Why China Is Unlikely to Save Russia’s Economy
Supply chain issues are just the start of it.
The war in Ukraine has brought unprecedented sanctions against Russia. Some of the harshest sanctions include banning several Russian banks from the SWIFT payment system, an American ban on the import of Russian oil, and the seizing and freezing of not just Russian oligarch assets but also the foreign currency and gold reserves of the Central Bank of Russia. The severity of these sanctions has prompted some on the pro-Putin right to suggest the West stands to lose more than Russia from the sanctions, or that the sanctions will merely tie Russia and China together. If Russia cannot trade with the West, it will just trade with China instead, this line of argument goes. But there are several reasons why China won’t save Russia’s economy:
First, supply chains. If there is one thing we should all have learned during the past year of higher and higher inflation, it is that supply chains, even today, are quite inflexible and prone to bottlenecks, especially when there are sudden changes in demand. Imagine now that, instead of shipping all their exports and imports to and from Europe, Russia had to ship them to and from China—a country that, for reference, is 4,500 miles away from Germany.
Russia also has to do this with no foresight whatsoever. With the pandemic-related supply chain issues, there were months of warnings, allowing planning to take place that was able to at least somewhat mitigate these issues. Russian exporters and importers are also highly unlikely to have the same level of access to highly skilled supply chain specialists and supply chain software that big companies in the West have.
Of course, supply chains mostly affect goods, not services. That, however, brings us to my next point.
Russia’s exports are uniquely badly suited for a change in destinations. Russia does not export a lot of services; in fact, services made up less than 15 percent of Russia’s exports in 2018. Instead, Russia’s exports are mainly oil, natural gas, and petroleum. This is what makes the already gargantuan supply chain issues virtually insurmountable: Oil and gas are transported through pipelines. There are no spare pipelines running from Russia to China, just lying there waiting to be used in case Russia ever found itself unable to trade with Europe.
Of course, Russia does already trade with China, and there are some pipelines already built, but pipelines have a limited capacity, and the existing pipelines are built with existing Chinese demand on Russian oil and gas in mind. One may think that Russia could simply transport their oil to China through other means, but the reason oil pipelines exist is because they are cost-efficient. Russia’s cost of producing oil is already far higher than that of countries in the Middle East, partially due to higher taxes. To make matters worse, 80 percent of Russia’s population lives in the European part of Russia. There simply are not that many people available who could transport the oil and petroleum in the sparsely populated eastern regions that are close to China. In short, while Russia may be able to sell a bit more oil and gas to China, it won’t nearly offset the lost exports to Europe and North America.
Then there are the other problems such as renegotiating the existing trade relationship with China, finding new customers for Russia’s exports in China and negotiating sales agreements with these new customers, and finding sellers in China who can produce goods and services Russia can no longer buy from the rest of the world. All of these things can be done, but none of them can be done overnight.
Third, even assuming the supply chain issues could somehow be resolved, the average Chinese person simply does not make nearly enough money to replace Western consumers. The average salary in China is estimated at the equivalent of just more than $13,000. While it is true that there are more people in China than in Europe and North America combined, Chinese consumers lack the spending power of their First World counterparts. Also unlike Europe, natural gas is not a main source of heating in China, although the government has attempted to change that.
Fourth, China and Russia have a complicated history. Russia and China may both have authoritarian regimes that dislike the West, but this was also true during the Cold War, and it did little to prevent the Sino-Soviet split that almost resulted in an all-out war between the Soviet Union and Communist China. As much as Putin and Xi have demonstrated a willingness to work together, there is no indication that China is interested in once again being the side-kick to a new Russian empire. This time, China is going for the top spot, aiming at becoming the world’s undisputed No. 1 superpower.
To China, it matters little whether or not Ukraine joins NATO or not. China would likely have objected in a hypothetical scenario where NATO expanded to include one of China’s own neighboring countries, but Ukraine is too far away to matter. It is unclear whether China considers it to be in their best interests to help Russia bypass sanctions, and there are some early indications that that is not the case. If China does help Russia, it will be because it’s good business, nothing else. Which brings us to my final point:
Russia has no leverage. Russia has been effectively isolated economically, with few major countries left that it can trade with. China is aware of this, and will almost certainly increase their imports of Russian goods and services—only now, they will pay a fraction of what the West, or indeed they themselves as late as last month paid. After all, what is Russia to do about it? At this point they will be desperate to sell anything at all, just to keep the lights on.
How do we know China will act this way? Other than basic supply-and-demand economics dictating it, we know because China has done this before. When Iran and Venezuela were sanctioned, China swooped in to import vast quantities of oil from them—at bargain prices.
Russia’s massive geographic size makes many forget that its population is only 10 percent that of China, and its GDP lower than global middleweights like Italy and South Korea. With China as its only major trading partner left, Russia will be completely at China’s mercy. If Russia cannot pay with money, China will certainly demand payment in the form of political concessions and support. Far from re-creating the Russian Empire, Vladimir Putin’s invasion of Ukraine could actually turn Russia into a Chinese vassal state.
One of the clearest signs of how much the sanctions are hurting Russia is the downgrade of the country’s credit rating. Most who have followed the war in Ukraine have probably heard of Russia’s credit rating being downgraded, but what few know is that Russia actually has a very low level of government debt. The sanctions, however, are so damaging that it likely won’t be able to afford to make payments on this otherwise insignificant debt. Current projections state that Russia is on course to default on its debt possibly as soon as the middle of April.
While politicians may have a vested interest in talking up the damage that the sanctions they have imposed is having on the Russian economy, financial institutions are different, and it would seriously damage their credibility if it turned out that Russia’s economy was fine all this time. It is therefore noteworthy that so many financial institutions are talking up the prospect of a Russian state bankruptcy. Clearly financial institutions and investors all over the world who in the past two weeks have dumped Russian government bonds and assets do not believe that China is going to be able or willing to bail Russia out.
Some may note that there are other countries than China that Russia could potentially trade with, countries that are not politically aligned with the West. This is true, but virtually all of the above issues apply to any other of these potential trading partners as well. Crucially though, most of the issues listed above are short-to-medium term issues. In the medium-to-long term, new pipelines can be built, trade agreements renegotiated, and so on.
Rather than being an argument against sanctions, the idea that Russia may replace the West with other trading partners is an argument for harsh sanctions, in order to break Russia before it has a chance to do so. It will not be free for us to do so, but freedom is never free, and we must never forget that the fate of the global democratic order that emerged after the Cold war is what is at stake. Sanctions may be expensive, but we cannot afford to lose.