The Dragon and the Bear

Could China reconcile with Russia?

The crisis in Crimea and Ukraine seems to have had little impact on the markets. Germany, the European economy most closely affected by what happens in Russia, has seen its stock market hover near its all-time highs. German newspapers have more coverage of Edward Snowden and the NSA revelations than they do of the military upheaval close to their borders. The markets seem to have concluded that Ukraine is not that important.

But the confrontation may have implications with an economy further afield: China. China has been isolated by suspicious neighbors who are worried that their economies and cultures will be overshadowed by the global giant. Both China and Russia have bristled as America has sought to contain their influence. Could they work together to frustrate American foreign policy goals?

The two powers tried it before, in the ‘50s, when both were pursuing global Communism. That connection ultimately foundered, however, over personality conflicts and the desire each had to lead the communist movement. While past problems may be instructive, they are not necessarily prologue. Global powers have found common cause before. Could the enemy of their enemy be their friend?

America is no longer the unipolar power it was following the Cold War. The world is now multi-polar, and dangerous. Both China and Russia are deeply suspicious of American containment strategies. An alliance between the two could spell trouble for global trade, and make budget-cutting in the US military more difficult.

Christians look for the lion to lie down with the lamb as a sign that peace is breaking out. But right now it looks more likely that the Dragon will lie down with the Bear.

Douglas R. Tengdin, CFA

Chief Investment Officer

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