After Ukraine crisis, China and Russia are a clear second in a two power world

Russian President Vladimir Putin (L) and Chinese President Xi Jinping pose for a photograph during their meeting in Beijing, on February 4.

Australians should look past the latest US share market carnage caused by the Russian invasion of Ukraine and the commercial repercussions of the unprecedented sanctions.

Ukraine has not only united what was a disintegrating Europe but has fused a Trans Atlantic partnership that is set to change the balance of world economic power.

Until Ukraine, the world was dominated by three powers – the US, China and Europe with China set to become the largest.

With Europe and the US establishing an era of joint development and co-operation, China and its mate, a likely recession ridden Russia, are a clear second in a two power world.

When negotiating at the Winter Olympics, Chinese President Xi Jinping and Russian President Vladimir Putin could never have dreamt that this would be the outcome.

Australia’s Peter Dutton, Scott Morrison and Marise Payne could never have dreamt that the Quad alliance between India, Japan, Australia and the US plus the AUKUS nuclear submarine based alliance that they masterminded, would become key levers to make sure that the new superpower does not forget the Indian-Pacific region. Our importance in the region has escalated. So has the role of the Morrison government.

Russia and China earlier had established a trading system outside the rest of the world and Russia believed that with China’s help it would overcome any US sanctions.

But the US had learned from its attempts at sanctions after Russia‘s Crimea acquisition and those imposed on Iran. And unlike those attempts, this time Europe, including Switzerland and the UK, were united with the US. They quickly excluded the big Russian banks from SWIFT, the financial messaging system that underpins most international transactions. They are freezing assets belonging to Russia’s central bank, depriving the institution of hundreds of billions of dollars in foreign reserves. They imposed sanctions on the Russian Direct Investment Fund, a sovereign wealth fund that is run by a close ally of Putin.

These moves are both incredibly unprecedented and are crippling the Russian currency and banking systems forcing 20 per cent interest rates. Trade will be crippled although gas was excluded because Russia provides around 40 per cent of Europe’s gas which heats the continent, fuels many of its power plants and industrial processes.

Part of the new era of co-operation will be a joint approach to energy with the emphasis on non carbon sources. This will be linked much closer integration of supply chains to reduce dependence on Russia and China. Already the alliance is moving to put a lid on oil prices and companies in the alliance are severing links with Russia.

But Europe and the US will not escape the repercussions of their sanctions because Russian companies have some $US170bn ($A234.35bn) in debt due in the next 12 months and the securities are already trading at a big discounts. There will be losses. Supply chains are being severely disrupted and there as deals fall over more losses will be incurred.

Fear of the unknown losses is hitting stock markets and triggering her rush to US bonds plunging yields.

But this masks the bigger picture which will be accelerated by the defence transformation.

Arms are coming to Ukraine from all over Europe led by Germany which is now set to double it’s defence expenditure. Turkey supplied drones which proved very effective against the Russians.

In many ways the supply of munitions is just as unifying for the Transatlantic partnership as the sanctions.

Russia is likely to eventually win the war in Ukraine but the inevitable Russian recession and even depression will continue until Putin is removed as Russian President and the country withdraws from Ukraine with a an apology and reparations.

China suddenly realises it is caught in a trap.

The South China Morning Post sums up the dilemma of Presiddent Xi:

“China’s refusal to condemn the Russian invasion of Ukraine leaves it in a “lose-lose situation” that will hamper its ambition to expand its economic influence globally.

“As fighting rages on, Beijing’s ability to effectively distance itself from the dispute is becoming harder, potentially damaging the country’s long-term economic interests.”