Russia-Ukraine crisis: China urged to weigh economic costs of Moscow coalition as sanction threats mount

Beijing's deepening ties with Moscow show a united front against threats from the United States, but there is concern within China that a quasi-alliance could come with economic consequences should the Ukraine crisis escalate.

Following a meeting between Chinese President Xi Jinping and his Russian counterpart Vladimir Putin early this month, the neighbours announced they were "entering a new era of global sustainable development", while unveiling a series of agreements, including a new gas deal.

The show of solidarity on the sidelines of the Winter Olympics was keenly watched by the international community, with both sides agreeing to safeguard "international fairness and justice", and using the meeting to push back against US economic threats.

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After the summit, however, some Chinese analysts warned Beijing must carefully weigh the risks of a coalition with Moscow, and could be better off striking a balance between global powers.

"China must make clear what suits its national interest the best. We need to ask what we will get and how much will we lose?" said Feng Yujun, director of Fudan University's Centre for Russian and Central Asia Studies.

"Why should we band together? What can Russia provide us?"

China and the former Soviet Union were allies in the early years of the Cold War, but relations became strained in the late 1950s, leading to a border skirmish in 1969.

The fallout paved the way for former US President Richard Nixon's historic visit to Beijing in 1972 and the re-establishment of diplomatic ties seven years later.

Since the collapse of the Soviet Union in 1991, trade between Russia and China has boomed, despite setbacks in 2009, following the global financial crisis, sanctions in 2014-15 over Russia's invasion of Crimea, and the impact of the coronavirus.

In 2021, bilateral trade jumped 35.8 per cent from a year earlier to a record high of US$146.9 billion, up from US$89.2 billion in 2013, Chinese customs data showed. Imports of Russian goods - mainly energy products - increased 37.5 per cent year on year to reach US$79.3 billion, doubling in size from 2013.

Exports to Russia, which consisted mainly of industrial products, rose 33.8 per cent to US$67.6 billion over the same period, up from US$49.6 billion eight years earlier.

The two countries have set a goal of boosting trade to US$250 billion by 2025.

Despite the deepening trade ties, Russia still relies more on the European Union (EU), its largest trade partner, for overseas earnings. The EU bought US$166.1 billion worth of goods from Russia in the first 11 months of last year, according to financial data provider Wind.

That is likely to take a hit, however, if Russia escalates conflict with Ukraine, as most analysts expect Western sanctions on Moscow to be much more severe than those imposed following the 2014 annexation of Crimea.

China-Russia trade would be caught up in the fallout, especially if Russia was excluded from the US dollar-dominated SWIFT financial messaging service, as most payments between the countries are settled in dollars, Feng said.

There are also questions over the impact that sanctions would have on the newly-signed China-Russia gas deal that is to be paid in euros.

In the short term, China cannot avoid the US dollar system, Feng said.

Most Chinese foreign exchange holdings are denominated in US dollars, including US$1 trillion of US Treasury bills. Despite American efforts to decouple from China, US-bound merchandise shipments rose 27.5 per cent to US$576.1 billion in 2021, according to customs data, which is more than eight times the amount of Russian purchases.

Both China and Russia are working to lower their exposure to the US dollar by using their own currencies for trade settlement and carrying out currency swaps, said Wang Yiwei, a professor of international relations at Renmin University in Beijing.

The two sides agreed to a 150 billion yuan (US$23.5 billion) currency exchange in 2014 that will be renewed every three years.

The Chinese currency accounted for 12.8 per cent of Russian foreign exchange reserves in 2020 and 30.4 per cent of its sovereign wealth fund holdings in July last year, according to data from Russian authorities.

About a quarter of bilateral trade was estimated to be settled in each nation's respective currencies in 2020, compared to 2-3 per cent in 2013, the Russian ambassador to China told local media last year.

Wang said the China-Russia coalition was a buffer against US economic sanctions and financial restrictions that threatened both nations.

"The US is very important from an economic perspective," he said. "The question now is: will it threaten - and take more obvious action - to kick China out of its financial system? We should not have illusions any longer."

Trade dialogue between China and the US appears to have stalled, despite an attempt to repair relations at a virtual summit between Xi and US President Joe Biden in November last year.

Biden has said he is not prepared to drop Trump-era tariffs because China has not lived up to its purchasing agreements under the phase-one trade deal.

US trade data released this week showed that China is still lagging behind in purchases of American farm and manufactured goods, energy and services.

Chen Fengying, a senior researcher with the China Institutes of Contemporary International Relations, said the cold war mentality of some Western countries had brought China and Russia closer.

"There's no choice but to hug for warmth," she said. "Both countries need to join hands to ease their respective pressure."

But Chen said their cooperation should not be viewed in the context of Ukraine, attributing the recent energy deals to strictly economic needs.

"One has demand, while the other has supply. It's the result of the market," she said.

Kadri Liik, a senior policy fellow at the European Council on Foreign Relations, said in a December report that the neighbours "maintain cordial relations with each other out of a mutual strategic need to do so".

"And the complementarity of their economies only reinforces this - regardless of what the West says or does," she said.

Russia is China's second largest source of crude oil imports after Saudi Arabia. Bilateral energy trade was worth US$34.9 billion in the first three quarters of last year, accounting for 34.3 per cent of the annual total, Chinese government data showed.

Construction of a second gas pipeline between the countries has been fast tracked, as China has prioritised energy security following a crippling nationwide power crunch last year and diplomatic tensions with resource-rich nations like Australia.

Beyond trade, China and Russia can cooperate on defence, finance, energy and diversification from the US dollar, Wang said, adding "if Russia is tamed, the US will act more recklessly towards China".

Yu Hongjun, former Chinese ambassador to Uzbekistan, said Beijing and Moscow should increase cooperation, particularly in trade, finance and technology.

"Both need to rectify the thought that Russia is only an energy and raw material supplier, while China just provides industrial products in return," he said.

The US and China are still at loggerheads over Xinjiang, Hong Kong and Taiwan. Beijing is also uneasy over the newly formed Aukus security alliance between Australia, Britain and the US.

Russia has been China's primary arms supplier - from Sukhoi fighter aircraft to kilo-class attack submarines - since the early 1990s. It accounted for three quarters of China's arms imports between 2016-20, according to an estimate from the Stockholm International Peace Research Institute in December.

"Putin is more confident believing that he has Beijing on his side," Eurasia Group, a leading political risk research firm, wrote in its annual report last month.

"A blow-up of the situation in Ukraine is likely to be accompanied by China vetoes favouring Moscow in the UN Security Council at a minimum ... A 'rogue' Russia is no longer operating in isolation."

This article originally appeared on the South China Morning Post (SCMP).

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