China Macro Economy: Ukraine war casts shadow over China’s belt

Contractors and investors involved in EAEU and belt and road joint projects could run afoul of restrictions if they seek financing or conduct other business with companies that have been targeted by Western sanctions, he said.

The risk of these “secondary sanctions” has prompted hundreds of businesses and multilateral institutions to suspend ties with Russia.

 

The Asian Infrastructure Investment Bank and Bank of China have curtailed Russian access to capital markets, according to a database compiled by Yale University’s School of Management. 

Oil and gas behemoth Sinopec has suspended talks with Russia for a gas chemical plant worth up to US$500 million, and at least five Chinese companies stopped work on Russia’s Arctic LNG 2 project in northern Siberia at the end of May.

“The war in Ukraine is impacting bilateral developments between Russia and China, and the coordination within the Eurasian union,” said Paul Stronski, senior fellow at Carnegie’s Russia and Eurasia Programme.

 

“On sanctions, we are seeing Beijing being quite supportive of Moscow in this war, which is surprising given China’s normal approach to condemn separatism and interference in the internal affairs of another country. That is essentially what Russia is doing.”

But beyond diplomatic support and motivation to buy cheap energy, many Chinese companies “have been wary of running afoul of US or EU sanctions” because both economies are “far more important export and trade markets” for companies in China, Stronski said.

The impact of sanctions imposed on Russia will be felt across the EAEU because the “design” of the union ties them to “Russia’s own fate”, according to Kataryna Wolczuk, an associate fellow at Chatham House’s Russia and Eurasia programme, and Rilka Dragneva, professor at the University of Birmingham’s school of law.

Kazakhstan and Kyrgyzstan, for example, are likely to see negative impacts on their currencies and remittances, while restrictions will affect the trade of key commodities, they wrote on the think-tank’s website last month.

 

“Sanctions have also been applied to Russian railways, and this is probably why the uncertainty about the Belt and Road Initiative arises,” she said. “However, it is worth emphasising that the sanctions include access to financial markets and transactions in securities. Thus, they do not cover cargo transit contracts via Russia.”

A rail line from the Chinese border through Kazakhstan, Russia, Belarus and into the European Union, which was “heavily subsidised by the Chinese side” and seen as vital to get goods from China to Europe through the EAEU, “is now dead”, said Stronski.

“European suppliers now are wary about putting their goods on a train via Russia given the reputational risks, or fears that Russia will hold up these goods,” he said. “Chinese producers have grown wary of using the route, given all the same reasons.”

Increasingly alert to external uncertainty, China is prioritising risk control and prevention for its belt and road push this year, according to a report released in early March by the National Development and Reform Commission.

And Chinese companies have already begun scaling back international investment under the initiative.

Some 194 belt and road projects valued at US$13.66 billion were announced last year, down from 399 projects valued at US$80.51 billion in 2020, according to a report by financial data provider Refinitiv released in December last year.

As for Russia, international isolation will hasten its “pivot to the East” by building the “friend-shoring” alliances, said Zhao at the Shanghai Institute for International studies.

“Members of the EAEU will hasten the free flow of trade, services, capital, labour and the progress of local settlements in the region before 2025,” he said. “They’ll also strengthen security initiatives with their allies in order to broaden the post-Soviet space of influence.”