China seeks to fill the void left by sanctions on Russia (but in its own way)

Since the beginning of the war in Ukraine, China has been careful to officially maintain its “pro-Russian neutrality”. However, Beijing’s propaganda machine is hard at work amplifying Russian narratives in line with their recent “boundless friendship.” Beijing has refused to impose any sanctions on Moscow and, after an initial period of adjustment marked by economic disengagement, has continued to deepen its economic ties with Russia. At the same time, China seeks to minimize its exposure to OECD sanctions and demands high export prices from its northern neighbor, especially for strategically important products such as semiconductors.

Semiconductor export from China to Russia

Chinese imports from Russia – made up almost entirely of raw materials – experienced a brief decline after February 24, but then recovered, first due to the rise in prices caused by the war and then due to the growth in the levels of imports. import, in contrast to the sharp drop in imports of the G7. Sanction fears that first capped import volumes — especially oil, backed by big financial deals potentially exposed to secondary sanctions — have clearly faded. Low Russian oil and gas prices have helped attract more purchases from China, which has now overtaken Germany as biggest buyer individual Russian energy. Also, other big emerging economies are fast catching up. Compared to the April-May boom, import volumes in June slowed down a bit; this may be due to weak demand from a slowing Chinese economy and some production and supply constraints due to sanctions.

Chinese exports to Russia plummeted after the outbreak of the war, but have since recovered. Unlike exports from the European Union and the United States, this initial slowdown was probably due to the weakness of the Russian economy. Nonetheless, China outperformed all of its non-OECD G20 peers, including Brazil and India, although Turkey is suspected of skirting sanctions. Only exports of chemicals, plastics and semiconductors escaped the downward trend. However, China has been selective in meeting Russia’s technological needs to avoid being hit by OECD sanctions.

Semiconductors are a good example of what happens when high Russian demand is coupled with Chinese capacity and legal confidence regarding sanctions. After a brief decline, Chinese deliveries of integrated circuits and other semiconductor products have soared since April, when China stepped in to fill the gap left by the drop of 90% of world exports to Russia, likely fueled by greater clarity on G7 sanctions. Export values ​​have experienced staggering growth, reflecting in part the low pre-war starting point. The fact that this has not been fully reflected in export volumes probably reflects China’s export of more sophisticated products to compensate for the withdrawal of OECD countries, as well as the fact that Chinese producers have taken advantage of their greater market power and have increased prices as a result. General inflation and rising prices in the semiconductor market have also played a role.

After Russian requests for Chinese chips for bank cards linked to the mir payment system in early April were met with some initial misgivings, China repeatedly underlined its firm support for to the Russian Federation. While Chinese chipmakers – such as SMIC – that rely directly on US and EU equipment have been reluctant to take part, companies that package the chips and are not exposed to the US and EU markets have taken over. Russian motherboard manufacturers have modified their products to adapt them to Chinese-made chips (which are still made on TSMC equipment). Although slower and more power-hungry than their counterparts from Intel and AMD, these chips are sufficient for basic Internet browsing and office work. However, Chinese exports fall short of Russian needs, leading Moscow to stock up on microchips from home appliances and other commercial technologies for reuse in weapons systems.

Caution among Chinese companies and investors; increased trade in yuan

Although China started selling dual use drones In Ukraine, the country’s largest drone manufacturer, DJI, subsequently decided to suspend operations in both Ukraine and Russia over fears that its products would be adapted for military use. Ride-sharing company DiDi also announced its intention to withdraw from Russia for business reasons just before the outbreak of the war, but was forced to back down due to public reactions in China. In general, however, Chinese tech companies have listened to market forces without completely disassociating themselves from Russia. Huawei, for example, although it continues to provide services in Russia, has closed four of his nineteen official outlets in Russian cities. Although very few Chinese tech companies have abandoned the Russian market entirely like their Western counterparts, trade here also appears to be subject to economic considerations, as the declining purchasing power of Russian consumers holds back sales.

In financials, for which current data is scarcer, signs point to moderation on the part of Chinese investors. It should be noted that massive foreign exchange inflows from Europe for oil and gas have more than met Russia’s external financing needs for now, with a current account surplus on track to exceed 10% of GDP. The detailed information about the infrastructure projects and their financing suggests that they have been discontinued entirely, and there has been no indication of additional bank loans by China. Many Chinese financial service providers have announced their withdrawal from the Russian market amid great legal and economic uncertainty and Chinese financial services have not become widespread in Russia despite support from Moscow. Trade in yuan and rubles has increased significantly in the Russian capital, likely reflecting the abandonment of G7 currencies. despite some anecdotal events and of interest expressed by several countries, there have been no indications of a wider use of the yuan internationally in other foreign exchange markets or in international payment systems.

Closer to Russia, further from the international community

Relations between China and Russia have traditionally been characterized by competition, but with Russia’s war against Ukraine and China’s rise in world politics, they have come to have a common enemy: the United States and NATO. Despite Russian frustration over China’s prioritization of its economic interests, Beijing has stepped up its efforts to deepen bilateral exchanges since the war began. Chinese and Russian officials have not shied away from exchanges, there have been multiple phone conversations between Xi and Putin, and a strong call for economic cooperation was made at the mid-June meeting of Russia’s main economic forum. New cooperation agreements have been signed in key sectors such as energeticthe space and the agri-food. At the BRICS summit in June, Xi proposed specific cooperation on cross-border payments and industrial value chains, while strongly criticizing sanctions as the cause of most of the world’s current turmoil, which coincides with Putin’s arguments.

Meanwhile, Beijing has done little to soften the grim humanitarian repercussions of the war, even in international markets for food and raw materials. China is believed to be the largest holder of reserves for most agricultural products and raw materials, but has nonetheless turned a deaf ear to any proactive contribution to cap commodity purchase prices or to facilitate exports. food. And what is worse, it has not relieved his stealthy restriction on the export of fertilizers nor has it expanded its refined oil export quotas, despite having the world’s largest capabilities in both industries. Even when it comes to refugees, it is difficult to identify a substantial contribution from China.

Although neither its government nor its companies have given full support to the Russian economy, China has continued to provide vital economic and diplomatic support to a rogue state, in blatant defiance of the EU’s core interests. It is hard to conceive of a better wake-up call for Europe to speed up its efforts to develop as a geopolitical actor and reduce its economic dependence on autocratic states.

Article originally published in English in the Web of MERICS.