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Eleanor Roosevelt once said that no one won the last war and no one will win the next war, but obviously someone forgot to remind her that this is actually just a special military operation because already as the conflict in Iran unfolds, there are two parties that are seemingly coming out ahead without even directly getting involved. Russia, now in the fourth year of its own invasion that was supposed to be over in two days, is enjoying the diverted global attention away from the war in Ukraine, but also potentially more importantly, this shakeup of global energy flows is throwing a lifeline to an economy that by most estimates was quickly running out of options. Now, maybe getting saved
at the last second by circumstances completely outside of their control may not really be winning in the traditional sense, but it is giving them more of what they need, which is time, money, and indifference. China, on the other hand, is pretty openly viewing this conflict as a once-in-a-generation opportunity to cement their influence on the global economy in ways that will probably continue to pay out for decades to come. Around 2 weeks ago, it was announced that the blockade of the Strait of Hormuz would be relaxed for ships transacting oil in Chinese RMB, rather than the long-time global default of US dollars. This, at the very least, was a major economic warning shot across the bow of America's global financial
dominance, all at the same time that even its allies are playing around with reducing their dependence on their payments infrastructure. Understanding the petrodollar and what it could mean if it went away is one thing, but beyond these direct economic ambitions, it also must be recognized that China is seemingly getting something money can't buy, regardless of what currency it is denoted in. They are looking like the reasonable, sensible actor trying to broker a peaceful, profitable deal between the squabbling parties involved. Now, whether this is actually true or not behind the geopolitical scenes, it may not even matter economically because China at least has the appearance of a
stable and confidence-inspiring economic partner to trade, invest, or otherwise do business with. But, these perks also haven't come completely for free. China, at the end of the day, is still by far the largest net importer of oil and natural gas in the world and is hugely dependent on these energy sources to power their industries. Any potential and slightly abstract long-term geopolitical advantages it may be able to line up need to be pragmatically weighted against the immediate reality that the workshop of the world is now paying twice as much to keep the lights on. So, what were the economic realities these two economies are facing? How has the war in Iran furthered those
interests? And finally, do these countries really have a vested interest in seeing this conflict come to an end? Due to this war in Iran, inflation has been rapid across most of the world, but it does not affect everywhere the same. That's why I use Surfshark. It's a VPN, a virtual private network, that encrypts your internet traffic and allows you to access over 4,500 servers in 100 countries, letting you check prices on things like flights, hotels, and consumer goods from any of these locations. But it can do much more than help you get good deals. Surfshark protects you from all digital hackers, scrambling all your data so it's a blur to people trying to steal your information. But what separates Surfshark from most other VPNs is that
it's actually actionable. My favorite feature, CleanWeb, blocks all pop-ups so you can stay focused on what you're doing. With AI hackers and inflation on the rise, Surfshark is offering Economics Explained viewers a special deal. With our code, you can get four extra months for free. Go to surfshark.com/economics or use code economics at checkout to get four extra months of Surfshark VPN. To understand why Russia is quietly celebrating this conflict, we really need to look at where their economy was before the war in Iran started and what their objectives were to assess how they have either been accelerated or hampered. All things considered, it's not a healthy economy. Russia became the
most heavily sanctioned country on Earth after its invasion of Ukraine beginning in 2022, after ironically taking that title off Iran. Thousands of sanctions from dozens of countries have targeted Russian banks, oligarchs, state-owned enterprises, and entire sectors of the economy. The goal was to make the war economically unsustainable, and to some extent it has worked. Russia's access to global financial markets has been severely constrained, major Western companies have pulled out, and the country's ability to import advanced technology has been significantly curtailed. Inflation has been a persistent problem and their central bank has raised interest rates to over 15% to try and curb it, but prices are
still running hot as imports become scarce and increasingly hard to trade through legitimate channels. For ordinary Russians, that means the cost of everyday goods has been climbing steadily while the range of available products has narrowed. The war in Ukraine has also been devastating to Russia's long-term economic prospects. Hundreds of thousands of young men have died or been injured right at the start of what would have been their working careers, which means Russia is losing a generation of productive labor at the exact moment it can least afford to. The demographic implications of that alone will be felt for decades. But there have been three lifelines keeping the economy from collapsing outright.
The first is that Russia is the most resource-rich nation on the planet. Oil, natural gas, metals, timber, Russia has enormous quantities of practically everything the global economy runs on. These resources are also somewhat fungible, which means that once a barrel of Russian oil enters the global system, it becomes very hard to determine where it came from, especially for buyers that don't want to ask too many questions. Gray market sales through intermediary countries have kept Russian energy revenues flowing even under sanctions. The way this typically works is that Russian crude gets shipped to a country like India or Turkey where it gets refined or blended with other oil and then re-exported as a
product of that country rather than as Russian energy. The original origin gets laundered out of the supply chain and by the time it reaches a European or Asian buyer, there is plausible deniability built into every step of the transaction. The second is that Russia is a breadbasket. Domestically, it can continue to feed its population just through its own agricultural production even if the selection of seasonal produce is slightly more limited than it used to be. In an economic siege, food self-sufficiency is an enormous strategic advantage that many sanctioned countries simply don't have. Russia is actually one of the world's largest exporters of wheat and that gives it leverage over countries that depend on
grain imports to feed their populations. And the third is that Russia has built a relationship of convenience with other major powers through the BRICS network, most notably China. China is thirsty for cheap energy and natural resources, and Russia can be supported by China's manufacturing base in return. It's a symbiotic relationship that neither side particularly loves, but both sides very much need. Russia gets manufactured goods and a willing buyer for its discounted energy exports. China gets cheaper fuel than it would pay on the open market. Now, the war in Iran strengthens all three of these lifelines simultaneously, which is why this conflict has been quietly one of the best things to happen to the Russian economy since the invasion of Ukraine
began. As oil supplies from the Gulf have been disrupted, global oil prices have risen significantly. That translates directly into greater revenues for Russia, even with the discounted gray market prices they have been charging to get around sanctions. Higher global benchmarks mean Russia's discounted barrels are still fetching more than they were 6 months ago. If the global price of oil rises by $30 a barrel, even a steep discount still leaves Russia better off than it was before the disruption started. But, it goes further than just higher prices. Energy sanctions on Russia have actually been relaxed in some cases as governments in the West are prioritizing keeping the lights on in their own countries over the geopolitical
condemnation of Russia's actions in Ukraine, which means Russia is not only getting more per barrel, it's also finding more willing buyers who would have previously avoided Russian oil for political reasons. The moral calculus changes quite quickly when your own citizens are facing energy shortages and heating bills are doubling. Governments that were loudly condemning Russian aggression 2 years ago are now quietly importing Russian energy through intermediary channels because the political cost of an energy crisis at home is higher than the political cost of hypocrisy abroad. The food angle is also about to become much more significant. Oil is not just used for energy, it's also a key input for making
nitrogen fertilizers, which are responsible for feeding most of the planet. Modern agriculture depends on ammonia-based fertilizers to sustain crop yields, and ammonia production requires natural gas as a feedstock. Without affordable fertilizer, crop yields fall, and when crop yields fall, food prices rise. So, as oil and gas supply disruptions persist, the cost of food production globally is going to climb. And countries in Africa, South Asia, and the Middle East that depend on imported fertilizers and grain are going to be particularly exposed. Russia's agricultural output, combined with its oil and fertilizer exports, will become even more strategically important the longer these supply issues carry on.
Countries that might have otherwise kept Russia at arms length are going to start finding reasons to pick up the phone because the alternative is food insecurity at a scale they can't politically survive. Russia's relationship with China could also deepen as a result because China is benefiting from this conflict in its own ways, and the two countries now have an even stronger shared interest in maintaining their economic partnership. When both sides of a relationship are getting what they need, the partnership tends to harden into something more structural than transactional. And then there is the indifference factor, which might actually be the most valuable thing Russia is getting out of this
conflict. Global media attention, diplomatic energy, and military resources are all being redirected towards the Middle East and away from Ukraine. The pressure on Western governments to maintain tough sanctions on Russia diminishes when their electorates are worried about a different war entirely. Now, to be fair, none of this means Russia's economic problems are solved. Sanctions still bite, inflation is still elevated, and the structural damage from losing hundreds of thousands of working-age men is real and long-lasting. The Central Bank can't cut rates without reigniting inflation, and the technology gap with the West is widening every year.
Russia's economy is surviving, but it is not thriving, and there is a meaningful difference between the two. An economy that is just surviving can keep going for a while, but it is not building the foundations for long-term prosperity, and eventually the cracks catch up. What the Iran war has done, though, is buy Russia something it desperately needed: time. Time for its economy to stabilize, time for global attention to drift elsewhere, and time for new trade relationships to harden into something more permanent. Whether that time is enough to actually turn things around is another question entirely. China's situation is very different. The economy is not drowning the way Russia's is, which means China is viewing the
Iran war less as a lifeline and more as an opportunity to accelerate ambitions it already had. That said, things haven't exactly been smooth. Trade tensions with the United States that have been playing out over the past 15 months have not been easy on Chinese industry. Tariffs have raised costs, disrupted supply chains, and created genuine uncertainty for manufacturers who depend on access to the American market. Some industries have adjusted by rerouting exports through third countries to avoid the tariffs, but that adds cost and complexity. Others have simply absorbed the higher prices and accepted lower margins. The property market, which is a major component of the domestic Chinese economy, is still struggling. Developers
that over-leveraged during the boom years are carrying enormous debts, and consumer confidence in real estate has not recovered. Companies like Evergrande and Country Garden, which were once some of the largest property developers in the world, have either defaulted or are still working through restructuring processes that have dragged on for years. This matters because for most Chinese households, property represents their primary store of wealth, which means when property values stagnate or people feel poorer and spend less, and that drags on the broader economy. It is one of the key reasons why domestic consumption in China has been slower to recover than many economists expected.
The government itself has accumulated significant debt through various channels, local government financing vehicles, state-owned enterprises, and direct central government borrowing. This creates fiscal constraints on how aggressively Beijing can stimulate without creating new bubbles or undermining confidence in the RMB. Beyond the immediate challenges, though, China has a set of strategic objectives that predate the Iran conflict by years, and the war is accelerating almost all of them. The first objective is moving up the value chain. China's workforce is
getting older and more expensive, which undermines its competitiveness in low-cost manufacturing against countries like Vietnam, Bangladesh, and Indonesia. Countries that also haven't come with the strategic baggage that China does, like intellectual property concerns, heavy government regulation on foreign businesses, and capital controls. The response has been to pivot towards higher-tech products that depend on industrial expertise, rather than just having the cheapest possible workforce. Batteries, solar panels, and electric vehicles are the headline industries here, and China now dominates all three
at a global level. Chinese companies now produce more than 80% of the world's solar panels and roughly 75% of all lithium-ion batteries. The second objective is building up the loose coalition of countries that have been left aside from the Western-led global economic system for the past 50 years. This is manifested in things like the BRICS partnership, which China has been actively expanding beyond its original five members. It has also shown up in direct investment into developing economies, particularly across Africa, with varying levels of strings attached. And of course, the Belt and Road Initiative, which is essentially China's infrastructure diplomacy program. Building ports, railways, and telecommunications networks across Asia, Africa, and Latin
America to create trade dependencies that flow through Beijing. The idea is straightforward. If your country's most important port was built with Chinese money and your telecommunications backbone runs on Chinese technology, the economic relationship becomes very hard to walk away from. The war in Iran is accelerating almost every single one of these strategic objectives, and in some cases creating entirely new opportunities that didn't exist before the conflict started. The most immediate advantage is the opportunity to push the RMB as a viable alternative currency for global trade. The Strait of Hormuz arrangement, where the blockade was relaxed specifically for ships transacting in Chinese RMB, was a direct challenge to the US
dollar's dominance in global energy markets. For countries that fear reprisals from the United States, which has clearly shown it is willing to weaponize its payments infrastructure as a geopolitical bargaining tool, the RMB is starting to look like a practical alternative. Not because they trust China more necessarily, but because having a second option reduces their vulnerability to American financial pressure. To understand why this matters, you need to understand how the petrodollar system works. Since the 1970s, the vast majority of global oil has been priced and traded in US dollars. This means that every country that imports oil needs to hold dollar reserves, which creates enormous global
demand for dollars and for US government debt. That demand is one of the key reasons America can borrow as cheaply as it does and run the deficits that it does. If even a fraction of global oil trade shifts to being denominated in RMB instead of dollars, it would reduce that structural demand for dollars and increase demand for RMB. That might sound abstract, but it has very real consequences for borrowing costs, currency stability, and the geopolitical leverage that comes with controlling the world's reserve currency. If the RMB can establish itself as even a partial alternative petrocurrency, that also changes the dynamics around China's own debt. Chinese government debt
denominated in RMB becomes slightly more attractive as a cash equivalent if other countries are already holding RMB reserves for energy purchases. It's not going to replace US Treasuries overnight, but even a marginal shift in global reserve holdings is economically significant. The countries that China has been investing in across Africa, Central Asia, and the developing world are also likely to become even more China-focused as a result of this conflict. When the United States is projecting military force and China is projecting economic stability and infrastructure investment, the choice for countries that just want to trade and develop their own economies becomes a little easier to make. There are also
direct benefits to the major industries China has been building its future around. Solar panels, batteries, and electric vehicles are all going to be in significantly greater demand as oil prices rise and energy security concerns intensify globally. China has become the undisputed global leader in all three sectors, which means elevated oil prices don't just hurt their competitors, they actively boost demand for China's most strategically important exports. Every country that decides to accelerate its transition away from fossil fuel dependency is almost certainly going to be buying Chinese equipment to do it. The West has been talking about energy transition for years, but China has been building the actual supply
chain, and that head start is now paying off in a way that even the most optimistic projections in Beijing probably didn't anticipate happening this quickly. Beyond all of the economic mechanics, China is gaining something that's arguably harder to put a price on. They look like a stable third party. Even if other countries don't necessarily trust China's intentions, they are at the very least somewhat consistent and predictable with their objectives, which in a crisis makes them easier to deal with than actors whose positions shift with domestic politics. If China can successfully mediate or even partially broker a resolution to this conflict, it will gain significant clout on the world stage as more than
just the big economy that makes stuff, but as a genuine global power that can shape outcomes. That kind of reputation takes decades to build under normal circumstances. The Iran war is offering China a shortcut. Now, of course, it would be misleading to pretend that this conflict has been nothing but good news for either country. And particularly for China, there are some real costs accumulating. The RMB is still a compromised currency. Capital controls and government intervention in the exchange rate mean that it will get a boost from countries that don't have any other options, but it is still unlikely to become the
global default anytime soon. Trust in a reserve currency ultimately comes from trust in the institutions behind it. Transparent central banking, rule of law, open capital markets, and China's financial system is still far more opaque than what most major trading economies are comfortable relying on. You can't freely move money in and out of China the way you can with dollars or euros, and that is a significant limitation for any currency trying to become a global standard. Countries will use the RMB when they have to, but they won't choose it voluntarily over a currency they can actually move around without government approval. China is also incredibly oil and energy dependent. As prices have risen, the
country is paying substantially more for something that it overwhelmingly imports in one direction. All of those abstract long-term geopolitical advantages need to be weighed against the very concrete reality that Chinese factories, power plants, and transport networks are all more expensive to operate at the moment. And it's also undermining the strength of a lot of China's coalitions at the same time as making them more important. BRICS now has more than just its title name members, and those extra members include Iran, but they also include Saudi Arabia and the UAE, two countries that Iran is actively attacking.
Geopolitical coalitions tend to work better when their constituent members aren't blowing one another up. The credibility of BRICS as a serious alternative to Western-led institutions takes a real hit when the group can't even maintain peace among its own members. This doesn't necessarily mean BRICS collapses, but it does mean that managing the coalition just got significantly harder for Beijing. The diplomatic balancing act of maintaining good relations with both Iran and the Gulf states simultaneously is not a problem that gets easier as the conflict escalates. At some point Beijing may have to pick a side. And that's a choice it has been very carefully trying to avoid. So, the question is, do Russia
and China actually want this conflict to come to an end? The honest answer is complicated because their interests don't fully align even with each other. For Russia, the incentives are almost entirely in favor of the conflict continuing, at least in the short to medium term. Every month the war in Iran drags on is another month of higher oil prices, relaxed sanctions enforcement, and diminished global attention on Ukraine. Moscow doesn't need to do anything to benefit from this. It just needs the world to stay distracted. Russia's economy has not fundamentally reformed. It has simply found breathing room. If the Iran war ended tomorrow and by some miracle oil prices quickly dropped back to pre-conflict levels, many of the pressures that were building before the
conflict started would come roaring back. For China, it's more nuanced. The strategic opportunities are real. The RMB gains, the coalition building, the demand for green energy exports, but the costs of elevated oil prices and a fractured BRICS are also real. China's ideal outcome would probably be a resolution that it gets to broker, which gives it the diplomatic credibility, while also bringing oil prices back down to levels that are more favorable for its manufacturing base. A prolonged conflict serves some of China's interests, but a swift Chinese-mediated peace would serve almost all of them, which is why Beijing has been publicly positioning itself as the responsible adult in the room, even as it quietly benefits from the
chaos. The uncomfortable reality is that both countries are rational economic actors who will make decisions based on their own interests, not on abstract principles about war and peace. And right now their interests are at the very least not pointing strongly towards a swift resolution. This is one of the more underappreciated dynamics of this conflict. The countries with the most influence over the parties involved, the ones who could theoretically apply the most economic pressure to bring things to a close, are also the ones who are benefiting the most from it continuing. That creates a structural incentive problem that makes a negotiated peace significantly harder to achieve. These aren't just petty
squabbles either. These attacks will have real implications across these countries, making throwing the future effectiveness of this group into serious doubt. But we have actually made an entire video on the economic fallout of the Iran war on the Gulf itself. So as always, we don't want to repeat too much here, but you should be able to click to that on your screen now. Thanks for watching, mate. Bye.
