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How far will China go to help Russia? Xi’s in no mind to prioritise Moscow’s economic woes

Russia expected help from China in three sectors—high tech, finance, and energy. That is where China's coming out as a pragmatic player, dipping business activity.

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The Russia-Ukraine war has put China on a choice board that is intrinsically against its economic and global interests. Ever since the war started, China’s role has been under tight scrutiny of the West.

The claims of a ‘no-limits’ friendship between Russia and China seem to have given in to the United States’ warnings to Beijing, should it try helping Moscow evade sanctions.

The warnings got darker when Washington blacklisted five Chinese firms in June for allegedly providing support to Russian defence. In the last 10 months of the war, China hasn’t violated the sanctions even once. On the contrary, China set up task forces to study systemic resilience to US sanctions and has been cautious and passive in its support to Russia.

How far will China go?

Veracity of China-Russia alliance

While China will keep deepening its strategic partnership with Russia, its policies will be low-cost and risk-averse, spread over a course of years to help the Kremlin survive the sanctions. Beijing’s priority, however, will be to protect its own economic interests.

If the war had ended in a few weeks like the Russo-Georgian war of 2008 or the Russian invasion of Crimea in 2014, it would be far simpler for Beijing to abide by the rules of engagement as envisioned by the ‘friendship’ of Xi Jinping and Vladimir Putin. But the sheer duration of the war and the scale of violence and destruction in the case of Ukraine have made Beijing warier of Russia’s international ostracisation. Experts disagree on the tenacity of the China-Russia alignment, and Xi’s apparent discomfort at the protracted Ukraine crisis was unmissable at the Shanghai Cooperation Organisation (SCO) in September.

With whatever calculation Putin invaded Ukraine, he did rely on support from China. Russian firms rushed to open Chinese bank accounts, hopeful of circumventing the duress brought on by sanctions. Beijing was expected to boost trade with Russia to cushion the stress. None of that actually took off.

Xi’s plans to dominate the world order ensure junior partner Russia’s survival but not at the cost of violating sanctions or jeopardising Beijing’s mammoth trade volumes with the US and the European Union (EU), its two largest trading partners.

Also read: China’s uncertain politics will force foreign firms to seek alternate production hubs

Pragmatism vs friendship

Russia expected help from China in three sectors—high tech, finance, and energy. The cost of violating sanctions in the first two offset the potential benefits for Beijing because of its reliance on the West. High tech and finance are the areas where business activity and transactions dropped drastically between China and Russia.

According to data provided by the US’ Congressional Research Service, Russia, in 2021, received only about 2 per cent of the total Chinese tech exports. Stepping up support for Russia would attract secondary sanctions, risking being cut off from important chip suppliers in the US. Just a month after the war, Chinese shipments containing laptops and smartphones to Russia plunged by 40 per cent and 60 per cent. The most drastic fall was seen in the export of telecommunications network equipment — it plummeted by a whopping 98 per cent, according to the US Department of Commerce. In a blow to Moscow’s drone aspirations, SZ DJI, China’s leading drone producer, halted operations in Russia to “reassess compliance requirements”. No wonder Russia only had Iran to turn to. Beijing also recently banned the supply of military-grade processors to Russia produced by Chinese company Loongson.

China’s pragmatism is visible in its financial support to Russia too. Two of China’s largest State-owned banks — Bank of China and Industrial and Commercial Bank of China— stopped financing purchases of Russian commodities immediately after 24 February. After Visa, MasterCard and American Express, China’s UnionPay, too, declined transactions with sanctioned Russian banks. Furthermore, the China-led Asian Infrastructure Investment Bank (AIIB) and New Development Bank (NDB) also suspended business and transactions with Russia days after the war started.

The dominance of the dollar in international financial systems may or may not be declining in the longer run, but it is potent enough for China to not risk its finances at present.

Moscow has often brushed off energy sanctions as ineffective, citing access to alternative markets in China, India, and Turkey. Of the three, only China needs more Russian energy to balance the loss of European markets. But this statement is warped in various shades of grey.

Also read: Ukraine now a bottomless pit for Western aid. With no attention to its chronic…

The twists in re-directing exports 

After the EU-wide ban, Russia has had to divert a whopping 1.5 million barrels per day (bpd) of oil that it was exporting to Europe. To divert such humongous volumes is contingent upon factors like availability of tankers, shipping insurance, pipelines and LNG facilities — all of which are way below satisfactory markers.

The lack of Strategic Petroleum Reserve (SPR) facilities in Russia also reduces flexibility for Russian exports. While an SPR enables a country to stock up crude during supply shortage, it can also hold up the immediate surplus. Without a potent facility to stock up for the diverted 1.5 million bpd, Russia has little choice but to cut production.

China has been buying as much cheap Russian oil as possible to beef up its several SPR sites. But its economic slowdown is likely to impact trade volumes. More importantly, the ban and the price cap give China even better leverage to negotiate more discounts as the number of buyers have drastically fallen for Moscow since December. A major limitation, however, is that the Eastern Siberia–Pacific Ocean (ESPO) pipeline between Russia and China is already functioning at its optimum. Going by precedents, the Atasu-Alashankou Pipeline deal will take years to stabilise operations.

Coming to natural gas exports that the EU plans to start phasing out in 2023, Russia will again be pressured to divert exports. An important contrast emerges when compared with the Russian oil export situation. While China’s appetite for Russian oil has been huge, the same cannot be said for Russian pipeline gas. Natural gas remains a small fraction of China’s energy imports that are dominated by crude oil.

The one running pipeline between Russia and China and its proposed extension, taken together, would carry about 26 billion cubic metres (bcm) of natural gas, which would still be drastically lesser than the 150-200 bcm that Russia was exporting to Europe in the years before the war started.

Also read: Who will pay the bill for rebuilding Ukraine? The answer lies in unfreezing Russian…

US tightening the sanction loopholes

As the war stretches on, the Western sanction regime is becoming more adept at identifying affiliations with a sanctioned entity that could be hidden under quasi-corporate contracts. China is mindful of these processes and is steering clear of getting caught in the web of secondary sanctions, especially when its economic challenges are mounting and Covid cases are soaring.

If there is one thing that the sanction regime has been successful at, it is testing the limits of the China-Russia alliance. China, embedded within the global supply chains and financial system, is more vulnerable to economic costs.

Apart from maintaining trade volumes with the US, China is also keen on maintaining its relations with the EU. With the EU-China trade and investment deal stuck and New Silk Road projects facing setbacks, the EU has blocked China’s Huawei in sensitive strategic technologies like the 5G. Obviously, Chinese priorities lie elsewhere than redeeming Russia’s economic woes.

Russia will be a diminished power after the war, regardless of whether it wins or loses. It is likely that the junior partner might get pushed further into Beijing’s lap and its exploitation. It will create a new set of challenges for the world and India too as New Delhi is wary of a China-led Asian order.

The writer is an Associate Fellow, Europe and Eurasia Center, at the Manohar Parrikar Institute for Defence Studies and Analyses. She tweets @swasrao. Views are personal.

(Edited by Humra Laeeq)

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