As Russian President Vladimir Putin weighed the pros and cons of invading Ukraine last month, he gambled that he could rely on the support of a crucial ally: his Chinese counterpart, Xi Jinping. And for a while that bet paid off.
Russia and China had been moving closer together for years as their relationships with the United States and its Western allies deteriorated. At a Feb. 4 meeting in Beijing on the opening day of the Winter Olympic Games, the two leaders formalized that goodwill by signing a 5,000-word accord proclaiming “no limits” to their nations’ partnership. They hailed each other as “best friends.”
Twenty days later, Putin sent tanks rumbling across the Ukraine border. At first, Chinese officials hewed close to Russia’s talking points, refusing to condemn Putin or even acknowledge his decision to send troops into Ukraine as an “invasion.” At a news conference in Beijing as recently as Tuesday, Chinese Foreign Minister Wang Yi declared China’s friendship with Russia to be “rock solid.”
And yet, as Russia’s attack on its western neighbor drags into a third bloody week, the bloom is off the Xi-Putin bromance. Behind the rhetorical facade, Chinese officials are reassessing the value of the Russian entente, distancing themselves from Putin and scrambling to reposition China as a neutral observer of the Ukraine conflict.
Forcing that shift is a chain of developments Xi and his allies failed to foresee: the recklessness of Putin’s attack, the strength of Ukrainian resistance, the incompetence of Russia’s military, and the force of economic sanctions slapped on Russia by the U.S., Europe, and their Asian allies.
China has the means to insulate Putin from the pain of Western sanctions, but it now seems more likely that Beijing will step aside, professing official outrage over Western sanctions without doing anything substantive to undermine them.
Putin’s war has tarred Xi’s global stature by association. It’s unclear whether the Russian leader alerted Xi to the scale of his planned assault on Ukraine when the two men met in Beijing. The magnitude of Putin’s attack has stunned even the best-informed Western Kremlin watchers. Xi, too, has seemed blindsided by the scale and violence of Putin’s strike.
If the Chinese leader was fully briefed about the invasion and embraced Putin as an ally anyway, he appears a willing coconspirator in the violation of another nation’s sovereignty, contradicting a fundamental tenet of Chinese foreign policy and fanning Western fears that Beijing has joined Moscow in a new “axis of authoritarianism.” Alternatively, if Xi was caught off guard by the attack , as U.S. CIA Director Bill Burns suggested in testimony before Congress this week, the Chinese leader looks naive—like he was “played” by his Russian comrade. For China, there are only awkward answers to the questions, “What did Xi know?” and “When Xi know it?”
As Russian rockets slam into Ukrainian hospitals, schools, and apartment buildings, sending more than 2 million refugees into Poland, Hungary, Moldova, Romania, and Slovakia, Xi’s “best friend” has succeeded in unifying China’s Western rivals in a way no American president ever could.
Members of the North Atlantic Treaty Organization (NATO) and its allies have forsworn military confrontation with Russia. But they are waging the financial and commercial equivalent of war, coalescing behind an extraordinarily harsh array of sanctions designed to inflict genuine pain on Putin and his cronies and bring Russia’s economy to its knees.
The U.S. and the European Union have seized the assets of Russian oligarchs and booted Russian banks out of the Society for Worldwide Interbank Financial Telecommunications (SWIFT), the global financial messaging system that connects 11,000 banks in more than 200 countries and processes the majority of global money transfers. Central banks throughout the West have frozen Russia’s sovereign assets.
Western multinationals including Ikea, General Motors, McDonald’s, and Starbucks have announced their withdrawal from the Russian market, as have Western banks and advisory firms like J.P. Morgan, Goldman Sachs, and McKinsey. Visa and Mastercard have terminated Russia-issued cards. Apple, Google, and Facebook have ceased operations in the country. Global oil majors, including Shell, ExxonMobil, and BP, are exiting Russia and unwinding all investments there.
The U.S. and the United Kingdom have banned Russian oil imports, and even the European Union, which gets 40% of its natural gas and 25% of its oil from Russia, is debating an energy boycott.
The sanctions are roiling Russia’s economy. Russia’s stock market has remained closed since Feb. 25, the day after Russian forces invaded Ukraine. The ruble has plunged nearly 40% against the dollar since the invasion, forcing Russia’s central bank to raise interest rates 20%. The three big global credit ratings agencies, Fitch, Moody’s, and S&P, have downgraded Russian bonds to “junk” status and warn that the country is careening on the brink of default.
There is a wide array of things China could do to help to shield Russia from the pain of Western sanctions: ramp up purchases of Russian oil and wheat, broaden existing currency swap arrangements, direct China’s policy lenders to extend loans to Russian companies, or make it easier to for Russian banks to use China’s own financial settlement platform, the Cross-Border Interbank Payment System.
Beijing is considering those measures and more. But the conflict has already inflicted immediate harm to China’s economy by driving up prices for oil and iron ore by more than a third since the invasion began and increasing the risk of global inflation. Those costs will increase exponentially if China, in trying to throw a lifeline to Russia, becomes the target of Western sanctions too.
Further risking China’s economy to help Russia is a poor exchange for Beijing. Russia, for all its nuclear prowess and natural resource wealth, is a small economy; the country’s 2021 GDP of $1.7 trillion was smaller than that of the state of Texas. China’s trade with Russia rose 36% last year to $147 billion. But that’s a tiny fraction of China’s trade with the EU ($828 billion) and the U.S. ($756 billion).
“As sanctions threaten to reduce Russia to an economically isolated pariah, China will not ride to its rescue,” argue analysts Xie Yanmei and Wang Dan at Gavelkal Dragonomics, an economic research firm, in a recent note to clients. “The calculation for China is simple: Its commercial ties with the U.S., European Union, and their allies in Asia are much more important than those with Russia.”
At the Beijing meeting, Xi agreed to relax restrictions on imports of Russian wheat, a move that would not only benefit Russia but also help China cope with a winter wheat harvest that because of damage from heavy rains, was described this week by China’s agricultural minister as potentially “the worst in history.”
The two leaders also signed deals for expanding Chinese purchases of Russian oil and natural gas. Since the outbreak of war, however, Chinese refiners have temporarily suspended their purchase of Russian crude oil because those transactions are typically settled in dollars, which risks exposing the Chinese companies to secondary sanctions.
On Thursday, the China Foreign Exchange Trade System announced that it would double the trading range permitted between the yuan and the ruble, allowing the Chinese currency to trade 10% in either direction. But the policy change was mostly symbolic: Only about 17% of all transactions between China and Russia are settled in yuan.
On Wednesday, China’s top banking and insurance regulator, Guo Shuqing, declared China’s opposition to Western sanctions against Russia. “We will not participate in such sanctions, and we will continue to maintain normal economic, trade, and financial exchanges with relevant parties,” Guo said in a briefing.
But as Gavekal’s Xie and Wang point out, “not participating” in Western sanctions isn’t the same thing as defying them. “On the contrary,” they argue, “large state-owned Chinese banks reportedly have already begun limiting transactions with Russia. Such moves are consistent with their historical pattern of complying with U.S. sanctions against North Korea, Iran, and even Hong Kong at the same time as the Chinese government vehemently denounced those sanctions.”
That restraint underscores the fundamental difference between Russia’s relationship with the West and China’s. Xi presides over an economy that is 10 times larger than Putin’s and got that way because China is highly dependent on the global economy; Russia is not.
“Beijing would clearly prefer to pursue a third way somewhere between the binary choice of supporting Russia or refusing to do so,” argue analysts at the Rhodium Group, a U.S. research firm. That middle path might involve “quietly maintaining existing channels of economic engagement with Russia…while minimizing the exposure of China’s financial institutions to Western sanctions.”
But such a straddle may not be enough to protect China from Western reprisals. “The problem for Beijing is that maintaining economic and financial engagement with Russia will be hard to conceal under the current sanctions architecture,” according to Rhodium analysts. “Moreover, the White House appears to be putting Beijing on notice that it intends to enforce secondary sanctions with the strategic intent of undermining the Eurasian entente.”
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