Recently, the United States, the European Union and other nations have announced a wide range of sanctions against Russia. China's initial reaction has been to criticize the use of these sanctions as a matter of principle, but the extent to which it will cooperate with the sanctions remains unclear. This piece considers what we know so far about the specific sanctions that are being used, and the role of and impact on China in their implementation.
Western sanctions on Russia have been proliferating in recent days. Among other examples, the United States has announced sanctions on several Russian financial institutions including Sberbank and VTB Bank; debt and equity restrictions on Russian companies with total assets of $1.4 trillion; and sweeping export restrictions related to cutting-edge technologies as well as items that could be used by Russia's military. The Biden administration also imposed sanctions on the owner of the Nord Stream 2 pipeline (and its corporate officers), a project that connects Russian natural gas to Europe. The EU also announced its own export restrictions, asset freezes, and other measures. In addition, the United States, the European Commission, and several EU and other nations announced that they will remove "selected Russian banks" from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging system, which is a system used to facilitate cross-border money transfers, so as to disconnect these banks "from the international financial system and harm their ability to operate globally."
With regard to the role of and impact on China, there are several important considerations and questions. First, the Chinese government will be forced to decide what political position to take on the Western measures. As a result, these sanctions could have the impact of dividing China and Russia and getting in the way of their close relations. China's position on these issues will have a profound impact on its geopolitics and international relations. Its rhetoric may not be as important as its actual behavior, but nonetheless its public statements are of great importance.
And second, the Chinese companies who carry out actual trade with Russia are key here. Since the West is not cutting off all trade with Russia, Chinese companies are sure to continue trading with Russia as well. The question is, how much trade will they engage in? Will they comply with Western demands to scale back in certain areas? Or will they step in to make up shortfalls from the Western pull out? So far most companies have been silent.
Overall, there are still many open questions about how Chinese companies and the Chinese government will approach the situation, and at this point the impact of the Western measures on China-Russia trade and general relations is unclear.
So far, China has tried to remain neutral to the extent possible and not take sides. Its foreign affairs officials have openly criticized the use of sanctions and said China will "conduct normal trade cooperation" with Russia. In this regard, China recently signed deals with Russia on oil and gas transactions and lifted wheat import restrictions from Russia. Russia’s oil and natural gas exports, which account for 15.5% of China's crude oil imports and 5% of gas demand, are likely to be spared from the sanctions for now. Chen Fengying, a senior fellow at the China Institutes of Contemporary International Relations, said normal trade is possible as the two nations have increased the use of local currencies in settlements. In 2020, China and Russia renewed the bilateral local currency swap agreement originally signed in 2014, covering transactions of 150 billion yuan over three years.
But continuing trade in particular products does not mean China will violate the Western sanctions. So far, Chinese oil importers are cautious, as they reportedly paused transactions to evaluate the impact of sanctions. And Chinese traders are reducing imports of Russian coal because of difficulties in securing financing from state banks worried about sanctions. "The latest signs suggest that China's not coming to the rescue," a senior Biden administration official said on February 26. The official further stated that this "suggests that, much like has been the pattern for years and years, China has tended to respect the force of U.S. sanctions."
And as to whether Chinese trade will help make up for shortfalls experienced by Russia, when the Ministry of Foreign Affairs was asked at its March 1 press conference whether the crisis will "boost Russian demand for Chinese goods as it shifts away from imports from Europe," the response was simply a general one that China does not "believe that sanctions are ... an effective solution to solve problems," and a repetition of the statement that "China and Russia will continue to carry out normal trade cooperation following the spirit of mutual respect, equality and mutual benefit."
One of the more important sanction tools is cutting Russia off from the SWIFT payment system, which is used by 11,000 banks and financial institutions. Banning Russia's access to SWIFT means Russia can no longer use the system to process payment transactions for trade activities, which would be a blow to Russia's economy, and also hit the global energy market and Russia's trading partners. As Russia's largest trading partner, China traded US $146.9 billion (link in Chinese) in goods with Russia in 2021.
When asked about China's stance on the SWIFT sanctions, Wang Wenbin, the spokesperson of China's Ministry of Foreign Affairs expressed skepticism about sanctions in principle, saying on February 28 that "China does not agree with resolving issues with sanctions, still less unilateral sanctions that lack the basis of international law. Reality has long proven that sanctions not only fail to resolve problems, but will create new ones. It will result in a situation where multiple players lose, and will disrupt the process of political settlement." But he did not comment specifically on whether China will promote alternatives to SWIFT.
Even China's own interbank payment system CIPS largely relies on SWIFT. "[W]e have not seen a system that can replace SWIFT in the short term," economists from Guotai Jun’an Securities, a securities company based in China, wrote in a note in July 2020. But a recent report from the company noted (link in Chinese) that "although the digital renminbi is uniformly managed by banks, it has distributed accounting system, so it will automatically record the paths and specific details of all transactions, and can automatically complete query, comparison and verification at the same time as the payment happens. It no longer requires a middleman like SWIFT. At the same time, the digital renminbi is endorsed by a nation, and there is no mutual trust problem between the two parties. This means SWIFT is not required for credit guarantee. Therefore, the use of digital currency will not depend on the SWIFT system, and the [ban of Russia's access to SWIFT] may promote the acceleration of de-SWIFT-ization."
Bloomberg analyst Andy Mukherjee seemed to agree that the digital renminbi could avoid dealing with SWIFT. In a recent piece, he stated that while it is unclear whether the digital renminbi would be a "viable alternative," "after Russia’s semi-expulsion from SWIFT, [Beijing] might want to find out."
So far, big Chinese banks seem to be cooperating with the sanctions as a general matter. Two large Chinese banks, Bank of China and Industrial and Commercial Bank of China, have reportedly curbed financing for Russia transactions. Bank of China's Singapore operation has stopped processing transactions involving Russian companies. These early signals may suggest that China will resume trade to the maximum extent possible, but may not go so far as to encourage its companies to violate Western sanctions in order to support Russia trade.
Another key area to watch is export controls. With regard to the export controls announced by the Biden administration so far, these measures will cut the Russian military off from "nearly all U.S. items and items produced in foreign countries using certain U.S.-origin software, technology, or equipment." They also restrict exports of "sensitive U.S. technologies produced in foreign countries using U.S.-origin software, technology, or equipment," including "semiconductors, telecommunication, encryption security, lasers, sensors, navigation, avionics and maritime technologies." According to Kevin Wolf, a former senior U.S. Commerce Department official, "[w]hat the administration has done here is set out a structure to cut Russia off from chips and said that this is a policy and a mission."
At the same time, the EU has imposed its own export control measures, including restrictions on "exports of dual-use goods and technology and on the provision of related services" and "certain goods and technology which might contribute to Russia’s technological enhancement of its defence and security sector."
Such export restrictions would apply to Chinese chips and tech products that are made with western software, technology or equipment. Taking chips as an example, at this point 70% of Russian chips are imported from China. Bloomberg noted that the Chinese chipmaker SMIC "makes chips that are less advanced than those from the likes of Taiwan Semiconductor Manufacturing Co., but they’re sophisticated enough for at least some military applications." But Chinese chip-makers are still heavily reliant on foreign technology. The same Bloomberg article points out that: "SMIC uses equipment from American suppliers like Applied Materials Inc. to make its chips." Peter Hanbury, a partner at Bain & Company, stated last year that "these are examples of locally designed chips [in China] but a lot of the IP [intellectual property], manufacturing, equipment and materials are still sourced internationally."
When asked at the February 28 press conference whether Chinese companies will comply with the U.S. export restrictions, Wang reiterated that "China doesn’t approve of resorting to sanctions to resolve problems. We oppose even more strongly unilateral sanctions without basis in international law. We demand that the US side, in handling the Ukraine issue and relations with Russia, shall not harm the legitimate rights and interests of China and other sides concerned."
Chinese companies that violate the U.S. export controls could face fines and sanctions themselves. “Such fines could run into billions of US dollars and penalties would include imprisonment and even sanctions imposed directly on those companies breaching sanctions if the violations are particularly severe,” said Paul Haswell, a partner at the law firm Seyfarth Shaw. This is how Chinese tech giant Huawei was put on the entity list, as it was considered to be violating U.S. sanctions on Iran. The listing of Huawei seriously harmed its revenue. For smaller companies, any sanctions could be a heavy blow to the survival of their business.
For Chinese companies that are already subject to U.S. export controls, however, they may be more willing to continue business with Russia. "Now that it’s almost certain that Huawei’s competitors like Ericsson would pull out of Russia and from co-operation in making 5G equipment, this will create space for Huawei," said Artyom Lukin, an associate professor at Far Eastern Federal University in Vladivostok. Huawei and SMIC, China’s largest chipmaker, are both on the U.S. entity list.
Even if this happens, such help to Russia may be only useful to a limited extent. "China alone can’t supply all of Russia’s critical needs for the military," a senior Biden administration official said recently, as "China accounts for only 16 per cent of global capacity."
China's anti-sanction legal tools
If the Chinese government chooses to side with Russia, there is a new administrative rule under which the government may find foreign laws or measures have unjustified extra-territorial application, if they meet certain conditions, including that "they are contrary to international law and basic norms of international relations" and there is "potential influence on the lawful rights and interests of Chinese citizens, legal persons, or other entities." In this case, the government may issue an order to prohibit the recognition, enforcement and compliance of the law or measure, allow domestic firms to seek compensation, and punish companies that violate the prohibition order. So far China has not invoked these rules.
In the event that Chinese companies violate U.S. sanctions against Russia, they may be punished by the United States. If that happens, China may invoke several domestic laws and regulations to safeguard its companies' interests.
China's Anti-Foreign Sanctions Law authorizes the government to take "necessary countermeasures" when "foreign nations, in violation of international law and basic norms of international relations, contain and suppress [China] under any kind of pretext or based on its own laws, or employ discriminatory restrictive measures against our nation's citizens and organizations, or interfere with [China]’s internal affairs." If countermeasures are determined, China may seize the assets of involved entities or individuals, or prohibit transactions or cooperation with the involved parties.
China recently said that it will sanction American companies Raytheon and Lockheed Martin over arms sales to Taiwan under the Anti-Foreign Sanctions Law, but no details were disclosed.
When the potential U.S. sanctions are export restrictions, China's Export Control Law authorizes the government to take reciprocal measures if “any country or region abuses export control measures to endanger the national security and interests” of China. So, China could in theory invoke this law to retaliate against U.S. sanctions.
Even with these legal tools at its disposal, the Chinese government may prefer to reserve these tools for when large interests are at stake. It is worth noting that these tools have rarely been used, even though China has faced increasing sanctions from the United States in recent years.
In the past, there have been instances of U.S. sanctions that the Chinese government and companies have been forced to make decisions about. But the Russia sanctions take the situation to a new level of seriousness, and how China will react is far from certain at this point. China will face difficult decisions in the coming days and weeks, with important implications for its relationship with both the West and with Russia.