China and Russia Press Ahead, Together

The G20 summit in China marked a possible tectonic shift in global economic power, with China’s President Xi pushing for a new model based on physical connectivity, like “One Belt, One Road,” writes ex-British diplomat Alastair Crooke.

By Alastair Crooke

This time the G20 was different. Intentionally so. The Chinese had prepared it and planned it to be so. Yet, as always, with the G20 meetings, there was little that is tangible to show for it all. No big solutions. No “in the margins” progress on Syria, Ukraine, Yemen or on a supposed ploy to manage the oil market. Just the usual, pre-cooked, bland communiqué about the need for growth.

Mostly, participants rehearsed their familiar stances (this was so for the Syria and Ukraine discussions: Germany’s Chancellor Angela Merkel and French President Francois Hollande had a case of cold feet about talking to Russia’s Vladimir Putin without Ukraine’s Petro Poroshenko being present – as had originally been scheduled).

So, how was this G20 different? Well, if one listens carefully, one might just detect the footsteps of change – of a new “order” readying itself to step onto the stage (at the apposite moment).  The sound of these footsteps was intentionally “softened” – designed to allow for a peaceful rise of a new global leadership. The watchword here was “change without upheaval.”

What was different was that it was distinctly China’s G20. China did not simply host the G20 for America to sweep in, give its “leadership” and stamp to proceedings, and then to fly off. China, at this G20, made it very plain that it was leading, and to make it clearer still, it made sure that the world should see that the guest of honor was the Russian President, and not the American President (who regrettably experienced some technical difficulties that marred his ceremonial arrival). There was a deeper purpose here: to underline strategic co-ordination with Russia in the context of the display of Chinese leadership.

Lest this careful G20 choreography pass unnoticed in the West, President Xi had telegraphed the essence of his G20 message when he addressed the Chinese Communist Party on the anniversary of its founding, a month or so earlier.

On that anniversary, President Xi told the party that: “The world is on the brink of radical changes. We see how the E.U. is gradually crumbling, and the U.S. economy is collapsing. This will end in a new world order.”

‘Critical Juncture’

Xi said it again at the G20, when he told heads of state that the world was at a “critical juncture” owing to sluggish demand, volatile financial markets and feeble trade and investment levels. He warned against the current trend towards protectionism, and said that the threat derived from highly leveraged markets is grave.

He also did two further things: he suggested that globalization be defined more in a physical way, rather than in a Western financialized way. And he also proposed that the rules of trade should not be the prerogative of the U.S. alone, but agreed by the G20 Trade Ministers jointly (a task which they began by trying to agree nine key principles).

Additionally, Xi successfully pressed for the G20 to set out the necessary reforms for international financial institutions — in essence pressing for a more just distribution of power and status in international financial organizations.

In short, as conventional monetary measures (such as “quantitative easing” or QE) and unconventional measures such bond purchases by Central Banks have proved so ineffective in stimulating growth (as noted explicitly by China’s deputy Finance Minister), and since growth drivers from previous rounds of technical progress have faded too, then China’s recipe of creating physical connectivity through the OBOR (One Belt, One Road) initiative would seem to be the more promising way to re-ignite global growth, Xi proposed.

This, together with new trade rules, and reform of the financial order (currently aligned to American and E.U. interests), might make “change without upheaval” possible — i.e. this was the best prospect for change without financial collapse and economic shock (China and Russia hope). Left unsaid is the corollary that without such policy realignments, both states foresee the inevitability of a further “shock,” similar to that of 2008.

Just to be clear – although softly said, both China and Russia are deprecating to the point of dire warnings of imminent crisis, the West’s mismanagement of the financial system, and of its over-reliance on further debt-driven financialized responses.

China is looking to physical investment, innovation and connectivity (maritime, rail, pipeline and electronic) to become the future drivers of growth, rather than more NIRP (negative interest rate policy), QE and bond purchasing. The West may not wholly disagree with Xi’s adverse diagnosis, but the latter has painted itself into a corner from which there is no obvious exit that does not risk triggering the very crisis that the West is seeking to kick further along the road. It sees “no alternative” (called “TINA” for “there is no alternative”).

And to be clear again, China is aligning the G20 against the American-claimed prerogative to set the rules of trade (through the TIPP and the TPP), and the ‘rules’ of the financial “system.” It seems that the G20 went along with both these Chinese proposals — Western “leadership” was an eroded asset at this G20.

Not Deferring to America

President Xi, therefore, has presented himself as a global leader who intends to take a lead, at least in economic matters, and not simply defer to the “indispensable nation” to hold the floor to itself.

Dmitry Kosyrev, a political analyst specializing on the Far East at the Russian news agency RIA Novosti, commenting on the summit in Hangzhou, wrote: “The whole idea of the peaceful rise of China is that this rise is not directed against any other country,” and this is reflected in the language: no fireworks, no harsh accusations.

But the soft language notwithstanding, “Xi’s G20” nonetheless amounts to a seismic shift in terms of Chinese policy (even if there is no “bang”): It represents the end for Deng Xiaoping’s maxim for China: that it should never take the lead, never reveal its true potential, and never overreach its potential. One could argue that Xi has just broken the maxim, on all three counts. China is taking a lead, reveling in its potential, and reaching ambitiously, with OBOR – One Belt, One Road.

So, what is one to make of this? The first point is that it is unlikely that the West is open to any such economic advice, and it is unlikely in any case, that it could extricate itself from its monetary policy “corner” – even if it wanted so to do. The West is more intent on preserving the status quo, rather than in changing it.

Secondly, China itself faces the complications of decades of debt and easy-money driven growth, plus the urgent (and difficult) need to transition away from its old manufacturing base. China’s own internal economic frailties may yet come to channel attention away from Xi’s macro-reform perspective; or, worse, China may yet find itself at the eye of the next financial crisis.

Thirdly, OBOR faces quite some resistance from states who fear being cast in China’s economic shadow. This may slow the unfolding of the OBOR project. Finally, America will never willingly yield its hold over the financial system – at least this side of a new global financial crisis.

But does this mean that “Xi’s G20” was of little consequence for the West? No, Chinese officials likely understand their own constraints very well. They probably recognize too that the OBOR might be a touch utopian. In short, the comments from Xi about the Western economy – a view also shared in senior quarters in Moscow, incidentally – suggest that both see some further economic or credit “shock” as inexorable.

President Xi very courteously and politely simply has pointed out that the West is wearing no clothes (its monetary tools are broken drums), and that a new order will arise as a consequence. Its standard was struck at Hangzhou, and it seems that much of the G20 are gathering to its banner.

What may emerge in more concrete terms – it is too early to say – is the second strand to President Xi’s global vision. In his address to the Chinese Communist Party, Xi said that relations of Russia and China should not be confined solely to economic relations, but rather, these two states should create an alternative military alliance: “we are now witnessing the aggressive actions by the United States against Russia and China. I believe that Russia and China may form an alliance before which NATO will be powerless,” Xi said.

Military Partnership

In effect, Xi offered Russia a military partnership with China, and predicted that Russia and China together might be the leading lights of the new global order. Countering Western coercion through its multi-dimensional tools of today’s hybrid warfare, in short, might be requisite to bringing the “new global order” into being — this seemed to be the thrust of Xi’s message.

It is to Russia, however, that one must look to for a preliminary outline of thinking for the post-financialized world. On July 25, President Putin, as William Engdahl has highlighted: “mandated that an economic group called the Stolypin Club prepare their proposals to spur a growth revival, to be presented to the government by the Fourth Quarter of this year. In doing so, Putin has rejected two influential liberal or neo-liberal economic factions [that associated with Alexei Kudrin, the former Finance Minister, and the Central Bank of Russia’s monetarist governor, Elvira Nabiullina], which had brought Russia into a politically and economically dangerous recession.”

The Stolypin Club was created by a group of Russian national economists in 2012 (named after Pyotr Arkadyevich Stolypin, Czar Nicholas II’s reformist PM) to draft comprehensive alternative strategies to lessen Russia’s dependence on the dollar world and to boost growth of the real economy. Engdahl writes:

“The Stolypin Group in many ways harkens back to the genius behind the German ‘economic miracle’ after 1871 … Friederich List, the developer of the basic model of national economic development … List’s national economy historical-based approach was in direct counter-position to the then-dominant British Adam Smith free trade school.

“List’s views were increasingly integrated into the German Reich economic strategy beginning under the Zollverein or German Customs Union in 1834, that unified one German internal domestic market. It created the basis by the 1870’s for the most colossal emergence of Germany as an economic rival, exceeding Great Britain in every area by 1914.”

A broad indication of this thinking centers around building on Russia’s traditional economic strengths – even if this requires a certain amount of initial tariff protection for those industries and government-directed low-cost loans. Sergei Glazyev’s (a prominent member of the Stolypin Club) 2015 plan, presented to the Russian Security Council, proposed to use Central Bank resources to provide targeted lending for businesses and industries by providing them with low subsidized interest rates, between 1-4 percent.

‘On-shoring’ Industries

The program also suggested that the state support private business through the creation of “reciprocal obligations” for the purchase of products and services at agreed-upon prices. In short, it emphasized greater economic autonomy, aimed at lessening Russia’s vulnerability to external economic shock, or to geo-financial warfare. It is, in a word, all about “on-shoring” of industry and assets.

It is also about moving toward a sovereign monetary policy. As Engdahl has writen, Glazyev proposed that the Ruble build up its strength as an alternative to the dollar system by buying gold as currency backing. He proposed that the Central Bank be mandated to buy all gold production of Russian mines at a given price, in order to increase the ruble gold backing. (Russia today is the world’s second largest gold producer.)

Earlier, this May, President Putin, speaking at the Economic Council Presidium, said as guidance to the Council: “The current dynamic shows us that the reserves and resources that served as driving forces for our economy at the start of the 2000’s no longer produce the effects they used to. I have said in the past, and want to stress this point again now, economic growth does not get underway again all on its own. If we do not find new growth sources, we will see GDP growth of around zero, and then our possibilities in the social sector, national defense and security, and in other areas, will be considerably lower than what is needed for us to really develop the country and make progress.”

It is not hard to perceive the deep convergence between Putin’s mandate to the Economic Council, and the message from President Xi to the G20. What is particularly interesting, is that Putin seems to be leaning toward a national economic model – despite all the understandable Russian shying away from anything smacking of a return to Soviet Gosplan central planning.

But the key phrase surely is: “I have said in the past, and want to stress this point again now, economic growth does not get underway again all on its own.”

Xi is saying the same. This is the direction in which the new wind is blowing: a different economics, global de-financialization coupled with (real economy) trading inter-connectivity.

Alastair Crooke is a former British diplomat who was a senior figure in British intelligence and in European Union diplomacy. He is the founder and director of the Conflicts Forum, which advocates for engagement between political Islam and the West, where this article originally appeared, http://www.conflictsforum.org/2016/xis-g20-and-a-world-on-the-brink-of-radical-change/.