Moscow is being hit with heavy economic sanctions in response to its invasion of Ukraine, but China, Russia’s biggest trading partner, has refused to join in the condemnation, leaving a major lifeline for Russia to survive new restrictions on trade and international financing.
Western democracies have moved to freeze the assets of state banks and officials after Russian President Vladimir Putin ordered attacks on Ukraine on Thursday morning. By Friday afternoon, Russian forces had unleashed airstrikes on multiple cities and closed in on Ukraine’s capital Kyiv.
These measures could raise Moscow’s costs of war, but experts said they were unlikely to devastate the Russian economy and deter Putin from his current assaults on Ukraine at least in the short term.
China’s business-as-usual attitude on trade with Russia could also undercut the international pressure on Putin, although analysts note that the effect of the economic measures is largely limited by many Western countries’ dependence on Russian energy.
China lifted all wheat import restrictions on Russia on Thursday, as part of a set of deals signed during Putin’s visit to China earlier this month during the Beijing Winter Olympics. Russia is the world’s top wheat exporter, but China had previously banned the imports due to concerns about fungus contamination. Russia also agreed on a 30-year contract to supply gas to China via a new pipeline.
Australian Prime Minister Scott Morrison, who has imposed sanctions against Russian oligarchs and lawmakers, criticized Beijing’s refusal to punish Russia for invading Ukraine.
“You don’t go and throw a lifeline to Russia in the middle of a period when they are invading another country. That is simply unacceptable,” he said at a press conference, referring to Beijing’s easing of trade restrictions with Moscow.
Continued trade with China has been instrumental in sustaining the North Korean economy, which was severely impacted by UN and Western sanctions imposed on the country for developing nuclear weapons.
But unlike North Korea, Russia’s $1.5 trillion economy is far more interconnected with global commerce, and it remains to be seen how far Western countries are willing to go to punish Putin’s government for its attacks on Ukraine.
About 70 percent of Russian gas exports and half of its oil exports go to Europe, where many countries are unable to find alternative sources in the short term.
Cutting themselves off from Russian energy, for example, could drive up prices and cause severe damage to these countries before new infrastructures are built.
For now, the U.S. has vowed to sever ties with Russia’s largest financial institutions and cut Russian political elites from the U.S. financial system, although Putin is not yet personally sanctioned. The Biden administration has also moved to block Russia from purchasing military and high-tech goods.
The United Kingdom, the European Union, Australia, New Zealand, Japan, and Taiwan have pledged to impose similar sanctions, although some details have not been released to the public. Some politicians have called for Russia to be banned from SWIFT, the world’s main international payments network, which could make it more difficult for Russian businesses to conduct cross-border trade.
The energy dependence on Russia means blanket bans on Russian finances are unlikely, according to Alexander Titov, a historian with Queen’s University Belfast. It also helps that Moscow has spent years reducing its U.S. dollar exposure and could still access a vast market outside of the Western bloc.
Russia was slapped with sanctions in 2014 over its annexation of Crimea. The nation has since then drastically reduced its investments in U.S. dollars while expanding its trade with China. Moscow slashed its dollar reserves to 16 percent of the central bank’s stockpile in 2021, down from more than 40 percent four years earlier, according to Bloomberg.
China, which objects to any sanctions on its northern neighbor, provides alternative financing and trade channels. “Immediately, it's extremely painful, but Russia is not going to change because they’ve been preparing for it,” Titov said. “Having China broadly on their side, certainly not joining the sanctions, will be of strategic help to Russia.”
Russia also exports large amounts of commodities to the Middle East, Africa and India, which could potentially help it fend off a decline in direct trade with the West. Governments in those regions have yet to announce any sanctions against Russia.
“The Russians have the resilience, at least for the time being,” said Alexey Muraviev, a national security and strategic expert at Australia’s Curtin University, adding the sanctions also hurt the rest of the world. The Russian economy—the world’s 11th largest—has been a leading exporter of key commodities such as oil, natural gas, and wheat. “If we expect that the sanctions will have immediate impact or short term impact, I think we’ve just been really over optimistic.”
Earlier this month, Russia’s Finance Minister Anton Siluanov said potential western sanctions would lead to a spike in market volatility, but Russia would be able to withstand them thanks to abundant gold and foreign currency reserves. Siluanov also said the country could divert its energy exports to other markets.
Energy infrastructure takes years to be built, but one such destination could be China, whose growing demand for energy helped post-Soviet Russia recover. Beijing is also seeking to diversify the source of its oil and gas, a need that became more urgent due to rising trade tensions with the U.S. and its allies.
Analysts said the sanctions could still add pressure on Moscow and impact Putin’s long-term strategy on Ukraine. “As long as the West does not include energy in the sanctions, it is unlikely that the sanctions will grind the Russian economy to a halt,” said Joshua Tucker, an expert on Russian politics with the University of New York. “What they will do, however, is increase the costs to Russia from this war. This will not happen immediately, but will happen over time.”
Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security, said the Russian economy would still suffer from being cut off from international financing. The restrictions on high-tech imports, such as semiconductors that could not be easily replaced by Russian or Chinese products, will hurt the country’s long-term competitiveness, she said.
The question is how much Moscow is willing to sacrifice, in terms of economic growth and social stability, to press its invasion forward. “Putin has shown himself willing, and his inner circle have shown themselves willing, to incur a lot of pain and a lot of economic stress,” Ziemba said. “This is an important foreign policy priority.”
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