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Not much China can do for Russia against sanctions, analysts say

Will China help Russia deal with the fallout from economic sanctions?

This has been one of the big questions since Russia invaded Ukraine last week. The two nations have forged close ties in recent years, with Chinese leader Xi Jinping calling Russian President Vladimir Putin his “best friend” in 2019.

During Putin’s visit to Beijing last month, the two states proclaimed that their friendship is “boundless”.

This was before Russia launched its war in Ukraine and was hit by unprecedented sanctions from Western countries.

Now, China’s ability to help its neighbor is being sorely tested. Experts say Beijing’s options are limited.

“China’s leaders are walking a very difficult tightrope in Ukraine,” said Craig Singleton, senior fellow for China at the Foundation for the Defense of Democracies, a think tank based in Washington.

Beijing was quick to help Russia after its economy was hit by sanctions from around the world. On Wednesday, Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, said the country would not participate in the sanctions, but also offered no relief.

Earlier this week, China’s foreign minister spoke to his Ukrainian counterpart and said that China was “deeply saddened to see the conflict” and that its “fundamental position on the Ukraine issue is open, transparent and consistent”.

And the Asian Infrastructure Investment Bank, a Beijing-backed development bank, said on Thursday that it was suspending all its activities in Russia as “the war in Ukraine unfolds.”

“China’s complicated messages suggest that Beijing will continue to blame Washington and its allies for provoking Russia,” Singleton said.

However, “such measures will fall far short of further antagonizing the United States over Beijing’s desire to avoid a complete collapse in US-China relations,” he added.

Close but relatively small business ties

Before Russia’s invasion of Ukraine, Putin significantly deepened his country’s ties with China.

During their recent visit to China, the two countries signed 15 deals, including new contracts with Russian energy giants Gazprom and Rosneft. China also agreed to lift all import restrictions on Russian wheat and barley.

Last year, 16% of China’s oil imports came from Russia, according to official statistics. This makes Russia the second largest supplier to China after Saudi Arabia. About 5% of China’s natural gas also came from Russia last year.

Russia, meanwhile, buys about 70% of its semiconductors from China, according to the Peterson Institute for International Economics. It also imports computers, smartphones and automotive components from China. Xiaomi, for example, is among the most popular smartphone brands in Russia.

China has also engaged Russian banks in its Cross-Border Interbank Payment System (CIPS), a clearing and settlement system seen as a potential alternative to SWIFT, the Belgium-based secure messaging service that connects hundreds of financial institutions worldwide. .

China and Russia share a strategic interest in challenging the West. But the invasion of Ukraine put their friendship to the test.

friendship test

“There is still no indication that China sees that helping Russia is worth violating Western sanctions,” said Neil Thomas, China analyst at the Eurasia Group, adding that a “blatant” challenge to those sanctions would come with a “punishment economic heavy” by Beijing as well.

“Beijing’s much-lauded lifting of Russian wheat import restrictions was agreed before the invasion and does not indicate Chinese support,” he said.

While Russia needs China for trade, Beijing has other priorities. The world’s second-largest economy is Russia’s No. 1 trading partner, accounting for 16% of its foreign trade value, according to calculations by the CNN Business based on 2020 World Trade Organization figures and Chinese customs data.

But for China, Russia imports much less: trade between the two countries accounted for only 2% of China’s total trade volume. The European Union and the United States have much larger shares.
Chinese banks and companies also fear secondary sanctions if they do business with the Russians.

“Most Chinese banks cannot afford to lose access to US dollars and many Chinese industries cannot afford to lose access to US technology,” said Thomas.

According to Singleton, these Chinese entities “could very quickly find themselves subject to greater Western scrutiny if they are perceived in any significant way as helping Russian attempts to evade US-led sanctions.”

“Recognizing that China’s economy and industrial production have been under enormous pressure in recent months, Chinese monetary policymakers will likely try to strike a delicate balance between supporting Russia rhetorically, but without antagonizing Western regulators,” he added.

There were reports this week that two of China’s biggest banks – ICBC and Bank of China – have restricted funding for Russian commodity purchases for fear of violating potential sanctions.

Reuters also reported last Tuesday that China’s coal imports from Russia have stalled as buyers have been unable to obtain financing from state-owned banks worried about international sanctions.

ICBC and Bank of China did not respond to a request for comment from CNN Business.

Significant practical restrictions

Even if China wants to support Russia in areas that are not subject to sanctions — such as energy — Beijing could face severe restrictions, experts said.

The “financial sanctions that have been imposed on Russia by the West place significant practical restrictions on China’s dealings with Russia, even when they do not directly restrict them,” said Mark Williams, chief Asian economist at Capital Economics, in a research note last Wednesday. -fair.

Some commentators have suggested that China’s CIPS could be used as an alternative by Russia, now that seven Russian banks have been removed from SWIFT.

But CIPS is much smaller in size: it has only 75 direct participating banks, compared to more than 11,000 SWIFT member institutions. About 300 Russian financial institutions are on SWIFT, while only two dozen Russian banks are connected to CIPS.

The yuan is also not freely convertible and is used less frequently than other major currencies in international trade. It accounted for 3% of payments globally in January, compared to 40% in dollars, according to SWIFT. Even China-Russia trade has been dominated by the dollar and the euro.

“In practice, as CIPS is limited to payments in yuan, it is currently only used for transactions with China. Banks elsewhere are unlikely to turn to CIPS as a SWIFT solution while Russia is an international pariah,” Williams said.

China also cannot replace the United States in providing key technologies for Russia’s needs.

Last week, the Biden administration announced a series of measures to restrict exports of technology or foreign goods built with US technology to Russia.

Russia mainly imports low-cost computer chips from China, which are used in cars and home appliances. Both Russia and China rely on the United States for cutting-edge chips needed for advanced weapons systems.

“China alone cannot supply all of Russia’s critical needs for the military,” a senior US government official told a news conference last week, according to Reuters.

“China has no production of the most advanced technology nodes. Therefore, Russia and China depend on other supplier countries and, of course, on US technology to meet their needs.”

This could lead Chinese tech companies – particularly the larger ones – to be even more cautious about potential deals with Russia.

“Some small Chinese companies that are not dependent on US inputs may supply some of Russia’s demand for US sanctioned technology,” said Thomas of the Eurasia Group.

“But big Chinese tech companies will be cautious to avoid the fate of Huawei, which the US government hampered by cutting off its access to advanced semiconductors,” he added.

Source: CNN Brasil

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