One of the reasons why the West won the Cold War against the tyranny of Soviet communism, was not necessarily because of the superiority of our political system nor was it just due to the might of the NATO military machine. The roots of the victory extend even beyond President Reagan asking Gorbachev to tear down German walls.
After Stalin's death, and after Nikita Khrushchev became leader of the Soviet Union; Khrushchev criticised Stalin, denouncing him and his "cult of personality" in a secret speech to the Politburo in 1956. He then started making overtures for "peaceful coexistence" with the West.
Mao felt that Khrushchev was betraying Communism and was attacking him personally, because he too had built up a cult of personality as Stalin had. Then Khrushchev backed out of an agreement to give China the information they needed to build their own atomic bomb.
The tensions between the Soviet Union and China would reach their peak in 1968-69, when they had a series of armed engagements along their borders, especially in the north east and and north west.
These hostilities and Russia's growing support of the North Vietnamese led to the 1972 rapprochement between China and the US (ping pong diplomacy) and ultimately to the invasion of Vietnam by China in 1979.
The West was fortunate. If there ever had been a sustained and united Soviet/China Axis, the world may have been a very different place. Just their combined diplomatic influence alone would have been immense.
Fast forward to 2009:
The global financial crisis has forced Russia and China to reevaluate their relationship. Whilst their economies structurally, have little in common (Russia looks to a higher oil price, whereas China is a net consumer), both of these nations are heavily dependent upon the US dollar as the worlds reserve currency for trade.
The dabasing of the US dollar is a major problem for all emerging nations, particularly for those who hedge their own currencies with US$ treasuries. Many in the developing world believe that the time has come for a balanced basket of currencies to be adopted as the world's reserve currency.
Back on April 1, before the G20 meeting I wrote the following:
"I think it likely that the dollars position as the worlds reserve currency will be under threat over the next few days. Whilst I do not expect the dollar doubters to prevail, it makes sense that Russia and China use its underperformance as leverage in their negotiations".
On June 16th at the BRIC conference, the AP reported the following: "The dollar gave back some of its day-ago gains after Russian officials called for the creation of new reserve currencies in addition to the dollar and said the country may invest part of its currency holdings in bonds issued by Brazil, China and India".
It goes on to say, Chinese officials have also pushed for expanding emerging economies' representation in the IMF's "Special Drawing Rights" basket, currently made up of the euro, yen, pound and dollar. SDR's have served, in limited use, as a reserve asset since 1969.
Referring back to the April 1 article in this blog, I wrote, "I think that the basket of currencies proposal as an alternative to the US dollar is a 'stalking horse' for the eventual launch of the Renminbi on the world markets".
In my opinion, China is not particularly interested in greater representation for "expanding emerging economies" in the IMF's SDR basket at all. Like all nation states, it puts self interest above all else.
Since the economic downturn, the US has weakened economically and China is resurgent. I think it only logical and even inevitable that the Renminbi and the Rouble eventually be included in the SDR basket.
Before this happens, expect even wider use of both currencies via bilateral currency swaps between China, Russia and its trading partners.
Inclusion of these two great nations within a global reserve basket could be a great geopolitical stabiliser. Trade is the greatest bringer of peace and harmony. War and political tension is its enemy. Having membership of a reserve currency brings obligation and responsibility. It behooves both of these superpowers to achieve a new entente cordiale.
Rather than being something to fear, maybe the political demise of the US dollar for a more inclusive global reserve has implications beyond just trade.
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