China walks diplomatic tightrope after shunning sanctions on Russia, while calling for end to crisis in Ukraine

As the tragic events in Ukraine escalate and countries around the world ratchet up sanctions on Russia, China faces a difficult balancing act. 

While its neutral stance towards the conflict has been viewed with opprobrium in some quarters, Chinese leaders are not insensible to the human suffering in Ukraine. Nevertheless, they are obliged by certain realities to tread carefully.

Russian military action in Ukraine offends China’s longstanding principle of non-interference in the affairs and territorial integrity of other nations. 

However, as the American political scientist John Mearsheimer has pointed out, Russian President Vladimir Putin is not the only global leader with blood on his hands in this conflict. 

US encouragement for NATO’s expansion to Ukraine was a last straw for the Russian leader, as it posed an unacceptable threat to Russian security. 

Given the threat felt by China over the US military presence in its own backyard, Chinese leaders cannot be unsympathetic to Russia’s sensitivities.

More importantly, China shares a 2,600-mile land border with Russia, and Russia is important to the security of Central Asian countries on China’s western border. 

In light of escalating geopolitical tensions, China has become increasingly reliant on Russia for energy and food imports to outflank the US Navy’s chokehold over shipments through the Straits of Malacca. 

It is therefore important for China to maintain good relations with Russia, and it has a strong vested interest in its neighbour’s stability. Thus, it is not an option for China to halt trade or freeze Russian assets.

Nonetheless, Putin’s decision to launch military action has unleashed a host of risks, with highly unpredictable outcomes.

Unintended consequences

First, the attack on a neighbour with deep cultural, commercial, and familial ties has already precipitated a backlash in Russia. 

Sanctions that impose severe economic hardship on Russia could also generate further instability.

However, if Putin is ousted, a new leadership in Russia that forges better relations with the US could pose a strategic threat to China.

Second, the conflict has already roiled financial markets. The negative hit to global economic growth will be compounded by the effect of sanctions. 

Russia has been a significant lender in short-term credit markets. Barring Russian lenders from SWIFT and freezing the country’s foreign exchange reserves could lead to a severe worldwide liquidity crunch. 

At a time when China’s own economy is slowing down, this could exacerbate the problems that the country is already facing.

Third, China’s refusal to join in Western sanctions risks being interpreted as support for Russian actions. This could provide a pretext for further economic sanctions on China. 

CIPS – China’s fledgling SWIFT alternative

While there is much speculation about potential benefits to China arising from the West’s sanctions on Russia, in particular that it could help accelerate renminbi internationalisation and the development of China’s Cross-border Interbank Payment System (CIPS), the reality is quite different.

Although bilateral trade between China and Russia grew by more than a third in 2021, Russia still accounts for only two percent of Chinese exports.

With a population of just 145 million and accounting for less than 2% of global GDP, Russia is economically far less important to China than America or the EU. 

In addition, the vast majority of China’s international trade is invoiced and settled in US dollars. 

That is why at least two of China’s largest state-owned banks have imposed restrictions on the financing of Russian commodities purchases to avoid becoming the targets of sanctions themselves.

Russian banks’ exclusion from SWIFT will encourage more of them to join CIPS. However, CIPS has just 1,189 users (of which 569 are Chinese banks) compared to more than 11,000 members of SWIFT. 

Although adding more Russian users would certainly be a boost to CIPS, it hardly poses a serious challenge to SWIFT’s dominance.

Border dispute contagion and nuclear threat

Fourth, mistaken parallels being drawn between Ukraine and Taiwan could encourage American policymakers to further encourage the Taiwanese independence movement. 

This could stoke passions among nationalistic elements in mainland China, creating a crisis that neither side wants.

Finally, the terrifying risk that tactical missteps could lead to nuclear conflict is as present in Chinese leaders’ minds as it is for all of us. No country would be spared from the fallout if this were to eventuate.

War can never be condoned. However, Ukrainians are now paying the catastrophic price of a long catalogue of strategic blunders committed in the wake of the end of the Cold War. 

China shares a strong interest with the West in the cessation of hostilities in Ukraine, and should be proactively engaged in helping to find a resolution. 

Most importantly, these tragic events should serve as a salutary lesson to Chinese and American leaders of the perils of allowing geopolitical tensions to metastasise. 

Both sides must return to open and positive engagement to resolve the frictions between them.

Read our latest issue of Trade Finance Talks, May 2022