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Critical Topics and Their Significance for the UPSC CSE Examination on September 18, 2024

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Power asymmetry between China and Russia

For Preliminary Examination:  Current events of national and international importance

For Mains Examination: GS II - International relations

Context:

As supplies from Moscow’s traditional partners have dried up under sanctions and Russia’s domestic capacity remains stretched, China has stepped up to help its friend. Compared to 2021, when high-priority goods from China accounted for 32% of Russia’s import needs, China’s share soared to 89% in 2023

Read about:

China and Russia's Alliance

Russia-Ukraine war through the prism of China

Key takeaways:

• Both Russia and China share discontent with the dominance of the U.S. dollar and the SWIFT messaging system, which underpin the current global financial framework. Their ongoing friction with the U.S.-led geopolitical order has intensified, especially following recent events.
• In response to Russia’s invasion of Ukraine, the U.S. and its allies froze approximately $300 billion of Russia’s foreign reserves held abroad. China, with nearly $770 billion of its $3 trillion reserves held in U.S. treasuries, fears facing similar actions in the event of a conflict with the West.
• Additionally, in 2024, the West imposed a SWIFT ban on Russian financial entities involved in dual-use goods or weapons trades, and the U.S. threatened sanctions on third-party financial institutions engaging with these entities.
• This led Chinese financial institutions to pause transactions worth billions of yuan with Russia due to fear of secondary sanctions.
• As a result, both nations are keen to reform or overturn the existing financial and economic systems. They have promoted de-dollarization and alternative payment systems, though progress has been slow.
• While over 90% of their bilateral trade was settled in local currencies by 2023, this represented less than 1% of global transactions. Renminbi-based transactions in global trade still account for just about 6%, with the dollar, euro, pound, and yen dominating.
• China’s domestic payment system, the Cross-Border Interbank Payment System (CIPS), is still far from rivaling SWIFT, limiting its broader impact.
• Russia’s isolation from the Western financial system makes it more desperate for alternatives, but China, though also frustrated, remains deeply integrated into the current system.
• This dynamic places Russia in a weaker position, increasingly reliant on China to drive any meaningful change. Moreover, China has the resources and diplomatic influence needed to cha