Investing and the Sino Soviet Axis

The Russian invasion of Ukraine will have consequences both in the short term and in the long term. The stock market is down and may fall farther. The Russian ruble is falling and could achieve junk status before all is done. Oil and natural gas prices are up and Europe will be looking for an energy supplier that does not threaten their sovereignty in return for heating their homes and fueling their vehicles. Unless Putin pulls his troops out of Ukraine and sends them home Russia will be permanently isolated on the world stage with China, North Korea, and Belarus as its only financial and trading partners. We will be seeing a new Sino Soviet partnership with China as the senior partner. Thus, we are thinking about the factors involved in your investing and the Sino Soviet Axis.

China Hits the Jackpot with Russian Energy Supplies

China has not cut off Russia from any financial relationships. In fact, before invading Ukraine, Putin went to China and signed a new energy deal. According to Reuters they have a 30-year agreement for Russia to supply natural gas to China via a new pipeline. The contract will be settled in Euros although it is now unclear where and how Russia will spend those Euros except in buying its technology and other goods from China. The New York Times reports that the deal included the sale of 100 million tons of coal for a price in excess of $20 million and an agreement to buy Russian wheat despite issues with plant diseases. An issue down for road for Russia will be that Exxon and BP have pulled out of all of their projects in Russia and Total will not be investing in any new projects. It was Western oil technology that helped Russia achieve its current level of production and without that help they may have problems going forward.

History of Sino Soviet “Cooperation”

In the early days of the Cold War (1950s) Russia took the Communist government of China under its wing. They sent engineers to help build up infrastructure and did all that they could to keep China as a communist ally instead of a government allied with the USA. After a few years China accused Russia of Social-Imperialism and said they were the greatest threat China faced. Then Nixon visited China and helped widen the Sino Soviet split. Nixon’s plan was, in fact, to help split China away from Russia which was the major threat to the US and West. Little did he suppose that China would someday pose a greater economic and military risk to the USA than Russia. Eventually China and Russia ended up fighting a battle on their border. In the 1980s a Soviet diplomat suggested privately to a US diplomat that the two countries should resolve their differences and pair up to oppose the rise of China.

Investing and the Sino Soviet Axis

China Pivots to Russia as an Ally

For those with long memories the situation globally is starting to feel like the 1950s when Russia and China teamed up (before they split up). China realizes that the EU and USA have increasingly come to view China as a geopolitical and military threat. Both will be bringing more manufacturing back onshore (reshoring) which will bit by bit affect the Chinese economy. The Chinese plan seems to be to use Russia as a source of raw materials for the Chinese industrial machine. The problem for China will be finding customers for their products as Europe and North America increasingly produce more goods at home. The problem for Russia will be finding itself as the junior partner in the relationship with the Chinese and having nowhere else to turn having cut off all bridges to the West.

What Investments Will Take Advantage of Chinese and Russian Isolation?

Assuming that Russia continues their invasion of and attempt to take over Ukraine sanctions and isolation from the West will continue. The West will also be bit by bit withdrawing from reliance on China. Thus, profitable investments going forward will likely be in companies working strictly in the USA or in companies like Intel that will be ramping up chip production capacity in the USA. Alternatively, high tech in the computer realm such as development of the Metaverse will be largely immune to problems emerging from the Sino Soviet axis.

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