This weekend, President Biden threatened China with sanctions if the CCP was found to be providing tacit support for Russia. Xi Jinping has set aside those threats and CCP officials have said that Russia is a strategic partner, and that their friendship continues. Since war broke out in Ukraine on February 21, China has provided Russia with two known lifelines.
In pragmatic terms, Russia makes business sense to China. It is China’s next-door neighbor, a gateway to the Arctic, and – more importantly – Russia is a natural resource provider.
For Russia, as Europe follows the U.S. in sanctions, albeit at a lower level due to closer business ties, they see China as a future buyer of its debt, not just its commodities. China is a financial market for Russia, especially if the Western one is going to be closed off to it for long. The MSCI and other major index providers recently removed Russian securities from their indexes and the VanEck Russia exchange-traded fund is no longer trading on the NYSE.
As Russian tycoon Oleg Deripaska said a couple of weeks ago, “the iron curtain has already fallen on Russia.”
China’s Foreign Minister Wang Yi reportedly said, “China is not a party to the crisis, nor does it want the sanctions to affect China.”
Hudson Institute senior fellow Michael Pillsbury thinks sanctions on China are necessary to end the war. He calls China the “invisible hand behind Putin.”
“Long term trade in energy supplies undercut the sanctions because it shows Putin he’s got somebody in his corner,” Pillsbury said on Fox News on Monday.
The Two Lifelines:
There are two known lifelines that have been thrown to Russia just prior to when fighting began in Ukraine, and one during. These are:
- Feb. 4. China signs a 30-year gas supply deal with Gazprom to build a new pipeline. And a 10-year oil supply deal with Rosneft. Both deals are agreed upon the day of the Russia-China Joint Statement signed just before the Beijing Winter Olympics opening ceremony. (The Gazprom deal was later inked on Feb. 28.)
- Feb. 25. China lifts all restrictions on Russian wheat imports. This decision came three days after sanctions were imposed by the U.S., U.K., and European Union, on Feb. 22. On Feb. 21, Russia sent armored tanks and troops into Ukraine’s ethnic Russian breakaway republics – Donetsk and Luhansk.
Worth noting, China’s two biggest lenders, the Bank of China and the Industrial and Commercial Bank stopped issuing U.S. dollar-denominated credit lines for purchases of Russian commodities, according to a Bloomberg article citing unnamed sources. Renminbi-denominated letters of credit are still available for some clients, subject to approvals from senior executives.
China, like most large emerging markets, is not imposing sanctions on Russia. To facilitate trade, the CCP said it would allow Russian companies to settle their trade in renminbi (RMB), including oil purchases, according to Chinese officials and state media. Russia has around 13% of its foreign currency reserves in RMB.
There are rumors that Russia, banned temporarily from the SWIFT international bank communications systems, would switch over to China’s Cross-border Interbank Payment System (CIPS) instead.
On March 17, U.S. Senators Todd Young (R-IN), Marco Rubio (R-FL), and Rick Scott (R-FL) introduced a bill called the Crippling Unhinged Russian Belligerence and Chinese Involvement in Putin’s Schemes (CURB CIPS) Act that, if passed, would sanction Chinese banks that conduct transactions with any Russian financial institution, including CIPS.
CIPS still works closely with SWIFT in order to access a wider network of banks, meaning if the Republican Senators’ bill became law, it would impact primarily the flow of information in international transactions between CIPS and SWIFT banks.
Russia may very well increase its use of CIPS, but that has been ongoing anyway. It is more of a directional trend than a lifeline, one that began prior to the February military incursion into Ukraine.
RMB-based trade accounted for approximately 28% of China’s exports to Russia in the first half of 2021, rising from only just 2% in 2013 when the Russia-Ukraine crisis began in earnest.
There have also been rumors in the Western press about China being on the cusp of providing military support to Russia, something that would likely invite immediate economic retaliation from Washington. To date, there has been no evidence of military aid to Russia from China. Pillsbury, who is piped into this sort of thing, also did not make a mention of this during his segment with Fox News.
Another obvious move to plug the holes left by Western firms vacating Russia would be if a Chinese SOE took control of the ownership stakes in Gazprom and Rosneft left by BP and Shell’s exit of those positions, respectively. There has been no word of this in the Chinese language press, only speculation in English language media reports that it would make sense for China to fill that void.
Foreign Affairs magazine posited recently that China may be helping Russia’s elite hide money offshore. However, the magazine admitted that money was mostly in Western-backed offshore accounts in the Cayman Islands and in Belgium.
Russia & China Ties
Over the longer term, the strategic relationship between China and Russia will be primarily about energy and other natural resources – from food to fertilizer. These are the main, economic drivers of the relationship.
But geopolitics is a close second, as the West, largely led by the U.S., is pushing away from China and has recently stated that it was almost completely finished doing business with Russia. Dozens of U.S. companies have already ceased operations there, either permanently or temporarily, including Ford and Goldman Sachs.
Russia will continue to substitute imports away from Europe and the U.S. and buy Made in China instead. This is a boon for China, especially if the U.S. and Europe continue being reliant on China imports as well. For Russia, its biggest loss over the long term might be capital markets. This is where China ultimately needs to come in with a lifeline.
Russian corporates (a little over 80%) have loans out in dollars and euros; and around 30% of the corporate bond market is in dollars and euros, with the rest being in rubles. China’s loans to Russia have shrunk dramatically since the pandemic began and, for now, that does not seem to be part of the lifelines on offer.
Lastly, pricing commerce in RMB is not a lifeline, nor is it enough of a solution to Russia, particularly if secondary sanctions are imposed and China opts to pull away from the relationship for a while.
China’s CIPS interbank messaging system still runs on SWIFT, hence the purpose of the Senate bill, and CIPS is still underdeveloped.
One thing is certain, the war in Ukraine has revealed China as Russia’s biggest, more relevant ally. China is not going to side with the West any longer. Distrust is rising on both sides.
That the United States has thrown much of its fortunes to the Chinese economy and handed China its manufacturing base is a headwind for economic and national security. This headwind is only recently being felt in Washington. It has long been felt in small cities and towns across the United States.
China’s support of Russia, especially if it is extended into the financial sector, would be a green light for Washington.
“I believe the Chinese could stop the war with one phone call to Putin,” said Pillsbury. “It’d be like your banker saying, hey, I’m calling all your loans. China is ten times larger GDP than Russia. The geopolitical balance here is that China looks down on Russia, and they were told by the Russians that they will be out of Ukraine fast. Probably the only way to get ahead on this is to sanction China. The war is going to go on because the banker is not going to make that call.”
The Russia-Ukraine war is disrupting supply chains again, right at a time when the U.S. was coming out of the delivery disruptions caused by the pandemic.