It’s still early days, but at least Vladimir Putin has made his move. As expected, the President “liberated” the Russian-speaking regions of Ukraine (anyone remember the Sudetenland?). As Russia moved troops into Ukrainian territory challenging Ukraine’s right to be a nation, Western countries announced financial sanctions. The idea must be that these sanctions against individuals and financial institutions will somehow cripple Russia.
World War II ended with nuclear bombs dropped on Hiroshima and Nagasaki. Access and parity, if not superiority, in nuclear and thermonuclear armaments became the game during the years 1945-90. It ended with no nuclear missile launches and a general feeling that the West had won the Cold War.
Today, Western hegemony is more fragile than the United States thinks. It will not be a war with nuclear weapons so much as with digital currencies.
The reasons for the defeat and demise of the Soviet Union are many, but the most relevant dimension was economic. As the Soviet Union stole a lead over the United States in space travel when it launched Sputnik, the United States quickly deployed economic resources to overtake the Soviet Union in this area. President Ronald Reagan’s threat to launch “Star Wars” type missile technology defeated the Soviet Union. President Mikhail Gorbachev knew that the Soviet Union lacked the economic depth and strength to fight.
This time, at least for now, the West seems confident that it can bring Russia to its knees not by firing missiles but by imposing financial sanctions. Is this a credible strategy and, if so, why? How did the financial weight become a weapon?
The history of this armament is older than that of nuclear power or space missions. At the end of the 15th century, Christopher Columbus discovered America and allowed Spain to plunder the gold and silver mines of South America. A century of inflation followed between the mid-16th and mid-17th centuries. Then came the banks responsible for issuing “sound” money. The Dutch were the first with the Bank of Amsterdam. England and France followed. It took the French Revolution and the Anglo-French Wars ending at Waterloo to give England financial hegemony.
The gold standard, the Bank of England and the pound sterling allow the English to fix the price of gold at 3 pounds, 17 shillings and 9 pence per ounce. This award lasted until 1914. During World War I, Pax Britannica came to an end. The United States assumed hegemony during the interwar period. In 1933, President Franklin Delano Roosevelt unilaterally set the price of an ounce of gold at 35 dollars, which is double what it was under English hegemony. Dollar hegemony began with a 100% devaluation.
The hegemony of finance remains in the United States. Its currency and its financial and banking apparatus (Swift, for example) give the United States and its allies the power to unleash financial sanctions. The dollar is king. While English hegemony issued a pound sterling without inflation for 300 years (1790-1825 except due to the Anglo-French wars), the United States again massively devalued the dollar in 1971.
American hegemony unlike the British was characterized by massive inflation more or less from 1939 until the late 1980s. Inflation fell into single digits as Asian and especially Chinese manufacturers flooded Western markets . (The credit was taken by the Federal Reserve and the monetarists, but that’s what hegemony gets you.)
The American hegemony of the financial apparatus is total. The United States controls the International Monetary Fund. He can grab Afghanistan’s foreign exchange reserves and cause a famine to punish the Taliban for humiliating the United States. Will he now succeed in strangling Putin?
It is here that Putin’s visit to meet Chinese President Xi Jinping in Beijing becomes a significant indicator. It has been interpreted as a possible two-front war, with China seizing Taiwan while Russia seizing Ukraine. If this is attempted, it will be World War III, no less. The United States has forged alliances against a likely conflict with China since Joe Biden came to power. The Quad – USA, Japan, Australia and India – is one arm and Aukus – Australia, UK, USA – is another.
The Chinese have a long-term memory. They remember that between the 16th and the middle of the 19th century, China was middle earth, numero uno. Xi has pledged to win back that position for China during his lifetime presidency. Unlike the Soviet Union, China has a thriving and productive economy and military might to match.
But China has also grown stronger to challenge US financial hegemony. She tried to make the renminbi a key currency. He built banking institutions to challenge the IMF and the World Bank. It has invested in building a digital currency system in cooperation with Singapore. He has the technical ability to rival Swift.
This may be why Putin convinced Xi. China has the financial clout to help Russia survive Western financial sanctions. China is preparing for it. He is not 100% there but, as in the case of the Manhattan project, he has the means if necessary.
Only China can challenge US financial hegemony. (The euro had that ambition but completely failed.) If it can shield Russia from damaging financial sanctions imposed by the United States and let it keep pieces of Ukraine, the world scenario will totally change. Five centuries after Christopher Columbus, the world will turn towards the East.
As long as Chinese memory is, short is American memory. The United States won the Cold War, but it undermined its financial hegemony by failing to achieve long-term price stability. Just look at the price of gold in dollars since 1933 when the Americans took over the UK. It shows the negligence with which the United States has fulfilled the role that Britain has played so well. No wonder bitcoin creators distrust central banks. Even with an inflation target of 2.5%, the currency loses half its value every 25 years. During the Pax Britannica there was no inflation.
For now, China does not need to promise an inflation-free global financial system. All he has to do is bail out Russia.
Meghnad Desai is Emeritus Professor of Economics at the London School of Economics and Political Science and Chair of the OMFIF Advisory Board.