Ian Welsh

This has been a theme, but let’s keep nailing it shut.

My favorite recent news was this beauty:

Russia would struggle to sustain its assault on Ukraine without China’s support, Blinken said. “If China does not address this problem, we will,” he added, in a possible reference to sanctions against Chinese businesses involved in the trade with Russia.

China wants Russia to win, or at least not lose the war and needs Russia as a secure ally so that it can’t be encircled or blockaded. Russia has the food, minerals and fuel that China needs, and naval power can’t embargo supplies.

As for the effect of sanctions, well, what’s the line? “Don’t threaten me with a good time?” The effect of sanctions on China has been to make China stronger in almost every way.

Back in 2015 Xi decided on a ten year plan “made in China 2025.” The US hated it and sanctioned large chunks.

The results?

the analysis confirms that more than 86 per cent of these goals have been achieved, with some others likely to be completed later this year or next. Meanwhile some of the targets, such as electric vehicles (EV) and renewable energy production, have been well surpassed.

We all know that the Huawei and anti-chip sanctions have backfired completely. China now owns the legacy chip market and is making rapid progress in advanced chips. It created its own OS, bypassing Google, and has put out phones as advanced as those made by US and South Korean companies. The iPhone market share in China, one of its most important markets, is cratering.

Chinese EVs are crushing: they cost far less than Western ones (though when sold in Europe, they are marked up hundreds of percent) and the car market in China is now dominated by Chinese vehicles, where in 2015 foreign autos were preferred.

As for Blinken’s threats, the Chinese ignored them, and the US did, indeed, sanction.

Boo hoo.

Meanwhile, China has been selling Treasuries at a record clip.

China has decreased its Treasuries holdings from $849 billion to $775 billion between the beginning of Q2 2023 and Q2 2024, reaching its lowest holdings since 2009.

Can you say “reduction of exposure?” Sure you can.

At the same time, a number of African countries have removed their gold stockpiles from America. It seems that stealing Russia’s reserves for geopolitical reasons has consequences.

The largest economies in Africa and the Middle East are withdrawing their gold reserves from the United States.

Starting in 2024, Egypt, South Africa, Nigeria, Ghana, Cameroon, Senegal, Algeria and Saudi Arabia have decided to withdraw their gold reserves from the United States.

It should be noted that South Africa, Egypt and Nigeria are the largest economies in Africa.

Huh.

Let’s circle back to the “sanction China for trading with Russia” imbroglio. Russian foreign minister Lavrov had something to say about that:

“Russian-Chinese trade and economic cooperation are actively developing, despite the persistent attempts of the states of the collective West to put a spoke in the wheels,” Lavrov said. “There has been an almost complete de-dollarization of bilateral economic relations. Today, more than 90% of mutual payments have been transferred to national currency,” he added.

“Interaction in the energy sector is steadily advancing. The supply of our agricultural products to the Chinese market is growing. Joint projects are being implemented in the investment and industrial areas. The mutual benefit from such cooperation is clearly felt on both sides of the Russian-Chinese border,” Lavrov concluded.

Are sanctions working outside of China/Russia? Not in the near region. Lavrov again:

Despite the threats that our partners have received from the US and the European Union not to cooperate with the Russian Federation and the Republic of Belarus under pain of so-called secondary sanctions and other penalties, trade flows across the CIS are growing. [Trade] edged up by more than six percent last year, amounting to over $100 billion.”

Now let’s talk more generally. Every sanction is an imposition of geopolitical risk. Everyone in the world understand this: cross the US or Europe, in any way, and they will sanction you. If you use the US/European financial system, these sanctions can hurt. The way out is to move away from that system—to create another one, where transfers never touch the US or Europe.

So every sanction increase the incentives to create that system and move to it. Parts are already created, more will be and in the end there will be two major financial networks: one Western, one for the rest of the world. The effect on Western prosperity will be significant, though there will be advantages to Westerners not in the elite, as it will crush rent extraction by financial elites. (Though no doubt they’ll simple double down on domestic rent extraction.)

We are living thru the end of the Euro-American era. The end of centuries of dominance. It’s fascinating, but the consequences will be vast. Understand that it’s happening.

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