Will China be caught up in US sanctions over Russia?
How far will Xi go to support his "best friend" Putin?
Hello and welcome to What China Wants.
Today I’m continuing our analysis of what the Russian invasion of Ukraine means for China and its global ambitions. It is no exaggeration to say that Moscow’s war could be a major fork in the road for Beijing, not least because there are plenty of policy makers in Washington who are keen to make it so. We saw yesterday the US threaten China over the possibility of it helping Russia to avoid the heavy sanctions it is now enduring, and so in the article below I ask whether China would dare risk this. The answer is yes - but only up to a point.
Many thanks for reading, and as always please feel free to leave a comment, like, and share.
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As the conflict escalates in Ukraine, so the war of words between China and America increases. Yesterday, the US National Security Adviser Jake Sullivan said that China will face consequences if it helps Russia evade sanctions in its invasion of Ukraine. This followed multiple briefings by American officials that Moscow had requested military assistance from Beijing to help with its war effort, something that both Russia and China denied.
The West is right to be suspicious. China has a long history of undermining American-led sanctions against what it considers to be its allies. North Korea, long targeted by the United States, has a thriving coal market with China. According to a United Nations report from 2021, vessels connected to Pyongyang illegally made 41 coal transfers in about four months just offshore from China’s busiest port. In 2020 The US Justice Department charged five Chinese citizens with processing at least USD 2.5 billion in illegal payments to the North Korean state bank through 250 front companies; the transactions were conducted in China, Russia, Libya, and Thailand.
Then there is Iran. Tehran may have been isolated by the West but its relationship with Beijing appears stronger than ever. Not only does China buy more oil from Iran now than it did before the latest round of American sanctions, but the two countries have signed a USD 400 billion deal for oil in exchange for Chinese investment.
Sanction-busting to help Russia is, however, a different prospect for China. The main difference is the shift in the prevailing attitude within Washington. Over the last few years, a hawkish bipartisan view about China has emerged on the Capitol, and there are many who believe that the time is right to strike against Beijing to stop its ability to usurp American hegemony. This pushback started in earnest under President Trump, who not only initiated a trade war, but in November 2020 introduced a blacklist against Chinese companies accused of supplying the People’s Liberation Army.
As I reported back in 2020, many in Beijing took these to be the first shots in an eventual all-out economic war against their country, culminating in a dollar blockade – the type of blockade that has now been imposed on Russia.
China’s economy is still fundamentally reliant on US dollars. The country spends hundreds of billions of dollars each year importing food and fuel, and it is dependent on dollars to power its international trade (since only a smattering of countries accept RMB).
It isn’t just dollars that China needs from the West. Despite the vocal move towards self-reliance, China still very much needs Western technology. The country’s fledgling civil aviation industry discovered this recently when its state-owned commercial jet maker ended up on the US blacklist: the company’s new mid-market jet, the C919, is said to have just 25% of Chinese parts and so its development has been badly hit.
In short, Beijing does not yet have its defences ready for a full-on economic onslaught from the West. Likewise, the West does not yet have its defences in place for an economic war with its main strategic adversary. With 28% share of the world’s supply chain, any moves to exclude China would have a serious and long-lasting impact on Western economies. With all that’s happening with Russia, this is the last thing that the world needs.
However, Beijing does not want to give up its relationship with Moscow. About 15% of Russia’s crude oil goes to China, as well as gas, oil, and a wide range of metals. There are also substantial imports of Russian wheat, which is set to increase now all restrictions have been removed following the invasion. Rejecting Russian imports would weaken the Chinese economy in the short term, as well as undermining the country’s economic defences given that Russia is now in effect a captured economy.
To sum it up, we are likely to see China help Russia but in a way that doesn’t arouse public US ire. Major Chinese banks, including the Beijing-backed Asian Infrastructure Investment Bank, are already turning away Russian-related work, and so anything that challenges Russian sanctions is probably going to be channelled through smaller institutions, as it is with North Korea. That way China can throw them under a bus if needed without damaging their own economy.
President Xi Jinping’s declaration of limitless friendship with Vladimir Putin looks set to be stretched to the limit in the coming days and weeks. President Xi’s priority is to stay atop of the Chinese Communist Party, and the CCP’s priority is to stay in power. Both of these goals require stability and the continuous growth of China’s economy, neither of which will be achieved by China blatantly breaking Western sanctions to prop up Putin. By pushing the sanction busting underground, China hopes to have its cake and eat it, as well as putting the ball back into America’s court.
As Charles de Gaulle once said, "Men can have friends, statesmen cannot", something that Putin is probably about to discover – at least officially.