- The Washington Times - Thursday, December 25, 2008


President Nixon realized that a key to Cold War stability was a U.S.-led dance among the United States, China and Russia. Now, 18 years after the end of the Cold War, the global economic crisis has revived the need for this delicate pirouette.

Since Mr. Nixon’s visit to China, not withstanding the Soviet Union’s having morphed into a more traditional Russia, there have been three major shifts and decisions that are forcing Mr. Nixon’s old dance partners into a more complicated and deft ballet.

First was Deng Xiaoping experiment to invest China’s largest asset, its massive population, into a newly global marketplace. Peter Drucker, the founder of modern management, spoke of capital-intensive countries and labor-intensive countries. But Mr. Drucker could not foresee the metastasizing effect that globalization would have on China’s labor investment.

China, the so-called labor-intensive country, is now awash in capital. Its voracious economy has created an enormous relatively debt-free marketplace.

And while China’s growth has slowed dramatically during the current downturn, (potentially a major political problem) and while it will take some time to stimulate and readjust China’s economy from exports to internal consumption, China, with its tremendous capital pool is in an enviable position. Its banks appear to be free of the toxic assets of the Western banks, their households have a savings rate of 40 percent of their income and China has more than $2 trillion in foreign-exchange reserves.

In contrast to Mr. Deng’s astonishingly successful experiment was the failure of Russia’s Vladimir Putin to understand the modern globalized economy.

Where China invited the world in, albeit with Chinese partners, to modernize Chinese industry, Mr. Putin, with his insistence on a nationalistic and crony approach to Russian industry and his perpetual fear of losing control, did the opposite. Whether it was the state seizure of Yukos oil or badgering investors such as Shell and BP, the goal was not to modernize, not to create wealth, but to exploit wealth.

Economic cronyism is not new for Russia. Indeed, Mr. Putin’s crony capitalism has worked better for the country than did the crony communism of President Leonid Brezhnev.

During the past 10 years, a substantial entrepreneurial middle class has developed. But, as in Mr. Brezhnev’s time, oil money was the patina covering all faults.

And when the price of oil collapsed, as it has during the past four months, Russia remains not only a commodity country but also a politicized commodity economy under tremendous stress.

Zeljko Bogetic, the World Bank’s lead economist for Russia, said in Moscow on Dec. 19, “If oil prices in 2009 and 2010 average $30 a barrel, that would be a nightmare The pressures on the current account and public finances in Russia would quickly rise to a point where the financing constraint would become so sharp that it’s possible even to envisage Russia’s return from a creditor to international organizations to [that of] a borrower.”

Russia’s reserves are the third largest in the world, but it is spending billions of dollars a day in an attempt to falsely shore up the rubble and prevent any internal political discord.

The Russian government, whose legitimacy is based on economic growth and sustaining this new middle class, is threatened by a storm that it has no experience handling.

There was a time when Russia and China were trying to demonstrate together the efficiency of authoritarian capitalism as a counter to America’s unilateral power. This was true especially when they were both growing rapidly and the United States was mired in a slowing economy and pinned downed in Iraq.

But Russia’s acute vulnerability to the world economic crisis, brought on by its mistrust of a capitalism that is not controlled by the state, its insistence on blending cronyism with corporate management and its belief that the oil bubble would never bust, has made Russia an unnecessary partner for China.

Mr. Nixon’s actions were based on the United States being a desirable and indispensable partner. Although still powerful, the abdication of America’s political and corporate leadership to the forces of easy money and cheap energy has created a still indispensable but much less independent America.

The massive U.S. debt to China and the forthcoming need for an economically embarrassed America to sell its products to a newly stimulated domestic Chinese economy will force Washington to move closer to capital-rich China.

So the dance has come full circle.

While the original choreography was based on a concept to check Soviet power, in the new dance, Russia will feel like the odd person out. And a left-out Russia, frustrated by its deteriorating economic geopolitical relevance, its fear of China reinforced by the growing relationship between the United States and China and its historic insecurity, will be, by definition, destabilizing.

Edward Goldberg, a consultant on international trade with Russia and Eastern Europe, teaches international marketing at the Zicklin Graduate School of Business, Baruch College of the City University of New York.

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