In early July, China’s Foreign Minister Wang Yi met his Russian counterpart Sergei Lavrov in Bali on the sidelines of a G20 ministerial meeting – already the second time the two have held talks since the start of Russia’s invasion in Ukraine. Both sides attested the meeting a friendly atmosphere and highlighted the “increased volume and scope of practical engagement” as well as the two countries “strong resilience and strategic determination” in the face of global challenges. Their attitudes echo the Joint Statement from February 4th, just weeks before the offensive was launched, where Putin and Xi declared that there will be “no limits” in China-Russia relations in the “new era” the world is entering.
In contrast to most Western countries, China has largely refrained from condemning the operation and refuses to join the western sanctions, bringing it a lot of international opprobrium for this seeming act of support for Moscow. What do the facts of the so-called “pro-Russian neutrality” tell us so far?
First, bilateral trade between the two countries has indeed increased by 28.9% in the first five months of this year, amounting to $65,8bn. This represents a continued positive trend already visible for the past 25 years, further accelerated after Russia’s annexation of Crimea in 2014 and Moscow’s intensified “turn to the East”. Last year, bilateral trade in goods and services totalled $148.8bn – a year-on-year increase of 36% (cf. chart).
The recent increase in trade is, however, quite unevenly distributed. Russian exports of commodities, and especially crude oil, natural gas and coal have over the years made over 70% of Russian exports to China, and now oil alone is responsible for a 55% rise in total imports in May compared to a year ago. Lack of consensus on sanctioning Russia’s energy trade combined with a considerable price discount Moscow offered its non-Western trading partners – estimated at over 30% at its peak - seem to have further contributed to Beijing’s interest in buying record volumes of Russian oil and replacing Saudi Arabia as China’s primary oil supplier. This, however, seems to be rather a case of economic pragmatism than deliberate political support. Besides, as the effect of sanctions is building up, Russia is likely to double down its efforts to increase bilateral trade despite asymmetric relationship concerns.
Chinese exports into Russia, on the other hand, have been on the decline since February, and fallen by another 8.6% in May. China exports predominantly electronics, equipment and vehicles to its northern neighbour – industries that are still less developed in Russia. Mobile phones for instance, in January with $821m still the top Chinese export good to Russia, tallied in May at merely $152m – 82% less. Like already back in 2014, Chinese companies are wary of violating the sanctions and largely comply with them.
Second, Chinese investors these days seem to remain cautious in light of the looming threat of secondary sanctions. China’s phone giant Huawei for instance has halted its production in the country, and Xiaomi and Lenovo are rumoured to even be leaving Russia. The case of Iran could, however, indicate that investments might become more interesting, especially should asset prices come down further.
Third, there is also no indication of direct support for Russia with regards to finance. Despite the RMB gaining in importance in bilateral trade as of recent, China’s state-owned banks comply with the sanctions, and the largest Chinese banks have curtailed their operations in Russia. Likewise, China’s UnionPay international payments system refuses to work with Russian banks that are on a sanctions list.
So, while five months into the Ukraine war it is too early to ultimately judge whether Beijing’s economic actions vis-à-vis Russia are purely opportunistic or more reflective of a “pro Russian neutrality”, a few things seem to be clear.
First, bilateral trade in commodities is set to strengthen. Russia’s dependence on China as a purchaser of Russian commodities will further increase once the Western embargo fully kicks in this fall. At the same time, China as the largest energy consumer also relies to some degree on Russian energy and food supplies, and given the increasingly hostile international environment, Beijing might consider a growing energy supply trade with Russia to be one of the safest remaining options.
Second, moving forward, an increasing adoption of the RMB in bilateral trade is very likely. In the current geopolitical context, this would serve the interests of both sides.
Third, as Chinese policymakers understand that the systemic competition with the West is unlikely to stop regardless of what it does, China remains cautious and pragmatic and is playing for time while reorienting its economy inwards and safeguarding its supply chains.
For now, however, its support for Moscow is more a support in words than in deeds.
