‘It’s going to be a wash’: The Pyrrhic victory of Russian sanctions

After the West’s sanction barrage roiled Russia’s economy, the message to Chinese businesses was clear: Side with the West or risk being next. Last week, U.S. officials mulled a second salvo against Chinese chipmaker SMIC and consumer tech brand Lenovo that would further injure the Russian economy. In the ensuing days, some Chinese banks and businesses complied, despite Beijing’s strong opposition to sanctions as a coercive tool.

The self-sanctioning of Chinese firms was a testament to how indispensable Western markets have become to China over the decades. “For most Chinese companies,” wrote Dan Wang, an analyst for Gavenkal Dragonomics, in a research note, “Russia is just too small of a market for the business to be worth the risk of getting cut off from developed markets.” But not all Chinese companies are beholden to the West. A generation of Chinese firms — in banking, manufacturing, and technology — thrived almost entirely from a ballooning Chinese middle class (and state support). And for these self-reliant firms, Russia presents a golden opportunity.

“[The sanctions] have created a vacuum in which Chinese firms can step in, and it has improved their bargaining position,” said Daniel Ahn, a fellow at the Wilson Center in Washington, D.C., and ex-chief economist at the U.S. State Department. “I think it’s going to be a wash from a direct economic point of view.”

After Visa and Mastercard suspended operations, Russian banks flocked to an alternative: China UnionPay. The payment system, which has 99.5% of expenditures conducted inside China, has a new, and desperate, Russian clientele.

China’s tech companies also stand to benefit. China is already one of Russia’s top suppliers of mobile phones, electronics, and telecommunications gear. But as Western tech giants such as Google, Apple, and Amazon vacate the country, Chinese counterparts — Baidu, Huawei, and Meituan — could capitalize on a newly technologically impoverished Russia.

The Chinese automaker Great Wall Motor invested over $1 billion in the past three years in what it called “the largest investment project” for a Chinese manufacturer in Russia, its factory producing over 150,000 cars in 2020. After the departure of Ford, Volvo, and Toyota, the manufacturer now enjoys very few competitors in one of the top ten auto markets in the world.

Financial experts have long warned that Russia’s financial exile could accelerate plans for a non-Western banking alternative such as one based on the RMB. Similarly, excising non-compliant businesses could supercharge the creation of a new economic bloc, made from the outcasts, so to speak, of the Western system. The telecoms giant Huawei, blacklisted by the U.S. in 2019, signed a deal with Russia’s largest mobile network operator, MTS, that summer. The company has since ventured deeper into Russia as paranoia over Western technology consumed both Beijing and Moscow. Ahn believes the opportunities for China will outweigh the immediate shocks to China’s bilateral trade and its self-sanctioning enterprises.

“An unknown Chinese bank”

China is no newcomer to transacting with pariah states. In 2016, the United States restricted Chinese telecoms giant ZTE for setting up shell companies to sidestep U.S. sanctions against Iran. According to a review of World Bank and United Nations trade data, China emerged as Russia’s biggest export destination following Western sanctions, imposed in 2014, after Russia annexed Crimea. Three months later, China inked a series of energy deals — including a $400 billion Power of Siberia gas pipeline contract — to revive Russia’s weakened economy.

The Ukraine crisis will deepen that marriage of convenience. “The first thing that I would expect is some unknown Chinese bank, maybe created overnight, will help facilitate the sale of some heavily discounted Russian oil cargo to some Chinese national oil company,” said Ahn. Although West-facing banks will remain leery, “there’s nothing stopping a Chinese state-owned entity, or a newly created bank, or even a special purpose vehicle to go ahead and facilitate this immediate market opportunity.”

In many ways, dealing with troublesome, resource-rich states has been a continuous challenge for a rising China — for decades, the country has tried to balance a newly global reputation with an insatiable appetite for resources. When forced to choose, China often elects for both. “China will, on the surface, seem to cooperate with the West,” Victor Shih, a political scientist at the University of California, San Diego, told me. But there are many underhanded tools at its disposal, says Shih: “What the Chinese government can do is have some SOE place a huge order from [the chipmaker] SMIC, and SMIC, not knowing where the chips will go, sells it to the SOE and the SOE, through some companies, sells them eventually to Russia.”

China’s sanction-dodging record includes those it has assented to. In 2019, the United States blacklisted two Chinese shipping companies for violating the UN sanctions against North Korea. According to a UN panel’s report, North Korea-connected vessels made 41 coal transfers offshore of China’s busiest port.

Sanctions as a gray rhino

In some universe, the Ukraine crisis presents Beijing with the opportunity to step into a new role: China could uphold its own principles of sovereignty, endorse the Western-led sanctions regime, and join the international order from which it has benefited greatly. Such an outcome could change the direction of the war, leave Russia’s economy weaker, and make the international system — from which China could work out its disagreements — stronger.

But the strategic and ideological forces — China’s paranoia about Western influence, wariness of security blocs like NATO or AUKUS, and instinct for stability amid crisis — points to a bleaker future. For years now, China has been on a narrow track toward economic self-sufficiency, a society free of the systemic risks posed by the West’s sanctions and its global financial crisis. In this world, Russia would be inextricably tied to China, and trade would occur in an RMB-backed system, with a newly emerging Asian bloc from Russia to Pakistan to Turkey. Only the latter could grant Beijing the opportunity to bring Taiwan under direct Chinese control and withstand the international blowback.

In a widely publicized speech last year, President Xí Jìnpíng 习近平 warned hundreds of top Communist Party officials to be on high alert for “black swans and gray rhinos,” a metaphor for risks, both conspicuously unpredictable and predictably inconspicuous. Sanctions are gray rhinos: crises made predictable because they have become an indelible crutch of the liberal international order. The Ukraine crisis may not send Beijing and Russia into each other’s arms today, but it will supercharge Beijing’s deep distrust of the West for years to come.