Is Russia Being Driven Into the Arms of China?

Is Russia Being Driven Into the Arms of China? [12]

The “isolation of Russia” idea is one which has been receiving a lot of traction of late. Russia’s recent economic woes have sometimes been covered with barely contained glee despite the hardships that average Russians may have to endure if the rouble continues to collapse … not to mention the inevitable geopolitical backlash.

[13]Reuters image of the over 50% drop in the Rouble against the U.S. dollar

Russia has become isolated from its western neighbours on account of the putsch in Ukraine which led to the predominantly ethnically Russian Crimea seceding from Kiev through a democratic process.

European governments slavishly adhere to U.S. imposed sanctions. So from a western elite point of view, Russia is indeed isolated.

Whether antagonising Russia is damaging to Russia is a moot point. Certainly in Russia’s current straits the bankrupt west is in no position to help. European farmers are suffering from a loss of export markets while Europe is still dependent on Russian natural gas.

So how “isolated” is Russia in reality?

Firstly, it is worth pointing out the obvious fact that countries do not have “friends”, just “interests”. Representatives of countries may have good relationships but these are built on expediency – not friendship.

So while there may be a great deal of distrust between the major powers of Asia, these issues are being overlooked for now because it is expedient. Standards of living across the board have been rising in Asia for twenty years. It is in no country's interest to enter into conflict.

By contrast, the west – led by the U.S. – has seen a remarkable fall in living standards over the same period. The bubble, prior to the 2008 crash, was not a golden-age for families as increasingly both parents were forced to work to just afford a roof over their heads.

Premier Li Keqiang at Moscow’s Tomb of the Unknown Soldier during his Russian trip in October

The relationship between Russia and China has morphed with these changes. Russia supplies China with hi-tech military hardware. Russia has negotiated two major natural gas deals with China in the last year. China expects to double it’s gas usage by 2030. So from a Chinese point of view it is certainly expedient to keep Russia on its side.

China may soon come to Russia’s aid and provide liquidity according to the South China Morning Post:
“Russia could fall back on its 150 billion yuan (HK$189.8 billion) currency swap agreement with China if the rouble continues to plunge”.

If the swap deal is activated for this purpose, it would mark the first time China is called upon to use its currency to bail out another currency in crisis. The deal was signed by the two central banks in October, when Premier Li Keqiang visited Russia.

“Russia badly needs liquidity support and the swap line could be an ideal tool,” said Bank of Communications chief economist, Lian Ping.

The swap allows the central banks to directly buy yuan and rouble in the two currencies, rather than via the U.S .dollar.

This highlights the long-term error of the west – pushing Russia into China’s sphere of influence.

For the first time in fifty years a country may be bailed out using a currency other than the dollar.

This, possibly, paves the way for the Chinese yuan to assume the role of a global reserve currency.

Also, it is worth noting that a weak Russia is not in China’s military interest at this time of simmering geopolitical tensions.

In the event of problems in the international monetary system, sellers of tangible wealth will want payment in a currency with some intrinsic value.

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MARKET UPDATE
Today’s AM fix was USD 1,210.75, EUR 982.03 and GBP 773.64 per ounce.
Yesterday’s AM fix was USD 1,199.00, EUR 962.36 and GBP 763.16 per ounce.

Spot gold fell $7.40 or 0.62% to $1,188.90 per ounce yesterday and silver rose $0.03 or 0.19% to $15.77 per ounce.

Spot gold in London rose over 2% after the Federal Reserve stated yesterday that it would take a patient approach towards increasing interest rates. This led to rising stock and commodities markets and hurt the U.S. dollar.

Gold in Singapore [15] rose nearly 1% to $1,202.08 an ounce, and traded at $1,201.11 at 2:49 p.m. in Singapore, noted Bloomberg.

U.S. Fed chief, Janet Yellen, said the Fed was not likely to raise rates for “at least a couple of meetings”, this has market participants focused on April 2015.
In London, spot gold climbed 1.8% to $1,209.46 an ounce after 1040 GMT.

Comex U.S. February gold was up 1.3% at $1,209.90 an ounce. Spot silver gained 3.2% to $16.19 an ounce.

Spot platinum was up 2.2% at $1,212.60 an ounce, while spot palladium rose 1.8% to $789.63 an ounce.

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