China and the World

Playing roulette

Chinese firms mull the risks of dealing with Russia


A difficult exit from Moscow

On February 21, three days before Moscow launched its invasion of Ukraine, the Chinese ride-hailing app Didi announced its departure from Russia.

The move was born of financial necessity – the company has been haemorrhaging money at home and abroad for many months now.

But five days later the Beijing-based company reversed its decision after it took criticism on social media for “supporting” US sanctions on Russia and “failing to support an ally”.

Up to this point the Chinese government has refused to condemn Moscow for its bloody invasion in Ukraine and has criticised the West for imposing an ever-growing raft of punitive sanctions.

The official line is that China’s relationship with Russia is “rock solid” and limited coverage of the war in Chinese state media is careful to shift the blame for the invasion to the West because it endangered Russia by “meddling” in Ukraine.

The question now is how will the new economic reality in Russia – crippling sanctions, the mass exodus of Western companies and an economy increasingly on a war footing – affect Chinese businesses continuing to operate there.

Different sectors may respond differently. Bloomberg reported on Tuesday that state-owned behemoths such as Sinopec and China Minmetals were in talks to acquire stakes in Russian gas giant Gazprom and Russian aluminium manufacturer RUSAL.

Video-sharing social media platform TikTok – which has its main market in the US but is owned by Chinese tech company Bytedance –  announced March 6 that it was suspending live-streaming and blocking the uploading of new content in Russia while it studies new Russian laws that make it illegal to refer to Moscow’s actions in Ukraine as a “war” or an “invasion”.  

Western companies as diverse as Shell, BP, Apple, IKEA and McDonalds have pulled out of Russia in recent weeks and the US has threatened to “shut” Chinese companies that supply American technology to Russia.

In an interview with the New York Times on Tuesday the US Secretary of Commerce Gina Raimondo said that any Chinese company found flouting export controls to Russia would simply be cut off.

Giving the example of advanced semiconductors she said companies such as the foundry SMIC in Shanghai could essentially be shut down “because we [would] prevent them from using our equipment and our software”.

Sino-Russian trade has increased substantially in recent years: bilateral trade hit a record high of more than $145 billion in 2021, after a 36% year-on-year rise. Russia exports slightly more to China with oil, gas and coal taking up most of the balance sheet. China’s main exports to Russia are machinery, mobile phones, cars and consumer goods.

Last week the Global Times published an article describing the Western pullout as an “opportunity” for Chinese smartphone and car manufacturers. The article has since been removed suggesting that Chinese officialdom is all too aware that it could be accused of sanctions busting.

Indeed, China’s position thus far seems to be refrain from criticism while minimising exposure.

The Asian Infrastructure Investment Bank said it will suspend business related to Russia and Belarus. Beijing is the largest stakeholder in the multilateral institution  with almost 27% voting power.

Meanwhile Russian banks are apparently scrambling to join China’s UnionPay system after Visa and Mastercard suspended operations in the country. Similarly, Russia’s expulsion from the Belgium-based financial messaging system Swift may see Russian banks turn to China’s Cross-Border Interbank Payment System or CIPS – which was set up in 2015 to internationalise the yuan. That said, the two systems aren’t interchangeable.

In the end China is having to balance things extremely carefully with Russia: domestically it is portraying itself as a staunch ally, leading, in the case of Didi to some members of the public turning on a Chinese company when it was perceived to have ‘deserted a friend’.

Yet at the same time many Chinese companies are wary of Russian exposure and are worried about losing access to the far, far bigger markets in the US and the EU should they get caught up in sanctions by selling to Russia. Sales by Chinese companies to Russian consumers are a tiny fraction of those to the US and EU, making the risk-reward trade-off considerable. 

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