At the Communist Party’s 19^th Congress in 2017, Xi Jinping told the assembled cadres that China was ready to “enter the center stage of global affairs.” With the U.S. and its Western allies now imposing harsh economic sanctions on Russia over its invasion of Ukraine, China’s time may have come. 

As generations of Chinese leaders had envisioned, China’s economic prowess now provides it with the capacity to backstop any major country that faces financial sanctions put in place by “imperialist” G7 countries. This ability to support a major international pariah with billions of dollars unambiguously places China as one of the two superpowers in the world. 

Any such move to support Russia would help both countries and their leaders in different ways. It would also drive these countries toward an increasingly autarkic Eurasian economic bloc, albeit one which large segments of their respective entrepreneurial and creative elites would find undesirable. 

With Russia’s land invasion of Ukraine now a reality, the U.S. has unleashed financial sanctions on major corporations and a wide swath of the Russian elite. A prohibition against Russian use of the SWIFT payments system or dollar clearance facilities is under consideration. By restricting Russian access to the dollar-led global financial system, these measures would effectively stop the sale of Russian oil and gas to the West and developed Asia. 

Because of its economy’s enormous size (with GDP of $18 trillion in 2021), China can easily help Russia and its oligarchs circumvent U.S. sanctions. For example, Chinese front companies could help sanctioned entities set up dummy companies in China, which would then “import services” from offshore related parties, thus siphoning millions out of China. Given that trillions worth of renminbi-denominated transactions take place within the Chinese banking system each day, and that China has control over its own payments system onshore, it would be difficult and time consuming for the U.S. to monitor and prohibit such channels for evading sanctions. 

If more severe U.S. sanctions were applied, the Russian economy would risk going into a downward spiral as sales of its oil and gas dried up. China would not be able to fully make up for such a huge decline in Russian exports, but it has the capacity to cushion the fall. Already, between 2019 and 2021, China has increased its imports from Russia by 20% to $78 billion. Given that China imports around $300 billion worth of energy supplies annually, it could potentially double its energy and commodities imports from Russia to over $150 billion, thus dulling the impact of U.S. sanctions. 

China could also extend tens of billions of dollars’ worth of credit facilities to Russia, with which it could buy manufactured goods from China or even from other countries. Thanks to China’s enormous $1.2 trillion trade surplus over the past two years, Beijing’s foreign exchange reserves have increased by $100 billion, with shadow reserves in the form of new dollar deposits in Chinese banks also increasing by $200 billion. These reserves provide Beijing with wide latitude to help the Kremlin with dollar or renminbi-denominated loans. U.S. sanctions might also prohibit the export of integrated circuits to Russia by most global producers. Again, although Chinese IC technology is not cutting-edge, the output of leading fabs like SMIC could meet a large portion of Russian demand, while Russia could also buy downstream electronic components from companies like Huawei. In all of these ways, Beijing’s backstop could afford the Kremlin the ability to outlast the G7’s will to continue with comprehensive sanctions. 

[T]he emergence of a Eurasian bloc led by China would represent the first time since World War Two that it has faced an economic power with the capacity to flout the concerted actions of a 75-year old global economic order.

China’s recent joint declaration with Russia, signed in early February, calls for “limitless friendship and endless cooperation,” paving the way for Beijing to flex its economic might to help its friend. By helping Russia, still one of the world’s major powers, China would be able to show that it has itself become a superpower capable of side-stepping measures put in place by the incumbent global leader, the U.S.. In the process, China would also have gained, in Russia, a weighty satellite state which would have become almost completely dependent on Chinese finance and technologies. Via this Russian dependence, China would also be able to entrench its dominance over most of the Central Asian republics, with which it already has close ties. Pre-eminence within this Eurasian bloc would provide China with superpower status and energy security; but it would also slow its integration with much of the world’s economy. A Warsaw Pact-style trading bloc could become a self-fulling prophecy, if G7 countries imposed partial restrictions on trade and financial transactions with Chinese counterparties. 

For Russia, signing the joint declaration with China was a timely move, at least in the short-term. Having China’s aid will allow Putin and his oligarchs to stay in power and continue to enrich themselves. In the medium term, however, China may demand the keys to Russia’s remaining military technologies, as well as dominance over the Russian IT market. More ominously for Putin as he continues the third decade of his rule, if the oligarchs around him can only access their money through Beijing, they may come to weigh the opinion of China’s leaders just as heavily as his own. This would not provide a favorable environment in which to rule as he enters his declining years.

For the U.S., the emergence of a Eurasian bloc led by China would represent the first time since World War Two that it has faced an economic power with the capacity to flout the concerted actions of a 75-year old global economic order. Although U.S. allies have time and again ignored or circumvented U.S.-imposed sanctions in the past, they either did so secretly, or they lobbied for exemptions from within the existing framework. The U.S. and its allies do not have the capacity to apply the same comprehensive sanctions to China as they may do to Russia, at least not without inflicting severe economic costs on themselves. Thousands of U.S., European, and Asian companies rely on cheap and well-made parts from China to make their own goods and generate profit. Comprehensive sanctions on China would cause trillions of dollars in losses for these companies. 

However, partial sanctions by the U.S., especially for goods with substitutes outside of China, could still inflict heavy losses on Chinese firms. Around two-thirds of Chinese exports still go to places where the U.S. economic and financial order holds sway, such as Europe and many APEC member countries. The atmosphere of mutual distrust between the G7 and China-Russia blocs, fortified by Chinese aid for an aggressive Russia, would likely make it more difficult for China’s technology entrepreneurs to raise funds and market products and services overseas. Among this highly mobile group of technology and business talent, some may choose to start their businesses outside of China or Russia. In combination with the increasingly arbitrary policies in China for technology companies, job opportunities for technology specialists there may begin to dry up. 

To be sure, G7 sanctions against China will only drive China and Russia towards an increasingly autarkic Eurasian bloc. That may have a ring of historical familiarity, and suit both sides in the short term. But it is a trajectory that is not favored by the most energetic segments of China’s entrepreneurial and creative classes and that ultimately will not serve China’s national interests. 

---