In the wake of Russian invasion of Ukraine, a slew of sanctions were imposed on Russia. These sanctions target banks, military exports, and oil refineries. But it is questionable whether the sanctions will work. China, India and many other countries are unlikely to toe the line.
But it is not India or China but Pakistan which the West considers a bête noire. In a joint letter, 22 Islamabad-based diplomats wrote a coercive letter to the Pakistan government to fall in line. Pakistan‘s prime minister retorted that his country was not a slave to any government’s policies. It is eerie that despite India’s abstention at the UN no-one chastised it.
India’s dependence on Russia
It is India not Pakistan that imports a lot of military hardware from Russia. India understands that without sustained military supplies, 60 percent for the three services, from Russia it can’t keep up its military posture against its twin enemies, China and Russia.
India’s department of military affairs is mulling innovative ways to bypass the sanctions. Both countries have commercial experience in bypassing sanctions.
In August 2021, Victor N. Kladov who heads Rostech announced that his country had fructified military deals worth $15 billion with India t since 2018.
These included the $5.5 billion purchase of five Almaz-Antey S-400 Triumf self-propelled surface-to-air (SAM) missile systems,building four Admiral Grigorovich Project 1135.6M frigates for $2.5 billion and licence-producing 601,427 Kalashnikov Ak-203 assault rifles for $960 million. Besides, leasing a follow-on Project 971 ‘Akula’ (Schuka-B)-class nuclear powered submarine (SSN) 2025 onwards for the Indian Navy (IN), for a decade would cost $3 billion, raising outlay to nearly $12 billion just for these four aforementioned weapon systems.
Add to it payments for launchers and missiles for the IAs 9K338 Igla-S (SA-24 ‘Grinch’) man-portable air-defence systems, 300 mm rockets for Smerch multiple rocket launchers, and 125 mm Mango armour-piercing, fin-stabilised, discarding-sabot ammunition for T-90S main battle tanks or MBTs, alongside miscellaneous ordnance.
In July 2018, India signed a $654 million contract to execute the mid-life upgrade of four of its legacy ‘Kilo’-class Type 877 diesel-electric submarines. The procurement is underway for purchase of spares and components for over 700 of the IAF’s fixed wing fighter and transport platforms and helicopters, the IA’s over 3,000 T72M1 and T-90S MBTs and some 2,000 BMP Infantry Combat Vehicles, as well as the Russian aircraft carrier and its aerial combat complement.
India has already made the 15% advance payment of around $2.25 billion to Russia for major purchases. India still owes to Russia $12.75 billion for deliveries.
In August 2019, Russia’s VTB Bank signed currency deals with counterparts in India and China to dodge the Washington-imposed Countering America’s Adversaries through Sanctions Act (CAATSA).
In August 2018 India and Rosonboronexport, Russia’s defence export agency, entered into an agreement by which the public sector Syndicate Bank in Delhi agreed to directly transfer rupees/roubles to Russia’s Sherbank, doing away with normally routine letters of credit. The first tranche of the equivalent of $40 million was transferred in rupees/roubles in September 2019 as payment for the retrofit of one IN ‘Kilo’-class boat.
Since the mid-1960s, India had acquired over $70 billion worth of weapons from Moscow, of which more than half, or $35.82 billion, was procured between 2000 and 2020, according to the Stockholm International Peace Research Institute.
Russia’s ambassador designate to Delhi Denis Alipov pointed out those mechanisms still existed for bilateral defence trade between India and Moscow. He added much depended on the ‘readiness’ of Indian partners, overcautious over their financial exposure to the US and European markets, to continue doing business despite sanctions.
The general opinion in India, as expressed by military circles, is that it was ‘imperative’ for the MoD to find ways to pay Russia for varied materiel, without which the operational capability of India’s armed forces would be ‘severely undermined’ over the next 12-18 months. Currently the Indian armed forces have to depend on existing spares inventories, war wastage reserves and ultimately on cannibalising equipment to maintain operational clout.
Futile impact of sanctions on Iran
It was the US itself, who during the Shah’s days encouraged Iran to develop a nuclear programme, whether for peaceful or non-peaceful purpose
Despite IAEA rebukes and tighter sanctions, Iran did not shelve its nuclear enrichment programme. Regime change remained a far cry. The only visible impact of the sanctions was demonstrations against chicken prices (a staple food) and rising unemployment. Iran’s exasperating non-cooperation continues despite a flurry of warnings, including those from the White House and 10 Downing Street.
Were the sanctions imposed after due thinking?
Several writers, including John Galtung, Miroslav, Wallensteen, Schlesinger, Hufbauer, Garg, Jefferey Scot, Kimberley Elliot, Nye and Franklin L Levin have tried to define, illustrate and classify sanctions. Generally, sanctions are categorised as diplomatic, communicative and economic, but they are complex in their impact.
Experience of sanctions in some countries reflects that they strengthen ‘evil’ regimes instead of weakening them. In response to the seizure and detention of American diplomatic and counselor personnel in Tehran, the US froze Iranian assets and called upon the allied governments in 1979 to take similar action and halt their trade with Iran. The European industrial powers announced to cooperate. But, one by one, they resumed their commercial ties with Iran.
Isn’t it eerie that despite US restrictions, Iran never fell short of parts for her refineries or the American rail track? Several European multinational banks declined to declare Tehran in default on its financial obligations and thereby mitigated the effect of the US sanctions.
Cases of ineffective sanctions on several countries abound. In the wake of the Soviet invasion of Afghanistan, the US halted export of 17 million metric tons of grain to the then USSR. But Australia, Argentina, Canada and the European Union defied the sanctions. As a result, the Soviet Union was able to import 31 million metric tons of grain. The US’s ban on oil and gas equipment exports to the Soviet Union in the wake of the imposition of martial law in Poland also was ineffective. The European Union did not toe the US line. Sanctions on Iraq also did not work. And the US had to go for an all-out invasion.
The Waning Supremacy of the Petrodollar Economy
Since the 1970s, the US dollar has been the undisputed reserve currency around the globe. Agreements with Saudi Arabia (and many other Middle Eastern countries) cemented the global oil trade in the greenback currency. Trading oil and gas futures denominated in the US dollar solidified the position of the United States as the hegemon of Global trade – a shift from the traditional gold standard. While the Euro surfaced as a strong contender in the 90s, the dollar-denominated finance still flourished. And economies like China and Russia had no choice but to hold US Treasury securities and accumulate massive dollar reserves. However, multiple geopolitical and economic factors are now turning the tide against the supremacy of the US dollar. Rapid globalization was already a ticking bomb situation for the greenback. But now, China’s rise as the next potential powerhouse and Russia’s exclusion from the dollar-embedded SWIFT system is catalyzing this historic transition.
The tread towards de-dollarisation is not exactly a novel phenomenon. The infamous drift to exclude the US dollar originally spurred in Latin America in the 90s. In response to US sanctions, Venezuela attempted to shift away from the status quo by opting for oil payments in yuan over the US dollar. Chile resorted to Consumer Price Index (CPI) indexation to attract foreign investments in local securities over US Treasuries in the secondary market. However, due to weak supplementary monetary policies and crippling economic crises, the trend of de-dollarisation steeply reversed during the 2008 financial crisis. Since then, no significant development has threatened to derail the dominance of the US dollar. Yet, the booming Asian markets and the implicit rift between the United States and Saudi Arabia could be the next bad omen.
Saudi Arabia is the world’s largest Crude exporter, amounting to about 17.2% of the Global Crude oil exports (by value). Over decades, Saudi Arabia has been one of the core allies of the United States in the Middle East. Economically, the kingdom has served as the largest Crude supplier to the United States. Moreover, as Saudi Arabia leads the Organization of Petroleum Exporting Countries (OPEC), the United States has enjoyed a sway over Global oil prices. Since the oil trade is denominated in the US dollar, it has allowed successive US governments to run massive trade deficits without any budgetary concern. Geopolitically, the Saudi kingdom has been a US proxy in the Middle East to counter its arch-rival Iran. After the landmark Iranian revolution in 1979, Saudi Arabia further climbed the ladder of US preference in the region. However, with a shift from Republicans to Democrats, the two allies have inched apart to a certain extent.
Over the years, the United States has relented its dependence on imported oil by building its own strategic reserves. For example, the US imported an estimated 2 million barrels per day of Saudi Crude in the 1990s. That figure fell to mere 500,000 barrels per day in 2021 – a drop of 75% in a couple of decades. On the political front, the Saudi royalty has been particularly dissatisfied with Biden’s policy in the Middle East. Biden’s decision to unilaterally withdraw support for Saudi Arabia in the Yemen war distanced the kingdom from the US administration. A subsequent spree of Houthi attacks on Saudi oil facilities has further incensed the royalty. To add oil to the fire, Biden’s desperation to salvage the outdated Nuclear Deal with Iran has virtually alienated the kingdom to the point of indifference.
The implications are not complex to spot. Since Russia launched its onslaught against Ukraine in February, Saudi Arabia has actively refused to pay heed to Biden’s calls to expand Crude supply quotas and suppress Global oil prices. Instead, the OPEC+ alliance – OPEC members, Russia, and other allied producers – stuck to its original plan to modestly raise the June output target by 432,000 barrels per day. The brutal indifference to the Western calls has an underlying reason besides the concurrent row with the United States. The reason is the growing China-Saudi cooperation. Over the past few years, Saudi’s structure of the international oil trade has undergone a fundamental change. That is predominantly due to increasing cooperation of China which is not just limited to the energy sector. Under the hood of its Belt and Road Initiative (BRI), China has also objectively expanded its potential presence in the kingdom through bilateral cooperation in infrastructure, trade, and investment.
According to the American Enterprise Institute’s China Global Investment Tracker, cumulative Chinese investments in Saudi Arabia reached $43.47 billion in 2021. According to data released by the Chinese General Administration of Customs (GACC), China imported an estimated 542.39 million tons of Crude oil in 2020 – comprising more than 25% of the kingdom’s total Global oil exports. Sources from Saudi Arabia’s top securities regulator suggest that the kingdom’s Sovereign Wealth Fund may soon start investing in Chinese companies after years of limiting its overseas holdings in the US and Europe. Official sources suggest that Saudi oil giant Aramco is in talks to strike a partnership with the Chinese petrochemical consortium. Recently Aramco also finalized a $10 billion deal with Chinese petroleum companies. All the factors unambiguously point in a single direction – Saudi Arabia is leaning away from the US to China. Naturally, the de-dollarisation of trade and investments would facilitate bilateral relations with China.
There are, however, some drawbacks to the petroyuan when compared to its counterpart. While China’s financial markets have exponentially grown over the past few decades, they are still relatively illiquid compared to the US capital markets. Moreover, the massive $13.4 trillion eurodollar market extensively facilitates trade in European markets. Meanwhile, trades in yuan would be limited to China and subject to manipulation from the People’s Bank of China. Thus, trades settled in yuan would be an inconvenience to the smooth operation of trade and short-term deposits. However, these problems could be resolved if petroyuan is used as a barter for investments in China.
Like Saudi Arabia, economies like Russia and Iran have also inched closer to Asia. Russia, for instance, has consistently voiced its propensity to shift toward the Cross-Border Interbank Payment System (CIPS) – a transaction system clearing international settlements and trade in the Renminbi – to trade its oil in Asia under western sanctions. India has openly defied the US pressure by purchasing roughly 15 million barrels of oil from Russia since the invasion of Ukraine. The Russian Crude now accounts for about 17% of Indian imports – up from less than 1% before invasion. The rudimentary reason is cheaper oil in Roubles, especially when Europe is still weighing an embargo on Russian oil. Even Iran has notoriously traded Crude with China under US sanctions by abandoning the US dollar for settlements.
Some economists may argue that even combined, the effect of de-dollarisation would be gradual and uneconomical. But we need to understand that the historical context is skewed, and ground realities today are comparatively different. Firstly, the economies in Asia are significantly less dollarised than the emerging economies of Latin America discussed in the existing literature. Secondly, the Asian economies – particularly China and India – are much more significant in terms of size and monetary policy. Even a shift towards semi-dollarisation could upend the clout of the United States and significantly reduce the power of US sanctions.
The US lawmakers are understandably irked by the defiance of the OPEC+ alliance. Recently, a US Senate Judiciary Committee passed the No Oil Producing or Exporting Cartels (NOPEC) bill to amend the US antitrust law. If passed by the full Senate and House, the US Attorney General would gain the authority to expose OPEC+ countries to lawsuits for possible collusion, bypassing the sovereign immunity guaranteed to OPEC+ nations. While similar motions have been filed and failed over the past two decades, the notable highlight is the US desperation in the face of helplessness. Saudi Arabia already warned the US lawmakers in 2019 that such a bill, if passed, would force its move to trade oil in different currencies. Today, with Europe’s belated timeline to phase away from Russian Crude to China’s expanding influence in Eurasia, it seems the inevitable transition from the petrodollar may strike sooner than initially expected – if expected at all!
Chinese Maritime Strategy: Further Expansion and Progress
The Belt and Road Initiative represents a shift in China’s global perspective as well as an update to its role and status in the international system, as announced by Chinese President Xi Jinping. Reviving the Silk Road as a means of connecting China with the rest of the globe was the biggest initiative so far. This initiative will connect China with the Arab Gulf states and the Mediterranean through Central Asia. The maritime silk road will connect China’s coast with Europe by way of the South China Sea and the Indian Ocean. It will also connect China’s coast with the South Pacific by way of the South China Sea.
The “string of pearls” strategy, which refers to a network of Chinese military and commercial facilities and relations on the length of the sea lines of communication, which extend from the Chinese mainland to the Horn of Africa, was used to secure Beijing’s global vision of military protection, diplomatic networking, and economic cooperation.
Some scholars believe that this would be a major threat to Britain which relies on the Commonwealth, China is gaining more influence in South Asia through the China-Pakistan Economic Corridor and the loan diplomacy, which weakens British influence in the Indian ocean. It also challenges Britain in the strategically important Malacca channel.
Experts mention that a state may only be considered powerful when it completely dominates its geographical surroundings. Aside from its strategic location on the international trade route, where 40 percent of all trade passes through the South China Sea and 30 percent of all oil traded globally. Beijing places a high value on the security of China’s regional environment.
China has overtaken the United States to become the world’s largest naval force – but experts believe that the mere comparison of the number of ships neglects many crucial elements that define the efficacy of any naval power.
The United States maintains, so far at least, a huge edge in many naval capabilities, as it has 11 aircraft carriers compared to China’s two. It also excels in the numbers of submarines, destroyers, cruisers, and huge nuclear-powered vessels. But it is projected to considerably enhance the size of the Chinese fleet.
Former Chinese People’s Liberation Army colonel Zhou Bo, currently at Tsinghua University in Beijing, says it is “extremely necessary” for China to build its navy in order to confront the maritime dangers it faces. He particularly says that “the largest challenge we are experiencing is what we regard as US provocations in Chinese territorial seas.” The US Navy expects that the total number of warships owned by the Chinese Navy would expand by 40 percent between 2020 and 2040.
Controlling waterways is a priority for Beijing. Attempts will be made to broaden its maritime presence outside the Indian Ocean, if possible. It is clear from this that China is interested in building strategic fulcrums around the world, such as huge ports equipped with sea cables and digital networks, as well as superior logistics services that might be used for military purposes if necessary.
China and the Indo Pacific Economic Framework
The Indo Pacific Economic Framework (IPEF) signed by a total of 13 countries, on May 23, 2022, in Tokyo is being dubbed by many as a means of checking China’s economic clout in Asia and sending out a message that the US is keen to bolster economic ties with its allies and partners in the Indo-Pacific.
Many Chinese analysts themselves have referred to the IPEF as ‘Economic NATO’. China has also been uncomfortable with the Quadrilateral Security Dialogue (Quad) which consists of US, Australia, Japan and India , and has referred to Quad as an ‘Asian NATO’ – though members of the grouping have categorically denied that Quad is an ‘Asian NATO’.
Countries which joined the US led IPEF are Australia, Brunei, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam. These countries together account for 40% of the global GDP. The four key pillars of the IPEF framework are; supply-chain resilience; clean energy, decarbonisation and infrastructure; taxation and anti-corruption; and fair and resilient trade.
While launching the plan, US President, Joe Biden said:
‘We’re here today for one simple purpose: the future of the 21st Century economy is going to be largely written in the Indo-Pacific. Our region,’
US Commerce Secretary Gina Raimondo while commenting on the IPEF said that it was important because it provided Asian countries an alternative to China’s economic model.
A few points need to be borne in mind. First, many of the countries — Australia, Brunei, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam – which have signed the IPEF are also part of the 15 nation Region Comprehensive Economic Partnership (RCEP) trade agreement of which China is a key driver (Indonesia, Phillipines and Myanmar have not ratified RCEP). RCEP accounts for 30% of the world’s GDP. Trade between China and other member countries has witnessed a significant rise, year on year in Q1 of 2022.
Second, many of the countries, which are part of the IPEF, have repeatedly said that they would not like to choose between China and US. The Singapore PM, Lee Hsien Loong who was amongst the first to hail the IPEF, has emphatically stated this point on a number of occasions. In an interview to Nikkei Asian Review on May 20, 2022, Lee Hsien Loong reiterated this point. In fact, Lee Hsien Loong even pitched for making China a part of the Comprehensive and Progressive Partnership for Trans Pacific Partnership (CPTPP) (TPP the precursor to the CPTPP was a brain child of the US). Said the Singapore PM:
‘We welcome China to join the CPTPP,’.
Here it would be pertinent to point out, that China had submitted an application for joining the CPTPPIN September 2021. In the interview, Lee Hsieng Loong did state that countries in Asia needed to have good relations with US, Japan and Europe.
Indonesia’s Trade Minister Muhammad Lutfi who attended the signing of the IPEF on behalf of the President Joko Widodo stated that he did not want to see IPEF as a tool to contain other countries.
One of the reasons why many countries are skeptical about the IPEF is the fact that it does not have any trade component. A number of ASEAN member states have pointed to the IPEF making no mention of tariffs and market access as one of its major draw backs. At the US-ASEAN Summit, held earlier this month Malaysian Foreign Minister, Ismail Sabri Yaakob had referred to this point. Like many other countries, Malaysia has welcomed the IPEF, but in the immediate future sees RCEP as a far greater opportunity.
US President Joe Biden has not deviated significantly from the policies of his predecessor, Donald Trump, with regard to trade and the US is unlikely to return to the CPTPP at least in the immediate future. Biden and Senior officials in his administration have spoken about the need to check China’s growing economic influence, specifically in Asia, and to provide an alternative model. While the US along with some of its Indo Pacific partners has taken some steps in this direction (only recently, leaders of Quad countries during their meeting at Tokyo announced that they would spend USD 50 billion, in infrastructural aid and investment, in the Indo Pacific.
Given his low approval ratings, and diminishing political capital it is unlikely that he is likely to change his approach towards trade significantly. US Trade Representative Katherine Tai said the TPP was ‘fragile’, and that there was no domestic support for the same.
In conclusion, while the IPEF does have symbolic importance it is important to bear in mind that many signatories themselves have close economic relations with China and would not like to get trapped in competition between US and China. Unless the US re-examines its approach towards trade, which is highly unlikely, and unless countries which are part of the Indo-Pacific vision are able to strengthen economic cooperation, China is likely to dominate Asia’s economic landscape – even though there is growing skepticism with regard to the same.
Israel admits involvement in the killing of an Iranian army officer
Col. Sayad Khodayee, 50, was fatally shot outside his home in Tehran on Sunday when two gunmen on motorcycles approached...
Economic And Political Reform Is Needed In Sri Lanka, Not State Violence
Sri Lanka’s worst economic crisis since independence has highlighted years of political and economic mismanagement and a reliance on state-sanctioned...
The Waning Supremacy of the Petrodollar Economy
Since the 1970s, the US dollar has been the undisputed reserve currency around the globe. Agreements with Saudi Arabia (and...
Chinese Maritime Strategy: Further Expansion and Progress
The Belt and Road Initiative represents a shift in China’s global perspective as well as an update to its role...
World’s richest countries damaging child health worldwide
Over-consumption in the world’s richest countries is creating unhealthy, dangerous, and toxic conditions for children globally, according to a new...
Open and Closed: From Russia to China to America, the Largest Societies Are Pushing Their Limits
Today we are seeing the largest nations in the world pushing their limits. Open societies are pushing the limits of...
UNICEF urges leaders to keep schools safe following deadly Texas shooting
Governments must take greater action to ensure school remains a safe place for boys and girls, the head of the...
Science & Technology4 days ago
Space exploration and the future exploitation of asteroids
Defense3 days ago
What makes India’s participation in the Quad intrinsically unique?
East Asia4 days ago
What China Does Not Know about India
Tech News3 days ago
New Initiative to Build An Equitable, Interoperable and Safe Metaverse
Middle East3 days ago
India-UAE tourism and education linkages
Americas3 days ago
The WW III that Biden and All Other Neocons Are Leading U.S. Toward
Tech News3 days ago
Growing Intra-Africa Trade through Digital Transformation of Customs and Borders
Environment4 days ago
Global Food Crisis Must Be Solved Alongside Climate Crisis