This is the first of two articles examining the impact of the Hormuz shock and the global response. Part 1 examines China’s strategic response to the energy crisis, the wider Global South’s experience, and how dollar system financial architecture is re-anchoring the developing world in dollar dependence.
The second will examine the regional fragmentation of global supply chains, how economic costs are being redistributed geographically, and what the World Bank’s October commodity outlook says about the future.
This is part of an ongoing series on the Petroyuan Trap hypothesis and the wider war against the emerging multipolar world.
Introduction
For much of the past year, this series has traced the convergence of shocks beneath the global economy. The war in Ukraine, the disruption of the Strait of Hormuz, the fragmentation of supply chains, and the escalating geopolitical competition over the structure of the international financial system. What is emerging is not a single crisis but a multi-layered pressure campaign—one that is being exploited to impose costs on adversaries and allies alike.
So far, the energy shock has not yet produced the global depression that some feared, primarily because of China’s immediate response. But it has produced something more subtle: a redistribution of economic costs along geographic and financial lines. China absorbed the initial energy shock internally, using reserves, administrative price controls, and industrial coordination to shield its population—and crucially, its industrial supply chain and currency—from the worst of the price increases. It’s strategic planning and preparation limited global energy inflation thereby protecting its offshore yuan exchange rate. India and much of the Global South, lacking China’s policy flexibility and energy options, absorbed it through government balance sheets, subsidies, and external financing.
China’s adjustment was effective, but it was not free. It came at the cost of reserve depletion, refinery losses, and reduced industrial activity. Crucially, it may not be sustainable indefinitely. The question for the months ahead is how long China can maintain this flexibility—and what happens when it can no longer do so.
Conversely, the United States retains the ability to escalate or de-escalate pressure on the Strait by periodically intensifying the conflict with Iran as mentioned in my previous article. The current equilibrium—restricted but functioning flows—is unusually favourable to Washington. It imposes disproportionate costs on America’s competitors while sparing the U.S. economy the worst of the disruption. This leverage is not static but dynamic and can be adjusted.
1. China: Strategic Resilience and the Limits of Adjustment
China’s response to the Hormuz shock revealed something important: energy security is not just about buying enough oil. It is also about having the institutional capacity to manage a shortage—to ration, to regulate prices, to decide who absorbs the cost and ensure they are distributed in a way that prevents critical points of failure emerging.
China has demonstrated that it possesses that capacity. But this strategy has limits, and those limits are now becoming visible.
Prepared in advance
China’s response was not improvised. It entered the crisis with advantages built up over more than a decade: roughly 1.4 billion barrels of crude in strategic and commercial storage, according to a March China Daily investigation; a diversified supplier base; land-based pipelines; domestic coal and renewable capacity; and an electric vehicle fleet that had already begun displacing oil demand.
The Council on Foreign Relations identifies supplier diversification, electrification, and reduced reliance on imported petroleum as central to China’s energy-security strategy. These policies were pursued for environmental and industrial reasons. But they had a strategic side effect: they reduced China’s exposure to exactly this kind of geopolitical disruption.
China cut imports rather than chasing barrels
When the Strait was disrupted, China did not scramble to replace every lost barrel on the international market. Instead, it slashed imports.
Seaborne crude imports fell by more than 5 million barrels per day through June—over 40% below prewar levels—without triggering an economic collapse or significant economic slowdown. That figure compares seaborne imports with the prewar baseline, not total oil consumption.
Beijing drew down inventories, restricted refined-product exports, and used its administered fuel-pricing system to limit how much of the international price increase reached domestic consumers. Refiners, facing higher costs and capped selling prices, responded by reducing purchases and throughput.
This adjustment concentrated the economic fallout in the refining and petrochemical sectors rather than passing it through to households and industry.
The cushion
This was only possible because China had stockpiles to draw on. Inventories allowed the economy to tolerate a temporary drop in crude purchases without an equivalent drop in final consumption. The IEA’s October report confirms the scale of the drawdown: China accounted for 78% of the 76-million-barrel decline in non-OECD crude inventories during September. Strategic reserves can buy time but they cannot permanently replace imported crude. This is the central tension in China’s approach.
Electrification as a second line of defence
Electrification provided an additional structural buffer. China’s electric vehicle fleet was already displacing roughly 1.3 to 1.5 million barrels of oil demand per day by 2026. Oil China’s economy no longer needed, because its transport system had already begun to move away from petroleum.
The crisis appears to have accelerated the shift. Higher petrol prices pushed more passengers toward electric taxis and public transport. Electric and LNG-powered trucks kept freight moving even as diesel consumption fell. Kpler estimates Chinese gasoline and diesel demand will fall by about 440,000 barrels per day in 2026, even as road freight volumes rise.
Coal substitution
China has built a large domestic industry that substitutes coal for oil and gas as a chemical feedstock, reducing its exposure to imported petrochemicals. Coal now supplies the vast majority of China’s methanol and ammonia production, and the country has developed coal-to-olefins plants that make plastics and industrial chemicals from coal rather than petroleum. When petrochemical imports were disrupted, these coal-based plants kept running at high capacity while oil-based chemical production elsewhere in China fell sharply. This substitution gave domestic industry an alternative source of feedstock that the Strait of Hormuz could not interrupt.
The costs are real
It is important to remember that none of this came free. Reserves were depleted and while strategic stockpiles can be rebuilt, they can’t be rebuilt overnight. The drawdown that cushioned the shock leaves China with less buffer against the next one.
Refining margins were compressed. Throughput fell. Product exports were restricted. Industrial activity was affected. The adjustment was concentrated in refining and petrochemicals, but the effects rippled outward. Lower throughput means lower demand for the services and inputs that support the sector.
And the geopolitical environment remains uncertain. The United States retains the ability to escalate pressure on the Strait by intensifying the conflict with Iran. China’s strategy works as long as the disruption remains finite. Otherwise, the adjustment becomes much harder to sustain.
China proved it can absorb a shock that would cripple less prepared economies. But it has not proved it can do it indefinitely. Its strategic planning and policy response provided resilience, not immunity.
2. India and the Global South: The Transmission Belt
China’s experience stands in contrast to much of the developing world’s response. For countries that import most of their energy, a supply shock presents an immediate political choice. Let prices rise and pass the cost to households and businesses, or hold prices down with subsidies, borrowing, and emergency financing, and absorb the cost through the state. Both options are bad. The first is inflationary and damages domestic industry and household income, the second damages public finances and, eventually, the currency.
Many energy-importing developing economies have attempted to shield households and businesses from the full impact of the shock by absorbing part of the cost through subsidies, public borrowing and emergency financing. In the most exposed countries, the resulting pressures have produced a trail from disrupted fuel and fertilizer imports to higher fiscal expenditure, balance-of-payments strains and conditional dollar-system financing.
Bangladesh: the clearest complete case
Bangladesh is the cleanest example because the institutions themselves name the cause. The World Bank approved $1.1 billion in emergency financing, explicitly citing “rising food, fertilizer, and fuel prices stemming from the Middle East Conflict.” Of that, $300 million financed 600,000 tonnes of fertilizer, supporting roughly 1.4 million hectares of rice production. Bangladesh imports more than 85% of its fertilizer.
The IMF then reported that the war had raised import costs, subsidy costs, and inflation, and placed pressure on external accounts despite strong remittances. Bangladesh is now in discussions for a new IMF program.
Every link in the chain is documented: energy and fertilizer shock, import bill, subsidies, currency and fiscal strain, threatened fertilizer supply, food security risk, World Bank emergency imports, IMF negotiations.
Ethiopia: the sharpest physical disruption
Ethiopia may be the most dramatic case. After a fuel supplier declared force majeure, Ethiopia could obtain only about 60% of its required diesel imports during March and April. Diesel briefly cost around $270 per barrel delivered and jet fuel reached about $300.
The result was fuel rationing, queues, reduced traffic, forced leave for public employees, and higher fresh-produce prices in Addis Ababa. Inflation rose from 9.4% to 11.7%, driven partly by staple foods. The IMF rephased Ethiopia’s credit facility to bring roughly $200 million forward specifically because of the Middle East war and higher fuel import costs.
Hormuz disruption, fuel shortage, balance-of-payments pressure, transport disruption, food inflation, IMF intervention. The full chain, observable and documented.
Pakistan: the IMF does the arithmetic
Pakistan is useful because the IMF has quantified the transmission mechanism. Roughly 81% of Pakistan’s fuel imports come from Gulf states. The IMF estimates the shock adds about 1.5 percentage points to FY27 inflation and worsens the current account by around 0.4% of GDP. Under its adverse scenario, inflation rises about 2.5 points and the current account deteriorates by around 1.5% of GDP.
The prescribed response is equally revealing: let the exchange rate absorb part of the shock, keep monetary policy tight, and compress or reprioritize fiscal spending to preserve debt sustainability.
Pakistan received about $1.1 billion under its existing Extended Fund Facility plus $220 million under the Resilience and Sustainability Facility. These were not new Hormuz bailouts but policy adjustment inside the existing program clearly intended to incorporate the shock.
The Philippines: the most recent case
On September 24, the Asian Development Bank approved $1.5 billion specifically because the Middle East conflict is straining the Philippine economy. The money covers fuel security, electricity, food and medicines, public services, and income support. The Philippines imports almost all its fuel and much of its fertilizer. It also has a second exposure: about 1.1 million Filipinos worked in the West Asia in 2025, and those workers supplied roughly 18% of the country’s $35.6 billion in remittances. Here the chain is even more extensive. Fuel shock, fertilizer shock, remittance shock, price and external pressure, fiscal intervention, multilateral financing.
Sri Lanka and Cambodia
The ADB has committed $450 million between the two. Cambodia receives $250 million for fiscal support, agricultural inputs, and transfers to more than a million poor households, with co-financing potentially taking the package to $688 million. Sri Lanka receives $200 million, including $100 million added specifically to absorb “Middle East” conflict pressures. The IMF estimates that every $10 increase in the price of oil would widen Sri Lanka’s trade deficit by an amount equivalent to 0.6% of GDP, as the country pays more for imported energy. A closure of the Strait of Hormuz would add a further cost equivalent to roughly 0.5% of GDP.
India: transmission, but with buffers
India’s experience also illustrates the mechanism, but with important qualifications. India imports heavily across crude, LNG, fertilizer, and agricultural feedstocks. The Indian Council for Research on International Economic Relations estimates that the fertilizer subsidy requirement for FY2026-27 could rise well above the budgeted allocation, implying an additional fiscal requirement of roughly ₹0.7-1.6 trillion, or up to about 0.8% of GDP under its severe scenario.
Protecting farmers from international fertilizer inflation does not eliminate that inflation. It simply transfers the burden onto the state’s balance sheet.
But India is not Bangladesh. It has large reserves, earns heavily from services and remittances, and has a diversified energy mix. The rupee has weakened, bond yields have repriced, and the RBI has intervened. But India has not needed emergency IMF financing. The transmission is real but so are the buffers.
The uneven middle
Indonesia, a net oil importer despite its commodity exports, has seen rupiah pressure and fuel pass-through but no major emergency program. Kenya holds more than six months of import cover, though its fiscal and debt vulnerabilities predate this shock. Malawi looks considerably more exposed. Reserves are below one month of import cover, the trade deficit has widened as fuel and fertilizer imports outrun exports, and fiscal space is severely constrained.
The counterexamples
It’s important to note that not every developing economy is experiencing the same thing. Ghana benefits from gold exports and entered the shock with a large current-account surplus. The IMF notes that higher oil prices actually help its export and fiscal receipts, even though it still imports refined fuels. Nigeria is more striking still. It is now a net refined-fuel exporter, so it has escaped the physical diesel shortages affecting other African economies. Yet prices still pass through: petrol rose 22.5% and diesel 16% initially, and the IMF projects end-2026 inflation around 17%, roughly 3.5 points above its pre-war forecast. This shows that even an oil producer can experience inflation without experiencing the financing channel.
The pattern
Looking at the wider picture, a multilateral crisis architecture that formed around the shock comes into focus. The ADB has mobilized $4 billion, including about $1 billion in trade finance for energy and food imports, after formal requests from 15 governments. The IMF, World Bank, IEA, and WTO established a dedicated coordination group. The UN reports rising fuel costs now interacting with debt burdens, food insecurity, and constrained fiscal space.
The transmission belt is now consistent enough to describe. A fuel and fertilizer shock raises import costs. Governments absorb the increase through subsidies and borrowing rather than passing it to consumers. That produces fiscal strain and pressure on the currency. External financing follows, and with it the policy conditions attached.
Those conditions matter more than the money. In Ethiopia and Pakistan, IMF documents explicitly tie the Middle East shock to spending cuts, energy-price adjustments, and exchange-rate changes. The crisis is being transmitted not only through commodity prices, but through the terms on which struggling economies receive support.
The consequences will accumulate through 2027. As fiscal space narrows, governments will be less able to cushion the next shock. Weaker currencies raise the local cost of dollar debt. Subsidy reform, when it comes, pushes costs back onto households—often at the worst political moment. Countries with commodity exports, large reserves, or strong remittance earnings are managing. Those without are not.
What makes this structurally significant is not the size of any single program. It is that the adjustment is being financed externally, on terms set by the institutions of the dollar system, at a moment when no alternative architecture exists at sufficient scale to offer a choice.
3. The Strategic Objective: Fracturing BRICS and Re-anchoring the Global South
I have argued throughout this series that the Iran war is not primarily a “Middle Eastern conflict.” It is a strategic component of a wider economic and financial campaign whose objectives are threefold: to contain China, to fracture BRICS, and to lock the Global South back into dollar dependence. The financing architecture now emerging around the Hormuz shock is the mechanism through which the second and third objectives are being achieved.
The mechanism is necessity
Countries facing the transmission chain documented above—fuel and fertilizer shocks, import bill pressure, fiscal strain, currency pressure—have no realistic alternative but to seek external financing. And the institutions capable of providing that financing at scale are the IMF, the World Bank, and the regional development banks. These are not neutral utilities. They are the institutional expression of the dollar-centred financial order. Their lending is denominated in hard currency. Their conditionality means fiscal consolidation, subsidy reform, exchange-rate adjustment, and monetary tightening. Each of these conditions re-anchors the recipient economy more firmly within the existing financial architecture.
This is the point the earlier sections demonstrate but do not name. Bangladesh did not choose the World Bank over a BRICS alternative. There is no BRICS alternative capable of delivering $1.1 billion in emergency financing for fertilizer imports. Ethiopia did not turn to the IMF because it preferred conditionality. It turned to the IMF because the IMF was the only institution able to bring $200 million forward at speed. The Philippines received $1.5 billion from the ADB because the ADB had the balance sheet, the instruments, and the operational capacity to deliver it.
The absence of a BRICS alternative
This is what the New Delhi Declaration was designed to address. The declaration called for strengthening the Contingent Reserve Arrangement and the New Development Bank. It called for expanded local-currency settlement and interoperable payment systems. It framed energy security, fertilizer shortages, and food-price volatility as matters of strategic economic resilience. The diagnosis was correct. The institutional capacity was not.
The Contingent Reserve Arrangement’s total firepower is a fraction of what the IMF can mobilize. The New Development Bank lends in the billions, not the tens of billions. Neither institution has the instruments for rapid balance-of-payments support, trade finance for emergency food and fuel imports, or the kind of pre-arranged financing the World Bank announced in October. When the shock arrived, the BRICS institutions were not the first call, because they could not be.
This is the demonstration effect intended for the Global South. Every finance ministry watching the crisis unfold now sees that when an external shock hits, the dollar system delivers relief and the BRICS system does not. That lesson will shape political and economic behaviour long after the current crisis passes. It will shape where reserves are held, which institutions are favoured, and which alliances are prioritized when the next shock arrives.
The political dimension
At the Bishkek summit, Prime Minister Modi led a group of leaders in pressuring President Putin toward a ceasefire in Ukraine. The immediate motivation was economic: a ceasefire would begin normalizing energy markets, ease the pressure on India’s import bill, and signal to Washington that New Delhi was prepared to play a constructive role. India’s participation in the BRICS summit continued, and the New Delhi Declaration was issued with India as a driving force. But the declaration’s language reflected the compromised position—reform of existing institutions rather than replacement. India is not leaving BRICS but it is hedging within it. And the economic pressure documented in the previous section is the reason.
This is what fracturing looks like in practice. It does not require formal withdrawal. It requires that member states, under economic pressure, prioritize national survival over bloc solidarity—accepting financing from the dollar system, adjusting policy in line with its conditionality, and declining to build the institutions that would make the bloc a genuine alternative. The bloc remains on paper but its capacity to act as a counterweight diminishes.
The elegance of the Trap
None of this requires a coordinating committee. The IMF does not need instructions from the Treasury. Neither does the ADB. The conditionality attached to these programs is inherent in their institutional architecture. Their operational doctrines do not require micro-management from Washington.
And this is a crucial point. When a shock hits, the countries affected turn to the institutions that can help. Those institutions attach the conditions their mandates require. Those conditions re-anchor the recipient economies within the existing order. The BRICS alternative, which cannot deliver at scale, is discredited by default. The cycle repeats.
The trap hypothesis does not require the architects to have planned each individual financing package. It requires only that they understood the architecture—that a systemic shock would drive the Global South toward the dollar system’s institutions, and that those institutions would attach conditions that reinforced the order. The evidence from Bangladesh, Ethiopia, Pakistan, the Philippines, Sri Lanka, and Cambodia suggest they understood correctly.
The strategic payoff
The war has imposed costs on China. It has imposed costs on Europe and on American consumers. It has imposed severe costs on the Global South. But it has also produced something the architects of the campaign could not have achieved through negotiation or persuasion: a demonstration, in real time, that the dollar system is the only system capable of responding to a systemic shock, and that BRICS, as yet, cannot. That demonstration is one of the major objectives of the war, the financing architecture is the mechanism, and the Global South is the audience.
The Hormuz shock has revealed a fundamental asymmetry in the global economy. China, through a decade of strategic preparation and a system capable of coordinating inventories, industrial production, and administered prices, was able to absorb the initial disruption internally. The costs were real—reserve depletion, refinery losses, reduced industrial activity—but they were distributed in a controlled manner rather than passed through to households and the industrial supply chain directly.
The Global South, by contrast, had no such capacity. For countries dependent on imported energy and lacking the fiscal and foreign-exchange buffers to absorb the shock, the adjustment was transferred to government balance sheets. The result is a visible and documented trajectory: fuel and fertilizer shocks, import bill pressure, subsidy costs, fiscal strain, and multilateral financial intervention.
But China’s adjustment has limits. The strategy depends on the assumption that the disruption is finite. If the United States escalates pressure on the Strait, or if the disruption persists longer than expected, China’s capacity to absorb further shocks will be tested. The reserves that cushioned the initial shock are at least partially depleted. The refinery margins that absorbed the cost are compressed. The industrial activity that was reduced may not recover quickly.
The current equilibrium—restricted but functioning flows—is unusually favourable to Washington. It imposes disproportionate costs on America’s competitors while sparing the U.S. economy the worst of the disruption. And it can be adjusted. The leverage is not static.
The question for the months ahead is not whether China can manage the shock. It has demonstrated that it can. The question is how long it can do so, what happens when it can no longer maintain the adjustment, and what happens to the Global South?
This is the first of two articles examining the impact of Hormuz shock and the global response. Part 1 examines China’s strategic response to the energy crisis, the wider Global South’s experience, and how dollar system financial architecture is re-anchoring the developing world in dollar dependence.
The second will examine the regional fragmentation of global supply chains, how economic costs are being redistributed geographically, and what the World Bank’s October commodity outlook says about the future.
This is part of an ongoing series on the Petroyuan Trap hypothesis and the wider war against the emerging multipolar world.