China’s Long Game in Russia: Violating Sanctions? No. Ensuring Russia’s Survival? Yes.

China’s Balancing Act on Russia Sanctions

Despite Beijing’s prima facie rejection of the sanctions against Russia as “illegal” and “immoral,” a significant number of Chinese actors, both state and private, fear that violations could carry prohibitive costs. Compliance, by and large, is dictated by good business sense. In sectors where the costs of violating sanctions heavily outweigh any potential benefits—such as China’s nascent high-tech and financial sectors, which rely heavily on the West and minimally on Russia—business activity with Russia has dropped precipitously. In the energy sector—which relies heavily on Russian supplies and has been spared the worst sanctions for now, thanks, in part, to comparable European reliance—business activity with Russia has increased, while stakeholders try to figure out how to adjust in the longer term. In multiple sectors, ambiguities and gray areas persist.

Additionally, in their public-facing activities, Chinese state and private actors must deal with yet another balancing act: Among international audiences, they don’t want to be seen as supporting Russia’s war, but public opinion at home—fueled by state propaganda—is largely on Moscow’s side.

Different Sectors, Different Constraints

Though Beijing has insisted on maintaining normal trade relations with Russia, its apprehension about violating the sanctions is clear from trade data in the tech sector. The cost-benefit logic is evident: The Russian market made up less than 2% of Chinese tech exports in 2021, while getting cut off from key chip suppliers in the U.S. or elsewhere because of Western sanctions would be catastrophic for China’s tech giants. In March, Chinese shipments of laptops and smartphones to Russia plummeted by more than 40% and 60%, respectively, while exports of telecommunications network equipment fell by a whopping 98%, according to the U.S. Department of Commerce.¹ SZ DJI, China’s leading drone maker, halted operations in Russia to “reassess compliance requirements in various jurisdictions.”

In the private sector more broadly, trade attorneys and consultants saw an increase in queries from Chinese customers seeking to ensure sanctions compliance, Bloomberg News reported in March, with the majority of these clients taking steps like adjusting internal compliance systems, switching suppliers and terminating contracts.

Similar behaviors have emerged in China’s financial sector, where reliance on access to the dollar-dominated international financial system is high and the consequences of sanctions violations are taken very seriously. Though Chinese banks have extensive yuan-denominated services and assets in Russia, any potential benefits of sanctions busting pale in comparison to a loss of access to the U.S. dollar clearing system. Of China’s largest state-owned banks, ICBC and BoC reportedly stopped financing purchases of Russian commodities immediately after the Feb. 24 invasion. According to Russian media, UnionPay, China’s state-owned payments network, has refused to work with sanctioned Russian banks, including Sberbank, despite the market opportunity left open by Visa, Mastercard and American Express after their exit from Russia.

The energy sector’s behaviors are among the most complicated, and not just in China, where Russia was the second-largest supplier of oil and coal and third-largest of gas in 2021. Countries around the world, including U.S. allies in the Indo-Pacific region and Europe, are enticed by deeply discounted energy from Russia as they seek to keep inflation in check amid fragile post-COVID economic recovery. While global oil prices have soared above $100 a barrel (in part due to the sanctions), Russian Urals crude was trading at $30-some less per barrel than the European benchmark Brent as of June 30. This opportunity is too tantalizing to pass up. China has surpassed Germany as the No. 1 buyer of Russian fossil fuels since the start of the Ukraine war, according to a recent report by an independent Finland-based research group. But the $13 billion China spent on Russian energy supplies in that time is less than one-seventh the $97 billion spent by the EU.

As Western countries try to phase out Russian energy supplies, it is unclear whether China’s purchases might eventually lead to secondary sanctions—a prospect Beijing seems very concerned about.

Meanwhile, reports on energy sector activity have been piecemeal and sometimes contradictory or thinly sourced. It is safe to say, nonetheless, that some players, like in the tech and finance sectors, are exercising caution and some are positioning themselves to take advantage of new realities on the market:

• Playing it safe: Immediately after Russia’s invasion—and Western banks’ subsequent restrictions on commodity-trade finance and letters of credit for cargoes originating in Russia—Chinese oil importers “briefly paused” new seaborne purchases of Russian crude to “assess risks.” In early April, anonymous sources told Reuters that state-owned petrochemical companies—including Sinopec, CNOOC, PetroChina and Sinochem—have avoided signing new contracts with Russian suppliers while honoring existing ones; PetroChina officially said as much in early May.
• Taking advantage of cheap Russian energy: Mid-April saw reports that non-state refiners were still placing new orders for oil loaded at Russian ports; in May, oil imports by Chinese refiners had jumped to a record high of 1.98 million barrels per day, up almost 55% from the previous year. As of late May, a Sinopec subsidiary had reportedly hired 10 additional tankers to transport Russian crude loaded at a port in Russia’s Far East.²

Some business activities inevitably fall in a gray zone, with competing narratives and points of view. This may turn out to be the case with the five Chinese companies identified for U.S. export restrictions on June 28 for their alleged “support to Russia’s military and/or defense industrial base.” All five are electronics firms without global name recognition. The Biden administration has not yet laid out the specifics of the allegations, but, based on the Department of Commerce language and the scope of the firms’ business, it’s possible the companies were providing Russian industrial enterprises with critical parts that could be used in the defense sector—an activity Washington interprets as supporting Moscow’s war effort, while Beijing may see as normal trade relations.

Different Audiences, Different Messages

As noted above, in choosing how to respond to U.S. and European sanctions against Russia, Chinese actors must balance between international audiences opposed to Moscow’s war and domestic audiences who embrace the official line that the West is to blame for the conflict. After Xi’s birthday call with Putin, for example, Chinese state-run TV emphasized the Chinese leader’s promotion of “world peace and the stability of the global economic order,” while the Kremlin strongly implied—likely for the benefit of its own domestic audience—that Xi had acknowledged the “legitimacy of Russia’s actions” in Ukraine. China’s largest ride-hailing giant, Didi, reversed its plan to pull out of Russia within days of announcing it, amid intense online criticism in China for “toeing the U.S.’s line.” Local Chinese governments, meanwhile, more focused on domestic audiences than global ones, have been quite vocal in pledging economic allegiance to Moscow.³

Chinese Interest in Ensuring Russia’s Survival

China remains willing to provide Russia with an economic lifeline, whether in the form of continued trade or by other means, because Beijing sees a significantly weakened Russia as a geopolitical worst-case scenario. Though there are multiple reasons for this—from stability on China’s 2,500-mile border with Russia to domestic propaganda value to energy security—the most important for Beijing is having a strategic buffer in its rivalry with Washington.

Defying US and NATO

Much has been written about Beijing and Moscow’s shared grievances against the United States and its NATO allies. These were formalized during Putin’s February visit to China, shortly before the invasion of Ukraine, when he and Xi issued a joint statement condemning the U.S. Indo-Pacific strategy as endangering regional peace and stability and calling for an end to the ideology-driven approaches of the Cold War. Throughout the fighting in Ukraine, as well, Beijing has maintained what The Economist termed “pro-Russia pseudo-neutrality”—calling for peace but not condemning Moscow for its aggression, blaming the war on the U.S. and NATO and amplifying Russian disinformation. Both Xi and Putin reiterated these messages at this month’s virtual BRICS summit.

Sanctions will not change this shared stance. Washington has been clear for some time that it sees China as its main strategic challenge. But in recent U.S. strategic documents, China is often coupled with Russia as a joint source of alarm. If Moscow becomes severely weakened or paralyzed, China will become the sole focus of U.S. geostrategic energies, in Beijing’s view. Hence, China has an incentive to prop up Russia—using the policy domestically to help fuel anti-U.S. sentiment. Moreover, if the Ukraine war ends up strengthening NATO—which has now officially identified China as a challenge as well—Beijing’s motivation to support Moscow will only grow.

Support Is the Goal, Trade Is the Means

Considering the economic disparities between China and Russia—whose economy, prior to the war with Ukraine, fell between sixth- and 12th-largest in the world, depending on the measure—it’s unsurprising that Beijing has used its economic might to bolster Moscow. In addition to buying Russian energy and other exports, China can help Moscow weather sanctions by providing Russia with goods and materials that help keep its economy going but are not yet subject to sanctions.

Bilateral trade, a priority in the Sino-Russian relationship, had been rising before the war and the war has not stopped the trend. In the first five months of this year, trade between China and Russia reached $65.8 billion, up roughly 28.9% from the same period the previous year; in 2021, it jumped 35.9% from 2020. At their February meeting the two presidents pledged to increase bilateral trade to $250 billion by 2024.

Sources: Congressional Research Service, Statista and World Bank

Russian energy sales—now the crucial enabler of Putin’s war machine—are, of course, of particular importance. China was the top importer of Russian crude in 2021, according to Trade Data Monitor, with daily average purchases of 1.59 million barrels per day, or 15% of China’s oil imports. China accounted for 16.5 billion cubic meters of Russian natural gas exports, or 6.7%. Russia provided 14% of China’s thermal coal imports. New projects are also afoot. Only a week before Russia’s invasion of Ukraine, Beijing and Moscow reached an agreement on a new deal for Russian coal purchases worth more than $20 billion; the two also intend to construct a new gas pipeline, the Power of Siberia 2.

But Chinese sales to Russia are crucial to the latter’s industrial and consumer sectors—even more so now that fallout from the Ukraine war has isolated Russia from global markets. Chinese machinery and electronics imports to Russia totaled $28.8 billion in 2021, accounting for some 72% of imported computers and telecoms equipment. As of March, Chinese imports reportedly accounted for about 30% of apparel available in Russia. Chinese base metals are a key input in Russian manufacturing. With the war, Chinese exporters are filling in gaps left by sanctions and widespread divestment. Since Russia, for example, lost Ukraine and Australia as its two main suppliers of alumina—a key ingredient in the production of aluminum—Chinese alumina exports to the country have skyrocketed, growing nearly tenfold year on year.

Experts have cautioned that Beijing might extend covert support to Russia through offshore accounts, which are notoriously hard to track, but there has been no evidence of such activity thus far.

Getting Creative in the Long Term

Despite compliance with Western sanctions in the short to medium term, China will likely get more creative in developing tools to bypass constraints imposed by powerful rivals in the coming decades. Beijing has already set up task forces to study systemic resilience to U.S. sanctions should China be targeted, according to The Guardian.⁴ Chinese responses to such challenges could include new payment systems and trade routes, as well as greater self-reliance in the procurement of high-tech components like semiconductors. Perhaps, these tools would prove useful for Russia too, though that is certainly not the driving force behind Chinese efforts.

China and Russia, hampered by the U.S.-led SWIFT payment system, are likely to intensify their pursuit of long-run alternatives, a goal Putin talked up at the BRICS summit on June 22. Fledgling efforts include Russia’s homegrown ruble-based System for Transfer of Financial Messages (SPFS) and its Chinese counterpart, the Cross-Border Interbank Payment System (CIPS). Such efforts are unlikely to come to fruition in the near term. Limited in scope, CIPS is further restrained by stringent capital controls that will remain firmly in place. Moreover, according to official Russian statistics, only about 17% of trade between Russia and China is conducted in yuan, also known as renminbi; though this marks a significant increase from 3.1% in 2014, the bulk of bilateral trade is still settled in U.S. dollars.

Conclusion

As the war in Ukraine grinds on, the prospect of a floundering Russia and a reinvigorated NATO cuts against China’s core security interests, as it seems to give Washington a stronger hand in its Thucydidian rivalry with Beijing. This motivates China’s leadership to help Russia mitigate the impact of sanctions, leading to deeper strategic collaboration between the two. Nevertheless, financing Putin’s war risks jeopardizing China’s economic might, still dependent on relations with the U.S. and EU, which has forced Beijing into a tricky balancing act.

In the short term, Chinese governmental and corporate actors have largely obeyed the Western sanctions. In the long run, the economic onslaught against Russia will steel Beijing’s will to achieve technological and financial sovereignty in the face of Western dominance.

China’s tech and financial sectors are most wary of secondary sanctions, due to their heavy reliance on Western supplies and infrastructure. The behavior of the energy sector is more complicated, driven by both economic interests and geopolitical concerns. The prospects of secondary sanctions on China for buying Russian energy are slim for now, given that many countries, including U.S. allies, are still doing the same.

China’s state and non-state sectors face different incentives when it comes to sanctions compliance. Private actors, driven largely by commercial interests, have opted to relinquish a Russian presence rather than risk painful sanctions exposure, though this can provoke anti-Western backlash at home. China’s state actors, on the other hand, walk the tightrope of strengthening economic partnerships with Russia while trying to avoid the optics of directly funding Putin’s war on the international stage.

With Russia weakened by war, China certainly has greater leverage to extract benefits from the relationship. Bilateral ties still include plenty of mistrust. But it is unlikely that Beijing believes the war will divert U.S. attention from strategic competition with China in any meaningful way.