How does China help the Russian economy? Investment Monitor
Vladimir Putin’s “pivot to Asia” policy has been in place for more than a decade, and with mixed success. China has been Russia’s biggest trading partner for 12 years now, but the Russian economy remains heavily dependent on “the West”. The invasion of Ukraine only accelerated Putin’s desire to get closer to China, but again the results were ambiguous.
On the one hand, Beijing has very happily filled the void left by Western sanctions and the corporate exodus, while making pro-Russian noises at the right time, politically speaking. In contrast, Xi Jinping failed to rally Putin as the latter would have hoped after their spectacular encounter at the Winter Olympics in early 2022. That was indeed when they signed the rather absurd contract ‘no limits’, anti-western agreement (worthy of a particularly mediocre James Bond-style rip-off).
At that time, two weeks before the invasion of Ukraine, the Sino-Russian partnership seemed stronger than ever. Fast forward just a few weeks, and the illusion was shattered as Ukraine laid bare the gaping difference between the global ambitions of Beijing and Moscow, and the limits of their supposedly unconditional love affair. As a result, China offered Putin only half-hearted support, at best.
Beijing is happy to buy cheap oil from Russia
In recent months, the EU, the United States and other allied countries have announcement various embargoes on most Russian oil. China did not.
“China certainly contributes to Russia’s economy. It’s nothing new or special. All economies are intertwined and interconnected,” says Klisman Murati, Founder and CEO of Pareto Economics. “But China is also helping Russia in specific ways. He buys cheap and discounted Yural oil. So is India. In fact, the two countries account for half of all Russian oil purchases. China has overtaken Germany as the main customer of Russian oil.
It is important to note that, to avoid Western sanctions, China bought Russian oil in renminbi, which strengthens the Chinese currency. Moreover, this business outcome goes beyond oil. Sino-Russian trade as a whole increased by 29% between January and May 2022, compared to the same period in 2021, testifies to the fact that Chinese products have replaced many of those sanctioned or lost by the exodus of Western companies.
Chinese companies stay in Russia
More than 1,200 multinationals have reduced or abandoned business relations with Russia following Putin’s invasion of Ukraine, according to data compiled by the Yale School of Management. Its authoritative business list, updated weekly, plays a key role in praising and shaming companies that have, or have not, taken political action in Russia.
From a global perspective, China has the largest number of companies that, to date, continue to do business as usual in Russia. Specifically, there are some 41 Chinese companies in Russia, such as China Construction Bankwho have taken no action in the country.
Meanwhile, of the roughly 200 companies that have either halted Russian engagements altogether or directly left the country, nearly all are from Europe or North America. None come from China, with the exception of several large Chinese banks, such as ICCBwhich essentially had no choice, since ongoing Western sanctions against Russia effectively cut the country off from the international banking system, meaning major Chinese financial institutions had to follow suit.
Even if Chinese companies wanted to pull out of Russia for ethical reasons, they would face serious socio-political obstacles.
For example, carpooling app Didi suffered a major backlash from the Chinese public after announcing that it would withdraw from the Russian market on March 4. The Chinese have taken to the internet to accuse the country of caving in to US pressure, a development that shows broad support for Russia among the Chinese population. In fact, Didi was in such a hurry that the company actually made a U-turn and said it would continue to operate in Russia.
In short, public support for Russia has left Chinese companies little room to manoeuvre, as has Beijing’s uncritical stance toward Putin. The upshot is that, for companies like Didi, the safest course of action is inaction, while simultaneously avoiding any pro-Russian statements lest they be boycotted by Western companies or institutions.
But Putin stands in the way of China
Just weeks before Russia invaded Ukraine, Putin and Xi issued a 5,300-word statement that can be described as nothing less than a anti-western manifestoor more precisely a strong man of the defense of “alternative forms of democracy” via a “limitless” friendship between Beijing and Moscow.
A month later, Xi reaffirmed his country’s support for Russian sovereignty and security during a phone call with Putin. In short, China supports Russia politically in some ways, according to Murati.
“Just recently, at the recent BRICS summit in June, Xi called Western sanctions ‘arming forces’ against Russia,” he adds. “But China is in a very difficult position, ideologically, because it sees sovereignty as a vital value, and yet it supports Russia’s invasion of a sovereign state and condemns the West for pushing back war. from Russia, so it’s a pretty confusing message.
Adding to the confusion is the fact that China has for years challenged the US dollar system that has dominated global finance and trade since World War II. But the invasion of the Ukraine put a brake on this work.
“Beijing seems ready to see Russia as a source of nothing but discounted productssays Maximilian Hess, a London-based political risk and foreign policy analyst. “Putin wants to destroy the international order; China wants to see it revamped. Putin’s war in Ukraine has proven to be more of a threat to Chinese strategy than an opportunity.
“Even in the early weeks of the war, there were signs that Beijing was not going to ally with Russia in its attempts to challenge and undermine the dollar system.”
Indeed, the mainly Chinese-funded New Development Bank halted all transactions in Russia in early March, despite Russia being a capital member, as did the Asian Infrastructure Investment Bank of China.
“While China has refused to condemn Russia’s invasion of Ukraine, even to support Moscow at the UN, and to increase trade to replace sanctioned Russian products, it does not offer Russia the kind of credit or investment it needs to support a truly dollar-challenging system,” said Hesse.
To illustrate the point, he points to Beijing’s freezing of civilian airliner development projects with Russia, once estimated to be worth more than $50 billion. In March, Beijing reportedly suspended discussions on the development of a new major petrochemical plant. Meanwhile, the similar $10 billion Amur gas chemical complex40% owned by Chinese state-owned Sinopec, appears to be continuing, although it has been restricted by sanctions that could delay its planned completion date of 2024.
“Just before the war, Russia and China agreed on a new gas supply contract and plan to build the Power of Siberia 2 pipeline,” says Hess. “The first such pipeline and a supply contract was concluded within months of Putin’s initial invasion of Ukraine in 2014. Supplies were to be settled in euros, although that too will likely have to be reviewed following Western sanctions.
“However Mongolian officials said they still expect the pipeline, which will partially cross their country, to go ahead, no official announcement from Beijing has been made. Chinese investment through the Belt and Road Initiative, meanwhile, has dropped to zero This year.”
And now for China?
Beijing’s goal of overthrowing the dollar system is one that requires long term thinking and slow calculation. Cataclysmic disruptions such as the invasion of Ukraine do not accelerate this process because, in times of crisis, global investors flock to safe havens, such as the US dollar. As such, Beijing does not want to invest too much capital in Putin, given that he is an agent of chaos.
“Furthermore, China cannot risk secondary sanctions by doing business with Russia, because China’s private sector is very, very risk averse, especially in light of issues such as high debt, frustration population and large protests across China – which we don’t see much in the news,” Morati says. “So the Chinese economy is not ready for sanctions to be imposed on its companies.”
Xi and Putin want to pretend they have a ‘boundless’ friendship. In fact, the war in Ukraine has shown, with comic speed, how impossible this so-called partnership is. China is unwilling to support Russia in any deeply meaningful way, lest it incur the wrath of Western sanctions. More importantly, he can only support Putin’s wrecking ball approach to a limited extent, since China’s goal is to readjust, not destroy, the international order.