As the economy gets hammered by sanctions, China has emerged as the key player with the potential to lessen its partner’s economic pain.
But amid Moscow’s deepening international isolation, there are growing signs that Beijing’s willingness to throw its strategic partner an economic lifeline may only go so far.
Even as Beijing has refused to term Russian President Vladimir Putin’s assault on Ukraine an “invasion” and condemned Western-led sanctions, Chinese state-owned financial institutions have been quietly distancing themselves from Russia’s beleaguered economy.
The moves suggest a careful balancing act by Beijing as it seeks to buttress ties with Moscow without openly violating sanctions, which could jeopardize its access to key Western export markets and the US dollar-centric international financial system.
Bank of China’s Singapore operations recently ceased financing deals involving Russian oil and firms, the Reuters news agency reported on Monday, citing a source familiar with the situation.
The report followed a Bloomberg article on Saturday that said the Bank of China and the Industrial & Commercial Bank of China had restricted financing for purchases of Russian commodities.
Alicia García Herrero, chief Asia Pacific economist at Natixis in Hong Kong, said she expected Beijing to comply with US sanctions while continuing to support the Russian economy through the Chinese financial system.
“As far as banks are concerned, they can land in RMB and basically there is a number of things you cannot do, but there is a huge number of things you can still do,” García Herrero told Al Jazeera. “Even European banks can still finance energy imports, so why would Chinese banks not do it if European banks are going to do it, at least so far?”
“So in other words, they will comply with the letter of the law, but in my opinion, not the spirit of the law,” García Herrero added, describing Chinese banks’ recent actions as a “reflection of existing sanctions” but not a development that “means more”.
Beijing and Moscow have forged close ties in recent years, often aligning to oppose what they view as interference by the US and its allies.
Earlier this month, Putin held talks with Chinese President Xi Jinping in Beijing, where the two leaders declared that friendship between their countries had “no limits” and no “forbidden” areas of cooperation.
The meeting resulted in a raft of trade deals, including the signing of a 30-year contract for Russia to supply gas to China via a new pipeline. China’s trade with Russia rose to $ 146.9bn in 2021, according to Chinese customs data. Although up 36 percent year-on-year, that figure still remains only about one-tenth of the volume of China’s combined trade with the US and EU.
While calling all parties involved in the Ukraine crisis to “exercise restraint”, Beijing has declined to condemn the invasion and expressed opposition to “all illegal unilateral sanctions”.
Last week, Chinese customs authorities announced the lifting of import restrictions on Russian wheat, global exports of which are worth $ 7.9bn annually, as part of a package of agreements sealed between Beijing and Moscow earlier this month.
The United States, European Union, United Kingdom, Japan, Canada and Australia have unveiled a raft of punitive measures against Moscow, which include expelling some Russian banks from the SWIFT international payments system, blocking Russia’s central bank from using its foreign reserves to support the value of its currency, and banning broadcasts of Russian state media.
The Russian ruble plunged to record low against the dollar on Monday, sinking as much as 30 percent in Asian trading, fueling expectations of a run on Russian banks.
Cheng-Yun Tsang, an expert in financial regulation at National Chengchi University in Taiwan, said China would be cautious about any action that could threaten its access to the international financial system.
“We all know that China holds the largest forex exchange reserves globally, and among them, the US dollar dominates,” Tsang told Al Jazeera.
“It’s also noteworthy that China’s foreign exchange reserves fell around $ 28bn to $ 3.22 trillion in January this year. China also relies heavily on the SWIFT system. These facts might well lead China to a somewhat prudent move when it comes to providing financing with Russia, as jeopardizing its own ability to transact in US dollars would never be a good idea. ”
Tsang said Beijing’s moves to distance itself from Moscow appeared mostly symbolic, inflicting little actual pain on the Russian economy.
Beijing could find its balancing act harder to maintain if the US and its allies were to push for more severe sanctions down the track. Although expected to deal a significant blow to Russia’s economy, the sanctions blitz has largely spared the country’s lucrative energy industry due to fears of collateral damage to Western countries. Russia, the world’s third-largest oil producer and the second-largest producer of natural gas, provides about 40 percent of Europe’s supply of natural gas.
Gary Ng, an Asia economist at Natixis, said the current sanctions regime gives China considerable room to continue legitimizing trade with Russia.
“With China’s support, the pressure on Russia will definitely be less, especially for financial linkages. This is especially true as Russia is isolated and China is the only country with meaningful economic size that can offer help, ”Ng told Al Jazeera.
“The real tricky moment will come if the US expands the scope and enforces secondary sanctions, which will become a tug-of-war between China’s support for Russia versus whether the West is willing to pressure or put secondary sanctions on China given its large role in global trade. ”
Ng said the pressure campaign could prompt ostracised countries to seek to “reduce dollar dependency and establish more cross-border payment systems”.
“This can hurt the effectiveness of sanctions over time, but a complete replacement of the dollar remains very unlikely,” he said.