Beijing finds it increasingly difficult to stand with Moscow while protecting its own interests
The US has explicitly warned China of “potential implications and consequences” for aiding Russia in any way that could undermine the sanctions. Heeding the warning, large Chinese state-owned financial institutions that have significant overseas businesses are already avoiding deals that could potentially involve a Russian counterparty. However, it’s still possible for China to get around the sanctions by passing some of the business to smaller local banks that are domestically focused. MNCs should pay extra attention to second- or even third-tier banks in this regard.
It’s also possible that China’s state-owned enterprises (SOEs), particularly those in the energy, food, and commodities sector, will take instructions from Beijing and buy stakes in Russian energy and commodity firms to ensure supplies to China. Should that happen, they run a high risk of facing secondary sanctions from the West, and MNCs should also cut ties with them to avoid any potential damages to their businesses.
Russia’s invasion of Ukraine has, to China’s surprise, united the Western world in a way not seen since the end of the Cold War. Hundreds of MNCs have stopped operations in Russia. In the likely event that China continues to stand with Russia through a bloody, protracted stalemate, questions will arise as to why these companies are still doing business in China. Addressing such questions effectively will require forethought, so MNCs should lose no time in preparing for such tests.
Therefore, MNCs need to be extra careful in dealing with local business partners that might run afoul of the sanctions imposed by the West on Russian entities, whether intentionally or unintentionally.
Overview
US National Security Adviser Jake Sullivan met with China’s top diplomat, Yang Jiechi, in Rome earlier this week. The two had a very tense meeting in which Sullivan raised concerns about Chinese support to Russia.
According to US intelligence, Russia has asked for military equipment from China, but both Russia and China have denied the report.
China publicly aligned itself with Russia by declaring that the partnership between the two countries has “no limits.”
Since the war started, China has refused to criticize Russia’s invasion of Ukraine. It abstained twice in the United Nations on resolutions condemning Russia, and it has consistently refused to use the term “invasion” to describe Russia’s military operation. Instead, it blamed NATO for the war and accused the West of ignoring Russia’s security concerns.
China’s financial institutions, however, have been reluctant to help Russia with dollar transactions after it was excluded from the SWIFT system, but they helped Russian organizations open RMB-denominated bank accounts with Chinese banks.
China has recently presented itself as a credible mediator, calling for “maximum restraint” in Ukraine and expressing willingness to support peace talks between the two sides.
Our View
Before the war began, it seemed that China was ready to offer whatever support Russia needed in a partnership Beijing described as having “no limits.” However, Russia’s invasion of Ukraine runs counter to a key diplomatic principle that China holds dearly on the international stage—that every country’s sovereignty and territorial integrity should be respected. Since then, China has rhetorically retreated from standing with Russia unconditionally. Instead, it has tried to present a more neutral image by calling for both sides to show restraint and by stressing the importance of resolving the conflict through dialogue. Yet, due to a variety of political and economic reasons both at home and abroad, China is highly unlikely to truly shift its position on this matter, at least not immediately. China will continue to align with Russia in whatever way it can, even if it doesn’t do so overtly. Nevertheless, given the harsh sanctions Russia is facing now, there is a limit on what China can truly do to help its partner, because it needs to protect its own entities from being hit by secondary sanctions from the West.
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