China’s Shifting Balance of Interests After the Ukraine Invasion

Beijing’s talk about the need for "restraint" and the importance of negotiating is the standard Chinese diplomatic response to any conflict. The outright condemnation of NATO has simply replaced the invocation of "root causes" (根本原因). It is accompanied by the proverbial saying that "it is up to the one who tied the knot to untie it". Beijing’s one time announcement of a mediation proposal must be put into perspective: China claims it came from the Ukrainian Minister of Foreign Affairs, who supposedly suggested it to Wang Yi eight days after the beginning of the invasion. However, Ukraine had already approached Europe (and the French President) as well as Israel. Ukraine’s call for mediation has for China the value of being a perfect stamp of neutrality. Factually, over the past decade, China has multiplied mediation initiatives with special envoys and government meetings, from Syria to Burma. Not a single one of these initiatives has led to a peace process. They do, however, sometimes protect China from accusations of complicity with authoritarian regimes, allowing it to maintain or acquire relations with each party in the various conflicts.

China’s abstention in the Security Council and General Assembly is not exceptional either. Since Xi has come to power, China has abstained twelve times out of the twenty UNSC resolutions which Russia vetoed.

Rather than these rhetorical stands, it is the balance of Chinese interests that must be examined closely, particularly from an economic perspective. In the very short term, the new February 4 - just in time - gas contracts with captive prices and the simultaneous decision of opening the Chinese market to wheat "from all regions of Russia" are beneficial for both economies. As far as gas is concerned, this has no immediate consequences for third parties - since it depends on dedicated pipelines to China from fields that do not supply Europe.

The main issue, however, is China's willingness and ability to refuse or circumvent international sanctions, and to increase its own footprint and technological cooperation with Russia. Communication and digital equipment are first on the list of "modest" Chinese exports to Russia (USD68 billion, in fact twelve times the French sales to Moscow). However, the United States has enacted export bans on semiconductors, and the recent Huawei case shows the extent to which, in some areas, Chinese production remains dependent on patents or components, including from third countries (and Taiwan) whose flows the United States can control. The civil aviation sector is also affected in the medium term. After the C919, China has started a project with Russia for the C929, a larger aircraft for which the engines are to be developed with Aviadvigatel, of the Russian United Engine Corporation (UEC). On the one hand, Russian and Chinese technology gaps implied associating one or the other Western engine manufacturers. This is now impossible, and where would such an aircraft be sold if the sanctions are maintained, or where would it fly to? 

These examples highlight that a complete decoupling from the United States and other parties implementing technological sanctions requires Russian and Chinese joint self-sufficiency, and that beyond the Sino-Russian market, their products are accepted in significant third markets. With regard to aviation, both Russia and China are still far from reaching this point. Military cooperation, on the other hand, does not pose the same problems.

On less than critical technologies, one could envisage a field day for Chinese companies - as happened in Iran under Western sanctions. Not only low end consumer goods, but now also such products as automobiles, are a perfect example. The catch, however, is how to pay for increased Chinese exports, if the US and EU are serious about their financial blockade. China and Russia have prepared for some financial self-sufficiency. There is a very strong convergence of Chinese and Russian policies: both have maintained (China) or acquired (Russia) a balanced budget, and while Russia has built USD640 billion in foreign exchange reserves from the energy rent, Xi's China has moderated its appetite for domestic debt. Other features are common to both regimes: the creation of international payment systems that offer an alternative to SWIFT (even if the Chinese system substantially depends on it), increased control over Russian oligarchs and top Chinese entrepreneurs, the one-way use of offshore places and their opacity. 

But the very rise of China also implies a greater global interdependence. Chinese banks have sometimes had to implement the bulk of US sanctions (as was the case with North Korea, with indirect US sanctions against establishments in Macau), and have sometimes been spared by the United States (as was the case with the Iranian oil offtake, presumably settled in yuan and trade credits for Iranian imports). This time, however, the problem is much greater, given the ban on flows with the Russian central bank. Certainly, there are short-term loopholes: specifically, USD60-90 billion Russian central bank reserves in yuan, deposited in China. Russia might not be prevented by China from mobilizing these deposits to pay for its own imports or to recover liquidity in rubles, since China has a rising currency and trade surpluses. Russia’s sales of its yuan reserves could even help the Chinese central bank avoid interventions to limit the rise of its currency. In the short term, the UnionPay system and Chinese banks in Russia are going on the offensive with regard to credit cards: this will undoubtedly also serve to increase Chinese e-commerce sales in Russia, and more broadly the sale of consumer goods. In the short term, this is a good deal for China. But with what resources will Russian consumers be able to buy these products, if the ruble continues to fall? China would need to increase its export credits to Russia. The other - large - loophole is the proceeds from Russia’s ongoing sales of gas, oil and coal to Europe. This has strategic significance for gauging the actual extent of Europe’s support to Ukraine. Since more than half of China-Russia trade is now conducted in euros, Europe’s willingness to ban the use of euros by third parties trading with Russia is also a very significant issue. Europeans are faced with the issue of implementing extraterritorial sanctions, something they often reproached the US with. 

More concretely, cautionary advice is given to Chinese banks and companies to avoid falling under international sanctions. The Global Times has discreetly taken down an article that praised the circumvention of financial sanctions.

In the short term, Russian aggression represented a good deal for Xi Jinping. It creates a second front for the United States, bringing strategic attention back to Europe, and of course it puts Russia in a more dependent position towards China. China has conceded nothing, quite the opposite: Wang Yi has pointed out that NATO has similar plans in Asia.

The challenges for Beijing will begin to emerge as Russia becomes bogged down in a conflict of unpredictable intensity, but of long duration. Barring a Western military escalation, Russia would devote far more military and financial resources than Ukraine's supporters. It is unlikely that either Xi or Putin anticipated the firmness and speed of the European and American response. It is true that continued European energy purchases from Russia are a weakness. Western companies withdrawing from Russia create a red carpet for Chinese companies. But China can no longer rely on this weakness. If US intelligence disclosures are as exact today as they were in the past year, Vladimir Putin has already reminded Xi Jinping of their February 4 communiqué, requesting unspecified military assistance. 

That may be as much of a Putin pressure on China to publicly hold firm as an actual request. But this now presents a strategic dilemma for Xi Jinping. This is a year before his expected coronation at the CCP’s 20^th Congress, where he likely seeks stability. He has paused his own undertakings in Asia. The extent of Putin’s gamble, and even more the specter of a decisive weakening of Russia, is embarrassing for Xi’s own strategy. Yet to visibly disassociate China now would also be a considerable set-back, not necessarily with compensating gains towards the US and Europe. Provided the West holds firm and associates others in this new Cold war, the mid-term prospects for China hold little appeal. 

Between war and short-range sanctions, Europeans and Americans have, for the first time, drawn up a realistic option, though one that is admittedly painful for all in economic terms. 

Copyright: Leo RAMIREZ / AFP