China set to be a winner in Ukraine war

Mark O'Neill April 21, 2022 10:15

Whatever the outcome, its invasion of Ukraine will leave Russia more weak, poor and isolated from the world. Economists estimate its GDP this year will fall by about 10 per cent from the 2021 level.

The big winner in the war is set to be China, the only major country not to condemn the invasion and to retain a high level of normal trade and economic relations with Russia.

After the war, it will be able to buy Russian oil and gas at cheaper prices, acquire Russian assets at a discount and attract talented people who are fleeing the country in fear it is returning to the closed-door, xenophobic Soviet era.

To achieve this goal, China and its companies must continue to walk the tightrope of the last eight weeks in trading with Russia but not crossing the line into helping its war effort.

This is no simple matter. Vladimir Putin’s attack on Ukraine is the most transparent war in history. High-tech-savvy Ukrainians are putting on the internet hundreds of images and sounds of the war in real time, including radio conversations between Russian soldiers and their commanders and their telephone calls to their parents at home.

The Russian military budget does not extend to encrypting all radio conversation – those on open lines give the Ukrainian army excellent intelligence on where the enemy is and what he is talking about.

This means that, if the Ukrainian army were to discover on the battlefield arms, equipment, telecoms and other material made in China, it would be on the internet within hours, and China risk being sanctioned in the same way as Russia.

In the eight weeks so far, this has not happened.

In the first three months of this year, according to China Customs, Sino-Russian trade was US$38.2 billion, an increase of 28 per cent over the same period in 2021. In March alone – the invasion began on February 24 – trade was US$11.67 billion, an increase of 12.76 per cent year-on-year.

Last week Li Kuiwen, spokesperson of the General Administration of Customs and director general of its Department of Statistics and Analysis said that, despite the conflict, China was continuing normal trade and economic relations with Russia, Ukraine and other countries.

In the first quarter, China's trade with Ukraine climbed 10.6 per cent, Li said. He did not say how much of this was after February 24.

Given that the Russian military has destroyed Mariupol, one of Ukraine’s main ports, trade outlook seems to be highly uncertain as it would be difficult for Ukraine to export goods to China or vice versa.

Russian missiles and bombing raids have also destroyed industrial and agricultural projects in Ukraine in which Chinese firms invested. No one knows if they will be compensated for their losses and by whom.

Oil is a good example of the caution of Chinese state firms. China is the world’s largest oil importer and the largest buyer of Russian crude, at 1.6 million barrels a day. Before the invasion, Russia supplied 15 per cent of China’s oil imports, half through pipelines in the Far East and half via tankers from the Black Sea, Baltic and Far East ports.

But traders in Singapore said that Sinopec, CNOOC, Petrochina and Sinochem had declined to buy Russian oil to be delivered in May, despite steep discounts, because they do not want to be sanctioned for doing so. But they are honouring contracts signed before the war.

In any event, buying Russian oil now is no simple matter – who will insure the shipping and manage the payments and in what currency?

In addition, Sinopec has suspended talks for a major petrochemical investment and gas marketing venture. It would involve investment of up to US$500 million in a joint venture with Sibur, Russia’s largest petrochemical producer. Gennady Timchenko, a board member of Sibur, is on a sanctions list announced by the European Union and Britain.

In March, the Ministry of Foreign Affairs in Beijing summoned top officials from China’s three largest energy companies for a meeting on their business ties with Russian partners. It told them to be cautious and not to make any hasty moves to buy Russian assets.

Co-operation in science has also been suspended. Alexander Sergeev, president of the Russian Academy of Sciences, said last week that its Chinese scientific colleagues had “pressed pause” on joint science projects since the start of the war. The two countries have set up more than 1,000 joint research and exchange programmes, in space, nuclear energy, mathematics, physics and smart manufacturing.

China’s strategy is to continue normal trade as it was before the invasion but freeze new initiatives until the war is over. At that time, Chinese firms will be well placed to take advantages of a Russian economy that has been largely stripped of its western partners.

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Mark O'Neill

A Hong Kong-based writer, teacher and speaker.