China keeps Russian economy afloat

Nik Martin

Days after Russia launched its full-scale invasion of Ukraine in February 2022, the West foisted deep sanctions on Moscow in the hopes of hurting Russia's ability to finance the conflict. The sanctions targeted politicians and oligarchs, froze foreign reserves, curbed access to Western technology and cut Russian banks off from the Swift international payment messaging system.

The financial penalties were widely expected to bring Russia to its knees. Initially, the ruble plummeted in value and the Russian economy contracted by 1.2% in 2022. Last year, however, Russia's growth outpaced both the United States and Europe at 3.6%. The country is on course for another strong year in 2024.

Much of that growth came in the way of trade with China, which acted as a counterweight to the West by refusing to impose sanctions and becoming a major buyer of Russian energy. Despite pressure from the US and the European Union, the two countries have formed a deeper alliance since the war started.

Last year, Chinese President Xi Jinping even spoke of a "new era" of ties between Beijing and Moscow. His Russian counterpart, Vladimir Putin, is due in Beijing this week to further strengthen relations. During his third visit in just over two years, Putin will also attend the eighth China-Russia Expo, which begins this week in the northeastern Chinese city of Harbin.

"For Russia, besieged by sanctions and global isolation, China is a key lifeline for its wartime economy," Philipp Ivanov, founder and senior advisor of the consultancy Geopolitical Risks + Strategy Practice, told DW. "China is the main destination for Russian energy trade and the major provider of critical equipment and technologies that Russia can no longer access in the West."

As European and US brands left the Russian market to avoid international sanctions, Moscow stepped up purchases of Chinese goods from cars to smartphones. The ramping up of imports helped bilateral trade to reach $240.1 billion (€222 billion) last year, according to Chinese customs data — a rise of more than a quarter over the previous year.

While Russia has now become China's top crude oil supplier, some analysts think technological exports rather than energy have played a bigger role in boosting bilateral trade. After all, Russia made those energy deals with China at a huge discount after the West cut its reliance on Russian oil and gas in the wake of the Ukraine conflict.

"Russia would not have enough trucks, chips, drones or intermediate goods without Beijing because China is the only country exporting those goods to Russia right now," Alicia Garcia-Herrero, chief economist for Asia Pacific at the French investment bank Natixis, told DW.

Garcia-Herrero said while many countries fear repercussions from US and EU sanctions, China — as the world's second-largest economy — does not. "The payments for trade with Russia are made in Renminbi [Chinese currency] through the Chinese international payment system, so the transactions are harder to trace," she added, referring to the Chinese version of Swift, which is the main messaging network through which global payments are initiated.

In the latest sign that Washington is ramping up pressure on China, US President Joe Biden signed an executive order in December allowing secondary sanctions on foreign banks that deal with Russia's war machine. The order allows the US Treasury to isolate them from the dollar-led global financial system, which all banks heavily rely on.

Since the start of this year, several Chinese banks have stopped or slowed transactions with Russian clients to cut their risk of falling foul of the sanctions. Extra checks are being conducted on cross-border settlements that can take several months, which threaten to put smaller exporters out of business.

"The US has been successful in forcing Chinese banks not to finance exports to Russia," said Garcia-Herrero. "It's now very important that the US continues that pressure; that the sanctions include any company that exports to Russia, including dual-use products [goods that have both military and civilian uses] and banks that are financing those deals."

During a recent visit to Beijing, US Secretary of State Antony Blinken accused China of "powering" Russia's war machine by supplying Russia with electronics, chemicals for munitions and rocket propellants. Beijing has repeatedly denied the accusations. Blinken vowed further Western sanctions if China — the US's biggest competitor — doesn't curtail its defense-linked exports to Russia — which Washington considers its biggest nation-state threat.