If you owe a bank a million dollars, you have a problem. If you owe a bank a billion dollars, the bank has a problem.”
Of course, the Western financial system, based upon King Dollar, can continue to economically isolate Russia. As I noted just a few weeks ago, the dollar remains the world’s “safe haven” despite inflation. However, as I also said then, King Dollar’s “realm is a ruin.”
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A few years ago, then-President Donald Trump suggested Germany would become “totally dependent” on Russian energy. “The Germans just smirked,” chortled The Washington Post on September 25, 2018, clearly laughing along. No one is laughing now.
Germany’s BDI (Federation of German Industries) said a recession was practically inevitable after a halt in Russian gas deliveries. Indeed, all Europe has worse economic prospects than the United States because of the increase in energy prices. European states also face new expenses because of something else that President Trump warned them about. Western European countries, notably Germany, are having to step up their military expenditures.
While America faces challenges, the United States is not necessarily doomed to a recession. I think it will happen, but there are certainly more escape routes for Washington than they are for Brussels. Having the world’s reserve currency gives you certain options. Unfortunately, Washington also has more on the line. If the G-7 group of developed nations has shunned Russia, Washington needs to start worrying about BRICS.
The BRICS group consists of developing nations including Brazil, Russia, India, China, and South Africa. China just completed “hosting” its most recent summit. This group has posed a theoretical challenge to American power since at least 2009, when it called for a new global reserve currency. Russian president Vladimir Putin recently repeated the call for a new currency, saying the matter was “under review” and that Russia is “ready to openly work with all fair partners.” That might sound like wishful thinking from Russia, but some non-Western leaders are reportedly worried about the speed, effectiveness, and intensity of Washington’s sanctions against Russia.
We don’t need to speculate about China’s view. After the invasion, China’s supposed “no-limits” partnership with Russia found a hard stop very quickly. In March, the government said it wasn’t a party to the conflict and openly admitted it wanted to avoid sanctions. However, more quietly, it has implemented a long-term strategy designed to undermine American power. It’s only economic co-dependence that’s keeping the global economy limping along. More precisely, China hasn’t yet prepared itself for the economic cost that will be necessary for it to achieve its non-negotiable geopolitical objectives. It’s building both the political will and the economic self-sufficiency now. Its break from the American world order is simply a matter of time… unless America can crush all its economic rivals now.
One imagines Beijing’s frustration at Moscow’s invasion of Ukraine was greatly surpassed by its surprise at Russia’s inability to complete the conquest. Suddenly, one of the supposed pillars of its new alliance looked weak. Yet despite repeated Western predictions that Russia’s army is on the brink of collapse, the Russian army continues to move forward.
Ukraine says that it can win if it receives more Western weaponry and that might be true. What’s questionable is whether Western populations will continue supporting aid to Ukraine.
As yet, there’s little evidence Putin faces real domestic opposition. In contrast, the United Kingdom’s Boris Johnson and our own President Joe Biden have weak political positions. While the center-right Boris Johnson has been weakened by self-created scandals, center-left President Biden is suffering from issues not in his control, especially high gas prices. President Biden has already released barrels from the Strategic Petroleum Reserve and is calling for a gas tax holiday. While gas prices have been falling recently, they are dropping slowly. What’s dropping quickly is President Biden’s approval rating, now down for four weeks in a row.
Western leaders are gambling that they can maintain economic sanctions even as their own populations suffer blowback in the form of sticker shock. It remains possible that this will emerge as a geostrategic masterstroke and President Putin will be forced out of office. It’s also possible that you can ignore investing because you correctly assumed you’d win the lottery. Just because it’s possible doesn’t mean it’s likely and wishful thinking is no substitute for a strategy.
Politicians are being remarkably caviler about a war that is always going to matter more to Moscow than most capitals outside Eastern Europe. Western economic unity could break. Worse, other regions of the world might simply start ignoring Washington.
This is something that President Putin is openly encouraging, as Russia aligns with Washington’s enemies and even woos onetime allies like India with the promise of cheap energy. The obvious institution for a bloc that would oppose the West is BRICS. Washington needs to worry if BRICS starts growing and working more closely together.
The former is already happening. Iran has applied to join BRICS. If Iran is accepted, it would be a deliberate insult to the United States. Iran appears to be taking measures to expand its nuclear program. This is all happening against the background of what will probably be another election in Israel – the fifth in less than four years. If Benjamin Netanyahu returns to power, he has said he would be willing to counter Iran even without American support. Of course, any such act would also push many non-aligned nations into Iran’s camp while splitting the Western alliance.
Argentina’s request for entry into BRICS may be even more surprising. Russian Foreign Ministry Spokeswoman Maria Zakharova said on her Telegram channel: “While the White House was thinking what to disconnect, ban, or spoil in the world, Argentina and Iran have applied for joining [sic] BRICS.” At the summit itself, Argentinian president Alberto Fernández had said his country “aspire[d] to become full members of this group of nations that already represents 42 percent of the world’s population and 24 percent of the global gross domestic product.”
Washington is clearly feeling some pressure internationally. Though President Biden failed to get Build Back Better through the Senate due to opposition from his own party, he’s committed $200 billion to international infrastructure programs. This isn’t charity – it’s a direct challenge to China’s “Belt and Road Initiative.” It’s part of a larger $600 billion effort by the G7.
One must ask – where is all of this money going to come from? Ultimately, it’s putting further demands on the dollar. Every political, military, and cultural tool that America has is being set against Russia. And unfortunately, the longer this goes on, the more open China will be about taking sides. Chinese President Xi Jinping recently told Vladimir Putin that Beijing backs Russia’s “sovereignty and security” interests – not an endorsement of the invasion, but a closer statement of overt support than what we saw in February.
Investors need to keep their eyes on three questions:
First, will BRICS formally expand?
South Africa joined BRIC (and made it BRICS) in 2010 – if Iran and Argentina join to create a far more unwieldy acronym, it will be a signal about the limits of American power.
Second, is BRICS actually moving forward with a basket currency or is this simply Russian braggadocio?
For now, we haven’t heard much from other countries about this being something concrete. If another country mentions it, that alone would be more serious than Iran joining BRICS.
Finally, will China resume exports to Russia at prewar levels?
A recent study indicated that China was the second-largest contributor to the decline in Russian imports after the war began. Only the EU hurt Russia more. China really was trying to stay out of the sanctions regime. However, as the Chinese economy struggles after COVID-19 inspired shutdowns and the government becomes more vocally supportive of Russia, the stage is set for a change. Hard figures that show China is returning to a full economic partnership without fear of American sanctions would be a geopolitical bombshell.
If that shift occurs, China has lost its fear of Washington – and sees that it’s time to make a move. Make no mistake, China is letting Russia take the hits, but it will exploit the opening Moscow has made. To see what the future world order will look like, watch BRICS. If it keeps growing, America is in trouble – and so is the status of the dollar long-term.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.
