Russia invaded the Ukraine in February of 2022, and despite the world’s expectations, Russia is still contending with that decision. Though most anticipated Russia to achieve its aggressive goals within weeks, the war wages on even today. The Ukraine’s capacity to resist, and Russia’s miscalculations and poor logistics, have proven substantial, and in the process, Russia has found itself in an increasingly poor economic and social position. Western sanctions in response to the Ukrainian invasion have crippled Russia’s economic development plans. They have also required strengthening of Russian-Chinese relations in order for Russia to economically survive. In fact, it appears that there’s an increasing Russian dependence on China that could further undermine Russia’s future.
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Given the increasing tensions between China and the U.S., it’s not surprising that Russia would turn to China for support. As NATO allies and other western nations reacted with embargoes to Russian goods, China took advantage of the situation. But as time has passed, what looked to be a pure economic arrangement is evolving into something more. Russian-Chinese relations have expanded into military cooperation to some degree. Likewise, the two are becoming more entrenched monetarily with increasing Russian dependence on China and its currency. The question is whether this relationship will result in an ongoing global realignment, or perhaps lead to an ever-strengthening Chinese global position. This is not what western sanctions were supposed to accomplish, but it might just be a reality going forward.
China becomes absolutely vital for Russia’s survival. China will become the largest market for Russia. Russia has no alternatives, in terms of imports of critical tech like cars, cellphones, various equipment and machinery that is now banned from the West.” – Mark Savchuk, Head of the Oversight Committee, National Anti-Corruption Bureau of Ukraine
The Impact on Russian Chinese Trade
The early sanctions and embargoes in Russian goods were significant after the attack on the Ukraine. Europe invoked measures that reduced its reliance on Russian oil over the ensuing months, while the U.S. and other nations banned trade of a vast number of Russian goods while freezing various international assets. As the war extended into months, it became clear that a need for increased Russian-Chinese relations existed. Russia targeted China as a key export source for its oil reserves. This was not only because Russia needed revenue to support its military, but it was also to secure ongoing revenue to support its governmental operations. The end result has been an 80% increase in Chinese oil exports year-over-year for Russia.
While Russian dependence on China has grown as a source for its oil exports, it has also become increasingly reliant on Chinese products. Specifically, sanctions and bans from the West focused on a variety of technologies also forced Russia to look elsewhere. With Russia unable to get electronics and high-tech commodities from the U.S., Japan, and Europe, new options had to be explored. Here again, China made itself available, especially in light of its own trade wars with the U.S. Today, Chinese exports account for the second highest number of cars in Russia. And as of last year, two-thirds of all new Russian smartphone sales were Chinese-imported devices. Not only has Russian dependence on China involved a source for oil exports, but it has also extended to a reliance on Chinese imported goods in an effort to keep its economy running.
A Calculated Strategy by China
While embargoes forced Russia to advance its opportunities with China, China was not necessarily under the same pressure. Certainly, its trade war with the U.S. affected its exports, as did the global pandemic. But China still enjoyed a huge domestic consumer base and alliances with other Southeastern nations. As time has passed, however, China’s motivations for enhanced Russian-Chinese relations have grown. Currently, China is dealing with its own crises, including that of a declining real estate market. Thus, it behooves China to exploit its current trade relationship with Russia to compensate for its own economic pressures. An advanced Russian dependence on China would mean increased opportunities to demand lower oil import prices, and this could help China’s own economic problems significantly, especially if price reductions approached 50%.
At the current time, it’s clear that Russian dependence on China is much more profound than China’s need for Russia. However, global sanctions have encouraged both countries to seek out the other for support. While this support is primarily economic in nature, there are some other potential benefits as well. In the past year, for example, Russia and China–along with Iran–have carried out some joint military operations. Likewise, China is extremely interested in the outcomes of Russia’s Ukrainian invasion. Given China’s potential for aggression against Taiwan, Russia’s successes and failures in the Ukraine offer important data. And the closer Russian-Chinese relations are, the more insight China might gain along the way. In this regard, embargoes have similarly created a learning opportunity, as China considers western reactions to its own military advances.
“The new business model [for Russia] will be to sell commodities and other goods to China at a price that China dictates.” – Serhiy Fursa, Economist and Director of Dragon Capital, Ukraine
Potential Effects on Monetary Policy
In their current relationship, China has the upper hand. In other words, Russian-Chinese relations are not equitable, and Russian dependence on China for oil and goods will persist. This reality, however, is already having an effect on monetary shifts. For example, about 80% of all Russian and Chinese trade occurs via the Chinese yuan. Russia is similarly issuing company bonds in Chinese yuan as well. And BRICS nations, who have longed wanted to distance themselves from the dollar, are discussing an alternative currency. Such efforts are far from realizing a common currency like the Euro, or in even challenging the dollar’s supremacy. But the strengthening of Russian-Chinese relations demonstrates the potential for increasing monetary and economic commitments. Certainly, sanctioning Russia in the wake of the Ukrainian attack was the right move for western nations. Still, long-term repercussions of these actions must be appreciated in addition to their short-term objectives.
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