ANALYSIS | Why China won’t risk its economy to bail out Putin

(CNN Business) — Russia has in China an obvious ally to turn to as sparks geopolitical fly with the West over Ukraine.

but don’t wait that China offers a lot more than words of support for its neighbor to the north in case the United States and Europe follow through with threats to hit Russia’s economy if Moscow launches an invasion of Ukraine. Beijing’s diplomatic and military ties with Moscow may be strong, but its economic loyalties are far more complex.

Russian President Vladimir Putin met with his Chinese counterpart Xi Jinping on Friday as the Beijing Winter Olympics kicked off. The Kremlin described the meeting as warm and constructive, and the leaders agreed to deepen their cooperation, according to a report by China’s state news agency Xinhua. Russian oil giant Rosneft said it has agreed to increase supplies to China over the next decade.

“Working together, we can achieve stable economic growth… and face today’s risks and challenges together,” wrote Putin in an opinion piece published Thursday by Xinhua.

Those risks can be formidable if Russia invades Ukraine. Moscow has denied that it intends to do so.

But US lawmakers are threatening to impose what they call the “mother of all sanctionsRussia if it crosses a red line. European leaders are also preparing punishments that would go far beyond the restrictions imposed on Russia when it annexed Crimea in 2014.

China, which has its own tensions with the West, has already expressed diplomatic support for its ally. In a joint statement issued on Friday after their meeting, Xi and Putin said both sides oppose “further enlargement of NATO.” Russia fears Ukraine may join the alliance.

“Xi almost certainly believes there is a strategic interest in supporting Russia,” said Craig Singleton, China senior fellow at the Washington-based Foundation for Defense of Democracies. He noted that China “remains in permanent disagreement” with the United States.

There is already some evidence that tensions with the West have deepened Sino-Russian cooperation, according to Alexander Gabuev, senior fellow and chair of Russia in the Asia-Pacific Program at the Carnegie Moscow Center. He cited arms deals, joint weapons development and “increased numbers of joint drills” between the two powers.

But it is unclear to what extent that would extend to deeper economic cooperation in the face of harsh sanctions. Russia is deeply dependent on China for trade, but that is not the case the other way around. And the Chinese economy is already in a shaky spot, giving Xi less incentive to tie his country’s fortunes to Moscow’s in the event of a military crisis.

“It would be a ‘win’ for Putin if Xi simply goes along with China’s stated desire for a diplomatic resolution of the crisis, as it implies that Putin’s grievances are legitimate,” Singleton said. “Beyond that, however, China may struggle to really deepen its economic ties with Russia, at least in the short term.”

Russia needs China for trade. China has other priorities

China is Russia’s number one trading partner, accounting for 16% of the value of its foreign trade, according to CNN Business calculations based on 2020 figures from the World Trade Organization and Chinese customs data. But for China, Russia matters much less: trade between the two countries accounted for just 2% of China’s total trade volume. The European Union and the United States have much larger proportions.

“Beijing should be very cautious about getting into a conflict between NATO and Russia over Ukraine,” said Alex Capri, a researcher at the Hinrich Foundation. “China’s current economic ties with Russia, including its energy needs, do not justify Beijing risking further alienation and backlash from Washington and its allies. This could come back to haunt Beijing later on.”

Western authorities know that the stakes are also high for China. Last month, US Secretary of State Antony Blinken warned Beijing that an invasion of Ukraine would create “global security and economic risks” that could also hurt China.

China’s economy is already in trouble, which could make it difficult for Beijing to deepen ties with Moscow, or even deliver on promises it has already made, such as a recent deal to boost trade between China and Russia to $200 billion by 2024, about $50 billion per year more than now.

The International Monetary Fund China’s economy is expected to grow just 4.8% this year, down from 8% in 2021. The housing crisis and subdued consumer spending are slowing the growth rate.

Singleton said a deepening crisis in Ukraine would “almost certainly hit” energy and metals markets, weighing heavily on the world economy. That kind of emergency, coupled with China’s strict zero-Covid-19 policy, “could accelerate China’s already rapid economic slowdown.”

There are limits to aid from Beijing

A strong relationship with China would likely only mitigate rather than neutralize the impact of Western sanctions on Russia, according to Capri of the Hinrich Foundation.

And there are some problems that China can’t really help with at all, he added.

Take the “nuclear option” that could disrupt the Russian economy, for example. The West could remove the country from SWIFT, a highly secure network that connects thousands of financial institutions around the world. That could isolate Russia from the global banking system.

The Chinese yuan “is nowhere near internationalized enough to compete with the US dollar,” Capri said, noting that the dollar plays a critical role both in SWIFT and in trading commodities such as oil and gas, the “vital element of the Russian economy”.

Analysts at the Eurasia Group wrote in a report last week that Beijing may redouble efforts to build a yuan-denominated payment system, which could allow it to do business more freely with countries that have been sanctioned by the West without using dollars or euros.

Still, they wrote, companies in both China and Russia “still prefer to denominate trade in freely convertible currencies,” meaning any effort to reduce Western influence would be “more aspirational than substantive.”

Recent history is not in Russia’s favor. After Russia invaded and annexed Crimea in 2014, the country turned to China for support as it was hit with economic sanctions.

And while Beijing has publicly opposed such punishments and vowed to boost economic ties, their efforts were not enough to offset Russia’s problems.

Trade between Russia and China in 2015 fell 29% from the previous year, according to Chinese official statistics. Chinese direct investment in Russia talso suffered.

And Russian bankers complained that Chinese banks were reluctant to do business with them to avoid violating sanctions, according to an op-ed by 2015 written by Yuri Soloviev, Vice President of VTB Bank, a major Russian financial institution.

“China is the main partner in the bilateral relationship,” Eurasia Group analysts wrote in their recent report, noting that the economy is about nine times the size of Russia’s. “Beijing is likely to want to shape Moscow’s calculus in its favour.”