China Power | Economy | East Asia

Amid the Ukraine Crisis, China-Russia Economic Relations Remain Lukewarm

China’s mixed signals on the Ukraine crisis extend to the economic realm, long a weak point for Sino-Russia ties.

Amid the Ukraine Crisis, China-Russia Economic Relations Remain Lukewarm
Credit: Pixabay

Amid Europe’s worst military crisis in decades, countries around the world faced mounting pressure to choose sides between Russia and Ukraine. China, in particular, has faced outspoken criticism from Western officials and foreign policy commentators, who see Beijing as openly supporting Russia. China has meticulously shunned any provocative language, mostly repeating Russian official statements. It also blamed the United States and NATO for mishandling Russian security concerns, “fuelling the flame” of conflict, and denounced Western sanctions as damaging for the global economy. Chinese social media seemed less timid, with some netizens resorting to war-drum rhetoric, for which many faced bans from China’s censors.

Despite all the bravado about a close-knit brotherhood between China and Russia, Beijing has showed no enthusiasm for rescuing Moscow with any tangible economic lifelines. At the same time, China has also refused to turn its back on Moscow or bend under the threats of secondary sanctions from the United States. China does not like to being ordered around, and as – Politburo member Yang Jiechi said during his meeting with U.S. National Security Advisor Jake Sullivan – any attempts to pressure China would fail. Besides, Beijing is not an easy target to prosecute economically. Paraphrasing a popular business term, it is too big to be cancelled from the global economy, something the Trump administration’s trade war already proved.

China’s adherence to neutrality amid the Russia-Ukraine crisis was promoted during the Sullivan-Yang meeting; it was also underscored when Presidents Joe Biden and Xi Jinping held a two-hour telephone conversation days later. Neither interaction really helped Washington to win over China. Chinese neutrality, however, should not be conflated with de facto support of Russia. Since the outbreak of the conflict over a month ago, Beijing has remained unwilling to either openly bail out Moscow or criticize it.

India, by contrast, has been even more energetic in reaching out to Russia by ramping up oil purchases and jumpstarting trade in national currencies. India has already gained an advantage from the ongoing confrontation between Russia and the West by almost quadrupling its daily purchases of Russian oil at much cheaper prices. Now New Delhi is going even further by approving a proposal raised earlier by Russian authorities to allow Russian investors to buy debt securities of Indian companies. In fact, doing so required India to ease control over the system of its external commercial borrowing, which speaks of New Delhi’s willingness to deepen financial cooperation with Russia. Now Russian organizations can invest in bonds of Indian companies and pay for it with rupees via its own account open in the Reserve Bank of India.

In some cases, China has even limited Russia’s leeway by suspending some financial operations with it. Far from rushing to Moscow’s recuse, China’s largest state banks – the Bank of China and ICBC – halted operations dealing with Russian commodities. The China-subsidized Asian Infrastructure Investment Bank (AIIB) and BRICS bank suspended projects in Russia; Beijing also once again closed its ports to Russian seafood, citing COVID-19 precautions. Reports circulated that China had refused to supply Russian airlines with spare parts, though that was debunked by Russia later – the employee who blew the whistle was quickly fired by the Russian state aviation agency, Rosaviatsiya.

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The Impact on Trade

Chinese smartphone giants Xiaomi, Oppo, and Huawei have halved their supplies to Russia, and TikTok suspended services after blocking Russian state media. Even Chinese tech hegemons such as Huawei, which still operates in Russia in spite of sanctions, cannot become a panacea for the Russian market and could see its business slowing down. That is because Huawei heavily relies on other chip suppliers, which usually use U.S.-designed technology. Earlier Reuters reported that in 2019, of the 50,000 5G base stations sold by Huawei only 8 percent were free from U.S. technology or components.

Meanwhile, after being left with a near-monopoly after the mass exodus of Western and Japanese manufacturers, Chinese car makers, such as Haval, jacked up their prices by 50 percent, citing logistics bottlenecks. As Russian business magazine Kommersant underscored, such a sharp uptick can best be explained by simple economic logic: Competition has become less intense since the market supply is limited only to Russian and Chinese cars. So much for the official rhetoric Russia-China “no limits” friendship.

China will also be looking to fill in the void in the retail, and fast-moving consumer goods (FMCG) sectors left after mass exodus of foreign firms. In February alone, inflation of 8.4 percent – the highest rate since 2014 – made non-Chinese brands more expansive. As a result, Chinese automobile manufactures saw a 70 percent spike of sales in Russia.

Fresh statistics uphold the trend, indicating that China-Russia trade rose 38.5 percent in January-February this year, building on the record high of the last year – and that was largely before the current crisis began. With Chinese companies willing to explore new opportunities in the Russian market, which was left almost virgin after the exit or suspension of more than 400 international brands, China-Russia trade could set new records in the short term. Meanwhile, Chinese shipping giant COSCO is currently Russia’s last connection to maritime trade after all other major players suspended their services.

Financial Ties

In spite of those trends, China’s capabilities to cushion Russia from the economic fallout are limited. The two main avenues at China’s disposal to help Russia are energy and finance. Russian banks have revved up renminbi (RMB) deposit proposals, with Alfabank and VTB trailblazing the trend. Russian traders quadrupled RMB turnover in March to its maximum, constituting one-third of ruble-euro trading, while some banks saw a 1,000 percent daily increase in the issuance of UnionPay cards. Fresh polls indicate that after Visa and Mastercard suspended their operations in Russia, 35 percent of Russians eyed switching to China-powered UnionPay. However, some banks that frantically tried to satisfy skyrocketing demand said that they faced “tough” negotiations with the Chinese side, which also fears secondary sanctions if it admits many of the Russian banks into the system.

Indeed, China’s core bank institutions, which are responsible for most of the trade between China and Russia, would not risk getting blocked from dollar transactions. As a result, China’s small and provincial banks, the ones without an international profile, are likely to keep financing Russia and servicing payments, but the smaller scope of their liquidity assets may hinder larger projects. CIPS, the Chinese analogue of SWIFT, also comes with its limitations. The Economist reports that CIPS allows connection of foreign banks only via other Chinese clearing banks, which routinely use SWIFT messaging.

China-Russia trade turnover last year hit a record of $146 billion, and Russia’s central bank allocated 13 percent of its foreign reserves to the Chinese currency – a massive jump from just 0.1 percent in 2017. Trade in national currencies occupies roughly 18 percent of Russia’s reserves now and has huge potential, since currently its balance is almost proportionate. To foster that China has doubled the RMB’s currency band with the ruble to 10 percent to ease trading after the Russian ruble plunged to a record low against the U.S. dollar. But both the RMB and the ruble are low-converted currencies, with the RMB accounting for just 3 percent of the world’s business. That makes it of no use for Russian foreign trade conducted with any country other than China.

In order to overcome that problem, China and the Russia-led Eurasian Economic Union, whose market covers a population of more than 180 million, are currently in talks to create an independent international monetary and financial system with their own currency, which would be weighted as an index of the national currencies and commodity prices. Even if this alternative is launched in the near future, it will take years to completely ditch the U.S. dollar, which currently occupies more than 80 percent of global foreign exchange transactions.

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Russia and China have also strengthened their financial cooperation to hedge the risks of global sanctions. Bloomberg reported earlier that Russia has almost a quarter of all foreign ownership in China’s domestic bond market, the equivalent of $140 billion worth of Chinese bonds.

Energy Cooperation

In the energy sector, China could be the largest beneficiary of the crisis. Russia currently exports 150-190 billion cubic meters of natural gas to Europe, which also consumes 42 percent of Russia’s total oil production; while China purchases only 14 percent of it. With collapse of the Nord Stream 2 pipeline and the EU’s roadmap to slash Russian energy supplies by 2030, the bulk of Russian oil and gas would need to be redirected to Asia, with China and other Asian states (such as Japan, South Korea, and Pakistan) having more say over the prices and terms of energy contracts. However, the infrastructure is currently not sufficient to accommodate such volumes, and expanding it would take extra financing and time.

With all the current China-Russia energy projects reaching their highest capacity, Russia could pump up about 50 billion cubic meters of gas to China by 2025 – just one-third of current total supplies to Europe. Even when the Power of Siberia 2 pipeline, with an estimated capacity of 50 billion cubic meters, is launched (the date is currently estimated for 2028), Russia’s gas exports to China will reach only half of its current European deliveries. Hence, with European demand dropping and the supply of untapped Russian energy spiking, China could exercise more leverage over Russia in setting favorable prices. Chinese energy giants have already eyed larger stakes in Russian energy and commodity firms, which were abandoned in solidarity by the Western companies.

The Limits of China’s Support

Although China has been called on to broker a Russia-Ukraine truce, with Beijing even publicly stating such an intention, in the end China seems to be opting for low-profile approach. China-Russia ties have never been motivated by geopolitical turbulence, but rather the pursuit of their own logic and pragmatic interests. Neither side has ever showcased upfront support to each other on sensitive issues, be it Crimea or the South China Sea. However, China has been under the international spotlight recently with an unending stream of U.S. officials calling on Beijing to step away from Russia or “face consequences.”

Despite the ongoing heated debate among Chinese scholars on which side to choose, Chinese officials perceive the Russia-Ukraine spat as a reflection of a more long-term strategic showdown between the West and opponent states, led by Russia and China, during the transition to a new era of international relations, as their recent joint statement reads. However, China does not wish to be embroiled in other countries’ bilateral disputes or risk association with any of the conflicting sides, which could work to the detriment of China’s extremely globalized economy. Such a neutral position was specifically discernible during the Armenia-Azerbaijan conflict of 2020.

Already, China has started to cautiously calibrate its rhetoric on the crisis. First, Xi Jinping began using less generalized language when describing the crisis as an “outbreak of war” during his video conference with French President Emmanuel Macron and German Chancellor Olaf Scholz. Later Xi reiterated the same term in his call with Biden, stressing the importance “to end the war.” China’s top diplomat, Yang Jiechi, in his rendezvous with Sullivan said that the United States should not mischaracterize Beijing’s stance on the conflict, thus repeating after earlier remarks by Chinese Foreign Minister Wang Yi that China “is not a party” in the conflict. Beijing is walking a tightrope to characterize the conflict in terms that are acceptable and welcomed in the West while also distancing itself from the confrontation so as not to give any provocative or ambiguous signals to Moscow.

Beijing will further carry on with its stance of offering muted sympathy to Moscow while also promoting its own agenda of doing business with the United States and the EU. In a telephone call on February 17, Macron and Xi pledged to promote ratification of the stalled China-EU investment deal – a prospect that looks unlikely if China is seen as actively backing Russia. China is also seeking to secure its admission to the CPTPP and patch frayed trade ties with the United States, a point raised during recent Yang-Sullivan discussions.

Trade relations with the U.S. are of paramount importance for China, as both remain each other’s largest trading partners. Amid the current conflict, China was seeking waivers from the United States for most of the Trump-sanctioned Chinese goods, but in the end China got just two-thirds of the tariff waivers it had requested. China also purchased 200,000 tonnes of soybeans and booked orders for 300,000 tonnes more, along with 10 shipments of corn from the United States to compensate for pricing fluctuations in agriculture markets following ruptured supply chains from Ukraine and Russia.

Against this complicated economic background, Beijing continues doing the minimum it should to maintain momentum with Russia, while not overextending any of its efforts so as not to harm its ties with the West.