By Greg Smith
In 1972 President Richard Nixon taught the world the power of political strategy, greatly increasing U.S. leverage on the Soviet Union by opening relations with its bitter rival the Peoples Republic of China. Vladimir Putin recently tried a similar maneuver against the West, instantly proving he is no Richard Nixon.
Putin’s gambit, brokering a long-term $400 billion natural gas deal between Russia and China, was taken after Western nations placed sanctions on Russia in response to the latter’s invasion of Ukraine. Europe has grown dependent on Russian gas, and Russia on European money. Putin wants NATO capitals to shiver at the thought of its source of heat going east instead of west. In the future this example of Russia’s use of energy to gain influence will likely be looked upon as a poorly timed snub of a dull but reliable customer in favor of a Lamborghini-driving, Rolex-wearing, faux Gucci-clad garment mogul who lives with his mother, steals cable and is two months in arrears to his manicurist.
European leaders cannot help but now realize they can either dance to the Kremlin’s tune, freeze in winter or diversify their energy supply. Considering the burgeoning world gas trade, the latter will become easier as time wears on. Since Russia’s economy is nearly as dependent on energy exports as a Persian Gulf monarchy, Russia driving customers to find other suppliers is possibly the most short-term thinking seen outside Washington, DC in decades.
Were China to become a reliable long-term customer the net effect on the Russian economy would be negated. That is a Siberian sized ‘if.’
The dominant opinion that China’s economy will continue to expand as it has for over three decades is flawed. For the past five years China’s expansion of GDP has relied on massive use of borrowed money, which is being called China’s debt crisis or credit bubble, similar to that which brought on the Great Recession in the West.
The problem for Beijing is less that is has a credit bubble on its hands and more that its economy can no longer, without massive state stimulus, expand at nearly the double-digit numbers that has given it the moxie to swagger around the Pacific as the supposed next hyperpower. China’s debt-to-GDP ratio has grown from 130% in 2008 to over 250%. A healthy economy doesn’t require borrowing at a rate that is as rapid as it is massive. According to The Times of India, six years ago in China a borrowed dollar created nearly a dollar in economic growth. It now takes four borrowed dollars to create a dollar of growth, an unsustainable level even given China’s currency reserves.
History shows that no economy that allows credit to flow at such a rate escapes unscathed. Brazil, so recently a darling of the emerging markets, faced its credit bubble in 2013 and is now in recession. China’s credit increase has been much larger both in real and percentage terms.
Add in China’s rapidly aging population brought on by the One Child Policy and Beijing’s economic future is dim. The emerging market slowdown may act like the waves that swamped the Edmund Fitzgerald in 1975, dragging China’s highly leveraged economy into a decades-long funk. Putin has now voluntarily made this his problem, too.
If geopolitical push comes to shove, with ease the U.S. could choke the life out of China’s export-driven economy. Chinese demand for Russian gas would plummet, putting a huge dent in the Kremlin’s ability to compete with the West economically or militarily. While such a conflict is unlikely, natural economic forces are going to do slowly what the U.S. military could do quickly.
In 1972 China and the Soviet Union were bitter ideological foes that had fought a brief border war. Nixon’s rapprochement with communist China opened a new Cold War front, forcing Russia to adopt a more cooperative tone toward both the U.S. and China. In contrast Russia’s gas deal with China will alienate Europe, freeing the next U.S. president to lead NATO aggressively against Russia. China, not known for respecting its obligations to fellow nations, knows any dependency on Russian oil will come at a steep price when, inevitably, there is another Sino-Russo tussle. Beijing is the likeliest candidate to run up huge debts to Russia and hold off paying them as leverage.
Vladimir Putin just went long on a Chinese economic expansion living on borrowed time and money. Russian economic, political and military well being now relies on the success or failure of a sovereign version of Pets.com. ©
Greg Smith is a freelance writer and political consultant who lives in Bantam, CT. His blog is found at www.betterfatthanfascist.com.