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China and Russia's new aggression could have economic consequences

John Redwood, Charles Stanley’s Chief Global Strategist, looks at building tensions with the West

by
John Redwood

in Features

13.09.2018

Russia’s decision to assemble a vast army of 300,000 troops, to support it with 80 ships and 1000 aircraft, and get it to sweep across a vast area of central Russia in military vehicles was a calculated demonstration of force on a large scale. Operation Vostok also showed the burgeoning alliance with China. China sent small forces to exercise alongside her neighbour. It followed a summit between President Xi and President Putin where they discussed more collaboration. The exercise did not look like a defensive manoeuvre and the point was made that Russia has an ability to invade another country in strength and at speed should she wish to do so.

Meanwhile her ally China is completing its military installations in the Paracel and Spratly Islands and elsewhere across the South China Sea. As she does so, the country seeks to warn off foreign planes or ships it regards as hostile, seeking to extend Chinese territory well out into the sea. The US and her allies are determined to keep international sea lanes open through the area, and are now sending naval vessels on voyages that will pass close to the fortified islands and contested rocks and reefs of this troubled part of the world. Recently, HMS Albion of the UK Royal Navy travelling from Japan to Vietnam via the Paracels received a warning, with diplomatic reactions from China telling the UK more generally that this kind of action will have negative effects on the wider relationship. The UK states it was more than 12 miles off the coast of the Paracels, the protected national zone, without arguing about the true status of the Paracels and the claims Vietnam and Taiwan make to the islands. The UK is in a five-power defence arrangement with Australia, Malaysia, Singapore and New Zealand to keep these waters open for international shipping and commerce. The US and Australia have recently sent warships to these waters for the same reason.

These events of themselves imply some increase in tensions but do not directly affect economies and trade. Commercial ships are still sailing these waters successfully. They may push the West into more defence spending, as a sense of threat increases. They may well increase Mr Trump’s impatience with the low level of spending by many European NATO allies on weaponry. Where things get more serious is when China decides to pursue her strategic objectives at the expense of business. This is likely to be an increasing trend, as China converts commercial power into more direct political power. Consider what has happened to Lotte, Korea’s biggest retail group. They sold some land to the South Korean government to be used for a US missile system. This was being deployed as protection against North Korean missile developments, but was seen as hostile by China given the proximity of South Korea to the Chinese border with North Korea. China retaliated by removing the fire permits of most of Lotte’s stores in China, effectively stopping the company trading. Permits and business are still not restored. Lotte has lost large sums on its Chinese investments, and is looking for a buyer to get out of a very difficult position.

The more strategic interests China has around the world through the development of its Belt and Road strategy, the more it is likely the Chinese state will seek to pressurise private sector businesses attempting to undertake business inside and outside China. The more the rest of the world has trade deals and access to the Chinese market, the more China can use this as a lever for wider objectives.

Russia’s interventions in the Middle East also have commercial and market ramifications. Allied to Iran, she is at odds with the US pattern of alliances with Saudi Arabia and most of the Gulf states. The US has imposed sanctions on Iran which Mr Trump is requiring the EU to impose as well as the price for continued US trade. This takes Iranian oil off the western markets, and means the western trading community as a whole cannot do business with Iran where the US has imposed sanctions. Iran has to try and find outlets for her oil with countries that can withstand US disapproval. The overall impact is mildly negative for world trade, and a further force for higher oil prices.

The joint conduct of Russia and China will increase concerns in Washington, which in turn will affect perceptions of Russian and Chinese investments by US investors. These developments are mildly unhelpful to world growth and markets, and remind us of substantial risks to businesses investing and trading in troubled parts of the world, or parts of the world under Russian and Chinese influence.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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