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Is China helping to keep the Russian economy afloat?

Beijing is keen to buy Russian oil and offer lukewarm political support for Moscow’s war on Ukraine, but it has slowed serious investment and capital.

By Sebastian Shehadi

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 top trading partner for 12 years now, but the Russian economy remains highly dependent on ‘the West’. The invasion of Ukraine has only accelerated Putin’s desire to cosy up with China, but once again, the results have been ambiguous. 

On the one hand, Beijing has very happily filled the void left by Western sanctions and the corporate exodus, whilst also making pro-Russia noises at the right time, politically speaking. On the other hand, Xi Jinping has failed to rally around Putin in the way the latter would have hoped after their spectacular meeting at the Winter Olympics in early 2022. Indeed, it was then that they signed the rather absurd ‘no limits’, anti-West agreement (worthy of a particularly mediocre James Bond rip-off).

At that time, two weeks before the invasion of Ukraine, the Sino-Russian partnership looked stronger than ever. Fast-forward just a matter of weeks, and the illusion was shattered as Ukraine laid bare the gaping difference between Beijing and Moscow’s global ambitions, and the limits of their supposedly unconditional love-affair. As a result, China has offered Putin only half-hearted support, at best. 

Beijing is happy to buy cheap oil from Russia

In recent months, the EU, US and other allied nations have announced various embargos on most Russian oil. China has not. 

“China is certainly contributing to the economy of Russia. That’s nothing new or special. All economies are intertwined and interlinked,” says Klisman Murati, the founder and CEO of Pareto Economics. “But China is also helping Russia in specific ways. It is buying discounted, cheap Yural oil. So is India. In fact, the two countries are making up half of all purchases of Russian oil. China has surpassed Germany as the primary customer of Russian oil.”

It is important to note that, so as to avoid Western sanctions, China has bought Russian oil in renminbi, which is strengthening the Chinese currency. Moreover, this upshot in trade goes beyond oil. Chinese-Russian trade, overall, rose by 29% between January and May 2022, compared with the same period in 2021, testimony to the fact that Chinese goods have replaced many of those sanctioned or lost to the West’s corporate exodus

Chinese businesses are staying in Russia

More than 1,200 multinational companies have curtailed or abandoned business ties with Russia in the wake of Putin’s invasion of Ukraine, according to data assembled by the Yale School of Management. Its authoritative list of businesses, updated weekly, plays a key role in the praising and shaming of companies that have, or have not, taken political action in Russia. 

From a global perspective, China has the highest number of companies that, to this day, continue to do business as usual in Russia. More specifically, there are some 41 Chinese businesses in Russia, such as China Construction Bank, that have taken zero action in the country.

Meanwhile, of the 200 or so companies that have completely halted Russian engagements or straight up exited the country, almost every single one is from Europe or North America. None are from China, except several major Chinese banks, such as ICBC, that essentially had no choice, since ongoing Western sanctions on Russia have effectively cut the country out of the international banking system, meaning major Chinese financial institutions have had to follow suit.

Even if businesses from China wanted to pull out of Russia for ethical reasons, they would face serious socio-political obstacles. 

For example, ride-hailing app Didi was on the receiving end of a significant backlash from the Chinese public after announcing that it would withdraw from the Russian market on 4 March. Chinese people took to the internet to accuse the country of giving in to US pressure, a development that showcases a widespread support for Russia among the Chinese population. In fact, so squeezed was Didi, that the company actually made a U-turn and said it would continue operating in Russia.

In short, public support for Russia has left Chinese companies with little room to manoeuvre, as has Beijing’s uncritical stance towards Putin. The result is that, for companies such as Didi, the safest course of action is inaction, while simultaneously avoiding any statements that are friendly to Russia, lest they get boycotted by Western companies or institutions. 

But Putin stands in China’s way

Just weeks before Russia’s invasion of Ukraine, Putin and Xi released a 5,300-word statement that can be described as nothing less than an anti-Western manifesto, or more specifically a strongman defence of “alternative forms of democracy” via a “no limits” friendship between Beijing and Moscow. 

A month later, Xi reaffirmed his country’s support for Russian sovereignty and security in a phone call with Putin. In short, China is supporting Russia politically, in some ways, according to Murati. 

“Just recently, in the recent BRICS summit in June, Xi called Western sanctions ‘weaponising forces’ against Russia,” he adds. “But China is in a very difficult position, ideologically, because it holds sovereignty as a vital value, and yet it is supporting Russia’s invasion of a sovereign state and condemning the West for pushing back on Russia’s war. So it’s quite a confused message.”

Adding to the confusion is the fact that China has, for years, been challenging the US dollar system that has dominated global finance and trade since the Second World War. But the Ukraine invasion has thrown a spanner in these works. 

“Beijing appears set to see Russia as a source of little else than discounted commodities,” says Maximilian Hess, a political risk and foreign policy analyst based in London. “Putin wants to wreck the international order; China wants to see it re-ordered. Putin’s war in Ukraine has proved more a threat to China’s strategy than an opportunity.

“Even in the war’s early weeks, there were signs that Beijing was not going to ally with Russia in its attempts to challenge and undermine the dollar system.”

Indeed, the primarily Chinese-funded New Development Bank stopped all transactions in Russia in early March, though Russia was a capital member, as did China’s Asian Infrastructure Investment Bank.

“While China has refused to condemn Russia’s invasion of Ukraine, even supporting Moscow at the UN, and increased trade to replace sanctioned Russian goods, it is not offering Russia the kind of credit or investment that it needs to sustain a true challenge to the dollar system,” says Hess. 

To illustrate this point, he highlights Beijing’s freezing of plans to develop a civilian airliner with Russia, once seen to be worth more than $50bn. In March, Beijing reportedly suspended discussions on developing a new major petrochemical plant. Meanwhile, the similar $10bn Amur Gas Chemical Complex, 40% owned by China’s state-run Sinopec, appears to be continuing, though it has been constricted by sanctions that may delay its anticipated 2024 completion date. 

“Just before the war, Russia and China agreed 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 agreed in the months after Putin’s initial 2014 invasion of Ukraine. Supplies were to be settled in Euros, though this too will likely have to be revisited as a result of Western sanctions.

“Though Mongolian officials have said they still expect the pipeline, which will partially run through their country, will go ahead, no official announcement from Beijing has been forthcoming. Chinese investment through the Belt and Road Initiative, meanwhile, has fallen to zero this year.”

What now for China?

Beijing’s goal to overturn the dollar system is one that requires long-term thinking and slow-moving calculation. Cataclysmic disruptions such as the invasion of Ukraine do not accelerate that process since, during 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. 

“Moreover, China can’t risk any secondary sanctions by doing business with Russia, since the Chinese private sector is very, very risk averse, especially in light of issues such as high debt loads, population frustration and large protests across China – that we don’t see in the news much,” says Morati. “China’s economy is not ready, therefore, for sanctions to be placed on its businesses.”

Xi and Putin want to pretend that they have a ‘no limits’ friendship. In reality, the war in Ukraine has shown, with comic speed, just how impossible that alleged partnership is. China is unwilling to support Russia in a deeply meaningful way, lest it gain the ire of Western sanctions. More importantly, it can only support Putin’s wrecking ball approach to a limited degree, since China’s goal is to re-adjust, not destroy, the international order. 

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