Could China and Russia Collaborate Against Latest U.S. Financial Sanctions?
April 19 , 2021 (EIRNS)—Rampaging U.S. sanctions policy hits advanced and underdeveloped nations, “adversaries” and avowed allies, aiming to reduce living standards, lifespans, and national capabilities for economic progress. The latest financial sanctions against Russia—forget the pretext—is already pushing up Russia’s discount rate (likely from 4.5% to 5% this week) and the costs of credit throughout its economy. True, Russia has a federal budget surplus and not much international debt ($41 billion), and plans to issue only about $3.5 billion worth of new debt this year—which will be bought domestically. But it and all holders of its sovereign debt now must deal with the potential of a next step by the U.S. Treasury—perhaps in response to the condition of Alexey Navalny in prison—to extend the buying ban to existing Russian sovereign debt; i.e., to the secondary ruble bond market. Thus ruble bonds are already losing value, hurting the ruble and Russia’s ability (including its sovereign wealth funds) to raise capital.
But on Friday, April 16 Reuters reported that the People’s Bank of China (PBC) had given China’s state-owned commercial banks the authorization to buy $8.5-$10 billion worth of additional gold for their reserves, for delivery in April or early May. This is a very large purchase; these banks had been importing only about $600 million/month in gold over the past year or more, which was all they were given quotas to buy by the PBC.
If both China and Russia have large gold reserves (Russia already does), the imbalance is that Russia has large yuan reserves, while China has very small ruble reserves. But China can monetize some of this gold reserve, including by using it to issue credit to build ruble reserves. Thus it could not only become a healthy and helping market for Russia’s ruble debt; it could also issue new gold-reserve credit—along with Russia—into new credit facilities for development projects in other countries. This is a productive way of using China’s foreign exchange reserves which are growing again, to just over $3.2 trillion.
This doesn’t mean China can or wants to create a gold-backed yuan and “bring down the dollar” or “create a new yuan-based monetary system,” or similar claims. China’s dollar-denominated assets are $3.5 trillion; holdings of U.S. Treasuries; dollar loans to China’s commodity suppliers; Belt and Road Initiative project loans issued in dollars. People’s Bank of China Deputy Governor Li Bo, at Boao Forum April 18, reiterated, “Our goal is not to replace the U.S. dollar or other international currencies. I think our goal is to allow the market to choose, to facilitate international trade and investment.”
What the gold-reserve buildup does mean is that China can take, and may be taking now, a specific step to support and provide debt financing to Russia to the extent necessary to stabilize the euro and Russian interest rates; and, the two countries could, if they decide, use their gold reserves to go further in creating development project credit facilities.