Thoughts: Soviet Demise, Chinese lessons, Oil-Yuan contract and Bannon
孙子曰：国之上下，死生之地，存亡之道，不可不察也
A country’s rise and fall, the place of it’s birth and death, the laws of its survival and demise, is a subject of inquiry which cannot be neglected.
When studying the collapse of the Soviet Union, the usual discussions will revolve around Gorbachev’s policies of glasnost and perestroika, the inherent failings of a heavily bureacratic Marxist-Leninst political/economic system and, occasionly, Soviet imperial overextension. Western commentators often focus on these topics when discussing what lessons the PRC might have gleamed from this monumental event.
But they leave out what i feel is a more pertinent question: ‘How did the United States win?’ and ‘How can we replicate it against the United States?’
I postulate that the Cold War was effectively fought on 3 fronts: political ideology, military and financial/economic. The USSR was fully aware of the first 2 fronts but the nature of Marxist-Leninst outlook prevented them from realizing the importance of the economic front.
Having an open economy with control of the world’s reserve currency (through Bretton Woods and later the Petrodollar) , and by extension the financial system, since the end of WW2 allowed the United States to accumulate debt which it then spent on buying influence abroad or on its military. The capitalist market system also allowed US allies in Asia and Europe to develop their economies through export led growth and become nett contributors to the Cold War effort.
Conversely, behind the Iron Curtain the Soviet Union and the Eastern bloc command economies possessed none of these advantages. Soviet satellites in the Warsaw Pact were dependent on subsidies and even had to be kept in line with brute force. Soviet client states never developed vibrant prosperous innovative economies which could aid the Soviet Cold War effort. Despite its vast natural resources, the Soviet Union, straitjacketed by its Marxist-Leninst system, burdened by costly to maintain vassals and an expensive war in Afghanistan could not keep up with the US economically.
Failure to keep pace economically ultimately translates to defeat in the military arms race and the geopolitical struggle for hegemony. The technological gap that was beginning to widen and Soviet doctrinal inferiority was clearly demonstrated during Israel’s Operation Mole Cricket 19 against Syrian air defenses in the Beqaa Valley during the 1982 Lebanon War. Digital systems were beginning to revolutionize how wars would be fought and the Soviets unable to match US military R&D expenditures were stuck in the analog age.
When the Soviet Union finally collapsed, it didn’t matter how many divisions it had in Europe or how many ships/nuclear submarines Admiral Gorshkov’s ocean going navy possessed, it was bankrupt and the Politburo had lost its legitamacy. Reforms like glasnost and perestroika unleashed the simmering anger and resentment of the people which ultimately led to the fall of the Berlin Wall and the demise of the Soviet Union.
兵者，诡道也。故能而示之不能，用而示之不用，近而示之远，远而示之近；利而诱之，乱而取之，实而备之，强而避之，怒而挠之，卑而骄之，佚而劳之，亲而离之。攻其无备，出其不意。
The above lines written by Chinese military strategist Sun Tzu in his Art Of War 孙子兵法 translates as ‘All warfare is based on deception. Hence, when able to attack seem unable; when active we must appear inactive; when near appear far; when far away appear near. If the enemy is greedy tempt him, if he is confused attack, if he is secure, be prepared for him. If he is superior evade him. If he is temperamental irritate him. Pretend to be weak, that he may grow arrogant. If he is taking his ease, give him no rest. If his forces are united, separate them. Attack him where he is unprepared, appear where you are not expected.’
In hindsight, it seems China has followed this advice to the letter in the decades following the end of the Cold War. With the demise of the Soviet Union, the United States was the sole superpower concievably even a hyperpower. China, on the other hand, was a technologically and economically inferior minnow. Political power and military power rests on the bedrock of economic strength and technological innovation. The Soviet Union blinded by Marxist-Leninst ideology failed to fully grasp this but China did, and it ended confrontation on the political and military fronts to build up its strength by concentrating on economic development.
From the forceful crackdown on the Tiananmen Square protests of 1989, commonly known in China as the June Fourth Incident to Deng Xiaoping’s 黑 猫 白 猫，能 捉 到 老 鼠 就 是 好 猫 reforms which led to China’s rapid economic development to the formation of BRICS/SCO/AIIB to the OBOR/BRI initiatives to the upcoming oil-yuan-gold convertible contracts, every major move or reaction seems to reflect lessons learned from this long term struggle between the United States and the Soviet Union.
The first two are rather self explanatory for those familiar with the history. Chinese economic development lagged far behind Asian neighbours like South Korea, Japan and Taiwan. In order to maintain the legitimacy of CCP rule, reforms were introduced to spur economic growth. A good primer on the issue can be found in this writeup on Deng’s 1978 visit to Singapore. The Tiananmen crackdown was necessary to prevent pro-democracy forces, unleashed by the reforms and spurred on by similar movements in Eastern Europe, from overwhelming CCP control.
Having developed its economy, China’s next step is to supplant the US position as hegemon. When former White House strategist Steve Bannon said ‘ We’re not at economic war with China, China is at economic war with us’, he articulated a view I have held since 2009. By gutting America’s industrial base and appropriating American technology ‘through forced technology transfer and through stealing our technology, … cutting out the beating heart of American innovation’, the Chinese have undermined the bedrock of American power.
As Bannon said, “One of us is going to be a hegemon in 25 or 30 years and it’s gonna be them if we go down this path. The economic war with China is everything. And we have to be maniacally focused on that. If we continue to lose it, we’re five years away, I think, ten years at the most, of hitting an inflection point from which we’ll never be able to recover.” Unlike Bannon, I believe that the US is already pass that inflection point.
The formation of BRICS and the SCO shows that China understands the need for allies that can actively contribute and aid in its geopolitical agenda. The United States did not win the Cold War on its own but with the help of its European NATO allies and Asia-Pacific mutual defense treaty allies. While hopefully their economic development will allow them to become contributors in the future, so called Chinese allies like Myanmar, Laos, Cambodia and North Korea are recipients and beneficiaries more akin to client states. Conversely, states like Russia (key strategic partner), India and Iran are regional powers in their own right with much to contribute in a cooperative partnership.
OBOR/BRI while billed as a connectivity project, the new Silk Road of the 21st century is also a manifestation of Chinese economic warfare. Like the post WW2 Marshall Plan and the reconstructions of Japan/South Korea, the Chinese hope development of markets and infrastructure in places like Central and Southeast Asia, the Indian subcontinent, Africa and the Middle East will be a boon for its economy and grow its political influence.
The biggest and most understated advantage the United States had in its struggle with the Soviet Union was control of the world’s dominant reserve currency which created an artificial demand for dollars thus allowing the US government to borrow at lower costs. A good primer on the topic can be found here.
Today, Russia and China are fully aware of this and have been making plans to subvert the dollar’s position as dominant reserve currency. This view was clearly expressed by Putin at the recent BRICS Summit in Xiamen when he said ‘ We are ready to work together with our partners to promote international financial regulation reforms and to overcome the excessive domination of the limited number of reserve currencies.’
China has been quietly accumulating gold and inking bilateral swap deals to settle trade in RMB instead of dollars. Similarly, Russia has also been accumulating gold and following US sanctions, moved to create an alternative to the SWIFT transfer system. Instituitions such as the AIIB and BRICS bank are all part of the new financial architecture devised by China to replace the current dollar based system.
More importantly, China is expected shortly to launch a crude oil futures contract priced in yuan and convertible into gold. Yuan-denominated gold futures have been traded on the Shanghai Gold Exchange since April 2016. It is a mechanism which is likely to appeal to oil producers that prefer to avoid using dollars, and are not ready to accept that being paid in yuan for oil sales to China.
China and Russia and other members of the SCO are already trading hydrocarbons without using US dollars, but in their local currencies or gold.An oil futures contract in yuan and gold is about the equivalent of an ‘oil bourse’ — or a hydrocarbon exchange in yuan and gold — where every oil producer or trader can deal in hydrocarbons in non-dollar denominated contracts.
By pricing oil in Yuan, China directly threatens the hegemony of the US Dollar as it reduces the global demand for dollars to settle trade. Given the large deficits and already enormous debt ($20 trillion and counting), any significant fall in demand for dollars will have potentially catastrophic consequences.
“It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable.” — Thucydides, History of the Peloponnesian War
Graham Allison, director of Harvard Kennedy School’s Belfer Center for Science and International Affairs, coined the term Thucydides Trap in reference to the tectonic structural stress caused when a rising power threatens to displace a ruling one specifically refering to current US-China relations. His book Destined For War examines 16 similar cases since the 15th century, and all but four ended in war. Though he does not say that war between China and the United States is inevitable, he thinks it “more likely than not”.
However, I believe China is not looking for military confrontation. If I am right and China has indeed learned the right lessons, the war is already being fought everyday in the economic sphere. China will not seek to usrup the United States position through devastating violent military conflict but instead attempt to undermine its economic pillars and cause it to collapse under the weight of its own imperial hubris.
Because as Sun Tzu said ‘不战而屈人之兵，善之善者也’ supreme excellence consists in breaking the enemy’s resistance without fighting.
