China's Uncomfortable Position Between the US and Russia

The Issue

One month into Russia’s invasion of Ukraine, China’s increasingly perilous balancing act is still on: Beijing has not condemned Russia’s invasion but supports Ukraine’s sovereignty. It has rejected Western sanctions on Russia as unilateral but abides by some. Top officials meet almost weekly with their US counterparts to reaffirm their support for peace and negotiations, while the government's propaganda machine daily blames US foreign policy for the conflict. Such diplomatic gymnastics have allowed Beijing to keep lines of communication open with both Moscow and Washington so far. But the end-game for Beijing is increasingly unclear.

US and China Talk Past Each Other

Last week’s two-hour video conference between US and Chinese Presidents Joe Biden and Xi Jinping at least underscores that the two governments have made efforts to keep the conversation going, as agreed in November. But Russia's invasion of Ukraine has added yet another layer of disagreement and mistrust to the increasingly brittle US-China relationship, and will likely dominate an Apr. 1 EU-China summit.

While China portrays itself as a peacemaker, the US is warning of consequences if Beijing supports Russia militarily, and of taking unspecified countermeasures if any countries or companies undertake "systematic efforts to undermine, weaken, or circumvent the sanctions regime." Xi has rejected “sweeping and indiscriminate sanctions” on Russia and suggested instead that the US and Nato have “a dialogue with Russia to ... ease the security concerns of both Russia and Ukraine.” In the process, he appeared to blame the West for the conflict, rather than Russia, with which China enjoys a "no-limits" relationship.

And while the US tries to engage China on Ukraine, Beijing instead wants reassurance on Taiwan, which it sees, together with the Asia-Pacific region, as being under increasing threat from a Nato-type grouping under the US umbrella.

Fears that China may seek to take advantage of the West’s focus on Ukraine to forcefully “reunify” Taiwan with the mainland sooner rather than later are prompting foreign companies with business operations at China’s ports to prepare contingency plans in case of a possible conflict and sanctions on China, Energy Intelligence understands.

Most observers, however, believe that the strength of the Western response over Ukraine may instead prompt China to think carefully about how to unite Taiwan with the motherland. China wants absolute certainty it could win in a match against the combined military efforts of Taiwan, the US and possibly Japan, and be able to withstand whatever financial sanctions are levied in retaliation, Asian Society President and former Australian Prime Minister Kevin Rudd told a webinar organized by the Carnegie Endowment for International Peace this week.

"That's quite a ways off," he added, also noting that China can look at Russian President Vladimir Putin and see he was unprepared on both fronts. Separately, Beijing might also wish to avoid conflating its claim to Taiwan, which it sees as an integral part of China, with Russia's invasion of a sovereign state.

China’s Financial and Economic Gains

China stands to win from the existing banking sanctions against Russia if they help promote the internationalization of the Chinese currency, the yuan. But that is a big “if." Fortunately or unfortunately, the University of Auckland's Gerald Chan tells Energy Intelligence, "the yuan has become the currency of choice when it comes to bilateral trade while Western sanctions are in place” — with major currencies like the US dollar, euro, British pound and Japanese yen "more expensive and restrictive for Russia to use.” The digital yuan in particular could benefit from the situation as it helps speed up financial transactions and reduce costs, Chan add.

But for its internationalization to be successful, China will need to open its capital markets and allow its currency to float freely, something that will take time in state-controlled China. China’s Shanghai oil futures exchange, launched in 2018 to promote the yuan, has mainly attracted domestic participants so far. Reports of a Saudi wish to sell its oil in yuan were a messaging exercise.

In the meantime, fears of secondary sanctions if China or its companies come to Russia's aid are real. There are signs that state banks are shying away from financing, or offering letters of credit for, purchases of Russian goods. But with energy trade exempt from sanctions so far, China stands to benefit from cheap barrels if buyers find way to manage payments and shipping.

Chinese refiners are holding back from booking May-loading Russian short-haul Espo crude, because ship owners are reluctant to load Russian crude, analysts from data analytics company Vortexa told a webinar on Tuesday. But these buyers may step in later, they add. They may also choose to buy Russian Urals cargoes put together by independent traders and shipped to Asia as European refiners shy away from the grade. State PetroChina has for its part snapped up a cargo of April-loading Sakhalin LNG, at less than $30 per million Btu on a delivered basis, a substantial discount, market sources say.

A Relationship With Other Benefits

China and Russia pledged in February to ramp up trade between the two countries to $200 billion by 2024. This pales in comparison with China-EU trade exceeding $828 billion in 2021 and China-US trade of $755 billion. A pragmatic and economically driven China could be expected to tread carefully for fear support for Russia could damage those critical trade ties — no matter Beijing's “rock-solid” relationship with Moscow.

But it's not only about the economy. Xi’s personal chemistry with Putin (they have met 38 times since 2013), Russia serving as a geopolitical distraction while China focuses on its maritime boundaries, and China’s interest in long-term supplies of critical commodities are the three elements that cement the two countries’ relationship, Rudd said.

Still, China could still turn pragmatic if things go wrong in Ukraine: “If China felt that Russia may fail, it could, at five minutes to midnight, generate real diplomacy and mediate [in the crisis]," Rudd said. Russia using chemical weapons in Ukraine "might be a bridge too far” also, he added.