China, limited lifeline for Russia after sanctions for invasion of Ukraine

Russia has China to mitigate the effect of international sanctions for its invasion of UkraineBut Beijing is not willing to do anything in the name of friendship, analysts warn.

Western countries have enacted sanctions against Moscow to cripple its banking sector and currency. Several banks have been excluded from the Swift interbank platform, an essential tool of global finance to facilitate transfers.

China, which refrains from condemning the Russian intervention and rejects the term “invasion”, opposes any sanctions against Moscow.

Since the Russian invasion of Crimea in 2014, and the preceding sanctions against Moscow, China-Russia economic and political relations have been greatly strengthened.

The Asian giant, one of the world’s trading leaders, has by far the largest exchange reserves in euros and dollars.

China “has the financial means to help Russia” and is the only country that can do so, says economist Paola Subacchi of the University of London.

“A worthy relationship”

The Sino-Russian friendship is “an example of a dignified relationship, where each one helps and supports the other in its development,” Vladimir Putin estimated last month, received with great pomp in Beijing during the Winter Olympics.

The two countries, distanced from Washington, tend to reduce their exchanges in dollars for fear of possible sanctions thanks to the extraterritoriality of the greenback.

“When the ruble fell due to sanctions” linked to Crimea, China agreed to be paid in yuan to compensate for the rise in imports in dollars, Subacchi recalls.

But Beijing is not willing to go to any lengths to help Russia ease or circumvent Western sanctions.

The Asian giant has its own cross-border interbank payment system (CIPS), which works exclusively in yuan.

“CIPS can in theory partially replace Swift,” says Juuso Kaaresvirta, a specialist in China-Russia relations at the Bank of Finland.

But Chinese banks “are not going to take the risk” of doing so for fear of exposing themselves to sanctions that would deprive them of access to the dollar, says Kaaresvirta.

Several public banks would indeed be reluctant to finance purchases of raw materials in Russia, according to the Bloomberg agency.

Based in Beijing, the Asian Infrastructure Investment Bank (AIIB) — which is China’s answer to the World Bank — on Thursday suspended its activities with Russia and Belarus, both subject to sanctions.

“Life jacket”

The essential part of Russian exports are hydrocarbons, which China has increasingly acquired in recent years.

However, Chinese gas imports barely represent a tiny part of those of the European Union (EU).

Last month, Beijing and Moscow sealed a new deal to supply 10 billion cubic meters of natural gas to China from the Russian Far East. Payments will be made in euros.

China and Russia have several gas pipeline projects. The first of them entered service in 2019.

The Asian giant is undoubtedly going to measure its support for Russia with “great caution”, since Ukraine is one of Beijing’s wheat granaries, says Jie Yu of the Chatham House think tank in London.

China wants to avoid Western sanctions, without “turning its back” on Russia, observes Gary Hufbauer, a researcher at the Peterson Institute for International Economics (PIIE) think tank in Washington.

Shortly after the Ukraine invasion, Australia accused China of being Moscow’s “lifeline” for having lifted restrictions on its imports of Russian wheat.

This was the product of an agreement, which had been known since the beginning of February but was announced on the day of the invasion, and which allows imports from all Russian regions, against seven only before.

“Things are going to return to normal,” says analyst Chen Long, from the Plenum cabinet, implying that Beijing will not go further than other countries.

The analyst recalls that “Germany continues to buy Russian gas” and wonders: “Does it therefore become a lifesaver for Russia?”