America's Two Biggest Rivals Just Made a Major Strategic Deal With Each Other


The news: In a "symbolic blow to U.S. global financial hegemony," China and Russia have agreed to a 30-year, $400 billion gas deal that will provide China with the energy it needs to keep its economy growing and Russia with much-needed capital. And it's all in domestic currencies, bypassing the dollar entirely. Ten years in the making, Russian President Vladimir Putin called the deal an "epochal event" and proclaimed that both countries were very satisfied with the terms.

Thirty-eight billion cubic meters of gas will flow from Russia to China. Russia's state-run gas provider, OAO Gazprom, will also invest $55 billion in gas fields in eastern Siberia and the new pipeline in what is the biggest deal ever for the company. Gazprom's price rose 2.2% on news of the deal.

The price of gas stipulated in the contract will remain a "commercial secret," but assuming it includes only the costs of supply, China will pay around $350 per 1,000 cubic meters. Delivery prices will be tied to market oil prices.

Dubbed the Agreement on Cooperation, the deal was signed in the presence of Chinese President Xi Jinping and Putin during the latter's visit to Shanghai. 

Is this like, a new USSR or something? Analysts say that while the geopolitical timing is convenient, the move is primarily market-driven. Russia needs to maintain steady relations with the West to continue exporting gas to Europe, but since demand has plateaued, it needs to find more markets for energy products.

Nonetheless, the move comes as Russia's relations with the West have become increasingly strained over both its domestic policies and annexation of Crimea, as well as the continuing crisis in eastern Ukraine. And the deal may give Russia and China more leverage on the world stage.

"China sees the dominance of the dollar in international trade transactions as a remnant of American global dominance, which they hope to overthrow in the years ahead," said Hampshire College peace and world security professor Michael Klare. "This is a small step in that direction, to reduce the primacy of the dollar in international trade."

"Breaking the dominance of the U.S. dollar in international trade between the BRICS [Brazil, Russia, India, China and South Africa] is something that the group has been talking about for some time," said Moscow-based consultant Chris Weafer. "The Ukraine crisis and the threats voiced by the U.S. administration may well provide the catalyst for that to start happening."

What else does it mean? China's continued growth threatens to displace the United States in aggregate terms as the world's largest economy sometime in the next decade. A Sino-Russian economic alliance could be a key cornerstone of the new economic reality that emerges.

But China's much more lucrative relationships with the West probably preclude that alliance from being a manifestly hostile one, meaning that if the U.S. ends up playing second fiddle to China, any tensions will likely remain peaceful for the foreseeable future.