We’re doing something new, trialling an experiment with audio newsletters read by Microsoft Azure Al. Click here to listen to Swamp Notes and please do share your feedback by completing a short survey, or dropping us a line at [email protected]. Thank you.Continuing on with the topic of my most recent Swamp Notes, I want to explore the impact the war in Ukraine might have on deglobalisation and economic decoupling between the west and Russia/China.As I argue in my column today, there’s a strong case to be made that this is a real pivot point for the global financial system. Sanctions against Russia, although completely necessary, will make that country more dependent on China, which will look to settle more and more energy transactions in renminbi. Witness in the past few days gas deals between the two countries and a lifting of a Chinese export ban on Russian wheat. Commodity hoarding and economic nationalism is just getting started.All of this is part of a long-term strategy by China to reduce its dependency on the dollar; both Russia and China have been increasing gold reserves in recent years as part of this effort. We won’t move to a post-dollar world anytime soon (the dollar is 60 per cent of global reserves), but I wouldn’t be surprised to see the renminbi play a much bigger role in the global financial system within, say, the next decade. I also expect China to speed up its selling of US Treasury bills in 2022, which is going to raise a very tricky issue for the Federal Reserve, which is starting its own programme of quantitative tightening (more on that in a future note).In the US, one immediate question is whether war in Ukraine makes America double down on more economic self-sufficiency (or protectionism, depending on your point of view), or whether inflationary pressures actually push businesses (to the extent that they still can) to source more from China and other countries where supplies are still cheap.As I noted a few months back, the Covid-related fears of personal protective equipment shortages didn’t stop various US states from going right back to buying cheap Chinese masks as soon as they were available. As you might remember, China hoarded them at the start of the coronavirus outbreak for obvious reasons. Businesses worried about keeping margins up in the wake of already spiralling inflation may be inclined to try and source as cheaply as they can, wherever they can. Certainly, they are lobbying to keep the loopholes that allow them to do so.But, as I argued in a column last week, that may no longer be politically possible. Countries worried about conflict are likely to try and build as much self-sufficiency as possible, looking to bolster national or regional supply chains and to find new sources for raw materials. Witness Germany pulling the plug on Nord Stream 2 (it’s about time) and European politicians starting to talk about speeding up the transition to clean energy in order to reduce dependence on Russia once and for all. See also the semiconductor chip wars that are at the heart of the new Great Power conflict between the US and China, with Europe somewhere in between as per usual.In the short term, though, nobody can go it alone. In an ideal world, US energy could fill the gap for Europe, but Americans are already exporting about as much as they can to the continent (indeed, the lack of additional US shale energy for export is a cudgel that Republicans are now using to try and undermine Joe Biden’s investment in green energy). I’m expecting energy prices to rise and for US shale oil to become very important once again.Meanwhile, Russia and China are drawing closer to Iran.To me, this would be an ideal time for the US and Europe to come together and war game a new energy security strategy to buffer European vulnerabilities in the short term, and a longer-term agreement about how to approach climate change (how wonderful would it be if the two regions together took the lead on cutting-edge clean technology such as green batteries, rather than ceding that territory to China). I also think that they need a strategy not only for de-dollarisation but de-euroisation, as Russian energy no longer flows to the continent.I may be desperately hoping for upside here, but perhaps Russia’s actions have the potential to strengthen transatlantic ties and turn what seemed to be a tripolar world with the US, Europe and China heading in different directions, into a more bipolar one. That would probably be a more stable world. Gideon would you agree? And, to put the question you asked me last week back to you, what am I getting wrong about the European world view?Recommended readingAll of the FT Ukraine coverage has been fantastic, but you should make sure to pay special attention to our up-to-date blog, and also the deep history of Russia and Ukraine in this Weekend piece.Moving on to a different global conflict zone, I thought Jon Lee Anderson did a lovely job in The New Yorker with this on the ground look at how the Taliban are — surprise, surprise — finding it’s not so easy to govern Afghanistan.I was fascinated by this PBS documentary, Augmented, which chronicled the efforts of Hugh Herr, a former rock climber.Gideon Rachman responds With the Ukrainians fighting back and Putin waving his nukes around, it’s hard to concentrate on the economics.But you raise some crucial and fascinating issues. I think one of the Russian calculations from the beginning has been that China would “backfill” for them on sanctions — and that the special relationship between Putin and Xi would mean that Russia could never be isolated, and the economic damage could be managed. I think the Chinese would like to help. But they will be thinking very carefully about the risk of American and EU secondary sanctions. What if a Chinese bank tries to do business with one of the Russian financial institutions that the west has targeted — such as Sberbank or VTB. Might they find themselves targeted by American financial sanctions and cut off from the dollar market? Chinese financial institutions have been wary of running that risk — even when their own nation’s interests are in play. My favourite anecdote on this topic is that Carrie Lam, Hong Kong’s chief executive officer, cannot find a bank that will deal with her — even in Hong Kong — and has to be paid in cash because she has been targeted by US sanctions.The same goes for semiconductors. Will Chinese suppliers fill the gap left by the west in the Russian market? Very tempting — unless it means you get cut off from US tech and markets, as a result.Finally, you ask about European attitudes. I think there has been a total mood shift in the past couple of days. Look at the shifts by the German government on military aid to Ukraine, on a Swift ban for Russia and on the Nord Stream 2 pipeline. These are policies that Germany has opposed for many months, if not years. But they have been pushed through in days. I think Europeans suddenly feel that peace on their continent and their freedom is at stake, and they are now ready for some economic hardship in order to hit back at Russia. The transatlantic alliance has also been revived, and I give credit to the Biden administration for their patience in working with the Europeans. I shudder to think what would have happened if Trump had been in power.Edward Luce is on book leave and will return in mid-March.Your feedbackAnd now a word from our Swampians . . . In response to ‘Biden, Trump and the “who lost Ukraine” debate’:“If the US and Europe would have had more foresight when the Berlin Wall fell and Gorbachev was open to democracy. We should have pumped money in there to reboot their economy, Russia would have been a democracy by now. We left them in the cold then, missed our chance and are harvesting the results now.” — Pieter Walraven, Unawatuna, Sri LankaIn response to ‘It’s the geopolitics, stupid’:“Is it really important for the US to concentrate on the proliferation of democracy in the world rather than simply becoming a good citizen of the world and minding its own business? . . . If you look at the continental European constitutions of labour rights, you will notice that in our factories and offices the workers are much more invited and empowered to raise their voices than even in the US.” — Hartmut Oertel, Freiburg, Germany More
