China is the only major economy that still has a direct line to a rapidly isolated Russia – but pressure is mounting on Beijing to change that.
Just weeks after the two countries signed a ‘limitless’ partnership agreement, China is left with no choice but to recalibrate its stance on bilateral trade and macroeconomics with Moscow, after President Vladimir Putin launched an unprovoked war against Ukraine.
While Beijing still wants to rely on Moscow as a long-term strategic partner in fending off America’s global influence, it is likely to be wary of international backlash if it opts for moves that could be construed as an endorsement of the government. aggression of Putin, according to experts.
Chinese companies will also be reluctant to trade and invest in a country that has been cut off from much of the global economy.
On Monday, the Russian ruble fell 30% after a coordinated set of sanctions by Western allies limited Russia’s central bank’s ability to deploy its $630 billion in foreign exchange reserves and cut it off from SWIFT, the largest banking payment network in the world.
So far, Chinese policymakers have focused less on their ability to help Russia than on providing general comments on the impact of sanctions on the Russian and European economies, while China’s central bank has yet to comment. given clues about the state of Russian foreign exchange reserves or the currency swap line.
According to the most recent figures from the Bank of Russia, around 13% of Russia’s foreign exchange reserves – or around $77 billion – were in Chinese assets in June 2021. Moscow may seek to sell these assets in order to give a boost to its beleaguered liquidity.
“China is going to be very careful about how it comes to the aid of the Russian economy. The risks for China are incredible,” said Max Zenglein, chief economist at Merics, a think tank focused on economics. China in Berlin.
Even experts associated with the Chinese government are pessimistic about the future of the Russian economy following the latest rounds of sanctions.
“Against the background of financial sanctions and export controls, the business environment in Russia will further deteriorate, and international investors will definitely reduce their business in Russia and exit the Russian market,” said Han Yichen, Eurasia specialist at the Chinese Institutes of Contemporary International Relations. the official think tank of China’s national security apparatus, wrote in an article.
pay for war
Soon, Beijing will have to ponder demands for a Russian central bank facing tighter liquidity than at any time since the end of the Cold War. The key question for Chinese leaders is: does he want to be seen as funding Putin’s war chest?
“When Russia looks abroad, where its reserves have not yet been frozen, it will not be Europe, it will not be in the United States, it will be in China. But to get there, you need the political decision in China to help a bit,” said Jonathan Hackenbroich, sanctions policy specialist at the European Council on Foreign Relations.
“If China is perceived as undermining Western sanctions, it must also realize that it will be dealing with a stronger voice in a united Europe, the United States and Japan, which can quickly put China in a more awkward position,” Zenglein added.
The central banks of Russia and China established currency swap lines after the West imposed sanctions on Russia for its annexation of Crimea in 2014, at a time when China was also keen to expand the global use of its currency to challenge the strong position of the dollar. .
A year later, China launched the Cross-Border Interbank Payment System (CIPS), a much smaller alternative to Belgium-based SWIFT. It has 1,280 member financial institutions worldwide, compared to 11,000 for SWIFT.
The problem here is that neither the Russians nor the Chinese consider each other’s currencies useful. Indeed, as recently as early February, Russia and China agreed to a natural gas deal in euros, not their own currencies.
While the ruble is now on the edge of a cliff, the Chinese yuan is far from being a strong international currency. More than 40% of global payments are settled in dollars, while the yuan accounts for 2%.
“Currently in Russia, people are lining up to withdraw their deposits in rubles, dollars and euros – not yuan,” said Iikka Korhonen, director of the Bank of Finland’s Institute for Emerging Economies. “The fact that the Russian central bank has such a large share in the Chinese yuan will actually not be very helpful.”