Russia is turning to China to survive sanctions, but it won’t be easy

China, despite claiming neutrality, has maintained a pro-Kremlin lean and is opposed to sanctions, stating that it will continue to trade with Russia as usual. But questions remain on how far China’s systems are able to cushion the blow of Western sanctions and how far Beijing is willing to go to help its economic partner.

Many buyers, services and systems to which Russia has lost access have Chinese substitutes. But those options often fall short when compared with Western equivalents and face daunting practical and political hurdles before they could work as a viable replacement for global systems.

Chinese firms and institutions may also be hesitant to step in for fear of losing access to international markets, a far more important source of business than Russia.

“Even though China’s government probably wishes to assist Russia, it cannot shield its companies from the potentially crippling punishments for violating sanctions,” analysts at Gavekal Dragonomics, a research firm, wrote in a recent note.

Here are some of the Chinese alternatives that Russia can consider to make up for the financial services and technologies it has been denied.

Finance

Russian banks are turning to China’s UnionPay system as an alternative to Visa and Mastercard, both of which have suspended operations in the country. UnionPay says over 90 percent of ATMs in Russia are compatible with its cards, 3 million of which had been issued in the country as of 2021.

Several Russian banks have announced in recent days that they will use the Chinese service, with some giving customers immediate access to virtual cards so they can get to their savings.

Given UnionPay’s widespread international availability, fewer Russian cardholders will be left unable to withdraw cash or make payments if their banks switch to the Chinese payment system. (It does little to resolve the ruble’s plunging value or long lines at ATMs.)

How Putin tried — and failed — to protect the ruble from sanctions

The sudden influx of users, however, is a challenge for UnionPay, which remains primarily a provider for Chinese clients. Only 1 percent of its expenditure was outside China in 2020, according to RBR, a consultancy.

More pressing for some Russian banks is their disconnection from the financial information exchange system known as the Society for Worldwide Interbank Financial Telecommunication, or SWIFT. A Chinese alternative, the Cross-Border Interbank Payment System (CIPS), was launched in 2015 as a core plank of Beijing’s efforts to internationalize the Chinese yuan and challenge the dollar’s supremacy in global markets.

The CIPS clearing system, which uses the Chinese yuan as its quote currency, could connect with Russia’s own version or simply expand its partner network in Russia to become a viable alternative to SWIFT.

But CIPS is far smaller, with a network about a tenth of SWIFT’s 11,000 financial institutions. There is only a single CIPS clearing center in Russia, the Moscow branch of ICBC, and transactions using the messaging system would need to be made in Chinese yuan, which has drawbacks because of Beijing’s strict capital controls that prevent large volumes of the currency leaving China.

Using the CIPS systems to transact with Russian banks would also leave Chinese banks open to American sanctions.

China could serve as a crucial supply of cash to Moscow through Russia’s foreign exchange reserves. Countries tend to keep some assets in other currencies offshore to preserve buying power in case their own currency rapidly devalues — which is what is happening to the ruble. Most of these offshore funds for Russia have been frozen by Western countries, but some 13 percent of Russia’s foreign exchange reserves, or an estimated $77 billion, was in Chinese assets as of June, according to the Bank of Russia’s latest figures.

Energy

Russian energy giants’ drastically reduced access to Europe gives them ample motive to expand their presence in China. Nord Stream 2, a planned pipeline that would deliver 55 billion cubic meters of natural gas per year, has been suspended by sanctions.

Among Russian gas giant Gazprom’s best hopes to replace that demand is the Power of Siberia-1, a Russia-China pipeline that began deliveries in 2019.

But the project is significantly smaller in scale and remains at least a year away from reaching its full capacity of 38 billion cubic meters per year. The already operational Nord Stream 1 alone delivered 59 billion cubic meters of gas to Europe in 2021.

China is expected to rely more heavily on gas while it reduces reliance on coal power before 2030. Two additional Gazprom pipelines to China, one about to start construction and another under discussion, could add about 70 billion cubic meters of annual import capacity in coming years.

China could also buy more Russian oil, which accounted for about half the value of Russian exports to China in 2021.

When Putin visited Beijing in February, Russian oil giant Rosneft announced a 10-year deal to supply 100 million tons of oil to China via Kazakhstan.

But Beijing is also eager to prioritize its own production to improve energy security. In 2021, the country’s oil imports dropped for the first time in 20 years, in part because of rising domestic output.

While discounted barrels will find a home in China, there is little urgency to do so as prices soar, Michal Meidan, head of the China program at the Oxford Institute for Energy Studies, wrote in a recent note, adding that “overall stock levels are still well above 2019 levels, offering China a buffer.”

Technology

Cut off from Western technology and Internet services, Russia may need to lean more on Chinese technology. But here, too, the threat of secondary sanctions puts Chinese companies in a tricky position.

Greater pressure is now on China-based Huawei’s business in Russia, as European telecommunications suppliers Ericsson and Nokia cease deliveries to the Russia market. Only a handful of companies produce the technical gear that makes up the backbone of the Internet, so if sanctions are not lifted soon, Russia would probably need to turn to China’s Huawei or ZTE for replacement parts to keep its Internet operational.

Shifting networks to Chinese tech is neither cheap nor technically straightforward. Huawei and others have so far struggled to compete with European firms’ established presence in Russian mobile networks. However, the arrival of 5G with new equipment requirements has created an opening. Huawei launched a trial network of its faster service in Moscow with Russian mobile operator MTS.

The most obvious area where China could easily fill the gap left behind by Western technology firms is consumer electronics. The absence of Apple and Samsung, which account for 45 percent of Russian market share, could be filled by Chinese phone makers like Xiaomi, Honor and Realme. HP and Dell could be replaced by the Hong Kong-based Lenovo, a top seller in Russia.

But according to a report by the Financial Times, Chinese smartphone shipments to Russia have fallen since the invasion began as companies reduce their exposure in light of the plunging ruble and uncertain business environment.

Chinese firms may be even more hesitant to provide critical technology like high-end semiconductors, production of which is almost entirely reliant on U.S. technology and equipment, for fear of losing their already limited ability to purchase necessary equipment from the United States.

“Most large institutions in China are not willing to take the risk of falling foul of U.S. sanctions, and so any sanction-busting is likely to be done by smaller institutions that have less to lose,” said Martin Chorzempa, research fellow at the Peterson Institute for International Economics. “Overall, China looks like it’s going to complain but comply.”

Pei Lin Wu and Vic Chiang in Taipei, Lyric Li in Seoul, and Paul Sonne in Washington, D.C., contributed to this report.