European and American companies are lining up to leave Russia, and China is picking up the pieces. But not completely.
Western sanctions have severely reduced trade with Russia, and the international chorus against the country has made operating there extremely difficult. Businesses from every sector have left, including fast food chains like McDonalds and Starbucks, retailers like Unilever and Ikea, and even auto manufacturers like Toyota, Volkswagen, and Ford.
And in more than one instance, Russia has looked to replace its lost commercial tie-ups from the West with new ones in the East.
China has branded itself as an ally to Russia, declaring in February that the friendship between the two countries “has no limits” and no “forbidden areas of cooperation.”
But the onslaught of sanctions has placed China in an awkward position and forced its leaders to change their calculus. After an initial silent reaction to the invasion, and a refusal to join in international condemnation, China eventually admitted it was “gravely concerned” about the status of the invasion, particularly the risk that the ongoing conflict could pose to the safety of Ukraine’s nuclear power plants.
Experts tell Fortune that China is walking a delicate tightrope at the moment. Russia’s relatively small market size and international sanctions means there isn’t much commercial benefit for China to remain engaged with the country, but it is still reliant on two key Russian exports: energy and wheat.
And they add that the projections of a “Cold War 2.0,” in which China welcomes Russia into its open arms, similar to what the USSR enjoyed with communist China up until the late 1950s, is unlikely.
China and sanctions
Some Chinese companies and services have provided relief to Russia while it is cut off from the rest of the world.
Russian banks are turning to the Chinese financial services company UnionPay to issue credit cards in the country after Visa and MasterCard left. China may also allow Russia to further integrate its economy with CIPS, a Chinese international payments system, which would serve as an alternative to the SWIFT system used by most of the West, and that several Russian banks have been banned from using.
For Russia, China represents one of its only lifelines as the country is cut out of the global economy. But experts say it is not in China’s interest to stray too far from the international consensus against Russia.
“[China] doesn’t like the sanctions regime in general,” David Dollar, senior fellow at the think tank Brookings Institution’s China Center, told Fortune. But he cautioned that the Chinese government’s public stance on sanctions might not reflect how they actually might engage with Russia in future.
“We have to make a distinction between rhetoric and reality. The Chinese are going to speak out against the Western sanctions, but we should pay attention to what actually happens between them and Russia,” Dollar said.
Experts say that even before it invaded Ukraine, Russia’s economy was relatively inconsequential on a global scale, and their departure does not represent a huge loss for commercial brands.
“Russia’s economy is so weak, so small compared to what it could be,” Scott Kennedy, trustee chair in Chinese Business and Economics at the Center for International and Strategic Studies, a policy-focused think tank, told Fortune. “It’s not as deeply integrated into the global economy as others, so the downsides of sanctions and decoupling from Russia are relatively small.”
Some Chinese companies also haven’t been afraid to pull out of Russia already, as the scale of Western sanctions escalate.
Earlier in the week, Chinese tech companies Huawei and Xiaomi both cut shipments of their smartphone products to Russia, following in the footsteps of similar actions taken by other companies like Apple and Samsung. And on Thursday, Russian news agencies reported that China had stopped selling airplane parts in the country, complying with an earlier EU sanction that prohibited the delivery of airplanes and aircraft parts to the country.
China, experts say, has been playing a cautious, wait-and-see game. Despite the rhetoric used to criticize Western sanctions, China’s activities in Russia would heavily depend on what direction the sanctions take. Should they encompass more sectors, the relatively meager business opportunities in Russia might not be enough to convince Chinese companies to continue engaging with the country.
But despite Russia’s relatively small economy, China still needs it for a few things.
“China is a country that needs energy and needs food,” Dollar said. “There’s a big economic factor there.”
Oil and gas
China’s ties to Russian energy and food imports precede the Ukraine invasion and the West’s international shunning of the Russian economy.
At the beginning of February, China sealed a deal with Russian state-owned energy corporation Gazprom for a 30-year contract supplying natural gas to China. The agreement is expected to provide Chinese energy majors with an extra 10 billion cubic meters of gas a year, starting within the next three years. And that will be on top of preexisting pipelines and deals that supplied China with 16.5 billion cubic meters of Russian gas in 2021.
Earlier this week, Chinese state-owned firms were even rumored to be considering buying or increasing their stakes in Russian energy and steelmaking companies at the direct request of Xi Jinping. Such a deal would be an important part in strengthening China’s energy security in the coming years, according to Bloomberg.
China has increased its imports of foreign natural gas and oil to diversify its energy mix as the country attempts to distance itself from coal. Demand for natural gas in the country has been steadily rising, as gas imports to the country rose by 20% in 2021. Russia is currently China’s second-largest provider of oil, and third-largest provider of natural gas, according to Reuters.
Wheat
In addition to energy, China has also cemented its relationship with the Russian economy by sealing a new deal that increases the amount of wheat imports from Russia on Feb. 24, the same week that the West began imposing severe economic sanctions on the country. The deal allows wheat imports to come to China from all regions of Russia, which is the world’s largest wheat exporter, removing restrictions that had been put in place due to sanitary concerns.
“There are few economic benefits from having closer ties with Russia for China,” Kennedy said. “Fossil fuels, agricultural goods, minerals that Russia exports. China needs those, and Russia may be over the long term a more stable source of supply.”
China’s dependence on foreign agricultural imports is making itself clearer than ever after a rough wheat harvest this year.
The country’s agricultural minister warned last week that this year’s winter wheat crop could be the “worst in history,” after unseasonably heavy rainfall and higher wheat prices due to the Ukraine conflict.
China’s balancing act
But even though China has deepened its ties to Russian energy and agriculture, experts say that the country has to be careful not to become dependent on these products.
“Russia is a significant partner for China, but China has been careful not to be dependent on any one source,” Dollar said, pointing out that China has been increasing its energy imports from other countries. “I’m sure that in the current environment, China will be willing to buy some more oil and gas from Russia, but it probably won’t be a huge amount.”
Also, as global sanctions continue to hit Russia, Chinese companies might find fewer and fewer incentives to continue operating there, and they don’t want to get caught in the crossfire.
“The Chinese do not like the U.S. and the EU imposing sanctions. China is already facing lots of sanctions from the United States, and they’re worried that that’s going to ramp up,” Dollar said.
