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China not emerging as lifeline for sanction-slammed Russian economy

Despite a close partnership built around mistrust of the United States, Beijing is hesitant to incur Western wrath for evading sanctions on Russia

People walk by a trading center also known as Russia Market in Beijing on March 1. (Wu Hong/EPA-EFE/REX/Shutterstock)
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China’s strategic partnership with Russia has the potential to be a lifeline for a Russian economy foundering under crippling Western sanctions, but Beijing appears to be holding back over practical constraints and fears of secondary sanctions on Chinese institutions.

As Russia’s largest trading partner and one of the few countries globally that has not condemned President Vladimir Putin’s invasion of Ukraine, China is coming under close scrutiny from the United States and its allies for its ability to undermine the Western economic coercion used to press Moscow into a cease-fire.

Ma Xue, an analyst at China Institutes of Contemporary International Relations (CICIR), wrote Tuesday that the sanctions “provided Russia with an opportunity for cooperation with third parties and to find substitute markets to thereby evade or reduce the strength of sanctions.”

But China has not rushed to help Russia soften the blow. Chinese officials and commentators have urged caution at drawing American ire and instead suggested China focus on building up its resilience against similar measures that could target the country in the future rather than helping Russia now.

U.S. targets major Russian banks and tech sector with sweeping sanctions and export controls following Ukraine invasion

China’s public stance has been to repeat its long-held opposition to sanctions imposed outside the United Nations framework, and its statements on Ukraine have charted a narrow course. Beijing has supported Russia’s position by blaming NATO and the United States while claiming that China remains neutral and respects the sovereignty of all countries, including Ukraine.

China’s businesses and banks, however, appear to be seeking to avoid being pulled into Moscow’s standoff with the West.

Without making public statements, some Chinese institutions appear to be quietly adhering to sanctions, and there are few signs of significant attempts to create a lifeline for the Russian economy. According to Bloomberg News, two of China’s biggest commercial banks, Bank of China and the Industrial and Commercial Bank of China (ICBC), in recent days restricted financing or purchases of Russian commodities.

China’s announcement in February lifting restrictions on Russian wheat imports received a lot of attention, but it was just the fulfillment of a pledge made much earlier after concerns about the presence of dwarf bunt fungus found in previous shipments had been resolved.

Natural gas imports mark one area where China has the potential to aid Russia by replacing European demand, as the Chinese government looks to ease its dependence on coal.

Imports to China of Russian gas rose by 50 percent in 2021 after a pipeline connecting Siberia to northeastern Chinese provinces opened in 2019. The two countries agreed to a 30-year supply deal in February and are working on plans for a second pipeline.

However, surging gas prices caused by the Ukraine conflict may give China pause, after analysts were already predicting lower imports for the year. Beijing may also be wary of replacing U.S. gas imports with Russian ones, after it is already missing purchase targets under a “phase one” trade deal reached in early 2020 with the Trump administration.

Amid the roar of nationalism, a few antiwar voices in China emerge over Ukraine crisis

Similarly for Chinese technology groups, undermining business relationships with the West to build up ties with Russia is not an attractive trade-off. For many of China’s leading technology companies, business with Europe and North America dwarfs that with Russia, especially when it comes to purchases of cutting-edge equipment.

“China would risk losing access to technologies from the West if it ignores restrictions on Russia. And the West has far more to offer than Russia in terms of semiconductors, software and high-end industrial goods,” said Dan Wang, a Shanghai-based technology analyst for research firm Gavekal Dragonomics.

Even for two leading Chinese technology companies under U.S. sanctions — telecom giant Huawei and microchip manufacturer SMIC — the upside is limited for a pivot to Russia.

Huawei has begun to expand research and development in Russia, but extending that effort now could intensify already heightened scrutiny of the firm’s presence in Europe, where several countries continue to debate the national security risks of allowing Huawei to build 5G networks and other telecom infrastructure.

Because SMIC has been cut off from U.S. technology and equipment needed to make microchips on processes under 10 nanometers, it will struggle to meet Russian demand for advanced chips, and a failure to comply with sanctions could lead to bans on even more U.S.-made equipment, analysts said.

One exception to an overall cautious approach toward expanding Russian business during the conflict is ride-hailing giant Didi, which last week reversed previously announced plans to exit the country after facing criticism on Chinese social media for abandoning a friendly nation.

Yet Chinese Internet companies in general have a limited presence in Russia compared with Western alternatives, and many firms are focused on their affairs at home during a sweeping regulatory crackdown.

China also has the ability to aid Russian banks to make cross-border transactions using its yuan-based Cross-Border Interbank Payment System (CIPS), an alternative to the SWIFT messaging service to which the banks have lost access under Western sanctions.

But CIPS is limited by its current scale and Chinese restrictions on convertibility of the yuan, which accounts for a tiny portion of cross-border transactions compared with the dollar. On Tuesday, CIPS handled 11,513 transactions compared with around 40 million messages per day for SWIFT.

Even for Russia, which has been more proactive than most in using the yuan for deals, only 17.5 percent of trade between the two countries was settled in yuan in 2020, and China’s ICBC bank operates a lone CIPS clearing station in Moscow.

Even if China’s system were to facilitate transfers to Russian banks as an alternative to SWIFT, this would still leave Chinese institutions open to secondary sanctions, Chen Xin, a scholar at Shanghai Jiao Tong University, told Chinese publication Guancha. “America can sanctions those banks. If no one is allowed to do business with Chinese banks, and other people comply, then this system is incapable of working,” he said.

Instead of finding ways to support Russia, Chinese commentators have cast the Western sanctions as a warning to China and an incentive to accelerate long-term efforts to build Beijing-controlled alternatives to the U.S. financial system and technology.

“What we can clearly say is that in the future, if the United States acts against China, odds are good a ‘combination punch’ will also be adopted,” wrote Ming Jinwei, a blogger and former editor at Xinhua News Agency. “How to break America’s ‘narrative leadership,’ how to split the United States’ alliance system, how to break America’s extreme sanctions, these are all [questions] worth in-depth research.”

Lyric Li in Seoul and Pei Lin Wu in Taipei contributed to this report.