How Much Can China Help Russia Amid Sanctions?

A man walks past a store advertising cargo shipping to Russia and other countries, along a street in Beijing on March 4, 2022. (Hector Retamal/AFP via Getty Images)

News Analysis

As sanctions cripple the Russian economy, officials in Moscow are likely to seek ways to prop it up. With the Chinese regime refusing to participate in Western sanctions and reiterating its “rock solid” friendship with Russia, it may present an avenue for Russia to circumvent the punitive measures.

How Have Sanctions Affected Russia?

Sanctions from the West have severely inhibited Russia’s ability to participate in the global financial system. As a result, the ruble, Russia’s currency, has crashed and the Moscow Stock Exchange remains closed as markets internalize the fallout from the sanctions.

On March 8, Fitch downgraded Russia’s credit rating to “C” or “near default,” with the prognosis that sovereign default is “imminent,” the ratings company said in a statement. The ratings change follows a Russian presidential decree that may force payments that are currently denominated in foreign currency to be redenominated in rubles.

Given that the sanctions have pushed Russia toward financial autarky, it’s unclear how a Russian default will affect their economy.

How Could China Help?

The exclusion of Russian banks from the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, shuts them out from the messaging system used to coordinate global payments. Although this severely limits Russia’s ability to engage in transactions, it doesn’t actually preclude Russian banks from participating in transactions.

Rather than using SWIFT, Russian banks could seek refuge in China’s payments platform, the Cross-Border Interbank Payment System (CIPS). CIPS is China’s attempt to compete with the U.S.-dominated SWIFT and has been in use since 2015.

However, using CIPS would only provide limited relief to Russian banks looking to make global transactions. CIPs only has 1,280 members, while SWIFT has more than 11,000.

China’s unwillingness to participate in sanctions also means that Russia could access its estimated $77 billion of foreign reserves denominated in Chinese yuan. This may be critical if Russia does indeed default on its debt and is unable to fund itself externally.

China could also directly provide liquidity to Russia. China and Russia have a swap line that was agreed to in 2014, following Russia’s invasion of Crimea. This agreement, in principle, allows Russia to exchange yuan for rubles, and could potentially facilitate any trade flows between the countries.

But again, this option, if used, would only be a small reprieve. The Chinese yuan only accounts for a small fraction of global payments, while currencies such as the dollar and the euro are used much more frequently. Even trade between China and Russia may not use their local currencies. In 2020, only 17.5 percent of trade between the two countries was denominated in yuan. This underlines the importance of access to Western financial markets.

Overall, China’s ability to provide relief from the series of Western sanctions appears to be limited, meaning that Western sanctions are likely to continue to have hefty effects on the Russian economy.

“I don’t know what precise steps they’re going to take to mitigate the bite of the sanctions, but it’s not going to undo them,” Ori Lev, former head of enforcement at the Treasury’s Office of Foreign Assets Control during the Obama administration, told the Associated Press.