President Vladimir Putin has made it official. Russia is now a Chinese colony.
“We are in favor of using the Chinese yuan for settlements between Russia and the countries of Asia, Africa and Latin America,” Putin said on 21 March 2021. To explain, Putin wants Russian companies to accept China’s currency, the Yuan, in payment.
Consequently, Chinese companies will pay far lower prices for Russian resources, such as oil and minerals, because the Yuan is cheaper than the US dollar or the Euro. For example, a US dollar was worth 6.87 Yuan on 24 March 2023. Plus, a Euro was worth 7.39 Yuan on the same day.
A Wonderful Deal for Chinese Entrepreneurs
Hence, Chinese buyers with Yuan could have 6.87 times the buying power in Russia of an American with dollars. Similarly, the Chinese could have 7.39 times the buying power of a person with Euros.
This creates a wonderful deal for Chinese buyers and a terrible situation for Russian sellers. To explain, a Chinese speculator can buy Russian oil, gold, or iron with yuan. Then sell those materials on the international markets for Euros or U.S. dollars.
For example, Russian companies are selling oil to Chinese customers at a discounted rate, Quartz reports. Hence, Chinese make more money while Russians get poorer.
Moreover, a Chinese company can buy cheap Russian raw materials with yuan. Then use those materials to build products and sell the items in Europe for Euro, or the USA for dollars.
Russians have to go along with this deal because US and European sanctions block Russian access to the international financial system. For example, major Russian banks have no access to SWIFT. SWIFT is the system banks use for cross-border transactions.
Similarly, His Majesty’s Government has frozen all Russian bank assets in the UK, and barred Russian firms from borrowing money in London, the BBC reports. There’s also a ban on Russian gold imports, and bans on luxury exports to Russia.
Is it Colonialism?
Thus, sanctions are forcing Russians to use the yuan. I think this gives the People’s Bank of China (PBOC), which issues the yuan, control of Russia’s economy. In particular, the PBOCcan force the Central Bank of Russia to keep its reserves in yuan.
Notably, the Russian Finance Ministry raised the maximum possible share of Yuan in the country’s National Wealth Fund (NWF) to 60%, Reuters reports. Moreover, the NWF has liquidated its pound sterling and yen balances. Instead, the NWF’s only assets will be gold and yuan. Thus, the PBOC can control the NWF by adjusting the Yuan’s price or Chinese interest rates.
Consequently, I think the only country the NWF can do business with is China. For instance, the only place where the NWF can sell bonds or make investments is in Shanghai.
I think this arrangement gives Chinese bankers and speculators vast power over Russia’s economy. For example, Chinese bankers can set interest rates the NWF will pay and the price of Russian bonds. The NWF and Central Bank of Russia will have to go along because they cannot borrow money anywhere else.
Yes, it is Colonialism
You can call this arrangement colonialism. To explain, in colonialism, the mother country controls the colony’s economy.
For example, the British government controlled India’s economy until independence in 1947. Such economic control is often more powerful than military conquest.
Historically, such economic domination often precedes military conquest. For example, the British East India Company gained control of India’s economy in the mid-18th century. Economic control allowed the East Company to finance an enormous mercenary army and conquer India in the late 18th century.
To maintain his war against Ukraine, Putin is giving the Chinese control of Russia’s economy. Disgustingly, Putin hides his economic betrayal of Russia with nationalist propaganda and blather about a “multi-polar world.”
In reality, Putin is making Russia’s economy totally dependent on China. Putin is fighting American domination by succumbing to Chinese domination.
Chinese Power Grows with Russian help
The benefits for China are obvious. In particular, Russia can help the Yuan become a major reserve currency.
Reserve currencies are the money financial institutions and corporations use for cross-border transactions. Currently, the US dollar is the world’s most popular reserve currency.
The International Monetary Fund estimates 59.79% of global reserves are in US dollars. This gives the United States vast economic power. In contrast, the yuan comprises just 2.76% of global reserves.
Anything that increases the amount of yuan reserves expands Chinese economic power. Thus, Chinese power is growing at Russian expense, which looks like classical colonial exploitation to me.
Is a Russia-China Conflict inevitable?
Things could get bad when Russians realize what Putin has done. In particular, Russian nationalists will be angry at the level of Chinese control over their economy. I predict Russian nationalists will turn on the Chinese at some point, leading to conflict.
That sounds dangerous because Russia had 5,977 nuclear weapons in September 2022, the Center for Arms Control and Non-Proliferation in September 2022. I can imagine a scenario in which desperate and broke Russian leaders try to use nuclear arms to force economic concessions from China.
We need to end the Ukraine War and work to wean Russia off the yuan. If we don’t end the exploitative relationship between Russia and China, catastrophe could result.