Merlin Weekly Macro: China, Russia, and the emerging geopolitical reality

This is a tale of two photographs and a Joint Statement. All three together reflect just how much the global geostrategic tectonic plates have shifted in an alarmingly short period.

Going, going, gone

The first is the familiar photo, taken a mere 11 months ago, is now a portrait of what already seems ancient history: the leaders of the Free World, the ‘enduring partnership’ (according to Joe Biden at the time) taken on OMAHA Beach, Normandy, on the 80th anniversary of D-Day. David Cameron standing in for Rishi Sunak, both kicked out within a month, sunk without trace (our former Prime Minister had already deserted that day at the end of formal proceedings, pleading an urgent ITV election interview and leaving his foreign secretary as his proxy); Olaf Scholz also subsequently dismissed in a heavy electoral defeat; Joe Biden never even made it to polling day, dumped by his own party only two months later; only Emmanuel Macron survives, in office but hardly in power after a disastrous self-induced premature election campaign last summer.

Repeated today, the line-up could hardly be more different on every level, whether politically or in personality: Keir Starmer, Friedrich Merz, Donald Trump, and Macron knowing that his time also is up by constitution in two years’ time.

Red Square: say cheese! Smile!

The second photograph is of Red Square, Moscow on the 80th anniversary of the Victory over Fascism in the Great Patriotic War (otherwise known as VE Day), taken 10 months later on May 8th 2025. Twenty-nine world leaders, including Robert Fico of Slovakia, both an EU and NATO member state, were guests of Vladimir Putin to see his annual May Day military parade. It could have been a funeral. General Secretary Xi Jinping of China had pride of place, standing at Putin’s side wearing his usual lop-sided but inscrutable grin/grimace and betraying zero emotion. Putin and Xi have been in office for 25 and 12 years respectively and both have removed constitutional barriers to national presidency term-limits. Xi was in town not only in sympathy with Putin and offering overt public support, but also as a formal ally, there to cement relations with his ‘dear friend’ and to launch fresh initiatives in the New World Order.

'Global Stability’ Moscow/Beijing-style

Russia and China issued a Joint Statement the day after VE Day. A remarkable document, it is simultaneously a wholly disingenuous and hypocritical statement of intent about maintaining global strategic stability; it is a thinly veiled threat to NATO; it throws down the gauntlet directly to America; it is a series of security red lines covering most of the globe.

‘The independent, mature and resilient China-Russia relationship not only brings great benefits to the people of the two countries, but also makes important contributions to maintaining global strategic stability and promoting an equal and orderly multipolar world.’ Throughout, they refer to themselves as the ‘Two Sides’. It is surely a cruel joke that in invoking the sanctity and responsibilities of the United Nations (of which The Two Sides are members of the Permanent Security Council) towards global security and the protection of UN members, that with the complicit support of China, Russia invaded Ukraine, and China is on record as preparing for the ‘recovery’ of Taiwan by military or other means by 2027; Putin and Xi must have been struggling to contain their mirth when they thought up that bit.

‘One of the most pressing strategic risks to be urgently addressed remains the highly destabilizing expansion of existing and newly formed military alliances and coalitions that is being carried out by some nuclear-weapon States close to the frontiers of other nuclear-weapon States in an attempt to establish or expand permanent footholds in such areas, which are particularly sensitive to them, for the purposes of projecting military power, exerting forceful pressure and committing other hostile activities that threaten the core security interests of those States.’ Given the outbreak of hostilities a few days before, it could be construed as a reference to India and Pakistan. More likely, it is a little-disguised pop at Sweden and Finland for joining NATO, and a warning to Ukraine, Georgia and Moldova or any other non-member frontier state that any hint of their considering joining NATO is to be regarded as a direct provocation.

The communique then goes on indirectly to threaten both Poland (which has appealed to share the British and American nuclear umbrella, as well as asking the US to deploy tactical nuclear and air defence weapons on Polish soil) and South Korea (publicly debating a nuclear weapons programme as a deterrence against already nuclear-armed North Korea): ‘It is also of serious concern that such activities are accompanied by the forward deployment of military infrastructure and advanced offensive, defensive and versatile weapon systems that can be employed to accomplish strategic missions -- in particular, to perform decapitating and disarming strikes, while providing enhanced capabilities for missile interception.’

Trump’s proposal for a US equivalent of Israel’s ‘Iron Dome’, an integrated, layered national defence shield, is cast as a direct provocation to both China and Russia. The AUKUS tripartite treaty is dealt with in a similar manner: ‘The Two Sides state that the efforts undertaken by the AUKUS (US-UK-Australia) partnership to establish military infrastructure of two nuclear-weapon States in support of the activities of their nuclear forces in the territory of a State Party to the South Pacific Nuclear Free Zone Treaty undermine strategic stability and provoke an arms race in the region’. Even Elon Musk’s Starlink programme gets a nodding recognition, the stellar equivalent of get-your-tanks-off-our-lawn: ‘The Two Sides condemn the use of commercial space systems to interfere in the internal affairs of sovereign States and armed conflicts involving third countries.’

‘There’s no such thing as an ex-KGB agent’ (V. Putin, 2004)

There is much that is difficult to argue with in terms of preventing or not escalating an arms race and the responsibilities of the Nuclear States, but Moscow and Beijing’s cynicism is pregnant. The final, concluding paragraph is a dark statement of intent: ‘The Two Sides intend to continue in the most active manner to enhance the coordination of their approaches and to deepen the practical cooperation on maintaining and strengthening global strategic stability, as well as to jointly address common challenges and threats in this sphere’.

Lest anyone be in any doubt, however anodyne and superficially innocent the language, global strategic stability seen through the eyes of the Chinese Communist Party is their own strategic vision of the New World Order and the supremacy of global communism with Chinese characteristics. Anyone who seriously thinks that Xi wants Russia close but not too close is not only complacent but dangerously delusional; Russian cooperation with China, and the genuine partnership between Xi and Putin, is foundational to achieving the strategic goals of both. A transactional Trump firmly believes he can drive a wedge between them; Putin may indeed do a deal with the US to develop natural resources in the Arctic Circle, but if he does it will be because it is in Russia’s interests to do so. But the likelihood of Russia being seduced by the Americans away from China is minimal. The geostrategic reality is that physical and political mortality notwithstanding, Xi and Putin will be in office long after Donald Trump has left it in less than four years’ time.

But this is a game of ‘what came first, the chicken or the egg’. The timing of this communique was no coincidence. It was designed to put pressure on NATO ahead of the foreign ministers’ meeting which took place this week in Turkey in preparation for the full NATO leaders’ summit on June 24-26 in The Hague. Leading the witness to Fox News coming out of this week’s meeting, US Secretary of State Marco Rubio is confident that all member states will commit at the summit to annual spending of 5% of their national GDP on defence within a decade. 5% is the target Trump has publicly determined for many months as the minimum requirement. Like it or not, the arms race is on. Out in Lane 8, Starmer’s aim for ‘3% if conditions allow’ by the end of the next parliament (ie 2034) is two points and a commitment wide of the mark; he is way behind already.

Trump works the Gulf

But Trump is shifting the strategic landscape elsewhere, most obviously in the Gulf. The rehabilitation of Saudi Arabia by the Trump administration is almost complete. Defined as a “force for evil” by Joe Biden, Saudi under Mohammed Bin Salman (known universally as MBS) has been brought in from the cold. In the world’s most sensitive region geostrategically and geoeconomically, in which Iran and Egypt are both aligned with Russia (and Djibouti on the African side of the Bab al Mandab Strait at the base of the Red Sea is aligned with China), having Saudi back in the western tent as a bastion of stability is of great importance. It is instructive that within days of taking office, Trump was using the Saudis as the interlocutors and hosts for peace talks to end the Ukrainian war.

That Trump’s extended tour of the Gulf States has renewed and reinforced old friendships from his first term, when he successfully negotiated the Abraham Accords, is instrumental (if he was going to get a Nobel Prize for anything, that should have been it, creating rapprochement between several key Arab states and Israel). In the complex arena of Middle Eastern and Gulf politics but with their much wider connections, fomenting alliances including those which offer communication channels or influence with Iran, are important. This is particularly so while Trump is attempting to conclude a new nuclear containment agreement with Tehran (linked, is his re-evaluation of Syria’s new leader; this ex-Al Qaida luminary is one of Trump’s new tools to help isolate Iran politically, but it leaves Israel feeling highly uneasy).

Markets evaluation of risk

The big question is what happens next? What is the risk that a new Cold War that is obviously already upon us either deliberately or accidentally descends into a Hot War and one in which potentially half the world is burnt to a crisp? Whatever the protestations of the Sino-Russian alliance, NATO is a defensive mutual protection society. However, it is undeniable that Donald Trump’s determination for the US to be ‘the most dominant civilisation the world has ever seen’ is as overtly provocative to his foes as it is corrosive with his allies.

Both Russia and China have their strategic aims: China’s we have discussed; Russia’s remains to create a politically and militarily sterile buffer zone between NATO/the EU, and the Russian motherland (and for these purposes Ukraine is either Russian or neutralised). How far can/will either nation literally push the boundaries to achieve their strategic aims? How robustly will NATO, plus Australia, Japan and South Korea and others, respond? Arguably the period of maximum danger is the immediate future, i.e. within the next five years: non-US NATO members are militarily weak and have significant catching up to do to make up for three decades of neglect. But they will strengthen. The rational malign actor would use its opponents’ weakness as the opportunity to prosecute its own aims, rather than waiting for the opposition to get stronger. Not that they get much thanks for it, the Ukrainians have done the rest of the West a great service depleting Putin’s forces. But while he has made some big mistakes, Putin is still a canny operator; there are other more subtle, stealthy and subversive ways of achieving his aim.

Markets remain focused on economics and particularly trade and tariffs. They have breathed a collective sigh of relief (‘risk on’: equities up, bonds down) that both the US and China have found an off-ramp to allow goods to move once more between the two countries, at least for 90 days. But while it is difficult to quantify and to put a definitive number on it, the overarching geostrategic risks are perceptibly rising. To make it easier, for those who like counting things, the costs of confronting the risks as measured by defence spending are literally multiplying. Rapidly. Governments and markets are going to have to confront some hard truths when it comes to how it is going to be paid for and who underwrites the risk. It has been hard enough for many countries to get to 2% of GDP on defence spending; more than doubling again is a big leap when national indebtedness levels are already so stretched.

The risks are political, economic and financial; all three are inextricably interlinked. The moving parts are immensely sensitive and complex; but at its barest essential it is a simple equation: bullets or benefits; war or peace; vassalage or freedom. You choose.     

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