China Brokers a Surprising Mid-East Deal

We think a story of major importance has been buried by the news of bank runs in the US.  While not disputing the importance of the bank run stories (we’ve written on this ourselves), the implications of China brokering a deal between Saudi Arabia and Iran are very important.  The two warring nations have achieved some kind of change in relations brokered by China, which sees itself in the ascendency.  All this while China and Russia grow closer together.

One of the first things to be noticed is that the parties concerned could not find the US to be a fair go-between to get the deal done.  That speaks volumes about the decline in influence in the Middle East under the Biden Presidency.

Tensions between China and the US are rising.  Confirmation of the origins of Covid in a Chinese lab (funded by the US), warnings to China about helping Russia in the war in Ukraine, issues of trade and reshoring, spy balloons, and the new aggressive military and diplomatic muscle China is displaying, all are a matter of record. All that said, these countries, one a supposed ally of the US, the other an enemy, chose to have China as their mediator.

As we write, President Xi has been visiting Moscow, and the Economist reports Xi has invited Putin to China.  In an inversion of US policy for over 50 years, Biden and his State Department have driven Russia and China together rather than apart.  Uniting two countries that are nuclear powers certainly does not seem like a smart thing to do.  Meanwhile, the two dictatorships announce a “friendship without limits and a natural gas deal. 

But getting back to the Middle East, why would Iran and Saudi Arabia go with the Chinese?  Saudi Arabia may have concluded that past US flirtations with Iran indicated that Iran will be getting the nuclear bomb and the US would not be able to stop them.  Making a deal while you can, must have been at least one of their motives.

Biden’s conspicuous criticism of autocracies leaves little room for countries that are, and maybe both Iran and Saudi Arabia felt more comfortable with a fellow tyrant.  We don’t really like their political systems either, but it is not for the US to say.  Democracy is not something that can find fertile roots in cultures that have no respect for individual liberty and history has painfully shown, the US cannot impose new political systems from outside.  However, we can obviously succeed in alienating countries who find our interference intolerable.

Saudi Arabia has recently not answered Biden’s phone calls and has been further irritated by US attempts to prosecute high Saudi officials for the death of a journalist.  They also failed to respond to Biden’s request to increase oil production, all while the US tries desperately to destroy the domestic US oil industry.

Iran hates the “great Satan” and likely relishes sticking it to the US.

On even a  fundamental level, Iran and Saudi Arabia both are major oil and gas producers and the US has basically said that it wishes to lead the world in making sure neither country has a future for its primary export.  The US has signaled that basically, it wants to put both countries out of business over the next 10 years.  Both countries want a place to export their energy production and the US is hostile to their energy and economic interests.

On the other hand, China is eager to buy energy from both countries and builds coal plants at a record pace, all the while maintaining the fiction of being concerned about “climate change.”   When it comes to environmental hypocrisy, they have played the US and the ever-blundering John Kerry like a fiddle.  Then again, the fact that Kerry’s stepson and President Biden’s son Hunter have both been involved in China might go some distance in explaining this hypocrisy.

From the Chinese perspective, it is wonderful to dominate the production of windmills and solar panels, minerals for batteries, and at the same time build up their refining capacity for fossil fuels.  This gives them control of the energy situation, no matter how it evolves.  If “alternatives” are a great success, they are the primary supplier.  If they are a great flop, they literally will have the West of a barrel.

The fact is there is a “community of interests” among China, Russia,  Iran, and now even Saudi Arabia.  Each either produces or needs hydrocarbon energy and each sees the US as either unreliable or a source of constant interference in their affairs. The US has also weaponized the international payments system.

China has also wanted to wean itself off the US dollar system and has been working to expand the so-called BRICS nations into an alternative payment system.  They would love to get away from the “inordinate privilege” that the US maintained in the post-war era as the issuer of the reserve currency of the world.  Both Iran and Saudi Arabia want to join the new system.

If China can convince Saudi Arabia and Iran to sell oil in yuan, this also breaks the so-called “petrodollar.”  Already some limited oil payments have been settled in currencies other than the dollar and Russia announced it is supportive of using Yuan in Asia, Africa, and Latin America.

Russia also announced it would welcome the Chinese replacement of those western companies that have left Russia.  It is obvious the economic and currency ties between the two superpowers are tightening.

After the severing of convertibility to gold in 1971, the US sent envoys to Saudi Arabia that said if the Kingdom would only accept dollars in payments for oil, the US would protect the Kingdom of Saudi Arabia.  This created an instant demand for dollars as it was the sole global currency needed by all nations to purchase vital energy.

But since the US has not stopped Iran from pursuing its goals in the region, and its pursuit of becoming a nuclear power,  Saudi Arabia may now feel they may not be able to rely on the US and therefore supporting the dollar in this way is no longer necessary or even helpful.  Saudi Arabia must keep huge quantities of dollars issued by a government that is dangerously managing its finances.  If they don’t get the military protection promised, they are not required to keep up their end of the bargain and take payment only in US dollars.

Without the artificial demand for dollars for settling oil payments, this reduces the demand not only for dollars but for US Treasury Bonds issued in dollars.

China has been sharply reducing its holding of dollars and Mid-East oil producers may now feel it is best to diversify both their currency and credit risk.

Finally, the US seized the foreign currency reserves of Russia, an ally of both China and Iran, and showed to the world that holding dollars in Western Banks is a risky deal.  Get crosswise with the US on any major level and the US can seize your accumulated reserves without any judicial process whatsoever.  This is another common interest among China and the oil producers of the region.  The US through its fiscal excesses, blundering foreign policy, and environmental zealotry, has done much to undermine dollar supremacy and China is more than happy to assist in our demise.

For the US, the loss of dollar supremacy will mean higher domestic inflation, and higher costs to finance our swelling deficits twin deficits.  Moreover, hostility by Democrats to US domestic energy production leaves us more vulnerable to Mideastern oil producers, especially if they ally with China and Russia.

A deal can only be made if the interests of each party are served.  They must have concluded that relying on the US is not a good thing for them and it is time for some diversification of their monetary, economic, and political risk.

For the US, this loss of influence could be a major event.  Destruction of the reserve status of the dollar and the concomitant demand for US Treasury bonds could be a much lower standard of living for the US and much higher debt finance costs.

The wild card is Israel, which cannot tolerate Iran becoming a nuclear power.  If Iran and Saudi Arabia kiss and make up, it will be hard to unite a coalition against Iran.   Israel may not be able to use Saudi airspace if an attack on Iran is needed.  Israel does not have long-range strategic bombers and thus would require frequent aerial refueling. Further, Israel’s primary ally is the US, and has been humiliated and lost credibility in the region.

But that simply is not enough for Biden.  He is actively supporting the Israeli domestic political opposition to Netanyahu’s judicial reforms and Democrats have openly involved themselves in Israeli politics for years, always on the side of the left-wing Labor Party.   Democrats only support left-wing governments in Israel and likely Iran and Saudi Arabia have taken note.

This Chinese-brokered rapprochement simply is another byproduct of a failing  Democrat administration.

These are just a few observations that can be made.  There are likely many other important implications that will reveal themselves over time.

Whatever this deal means, it likely means a much more difficult road ahead for the US and an existential threat to the survival of Israel.

China becomes a bigger player on the world scene and the US is weakened.  All these are thanks to one of the most corrupt and incompetent Administrations in recent history.