What is China doing with Russia over Ukraine?
Experts say China's help will be crucial for Russia, but it won't be enough to completely alleviate the consequences of the Western bloc. The article in the newspaper El Pais
The series of sanctions the West has imposed on Russia in the wake of its invasion of Ukraine has damaged the economy of the Eurasian giant on the verge of endurance. With no access to the SWIFT international bank payments platform, with vetoes on the operations of its central bank and other entities, and under the weight of an embargo on the supply of semiconductors and technology for key sectors, experts calculate that it is only a matter of time before. for Russia to start sinking.
In this context, its strategic partner, China, can launch a lifeline. But the help it is able to provide, according to several analysts, is insufficient to pull the country out of the stormy waters it has just entered. “Does China want to come to the rescue? Yes. Can it? To a certain extent, ”sums up Alicia García-Herrero, Asia's chief economist at Natixis investment bank, in a telephone conversation from Taipei.
So far – we read in El Pais – the sanctions of the United States, the EU and other allies have focused – in addition to punishing key individuals in the government, including President Vladimir Putin himself, and closing the airspace – on the financial sector. Measures against the Central Bank of the Russian Federation freeze reserves deposited in other countries, totaling approximately $ 630 billion (€ 568 billion). Other commercial banks also had their foreign assets frozen.
The expulsion from the SWIFT platform, followed by an increasing number of countries, also makes it more difficult and expensive for Russian banks to operate abroad. So far, the punishments have not touched the crown jewels of Russian exports, oil and gas – which bring about $ 700 million a day in revenue to Moscow's coffers – although that, in the event of a protracted conflict, could change.
Since 2014, with international sanctions putting Moscow on the ropes following its annexation of the Ukrainian peninsula of Crimea, Russia has taken steps to seal itself off against possible Western punishment. It has cut its foreign debt, increased its gold and foreign exchange reserves, and reduced its dependence on European markets, which have grown from about 50% of Russian trade to 32% today – about $ 250 billion.
And the joint declaration, signed on February 4 during President Putin's meeting with his Chinese counterpart Xi Jinping in Beijing, connects Russia and China – the world's second largest economy – on an unprecedented level. The collaboration between the two "knows no bounds", said the two leaders.
This collaboration may extend to China's assistance to help its strategic partner cushion – as it has done in the past – the effect of sanctions, which are already starting to be felt. The ruble fell as much as 30% on Monday.
Some steps have already been taken: on February 4 it signed agreements to increase Russian oil and gas supplies for the next 25-30 years for an amount of 117.5 billion dollars (approximately 105.9 billion euros). It also lifted restrictions on imports of Russian wheat.
“There is no doubt that China wants to help its partner,” says García-Herrero. “If Russia is victorious, China needs Putin to owe it to her. It is a way to defend its interests in a very large part of the world: Mongolia, Kazakhstan… And if Moscow loses, it must protect its interests in Russia itself ”. In the latter case, it could, among other things, take advantage of the opportunity to replace foreign multinationals in Russia's oil majors or increase its collaboration in the Arctic.
So far, China has opted for a semblance of neutrality. He supports his ally, but above all by omission: he has not condemned the invasion or adhered to sanctions, which he considers "illegal". So far, however, the US has found no indication that China intends to violate these sanctions.
“The material assistance that China will provide will be limited because it has to be limited. China cannot go any further, ”Mikko Huotari, director of the German think tank Merics, specializing in China, told reporters on Wednesday. "But such assistance will be a lifeline for Moscow."
Among other things, Beijing may intensify its trade with its northern neighbor, a trend that has been accelerating since 2014, when Russia annexed Crimea and international sanctions put the country on the ropes. If then the trade between the two represented 10% of the total of Russia, today it represents 18% and amounts to almost 150 billion dollars. Gas, oil and agricultural products represent China's main purchases: since 2014 the country's consumption of Russian gas has tripled, thanks to the inauguration in 2019 of the Power of Siberia 1 pipeline. Russia, for its part, purchases from its partner in manufacturing products, chemicals and telecommunications equipment.
But given the volume gap it is still huge in the Russia-EU trade balance and Beijing "cannot replace Europe". “Especially in the gas sector”, underlines García-Herrero. As the economist recalls, there are no connections between the Russian gas pipelines that send the fuel to Europe and the Power of Siberia 1, making it "impossible for China to absorb the surplus of gas that Russia would have if the West decides to impose sanctions on this product or if Russia decides not to sell it to Europe ”. The two countries are negotiating a second gas pipeline, Power of Siberia 2, although its construction and entry into service could take years after the agreement is concluded.
Furthermore, there are areas where China simply cannot serve as an alternative to Europe or the United States when it comes to supplying products to Russia, as is the case with pharmaceuticals.
“Another key issue will be in the technology and communications sector. Clearly, there is a huge opportunity for Chinese proxies to cover Russia's potential losses from the upcoming tech sanctions. But the supply of high-tech and semiconductor equipment is a global issue and it doesn't appear that China can easily be a substitute, ”Huotari noted.
Beijing can help out in the financial sector. About 13% of Russia's reserves, roughly $ 90 billion, are denominated in renminbi, China's currency, and the People's Bank of China (PBoC, central bank) will not block their use. It could perhaps allow him to switch those funds into the US currency to provide liquidity, although according to Natixis' chief economist "it would be a great show of support … if he does, it will be in exchange for something." Russia also has a swap line with the PBoC worth 150 billion yuan, nearly $ 24 billion. "The PBoC may establish a dollar line of credit to provide hard currency liquidity to Russia, but there is an obvious credit risk," Natixis said.
Less clear is the relief that could come from shutting down the SWIFT platform for its banking operations. China has its own alternative system, CIPS, which Russian banks could use. But even this mechanism is not entirely independent from the international one and its level of transactions is much lower than that of its rival: it mobilizes 50 billion dollars a day in transactions, compared to 400 billion dollars of SWIFT. “It will be a very high transaction cost and only with Russian banks because there is no one operating internationally with CIPS, there is really no liquidity,” explains García-Herrero.
Chen Xin, a professor at Fudan University in Shanghai, expressed himself in similar terms in an interview with Guancha online, in which he stressed that allowing Russian banks to use CIPS could expose Chinese financial institutions to sanctions: "It is a system that it still relies on a network of banks, which could be sanctioned by the United States. If no one is allowed to do business with those Chinese banks and other countries join these sanctions, the system will not work. "
As García-Herrero summarizes, “there is no way that China can fully mitigate” the damage to the Russian economy. “Another thing is that it can soften the blows, but every time it softens one, it will pass the bill (to its advantage). This is the idea ”. Huotari, for his part, stresses that Russia "will clearly become more dependent on China in the future".
(Extract from the foreign press review by eprcomunicazione )
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/che-cosa-combina-la-cina-con-la-russia-ucraina/ on Sun, 06 Mar 2022 07:17:16 +0000.