While Moscow, Beijing playing best buddies, Chinese companies jumping ship Analysis by The Insider

The Insider has published an article on the Russian-Chinese relationships since the first days of the war in Ukraine, and how Moscow sees Beijing as an economic alternative to Europe and the US. Caliber.Az reprints the article.

Ever since the first days of the war in Ukraine, Russia has positioned China as an ally and an economic alternative to Europe and the US. Indeed, Beijing is yet to join the anti-Russian sanctions and has declared its intention to do business as usual. However, the volume of Chinese trade with Russia has been on a noticeable decline over the last few months, with ambitious cooperation plans abandoned, market giants like Xiaomi, Huawei, Lenovo, and UnionPay decisively severing ties with Russia, and Honor and DJI leaving this market entirely. It’s not only about the fear of secondary sanctions; the Chinese government has to stay mindful of the public attitude, which is not in favour of Russia’s belligerent policy.

A neutral stance

Throughout the war in Ukraine, China has been aiming for an open and persistent neutral stance. At the same time, Beijing officials consistently oppose any economic sanctions and demonstratively refuse to join them. Chinese leader Xi Jinping made a statement about the “illegitimate” anti-Russian sanctions and the need for continuous economic cooperation as early as March 6, and highlighted this position in almost all addresses and negotiations that concerned Ukraine: for instance, at a summit with European leaders on April 1 and in his speech at the Boao Forum for Asia. Meanwhile, Russian media are widely quoting Chinese foreign ministry spokesperson Zhao Lijian, who criticized sanctions as “the wrong approach to resolving the Ukrainian crisis”.

Russian politicians and pro-Kremlin experts share his perspective. The officials are confident (or at least pretend to be confident) that China is “fighting in their corner”. Russian foreign minister Sergey Lavrov announced on June 1: “We feel Beijing’s support for our efforts of defending conceptual Russian approaches to shaping the European security architecture.” According to Lavrov, the two countries are implementing “all of the approved interaction programs”. Moreover, Russia is persistent in its attempts to further extend China’s support, for instance, by explicitly informing China about market segments vacated by Western companies withdrawing from Russia.

A quiet retreat

Despite the extensive efforts of Russian diplomats and ardent mutual reassurances of the immutability of the Moscow-Beijing partnership, the two countries’ economic relationship is bumpy, with China sometimes joining the anti-war sanctions in all but name.

Thus, the WSJ released an exclusive report on May 6, describing the gradual and “quiet” withdrawal of Chinese companies from the Russian market. Indeed, Chinese exports to Russia have dwindled in the first few months of the war, shrinking by 27% in March and another 25% in April. The tech sector has shown the largest decline: early in March, analysts noticed that Chinese phone shipments to Russia nearly halved, with the largest manufacturers such as Xiaomi, Huawei, and Oppo responsible for most of the decrease. Today’s trickle of goods has already resulted in shortages in Russia. As RIA Novosti reported on June 8, Huawei has already started closing its outlets in Russia because of stock shortages.

Laptop supplies have also plunged by about 40% due to the frozen exports of Lenovo, Russia's second most popular laptop brand after HP.

As an ex-Xiaomi board member remarked in an interview for the Financial Times, open announcements of sales reduction or suspension in Russia are too “politically sensitive” for Chinese corporations. “But from a business perspective, it makes [sense] to stand by and watch what happens next,” he speculates. Another FT interviewee, a former Huawei executive, seconds his peer: “It is very risky to operate in Russia right now.”

State-owned corporations adhere to a similar strategy. Thus, Honor, a Chinese manufacturer of smartphones and consumer electronics run by a state-owned enterprise controlled by the Shenzhen municipality, has suspended further shipments of goods to Russia.

SZ DJI deserves a special mention. This Chinese company is the world’s largest consumer drone manufacturer and is also sponsored by the national government. On March 16, Ukrainian vice prime minister Mykhailo Fedorov appealed to the company on Twitter, demanding that it block its civilian drones Russia used in warfare. Although DJI did not rush to meet his request, company representatives offered the Ukrainian government to submit an official request for geofencing throughout Ukraine to disable active drones and condemned the malicious use of the company's products. A month later, on April 27, DJI publicly announced the suspension of its operation in Russia and Ukraine for the internal reassessment of “compliance requirements in various jurisdictions” – an unprecedented step for Chinese companies.

Supply issues are not limited to drones and consumer goods. On March 25, Sinopec, a Chinese state-owned chemical and energy company that ranks second by natural oil and gas extraction and processing in China, was reported to have paused cooperation talks with Russia, endangering potential investments to the amount of half a billion dollars.

Other collaborations with Russia are now also at risk. UnionPay, the payment system sanctioned Russian banks counted on partnering with, started negotiations only to halt them a month later. In conversation with RBC, sources in Russian banks remarked that UnionPay had never revealed the official reason for suspending the talks or mentioned sanctions at all.

UnionPay is not the only banking sector player to put its relations with Russia on hold. On February 26, almost immediately after hostilities broke out in Ukraine, several of China’s largest state-owned banks were reported to have restricted investment in Russian assets, including the Industrial and Commercial Bank of China and the Bank of China – the world's biggest and fourth-biggest commercial banks, respectively. Russia is starting to feel the effects, as Sberbank stopped offering international money transfers in yuan on June 7 without specifying the reasons. Notably, similarly to the tech giants, the commercial banks were not vocal about their restrictions and ties to the war in Ukraine, preferring a “quiet retreat”.

By contrast, the Asian Infrastructure Investment Bank (AIIB) chose a different approach. Founded and governed by China, this international financial institution competes with the International Monetary Fund and the World Bank. Since 2015, Russia has been an AIIB member and one of its largest shareholders.

On March 3, the AIIB released a statement on the war in Ukraine. The Bank expressed “sympathy to everyone affected” and announced it would suspend and review “all activities relating to Russia and Belarus”. Interestingly, there can be no doubt that Beijing utilizes the AIIB as a tool of foreign policy and economic diplomacy. John Ikenberry, professor of Politics and International Affairs at Princeton University, believes that promoting Chinese influence on the international stage is the AIIB's primary purpose. Therefore, the bank ceasing its operation in Russia could outweigh the steps taken by commercial banks and tech companies.

China's concerns

To summarize, Chinese companies and institutions, public and private alike, mostly tend to opt for a “quiet retreat” from Russia. They formally condemn anti-Russian sanctions but never fail to join them if they have to. The reasons may vary, with concerns about secondary sanctions topping the list. Western restrictions against Russia have turned out to be extensive enough to threaten even players who aren’t directly affected. Steve Brazier, CEO of the Canalys market analyst firm, explains in an interview for the WSJ that Chinese tech companies are fearful of sanctions against Russian organizations “automatically” applying to their trade partners:

“If a Chinese PC company were cut off from a key chip supplier, it would be catastrophic.” Understandably, they take steps to avoid it.

The same goes for banks: referring to Chinese financial institutions, Joseph Torigian, an American University Expert on Russia and China, points out they are no less vulnerable in the face of secondary sanctions, which explains their policy of distancing themselves from Russia.

Some Chinese experts share his conclusions. In an interview with the Financial Times, Zhan Kai, a lawyer at East & Concord Partners, a consultancy firm for Chinese companies seeking to cooperate with Russia, admits that Washington has a carte blanche in international sanctions: "The Russia-related sanctions are still not very clear and a lot depends on enforcement, on which the US government has a lot of leeways."

Another reason could be China's domestic political landscape. It appears that the ruling party has developed a plurality of opinions about Xi Jinping's seemingly pro-Russian course. On May 10, former Chinese ambassador to Ukraine Gao Yusheng published a piece in Chinese, slamming Russia and its military failure and highlighting an urgent need for a ceasefire. Despite being taken down shortly, his article caused quite a stir and received continuation in the shape of a no less critical piece by Yan Xuetong, a leading Chinese professor of international relations. Xuetong accuses Russia of violating the UN Charter and warns there will be a high price to pay; he goes on to say that China has nothing to gain in this war.

President of the Indian Centre for China Analysis and Strategy Jayadeva Ranade believes that the increasingly numerous critical articles on Russia attest to dissent within the party and Jinping's lack of confidence in his stance.

With a third election on the horizon, the Chinese leader is invested in public support. Although he has been standing his ground on the Russian issue so far, there is no telling if he will prevail. That said, even if he does, chances for a considerable change in his policy are slim: after all, China always puts its wellbeing above supporting a “friend”.

For the moment, we can safely assume only that China's “quiet sanctions” will persist and expand, with their implications becoming more and more tangible in Russia.