3 ways China and Russia are forging much closer economic ties

When they last met, in February in Beijing during the Winter Olympics, they proclaimed their friendship had “no limits.” Since then, Russia has sought ever closer ties with China as Europe and the United States responded to the invasion with wave after wave of sanctions.Beijing has carefully avoided violating Western sanctions or providing direct military support to Moscow. This balancing act, experts say, is a sign that Xi won’t sacrifice China’s economic interests to rescue Putin, who arrived at the Shanghai Cooperation Organization summit in Uzbekistan this week with his army retreating from large swathes of Ukrainian territory. But the trading relationship is booming, in a lopsided way, as Russia desperately seeks new markets and China — an economy 10 times the size — scrambles for cheap commodities.Trade in bilateral goods is at record levels as China snaps up oil and coal to The Russian central bank stopped publishing detailed trade data when the war in Ukraine started. But Bruegel, a European economic think tank, analyzed statistics from Russia’s top 34 trading partners recently and estimated that China accounted for roughly 24% of Russia’s exports in June.”China-Russia trade is booming because China is taking advantage of the Ukraine crisis to buy Russian energy at a discount and replace Western firms that have exited the market,” said Neil Thomas, a senior analyst on China at Eurasia Group.RussiaLast week, Russia’s Gazprom said it would start billing China in yuan and ruble for natural gas supplies, while Russia’s VTB bank said it was launching money transfers to China in yuan.For Beijing, it’s a boost to its ambitions to make the yuan a global currency.”Increased Russian use of the yuan also helps to inch forward China’s long-term goals to make the redback a global currency, to insulate itself from Western financial sanctions, and to enhance its institutional power in international finance,” said Thomas from Eurasia Group.For Russia, this partnership with China “is born of desperation,” said Krach.”Because Russia has been severely weakened, in part by sanctions, Putin is willing to do a deal with a predatory power so long as it gains access to capital,” he added.Chinese companies fill the vacuum Chinese companies are also taking advantage of the exodus of Western brands from Russia.Chinese smartphones accounted for two-thirds of all new sales in Russia between April and June, Reuters reported, citing Russia’s top electronics retailer M.Video-Eldorado. Their total share in Russia has steadily increased from 50% in the first quarter, to 60% in April, and then to more than 70% in June, M.Video said.Xiaomi was the best-selling smartphone maker in Russia in July, holding 42% of the market, according to Russian media Kommersant.Samsung (SSNLF), once the market leader, had only 8.5% of the market in July. Apple (AAPL) held 7%. The two companies accounted for almost half of the Russian market prior to the Ukraine invasion, but suspended sales of new products in the country after the war began.Chinese cars have also flooded Russia.Passenger cars from Chinese manufacturers accounted for almost 26% of Russia’s market in August, the highest on record, according to Russian analytical agency Autostat. That compares with just 9.5% in the first quarter.Major global auto players, including Ford and Toyota, have pulled back from Russia this year. Limits in ‘no limits’ partnershipBut there are also significant limits in the China-Russia partnership, analysts said.China is not providing military, commercial, or technological support that would “risk significant US sanctions on China,” said Thomas at Eurasia Group.”Beijing will not sacrifice its own economic interests to support Moscow,” he said.Fearing a US backlash, China has so far “steadfastly” refused to violate international sanctions against Russia, forcing Moscow to request military support from North Korea, said Craig Singleton, senior China fellow at the DC-based Foundation for Defense of Democracies.”Beijing’s refusal to violate US and international sanctions reflects its begrudging acceptance that China remains reliant on Western capital and technology to sustain its ongoing development, even though Xi is personally inclined to assist Putin’s war effort,” he said.Moreover, China’s rapid economic slowdown this year will further constrain Xi’s willingness to help Putin. The Chinese president won’t want to risk anything that further destabilizes the economy mere weeks before he’s poised to secure an historic third term at the Communist Party’s congress. What the future holdsFuture relations will likely remained strained, and China will want to keep its options open, analysts said.”There’s always been mistrust between the two regimes, which historically treated each other as rivals,” Krach noted.The current Sino-Russia partnership is mainly a “defensive” one, enhanced by Beijing and Moscow’s shared view that NATO and the United States pose a “palpable national security threat,” said Susan Thornton, senior fellow and visiting lecturer at Yale Law School. “Russia’s war in Ukraine is not in China’s interest, but given Western hostility, China will not oppose Russia,” she added.