China has tools to help the Russian economy. None are big enough to save him.

A border crossing with Russia at Manzhouli, China, marked by two arches and divided on the Chinese side by a green fence that stretches for hundreds of miles, Dec. 7, 2018. (Lam Yik Fei/The New York Times)

When the United States and its allies declared a financial war on Russia after its invasion of Ukraine, the world turned to see what China would do.

As a growing global power, one of the ways China has extended its influence is by establishing close financial ties with countries that don’t want to follow the rules dictated by the United States and other Western powers. Surely, it was thought, China would do the same for Russia.

There is only one big problem: money. Specifically, the money from China.

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To help Russia evade sanctions, China should offer a viable substitute for the US dollar. But Chinese money – the renminbi – is hardly used outside of China. Only 3% of global business is done using the red back. Even Russia and China trade mostly in US dollars and Euros.

Moreover, the risks of helping Russia avoid economic ruin may be greater for China than any possible rewards. Much of the Chinese economy depends on the US dollar and the financial edifice that underpins it. Chinese companies are active around the world, using the US financial system to pay employees, buy materials and make investments. China is the world’s largest exporter and is paid for its goods mainly in dollars.

If Beijing goes against sanctions against Russia, China’s financial stability would be in jeopardy at a time when its leaders have emphasized caution. Moreover, the few lifelines Chinese leaders might offer Russia would not be strong enough to help the country survive a financial blackout from the United States and its allies.

This could facilitate cross-border transactions, allowing China to continue selling to Moscow many of the goods it manufactures for the rest of the world. He could invest cheaply in Russian energy companies. He could let the Russian central bank cash in on some of the $140 billion it holds in Chinese bonds. Beijing could even create a rogue bank to help move Russian money around like it did for Iran and North Korea.

None of these measures would be enough to offset the sanctions against Russia, which have notably cut off the largest Russian banks from the global financial system and banned oil and gas imports by the United States.

“China will not save the sinking ship of the Russian economy,” said Eswar Prasad, an economist at Cornell University. But, he added, it could “maybe allow it to float a bit longer and sink a bit slower”.

The deepening friendship between Xi Jinping, the Chinese leader, and Russian President Vladimir Putin has helped bring the countries closer than they have been since the 1950s, when Mao cooperated closely with Josef Stalin and then Nikita Khrushchev. The warming of diplomatic relations has been built on a common desire to end what China and Russia see as American economic and geopolitical hegemony.

When Xi and Putin met on the eve of the Beijing Olympics, they said the bond between the two countries had “no limits”. Russia’s invasion of Ukraine days after the Games ended led the United States and other industrialized nations to impose waves of sanctions aimed at devastating the Russian economy.

China has repeatedly criticized these measures. Premier Li Keqiang did it again on Friday at his annual press conference, saying that “relevant sanctions will hurt global economic recovery, it’s in no one’s interest.”

But criticizing the sanctions is one thing. Choosing to go against the global financial order and risk drawing sanctions at home is quite another. Beijing has already indicated that it is unwilling to do the latter. The China-led Asian Infrastructure Investment Bank — an investment bank that Washington sees as a rival to the World Bank — announced last week that it would suspend lending to Russia and Belarus in because of the war in Ukraine. Some Chinese banks have cut funding for Russian commodities.

“Chinese banks are trying to reduce their exposure to Russia,” said ANZ Bank’s Raymond Yeung. “You can say that the theory that China offers a financial alternative to Russia remains questionable.”

China’s top banking regulator said last week that banks would not necessarily sever ties with their Russian counterparts. “We will not participate in such sanctions, and we continue to maintain normal economic, trade and financial exchanges with relevant parties,” said Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission.

As sanctions pile up, maintaining those economic ties will become more difficult without taking on more risk, and China’s options for helping Russia are shrinking. Western countries have excluded Russia from the Swift financial messaging and payment system, effectively excluding Russian banks from international transactions.

China has developed an alternative messaging service for financial institutions to communicate cross-border transactions. But this service operates on a small scale and relies in part on technology tangled up in sanctions.

After Visa and Mastercard ceased operations in Russia, several Russian banks turned to China’s UnionPay, which offers payment options in some 180 countries. For China to offer its own payment processing, transactions must not be in dollars to avoid penalties.

Then there is the money that Russia has in China. Thanks to central bank reserves, government investments and a long-standing loan agreement, Russia can quickly raise the equivalent of more than $160 billion in China, or about 16 months of Russian oil and gas sales. natural gas to the European Union and the United States.

Much of that money — around $140 billion — is tied up in bonds and denominated in renminbi. The rest is tied to agreements between the two countries’ central banks that each commit to short-term, interest-free loans worth $24 billion in emergencies.

A more diplomatically risky option would be for China to launder money for Russia through a small Chinese bank set up specifically to evade sanctions. This is what the China National Petroleum Corp did. in 2009 when it bought a small bank in China’s northwest Xinjiang province and renamed it Bank of Kunlun. The bank has helped Iran transact hundreds of millions of dollars.

In a similar scenario, a Chinese oil company could pay a shell company and its executives in China a very large “advisory fee” to trade oil on its behalf, instead of directly paying a Russian oil company for crude oil. . Eventually, however, such an operation would likely be stopped. This is what happened with the Bank of Kunlun after the US Treasury sanctioned it in 2012.

In another scenario, Chinese state-backed companies could co-opt the West’s stakes in some of Russia’s biggest oil and gas companies. US and European giants like Shell and BP have announced they will exit their joint ventures in Russia following the invasion, but there aren’t many obvious buyers other than Chinese state-owned companies.

“You have some of the most valuable energy companies in the world now trading at mere fractions of their true value,” said Taylor Loeb, analyst at Trivium, an advisory firm. “Developed countries will not touch these companies. That essentially leaves only China. It may be very bad PR, but the price may be just too good.

Even as Beijing contemplates how far it is willing to go to maintain its “unlimited” friendship with Russia, there is a stark reality: the renminbi cannot save Russia’s own currency, the rouble. The ruble is plunging and has already wiped out much of the country’s wealth. The only way for Russia to back it up? Buy US dollars.

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