Beijing’s upcoming crude choice

Foreign Affairs

Chinese imports of Russian crude showed signs of weakening, while Beijing may be facing a potential overseas debt crisis aggravated by Moscow’s invasion of Ukraine. Meanwhile, a recent Japanese Ministry of Defense white paper is critical of China and Russia.

Illustration by Derek Zheng

Chinese imports of Russian crude continue to fall, according to Bloomberg, and appear to be down about 15% from their post-invasion peak. Sinopec also cut back on Russian crude imports this week, though Reuters reported that China’s largest petroleum refiner was outbid by Dubai-based trader Coral Energy — and Chinese state-owned enterprises such as CNOOC, PetroChina, and Shandong Port International Trade.

As we’ve reported previously, Chinese demand for Russian crude is increasingly top-of-mind for Western policymakers, as the EU moves to phase out most Russian hydrocarbon imports by the end of the year. Since Russia lacks crude oil storage capacity, it must either consume the barrels domestically or export them.

If Russian crude exports fall later this year on tougher EU/U.S. sanctions, the impact could prove significant: oil and gas exports comprise about half of Russia’s exports and funded about 40% of Russia’s 2021 budget revenue, according to Bloomberg.

G7 countries are attempting to limit Russian crude oil earnings while minimizing damage to the world economy. The so-called “price-cap” mechanism seeks to maintain Russian crude export volumes near existing levels while capping the prices Russia can charge to customers. Beijing’s compliance with the price-cap mechanism would have a major impact on the Russian economy and the Kremlin’s ability to maintain the war in Ukraine at current levels of intensity.

China’s first overseas debt crisis and the war in Ukraine

The Financial Times, citing Rhodium Group data, estimates that Chinese lending institutions had to renegotiate $52 billion in loans in 2020 and 2021. While the loans are small relative to the Chinese financial system, there is growing concern about a potential debt crisis in the Global South. In May, German Chancellor Olaf Scholz said, “It really is a serious danger that the next big debt crisis in the Global South will stem from loans that China has granted around the world and does not quite keep track of itself, because there are so many players involved.”

Putin’s invasion of Ukraine is contributing to higher energy and food prices, increasing the probability of a Belt and Road Initiative debt crisis in commodity-importing countries. One VoxEU paper found that the FAO Food Price Index is at a record high, “easily surpassing previous spikes in the 1970s and early 2010s.” While Putin may be attempting to use a so-called “Hunger Games” strategy to immiserate African countries, drive up politically-sensitive refuge flows to Europe, and pressure the EU, this policy may also impose costs on Beijing.

Japan’s Defense White Paper criticizes China, Russia

Saying that the Kremlin’s “defiance of international order is not just Europe’s problem,” Japan’s 2022 Defense White Paper excoriated Russian foreign policy and warned that China “continues to unilaterally change or attempt to change the status quo by coercion in the East China Sea and South China Sea.” The Japanese Defense Ministry also said that “[China’s] ties with Russia, an aggressor nation, have deepened in recent years, with joint navigations and flights being conducted in the areas surrounding Japan by both Chinese and Russian vessels and aircraft.”

The document also described Japan’s allies and partners, including the quadrilateral cooperation between “Japan, the U.S., Australia, and India.” It also described how Japan is working with European nations and navies to “ensure that the [Indo-Pacific] region is free and open.”

Japan’s white paper did not describe cooperation with South Korea, however. The Chinese and Russian militaries conducted a joint aerial strategic patrol over disputed territory in the East Sea/Sea of Japan on May 24 in an attempt to exploit divisions between the two U.S. allies.

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