Russia should be prepared for the fact that the process of economic convergence will be difficult. The risk of secondary US sanctions against Chinese companies should be taken very seriously, writes Valdai Club Programme Director Ivan Timofeev.
The large-scale sanctions that have been slapped on Russia by the “collective West” naturally raised the question of its deepening and expanding economic relations with China. According to a number of parameters, Russia has no alternatives to cooperation with the PRC, or at least these are the most optimal. Such cooperation can be supported by the unprecedentedly high level of political relations, their already established economic partnership, Russia’s objective need for Chinese goods and technologies, and China’s reciprocal interest in Russia’s free market. The growing rivalry between China and the United States is also playing a role. At the same time, Russia should be prepared for the fact that the process of economic convergence will be difficult. The risk of secondary US sanctions against Chinese companies should be taken very seriously. China is highly integrated with the global economy. The risk of losing markets in the US, the EU or other countries as a result of restrictive measures is a serious factor, evoking caution among Chinese business in their relations with Russia.
Moscow’s need for deepening Russian-Chinese economic relations after February 24, 2022 is determined by the following tasks:
First, Russia needs to replace Western imports in its market, the supply of which has stopped due to foreign trade sanctions or informal boycotts. This is especially true of hi-tech goods and industrial equipment. They include electronics, equipment for oil refining, various types of machine tools, machines and parts for them. Chinese industry is the most diversified among the countries which remain friendly to Russia and can potentially be a source of such supplies, and in the long term, a base for creating more complex value chains.
Second, Russia needs markets for its exports, which are being consistently squeezed out of the EU, the US and other countries. Among the key items are oil, coal, ferrous metallurgy products, and over the long term — gas and other goods. Although China is unlikely to take over the entire volume of released exports, its market will play a key role.
Third, Russia needs an efficient mechanism for conducting financial transactions with foreign partners. The minimum task is to build reliable financial mechanisms for bilateral trade. A more complex task is the use of the renminbi for transactions with third countries. Both tasks are difficult to accomplish, but vital for partnership with China amid the new conditions.
China may be interested in developing relations with Russia due to the following conditions:
First, the sanctions free up significant market niches in the Russian market. Previously, they were difficult to occupy due to Russia’s well-established ties with Western partners. Today, there is an immediate liberation of the Russian market due to formal sanctions and informal corporate boycotts. Of course, the Russian market is incomparable with the US and EU markets. It will shrink due to the inevitable economic downturn caused by extreme economic pressures. However, even amid such conditions, the domestic market provides new opportunities for Chinese companies.
Second, China has the opportunity to obtain significant volumes of Russian raw materials at a discount. Russia will play an important role in diversifying the sources of raw materials for the Chinese economy.
Third, China can gradually strengthen its role as a major international financial centre. If the renminbi becomes the key currency of international transactions for Russia, this role of China will inevitably grow.
There are several factors that will contribute to the development of Russian-Chinese cooperation.
First of all, the already-accumulated volume of trade and economic relations should be noted. They form a solid base for further growth. The political climate is also important. If in relations with the EU and other Western players, mutually beneficial trade in the past decade and a half has been increasingly under pressure from political factors, then in relations with China, political conditions have been improving all these years. By themselves, they do not guarantee a breakthrough in the trade and economic sphere. However, they are a solid foundation for their development. Ultimately, it was politics that became the main reason for the collapse of relations between Russia and the West in the field of economics and trade. The broader context of Russian-Chinese relations also plays a role. American rhetoric against the PRC was scaled down since Donald Trump left office. However, the political and economic contradictions between China and the United States have not gone away. Beijing and Washington are strategic rivals. The crisis in relations between Russia and the West provides China with an opportunity to strengthen its position through a deeper partnership with Russia. The decline of the Russian economy is not beneficial to China.
There are also a number of difficulties. The first is related to the ongoing COVID-19 pandemic. China has experienced a new wave of the pandemic. The PRC authorities are forced to maintain a high level of restrictions, associated with business contacts. Sooner or later, the epidemic will cease to be a deterrent, but it prevents the immediate development of cooperation, which requires extensive human contact.
The second difficulty is more significant. Chinese businesses are afraid of secondary sanctions, as well as administrative and criminal prosecution by the US authorities if they violate the US sanctions regime, as well as the restrictive measures of other countries. Such a situation may arise, for example, in the case of mutual settlements between Chinese companies and Russian counterparties under sanctions in US dollars or even euros. Another scenario is the supply to Russia of goods that are produced in China under an American license and at the same time fall under US export control (for example, electronics). The resonant criminal and administrative prosecution by the US authorities of the Chinese company ZTE apparently had a serious psychological impact on Chinese business. The United States accused ZTE of supplying equipment with American components to Iran without permission and bypassing the US export control regime. As a result, ZTE pledged to pay more than $1 billion in fines to several US government agencies. The US authorities’ attempt to prosecute HUAWEI CFO Meng Wanzhou had a similar effect.
We can talk about the same effect in connection with the blocking sanctions of the US Treasury against the Chinese company COSCO SHIPPING Tanker for the alleged transportation of Iranian oil (however, the company was able to quickly have the sanctions lifted administratively). The risks of secondary sanctions and coercive measures are forcing Chinese businesses to carefully evaluate options when considering cooperation with Russia. A particularly thorough analysis is being carried out by companies that are actively working in the US and EU markets.
At the same time, secondary sanctions and coercive measures alone are unlikely to stop the growth of trade relations between Russia and China amid the new conditions. The export control of foreign countries does not apply to those goods that China produces using its own technology, and there are more and more products like this. Financial sanctions are unlikely to affect Russian and Chinese businesses in the event of transactions being conducted in renminbi outside the contours of the American financial system. That is, trading in national currencies will mitigate their impact. The Chinese authorities are actively modernising their legislation aimed at protecting Chinese firms from Western sanctions. There is no doubt that the risk of secondary sanctions and enforcement measures will be significant in the medium term. Russian business should be sympathetic to the caution of their Chinese partners. At the same time, operational work on financial mechanisms for mutual settlements and the development of market niches not related to Western technologies will provide more opportunities in the long term.
An important fundamental factor for further cooperation is knowledge of the Chinese language, culture and law. The lack of such competencies will prevent Russian businesses from seeking markets in China, attracting Chinese investments and suppliers, or conducting effective negotiations. Chinese businessmen in Russia, for their part, are quickly mastering the Russian language. The development of cultural competencies, at first glance, is secondary in comparison with financial infrastructure, transport corridors and other conditions. However, without them it will be difficult to count on the full development of our relations for decades to come.