China can see the limits of bailing out Russia’s economy
Alicia Garcia Herrero, Natixis Asia Pacific Chief Economist, Bruegel Senior Fellow
The unprecedented sanctions imposed on Russia in the wake of its invasion of Ukraine will devastate its economy, but just how bad things will get will depend on China and how much economic aid Beijing is prepared to extend to Moscow.
In the short term, surging commodity prices are no doubt boosting Moscow’s hard currency reserves, mitigating the $1 billion a day the war is estimated to be costing Russia. This means that Western sanctions, while draconian, have not pushed Russia into the economic abyss yet.
Meanwhile, China, which has clearly voiced its opposition to Western sanctions, has still not confirmed economic and financial support for Russia. Beijing’s two-pronged response has seen its financial institutions religiously follow the sanctions imposed by the West, while Chinese officials have announced the lifting of restrictions on imports of Russian wheat and investment in Russian corporations that may be suffering due to the sanctions.
A good deal of uncertainty remains as to how ready China really is to offer immediate support to the Russian economy. But if we assume that it is, then the real question that needs answering is, how much of it can Beijing actually do?
The reality is that Russia cannot rely on China to buy up all of the fossil fuel exports that it can no longer sell to the West, especially not gas, as the physical infrastructure in the form of pipelines going east is not yet connected.
As for financial sanctions, China’s financial infrastructure, namely China’s international payment system, is not a solution either, for a very basic reason: It still depends on the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the global messaging system for cross-border transactions, from which Russian institutions have been excluded thanks to Western sanctions.
Furthermore, even if China were ready to introduce its own messaging system and dump SWIFT, China’s international payment system is not liquid enough to provide a clear alternative to the global payment system that Russian banks, or any other bank in the world, for that matter, have been using for all of these years, namely Clearing House Interbank Payments System (CHIPS).
In the same vein, China’s digital yuan does not yet offer cross-border transactions of any relevance, nor does Russia yet have a formal agreement to accept circulation and settlement of China’s digital currency.
This situation is unlikely to reflect Russia’s lack of vision, quite the contrary. The Central Bank of Russia will be reluctant to accept the wide circulation of the digital yuan as a way to make up for its lack of access to hard currency because that would further reduce its ability to manage interest rates given the collapsing value of the ruble. Even now, the ruble is in danger of being substituted by the yuan, a nonconvertible currency, whether digital or not.
The real helping hand that China could offer is through the $90 billion worth of yuan that Russia has sitting on the People’s Bank of China’s balance sheet.
Unfortunately, though, Russia can only withdraw yuan to pay for Chinese exports into Russia, not to pay for goods imported from elsewhere or to meet other foreign currency obligations.
If the PBOC decided to convert Russia’s yuan reserves into hard currency, that would clearly help Russia’s current impasse but the reputational risk of potentially breaching Western sanctions would be a huge step for the PBOC to take and therefore makes it highly unlikely.
Over time, China will be able to support the Russian economy more solidly as new pipelines are built to redirect gas from Europe to China and as China’s international payment system becomes a credible alternative to CHIPS. But this is clearly more appealing for China than for Russia.
China would be able to strengthen its energy security by becoming Russia’s largest, if not its only, importer of oil and gas. Secondly, progress in yuan internationalization would accelerate without Beijing having to give up capital controls. In essence, China has an economic incentive to support Russia as long as it does not fall foul of Western sanctions.
For Russia, however, strong dependence on the Chinese economy and its financial system is far second best compared to remaining part of the global economy and maintaining a convertible ruble as its currency.
As for Beijing, the upside of having Russia shift further away from the West and becoming much more dependent on China is not the whole story. In fact, it needs to be juxtaposed against a risk that China has clearly underestimated, namely ending up being the target of the same sanctions being heaped on Russia.
For a long time, the Chinese economy was simply too big to be ignored, and Beijing’s attempts to punish countries such as Australia or Lithuania have not received an explicit response from Western investors. This time around, in the case of Russia, we are starting to see signs of Western investors voting with their feet.
The massive actions taken by over 300 multinationals in Russia will probably bring China to a rethinking of the pluses and minuses of trying to have it both ways with regard to the war in Ukraine. The long-term gains of moving closer to Russia might not match the impact of Western investors suddenly losing interest in China.
*This article was originally published by Nikkei Asia at
https://asia.nikkei.com/Opinion/China-can-see-the-limits-of-bailing-out-Russia-s-economy
