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China’s Shifting Balance of Interests After the Ukraine Invasion

ARTICLES - 14 March 2022

The gamble taken by Vladimir Putin with the invasion of Ukraine upsets commonly accepted geopolitical truths. The same goes for the response across the Atlantic, and particularly for their impact on financial flows. The effectiveness of sanctions and the risks of economic decoupling had been subject to ongoing debates. China may have thought it could enjoy the benefits of commercial and financial interdependence while challenging the liberal world order and Asia-Pacific security. Its support and continued trading with Iran had never been called in question. No one could have imagined financial measures so drastic that they deprive Russia of most of its foreign exchange reserves. No one anticipated that so-called market democracies would strike a key aspect of globalization, even in response to an aggression straight out of the previous century. The lesson is that despite American conflict fatigue or Europe’s attachment to the longest peace in its history, unprecedented sanctions can still take place. And even if Russia’s GDP is roughly that of a large Chinese province, the strategic impact for China of a Russian collapse would be infinitely more important. In the other direction, the meeting between Jake Sullivan, Biden’s national security adviser, and Yang Jiechi, China’s top diplomat in Rome today is likely to put a price on any support by China to Russia. 

But the end game is not clear to anybody. The entire impact and scope of Sino-Russian relations has changed in less than a month. Even occupying a nation does not automatically mean subjugating it. Speculations about the outcome seem to vary from day to day, which must also affect how Xi Jinping weighs his interests. This is reflected in the oscillations of Chinese diplomatic communication, whether towards government partners, or to the international public at large. China initially supported Russia’s aggressiveness, thinking it could reap the benefits without sharing the risks. However, Beijing finds itself increasingly embroiled in a misadventure that actually risks harming its own interests and projects. From possible secondary or indirect sanctions against Chinese companies to its own irredentist claims and the revisionism of Xi Jinping who, like Putin, manipulates ethno-nationalism to challenge the international order.

In essence, Beijing is attempting to adapt to the expectations of partners other than Russia, while also mitigating the risks that China will face if Putin's regime emerges too weakened from its gamble. Inside China, it is sticking to a Russian script to the point of broadcasting stories about Ukrainian biochemical weapons and relaying other Russian claims. It is also hiding as much as possible the war and its destruction.

But its official stand regarding Russia fluctuates. Xi Jinping signed an unprecedented communiqué with Putin on February 4, promising cooperation "without boundaries". The communiqué was no longer mentioned by the Chinese report on the last call between the two leaders on March 2. In between, the terms "territorial integrity" and "sovereignty" were absent from Chinese reactions for a few days (notably in the minutes of a call with Emmanuel Macron) before reappearing a few days later, in the mouth of Wang Yi, who went so far as to apply them to Ukraine: it is likely that during these few days, China had expected Putin to score a quick victory in Kiev. On March 7, Wang Yi describes a "rock-solid" relationship between Beijing and Moscow, yet he talks more about the past and the future than the present. He emphasizes that it is Xi who has suggested peace talks to Putin, and also that China-Russia’s bilateral agreement does not include "targeting third countries."

Let's not take this rhetorical wavering too seriously. Alignment with Moscow is of course not a principle: it is a strategic partnership "from which nothing is excluded" (February 4), but not an alliance.

Alignment with Moscow is of course not a principle: it is a strategic partnership "from which nothing is excluded" (February 4), but not an alliance.

There are several recurring themes in Chinese statements. In order: it is all NATO's fault, Europeans are NATO followers, a new European security order is needed; we have a "situation", "events" are occurring, and the words invasion and war are not uttered. When Chinese media destined for foreign audiences publish questionable pictures of destruction - Hu Xijin accusing the Ukrainians of using civilians as human shields is a case in point! Within China, the term "Nazism" with regards to Ukraine is thrown around loosely in anti-Western social media posts. Once again, things have gotten rather Orwellian.

Beijing’s talk about the need for "restraint" and the importance of negotiating is the standard Chinese diplomatic response to any conflict. The outright condemnation of NATO has simply replaced the invocation of "root causes" (根本原因). It is accompanied by the proverbial saying that "it is up to the one who tied the knot to untie it". Beijing’s one time announcement of a mediation proposal must be put into perspective: China claims it came from the Ukrainian Minister of Foreign Affairs, who supposedly suggested it to Wang Yi eight days after the beginning of the invasion. However, Ukraine had already approached Europe (and the French President) as well as Israel. Ukraine’s call for mediation has for China the value of being a perfect stamp of neutrality. Factually, over the past decade, China has multiplied mediation initiatives with special envoys and government meetings, from Syria to Burma. Not a single one of these initiatives has led to a peace process. They do, however, sometimes protect China from accusations of complicity with authoritarian regimes, allowing it to maintain or acquire relations with each party in the various conflicts.

China’s abstention in the Security Council and General Assembly is not exceptional either. Since Xi has come to power, China has abstained twelve times out of the twenty UNSC resolutions which Russia vetoed.

Rather than these rhetorical stands, it is the balance of Chinese interests that must be examined closely, particularly from an economic perspective. In the very short term, the new February 4 - just in time - gas contracts with captive prices and the simultaneous decision of opening the Chinese market to wheat "from all regions of Russia" are beneficial for both economies. As far as gas is concerned, this has no immediate consequences for third parties - since it depends on dedicated pipelines to China from fields that do not supply Europe.

The significant increase in China's estimated gas needs, due to the energy transition from coal, means that China's willingness to buy liquefied gas from the US may even persist. Speeding up the connection of gas fields that are also connected to Europe would be a wholly different matter, and a challenge to Europe. In the short term, it is the United States that will have to make trade-offs between what they agree to sell to China and the highly likely European shortage. Wheat purchases, on the other hand, will immediately reduce the quantities available for other countries, which are already likely to be deprived of Ukrainian wheat this year.

In the short term, it is the United States that will have to make trade-offs between what they agree to sell to China and the highly likely European shortage. 

The main issue, however, is China's willingness and ability to refuse or circumvent international sanctions, and to increase its own footprint and technological cooperation with Russia. Communication and digital equipment are first on the list of "modest" Chinese exports to Russia (USD68 billion, in fact twelve times the French sales to Moscow). However, the United States has enacted export bans on semiconductors, and the recent Huawei case shows the extent to which, in some areas, Chinese production remains dependent on patents or components, including from third countries (and Taiwan) whose flows the United States can control. The civil aviation sector is also affected in the medium term. After the C919, China has started a project with Russia for the C929, a larger aircraft for which the engines are to be developed with Aviadvigatel, of the Russian United Engine Corporation (UEC). On the one hand, Russian and Chinese technology gaps implied associating one or the other Western engine manufacturers. This is now impossible, and where would such an aircraft be sold if the sanctions are maintained, or where would it fly to? 

These examples highlight that a complete decoupling from the United States and other parties implementing technological sanctions requires Russian and Chinese joint self-sufficiency, and that beyond the Sino-Russian market, their products are accepted in significant third markets. With regard to aviation, both Russia and China are still far from reaching this point. Military cooperation, on the other hand, does not pose the same problems.

On less than critical technologies, one could envisage a field day for Chinese companies - as happened in Iran under Western sanctions. Not only low end consumer goods, but now also such products as automobiles, are a perfect example. The catch, however, is how to pay for increased Chinese exports, if the US and EU are serious about their financial blockade. China and Russia have prepared for some financial self-sufficiency. There is a very strong convergence of Chinese and Russian policies: both have maintained (China) or acquired (Russia) a balanced budget, and while Russia has built USD640 billion in foreign exchange reserves from the energy rent, Xi's China has moderated its appetite for domestic debt. Other features are common to both regimes: the creation of international payment systems that offer an alternative to SWIFT (even if the Chinese system substantially depends on it), increased control over Russian oligarchs and top Chinese entrepreneurs, the one-way use of offshore places and their opacity. 

But the very rise of China also implies a greater global interdependence. Chinese banks have sometimes had to implement the bulk of US sanctions (as was the case with North Korea, with indirect US sanctions against establishments in Macau), and have sometimes been spared by the United States (as was the case with the Iranian oil offtake, presumably settled in yuan and trade credits for Iranian imports). This time, however, the problem is much greater, given the ban on flows with the Russian central bank. Certainly, there are short-term loopholes: specifically, USD60-90 billion Russian central bank reserves in yuan, deposited in China. Russia might not be prevented by China from mobilizing these deposits to pay for its own imports or to recover liquidity in rubles, since China has a rising currency and trade surpluses. Russia’s sales of its yuan reserves could even help the Chinese central bank avoid interventions to limit the rise of its currency. In the short term, the UnionPay system and Chinese banks in Russia are going on the offensive with regard to credit cards: this will undoubtedly also serve to increase Chinese e-commerce sales in Russia, and more broadly the sale of consumer goods. In the short term, this is a good deal for China. But with what resources will Russian consumers be able to buy these products, if the ruble continues to fall? China would need to increase its export credits to Russia. The other - large - loophole is the proceeds from Russia’s ongoing sales of gas, oil and coal to Europe. This has strategic significance for gauging the actual extent of Europe’s support to Ukraine. Since more than half of China-Russia trade is now conducted in euros, Europe’s willingness to ban the use of euros by third parties trading with Russia is also a very significant issue. Europeans are faced with the issue of implementing extraterritorial sanctions, something they often reproached the US with. 

In the short term, Russian aggression represented a good deal for Xi Jinping.

Chinese analyses of this economic balance, coming from financial actors, are especially cautious or negative about Russia. It is only more general and political comments that point to Russia's resilience and accumulated reserves, as well as to opportunities for circumvention - essentially, the CIPS (Cross Border Interbank Payments System) at SWIFT. 

More concretely, cautionary advice is given to Chinese banks and companies to avoid falling under international sanctions. The Global Times has discreetly taken down an article that praised the circumvention of financial sanctions.

In the short term, Russian aggression represented a good deal for Xi Jinping. It creates a second front for the United States, bringing strategic attention back to Europe, and of course it puts Russia in a more dependent position towards China. China has conceded nothing, quite the opposite: Wang Yi has pointed out that NATO has similar plans in Asia.

The challenges for Beijing will begin to emerge as Russia becomes bogged down in a conflict of unpredictable intensity, but of long duration. Barring a Western military escalation, Russia would devote far more military and financial resources than Ukraine's supporters. It is unlikely that either Xi or Putin anticipated the firmness and speed of the European and American response. It is true that continued European energy purchases from Russia are a weakness. Western companies withdrawing from Russia create a red carpet for Chinese companies. But China can no longer rely on this weakness. If US intelligence disclosures are as exact today as they were in the past year, Vladimir Putin has already reminded Xi Jinping of their February 4 communiqué, requesting unspecified military assistance. 

That may be as much of a Putin pressure on China to publicly hold firm as an actual request. But this now presents a strategic dilemma for Xi Jinping. This is a year before his expected coronation at the CCP’s 20th Congress, where he likely seeks stability. He has paused his own undertakings in Asia. The extent of Putin’s gamble, and even more the specter of a decisive weakening of Russia, is embarrassing for Xi’s own strategy. Yet to visibly disassociate China now would also be a considerable set-back, not necessarily with compensating gains towards the US and Europe. Provided the West holds firm and associates others in this new Cold war, the mid-term prospects for China hold little appeal. 

Between war and short-range sanctions, Europeans and Americans have, for the first time, drawn up a realistic option, though one that is admittedly painful for all in economic terms. 

 

Copyright: Leo RAMIREZ / AFP

 

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