The war in Ukraine could put Russia deeper than ever in China’s pocket. Here’s how Beijing could use this economic leverage

Chinese Presidents Xi Jinping and Vladimir Putin stand together after a meeting in the Kremlin in 2019.Evgenia Novozhenina/Reuters

When Western countries imposed an arms embargo on China following the 1989 Tiananmen Square massacre, Beijing turned to Moscow, reviving an economic relationship that had soured in recent decades. ‘Soviet Union. In 2014, after Russia annexed Crimea, it was China’s turn to help, relieving Moscow of Western sanctions through a series of energy contracts.

Today, as Russia’s invasion of Ukraine makes it what US President Joe Biden has called an “international pariah” and the value of the ruble plummets following new sanctions , Moscow will again turn to Beijing for help.

“With the West and many allies and partners around the world united in sanctioning Russia, the country’s economy is bound to be severely hit, and only a few countries will be willing and able to help Russia mitigate this,” said Helena Legarda, a senior analyst at the Berlin-based Mercator Institute for China Studies. “China’s economic support will be essential.”

Although it remains unclear to what extent China is willing to undermine Western sanctions – the country’s banks appear to be complying for now, as they have done in the past with sanctions on the Iran and North Korea – the new measures will accelerate Russia’s eastward pivot and make the country more economically dependent on China than ever before.

This transformation began in 2014, when Russian President Vladimir Putin visited Beijing after the annexation of Crimea.

He signed a $400 billion deal there to supply gas to China. New energy export deals followed, while in 2017 Chinese banks provided around $12 billion in financing for a liquefied natural gas project on Russia’s Yamal Peninsula.

China has also provided Russia with high-tech equipment and expertise, helping the country step up internet censorship and surveillance, tools that have come in handy in suppressing dissent against Moscow.

Feng Yujun, vice-dean of international studies at Fudan University in Shanghai, said in a report last year that “attracting the maximum amount of Chinese capital has become an important way for Russia to break US and European sanctions. , ease the financial pressure and safeguard the national economy, people’s livelihood and even political stability.

Since 2014, China has overtaken Russia’s three main European trading partners – Germany, the Netherlands and Italy – with exports rising from $37 billion to nearly $50 billion by 2020. , although the European Union as a whole remains Moscow’s largest market, at $92 billion, according to data from the International Monetary Fund.

In terms of imports, Russia already buys almost as much goods from China, US$55 billion in 2020, as from the EU as a whole, US$62 billion.

These trends are likely to accelerate due to new sanctions and decoupling measures, such as Germany’s shutdown of the Nord Stream 2 gas pipeline, as well as deals worth an estimated $117.5 billion. Americans that were announced after a meeting between Chinese President Xi Jinping and Mr. Putin in Beijing in early February. Beyond tripling Russian natural gas exports to China by 2025, the new deals included lifting Chinese restrictions on Russian wheat, opening up new export markets for Moscow.

But while China is of ever-increasing importance to Russia, the economic relationship is not equal.

Russia accounts for only about 1% of China’s global trade activity, compared to 15% the other way around. In terms of gross domestic product, China’s economy is almost 10 times larger than Russia’s, and as Moscow becomes increasingly dependent on Beijing to buy energy and other goods, China has many lucrative markets around the world: the total foreign trade for 2021 was that of the United States. $6 trillion, four times the size of the entire Russian economy.

“Russia is less than 2% of global GDP, it’s a minnow,” said James Fok, a Hong Kong-based analyst and author of Financial Cold War, a book about the US-China rivalry. “From a trade point of view, Russia is not so important for China, much less than the United States or the EU.”

For all that Beijing may sympathize with Moscow, this divergence could make China reluctant to take steps that could lead to further economic backlash from the Ukraine crisis. Chinese stocks opened lower on Monday and there were already signs of logistical problems affecting trade in Europe as a result of the war, state media reported.

“While China will continue its economic engagement with Russia, I think China does not want to be seen by the international community as helping Russia evade sanctions,” said Tommy Wu, Hong Kong-based senior economist at Oxford. Economics. “I think major Chinese commercial banks will reduce their financial transactions with Russia given their exposure to the US dollar system. But what China’s political banks will do is less clear, given their exposure to infrastructure and energy projects in Russia.

A protester in Berlin on February 25 holds a sign reading “SWIFT off”, referring to the international financial transfer network SWIFT.JOHN MACDOUGALL/AFP via Getty Images

Regardless of what Beijing decides, Russia may have no choice but to tie itself ever closer to China, including by doing more Chinese yuan transactions.

Since Crimea, Moscow had sought to reduce its exposure to the dollar. New European sanctions, as well as the cutting of several Russian banks from the SWIFT network, could lead to the renminbi being adopted as a reserve currency.

While even large investors in China tend to prefer dollar-denominated transactions to the renminbi, due to the lack of offshore markets, Fok said “the Russians will have very little choice” but to convert a substantial amount of their foreign currency. yuan reserves, although he predicted that Moscow could also increase its gold holdings in a bid to diversify.

Russia and China have launched competitors to SWIFT in recent years, but Wu said Beijing’s cross-border interbank payment system (CIPS) is ‘probably the only viable alternative for Russian banks now because of sanctions’ .

“But while CIPS has become more sophisticated and now has more members, it is still far from being able to compete with SWIFT,” he added.

Depending on how the sanctions are applied, the system itself may not make a difference. Analysts said foreign banks and firms would likely fear being caught off guard and err on the side of caution, given the risk that Washington would cut them off from the dollar payments system or the U.S. market.

A man walks past a currency exchange office in central Moscow on February 28.ALEXANDRE NEMENOV/AFP via Getty Images

The outcome of this could mean that China emerges from the Ukraine crisis with a “heavy satellite state…almost entirely dependent on Chinese finance and technology,” wrote Victor Shih, a China expert at the University of California, San Diego. , in an article for the Wire. China, a Chinese news site based in the United States, on Sunday. “Through this Russian dependence, China could also assert its domination over most of the Central Asian republics, with which it already maintains close ties.

Moscow was previously wary of Chinese designs from its geopolitical backyard. The Russian-led Eurasian Economic Union was once seen as a potential counterweight to China’s Belt and Road Initiative, but the deal Xi and Putin signed in February would tie the two projects together. “with a view to intensifying practical cooperation”. -operation” and “promote greater interconnection between the Asia-Pacific and Eurasia regions”. He also called for greater economic integration of the Shanghai Cooperation Organization, a grouping of Eurasian powers dominated by China.

Joe Webster, independent analyst and author of the China-Russia report, wrote on Monday that the war in Ukraine and the blows to the Russian economy “can only reduce Russia’s regional hard and soft power capabilities, providing a void that Beijing will fill with its massive regional economic presence.”

In the February joint statement, the Russian and Chinese leaders said they “oppose the return of international relations to a state of great-power confrontation, when the weak fall prey to the strong.” As the dust settles in Eastern Europe, perhaps Moscow will look at this passage in a new light.

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RINGO CHIU/AFP via Getty Images

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