‘It’s going to be a wash’: The Pyrrhic victory of Russian sanctions

After the West’s sanction barrage roiled Russia’s economy, the message to Chinese businesses was clear: Side with the West or risk being next. Last week, U.S. officials mulled a second salvo against Chinese chipmaker SMIC and consumer tech brand Lenovo that would further injure the Russian economy. In the ensuing days, some Chinese banks and businesses complied, despite Beijing’s strong opposition to sanctions as a coercive tool.

The self-sanctioning of Chinese firms was a testament to how indispensable Western markets have become to China over the decades. “For most Chinese companies,” wrote Dan Wang, an analyst for Gavenkal Dragonomics, in a research note, “Russia is just too small of a market for the business to be worth the risk of getting cut off from developed markets.” But not all Chinese companies are beholden to the West. A generation of Chinese firms — in banking, manufacturing, and technology — thrived almost entirely from a ballooning Chinese middle class (and state support). And for these self-reliant firms, Russia presents a golden opportunity.

“[The sanctions] have created a vacuum in which Chinese firms can step in, and it has improved their bargaining position,” said Daniel Ahn, a fellow at the Wilson Center in Washington, D.C., and ex-chief economist at the U.S. State Department. “I think it’s going to be a wash from a direct economic point of view.”

After Visa and Mastercard suspended operations, Russian banks flocked to an alternative: China UnionPay. The payment system, which has 99.5% of expenditures conducted inside China, has a new, and desperate, Russian clientele.

China’s tech companies also stand to benefit. China is already one of Russia’s top suppliers of mobile phones, electronics, and telecommunications gear. But as Western tech giants such as Google, Apple, and Amazon vacate the country, Chinese counterparts — Baidu, Huawei, and Meituan — could capitalize on a newly technologically impoverished Russia.

The Chinese automaker Great Wall Motor invested over $1 billion in the past three years in what it called “the largest investment project” for a Chinese manufacturer in Russia, its factory producing over 150,000 cars in 2020. After the departure of Ford, Volvo, and Toyota, the manufacturer now enjoys very few competitors in one of the top ten auto markets in the world.

Financial experts have long warned that Russia’s financial exile could accelerate plans for a non-Western banking alternative such as one based on the RMB. Similarly, excising non-compliant businesses could supercharge the creation of a new economic bloc, made from the outcasts, so to speak, of the Western system. The telecoms giant Huawei, blacklisted by the U.S. in 2019, signed a deal with Russia’s largest mobile network operator, MTS, that summer. The company has since ventured deeper into Russia as paranoia over Western technology consumed both Beijing and Moscow. Ahn believes the opportunities for China will outweigh the immediate shocks to China’s bilateral trade and its self-sanctioning enterprises.

“An unknown Chinese bank”

China is no newcomer to transacting with pariah states. In 2016, the United States restricted Chinese telecoms giant ZTE for setting up shell companies to sidestep U.S. sanctions against Iran. According to a review of World Bank and United Nations trade data, China emerged as Russia’s biggest export destination following Western sanctions, imposed in 2014, after Russia annexed Crimea. Three months later, China inked a series of energy deals — including a $400 billion Power of Siberia gas pipeline contract — to revive Russia’s weakened economy.

The Ukraine crisis will deepen that marriage of convenience. “The first thing that I would expect is some unknown Chinese bank, maybe created overnight, will help facilitate the sale of some heavily discounted Russian oil cargo to some Chinese national oil company,” said Ahn. Although West-facing banks will remain leery, “there’s nothing stopping a Chinese state-owned entity, or a newly created bank, or even a special purpose vehicle to go ahead and facilitate this immediate market opportunity.”

In many ways, dealing with troublesome, resource-rich states has been a continuous challenge for a rising China — for decades, the country has tried to balance a newly global reputation with an insatiable appetite for resources. When forced to choose, China often elects for both. “China will, on the surface, seem to cooperate with the West,” Victor Shih, a political scientist at the University of California, San Diego, told me. But there are many underhanded tools at its disposal, says Shih: “What the Chinese government can do is have some SOE place a huge order from [the chipmaker] SMIC, and SMIC, not knowing where the chips will go, sells it to the SOE and the SOE, through some companies, sells them eventually to Russia.”

China’s sanction-dodging record includes those it has assented to. In 2019, the United States blacklisted two Chinese shipping companies for violating the UN sanctions against North Korea. According to a UN panel’s report, North Korea-connected vessels made 41 coal transfers offshore of China’s busiest port.