Xi Factor: Vladimir Milov on why China won't help Putin succeed

The scale of Chinese aid to Russia should not be overestimated. Despite Putin's urgent needs, China has yet to supply Russia with weapons and ammunition for use on the front line – precisely what Putin desires the most. Instead, a considerable amount of less significant production is being delivered, which is also crucial for maintaining Russia's war capabilities but falls short of causing a breakthrough on the battlefield. Thus, China, in one way or another, avoids crossing certain “red lines,” refusing official weapon deliveries against which the West warned Beijing.

Regarding the economic landscape, the situation is more nuanced. Fundamentally, China's current strategy involves substituting lost Western goods with its own in Russia. However, this substitution comes with a significant price premium. Take, for example, Chinese cars in the Russian market, which are twice as expensive as they are in China. Additionally, the gas producer Novatek had to raise the cost of the Arctic LNG-2 project by nearly $4 billion when switching from American Baker Hughes turbines to Chinese Harbin turbines.

As a result, by the end of the 11 months of 2023, Chinese exports to Russia exceeded $100 billion, not far behind Russian exports to China – last year, the balance of Russian-Chinese trade was shrinking drastically. Meanwhile, China mainly imports raw materials and first-stage products from Russia, preferring to negotiate significant discounts from Russian raw material exporters (later we will discuss this in detail). Russia, on the other hand, imports complex finished products. If those trends continue, the moment when Russia's trade balance with China turns negative is not far off – meaning that the emerging trade model is becoming evidently more advantageous for the PRC.

Furthermore, unlike Western countries, China is unwilling to act as a technological benefactor for the development of Russian industry and has no interest in seeing Russia as a competitor in the manufacturing sector. Moscow's Mayor, Sergei Sobyanin, recently alluded to this when he declared that Eastern countries are “engaging in a real economic war against Russia,” refusing to supply Russia with components and technologies for the development of its own production. First Deputy Prime Minister Andrey Belousov echoed similar sentiments in a pre-New Year interview with “Kommersant”:

“We must clearly understand that nobody is welcoming us to the markets of friendly countries. These markets are occupied either by goods from the friendly countries themselves or by competing goods from Europe... Currently, Russian goods are absent in China, absent in India, absent in Vietnam.”

Belousov hopes that Russian goods will appear in these markets, but this is a pipe dream. It's especially amusing to hear Russian officials speculate about a massive entry of our products into the Chinese market against the backdrop of the slowdown in the Chinese economy – when space is contracting for Chinese domestic goods. Do you think, under these conditions, China's leadership will be concerned about clearing space on its domestic market for Russian goods of uncertain quality and competitiveness?... And as for how much China values Russia as a partner in high-tech projects, one can judge from last year's story about how Moscow was simply ousted from the joint project to build the wide-body CR929 aircraft, over which they had portrayed “collaborative effort” for a decade.

Contrary to the hopes of Russian authorities, China has no intention whatsoever of investing in Russia. At the onset of the full-scale invasion of Ukraine, direct Chinese investments in the Russian economy barely exceeded $3 billion, according to the Bank of Russia—just a fraction of Russia's GDP. Moreover, these investments were primarily concentrated in just two Novatek's projects – Yamal LNG and Arctic LNG-2, which are largely exempt from taxes to the Russian budget, heavily reliant on Chinese equipment, and geared towards exporting inexpensive liquefied natural gas to China.

Over the past two years, there have been precisely zero (0!) new entries by Chinese investors into the Russian market, and there is no indication of such intentions. Despite the prolonged display of partnership, as stated by the Minister for the Development of the Far East and the Arctic, Alexey Chekunkov, “the PR aspect of our relations with China has outpaced their practical implementation – the number of projects in Russia where significant Chinese investors were genuinely involved can be counted with the fingers of only one hand.”

Russian bankers acknowledge that even Chinese banks, willing to work bypassing Western sanctions, are still so oriented towards Western financial markets that they simply won't engage with Russian banks lacking access to SWIFT. “The Chinese banking system, especially the use of the yuan in cross-border payments, is heavily dependent on SWIFT – the entire payment infrastructure is geared towards SWIFT, they have honestly admitted. If a Russian bank is disconnected from SWIFT for any reason, whether or not related to sanctions, it stands to lose access to cross-border payments through the Bank of China,” says Alexander Rakhmanin, Vice President of Rosbank.

That's the nature of this “partnership.” Over the past two years, it has become evident that China is not interested in developing Russia as a competitor in the high-tech goods market, has no desire to invest in Russia, and merely wants to obtain discounted raw materials from Russia in exchange for a premium gained by displacing Western goods in the Russian market.

Nevertheless, it cannot be said that China is entirely unwilling to assist Russia: Putin is valuable to Xi Jinping as a player helping weaken the West's positions. However, two clear principles can be discerned here. The first: China doesn't get involved in anything that carries significant risks without securing appropriate leverage. This applies to both investments in Russia and arms supplies: the risks are substantial in both cases, and China's ability to control the outcome is limited. For instance, by supplying lethal weapons to Russia, China would take on significant responsibility for the aggression against Ukraine, but it would not be able to control the military operations—although the downsides and risks would certainly materialize, there's no guarantee whatsoever that Putin would emerge victorious using Chinese weapons.

The second principle is that China is not willing to be anyone's donor and invests only in ventures that bring it tangible benefits. Therefore, the expansion of trade based on the principle of “cheap raw materials in exchange for Chinese goods with a premium” works, while investments and technological cooperation do not.

The Russian ruling elite, currently immersed in public anti-Western fervor, is facing the challenging realization that, starting from the 1980s, the West effectively acted as a donor for Russia—regardless of its reluctance to acknowledge it—across a broad spectrum of developmental factors: capital, technology, know-how. China has no intention of being such a donor; it is solely interested in minimizing support for the Putin regime, without providing any opportunities for its strengthening and development, and maximizing benefits for itself.

This extends to the military domain as well. Over the past two years, it has become evident that China is not willing to actively involve itself in substantial military support for Putin. Doing so would entail the risk of a significant escalation of tensions with the West and the possibility of facing substantial sanctions. Given the unprecedented slowdown of the Chinese economy, this is the last thing Xi Jinping needs. Consequently, China endeavors to assist its Moscow partners with secondary measures that can be easily disowned if necessary; for instance, it could be asserted that certain private companies were supplying drones, under the assumption that they were intended for civilian purposes.

Undoubtedly, this aids Putin, and the West is concerned about it—hence, sanctions targeting Chinese companies involved in supporting the Putin regime's military and defense industries. Whether there will be any effect, and whether we should expect an escalation of secondary sanctions, is an open question. However, it is crucial for China to demonstrate to the West that it pursues an independent policy, is willing to avoid crossing certain “red lines,” but won't fully yield under sanction pressure. Moreover, the profit generated from the sales of military products to Russia makes these ventures worthwhile. Therefore, a game of cat and mouse is likely to unfold, involving various schemes with dummy companies, but the supply of dual-use products will probably continue. Chinese manufacturers of such products are often less reliant on international markets, which limits the effect of sanctions on their behavior.

Could there be a new escalation in the U.S.-China rivalry, particularly in connection with ongoing deliveries of military products to Russia or a hypothetical return of Donald Trump to the White House? Here's something to consider: during the trade and economic rivalry between China and the U.S. in recent years, the scale of interaction between the two economies has sharply decreased. The share of Chinese goods in U.S. imports in the first half of 2023 dropped to 13.3%, almost half the peak value of 21.6% in 2017. This trend will continue regardless of Trump; many companies targeting the U.S. market have realized that placing production in China comes with risks and are shifting their manufacturing to other countries.

On one hand, all these factors significantly contribute to the observed slowdown in the Chinese economy: China is losing the American market and investors. On the other hand, paradoxically, the U.S. is losing a lever of influence on China's policy: in terms of trade, there won't be much left to cut. It must be understood that the relatively easy potential for reducing Chinese imports by the U.S. has already been explored, and further trade barriers will inflict more pain on the American economy than before. Regarding Trump, while making predictions is difficult, it seems that two factors will be decisive if he returns to office. First, Trump will focus on domestic policy, consolidating power and seeking political retribution against those who crossed him in the last four years—China might not be at the forefront of his agenda. Second, the goal of stopping Putin and the war won't be a priority for him. It's quite clear that Trump cares little about Ukraine, and he sees a strong potential business partner, if not ally, in Putin (and apparently, it's mutual).

Yes, hawkish sentiments regarding China, fueled by the nearly universal anti-China consensus in the American establishment, will arise. However, these will be constrained by the interests of big business, which stands to lose from an escalation of trade wars, and Trump's low level of interest in the war in Ukraine. Nevertheless, it seems that Trump has passed his peak popularity, and his victory now doesn't appear as likely as it did a few months ago—but that's a topic for a separate discussion.

Taking all these circumstances into account, it seems that the task of blocking the channel of dual-use product supplies from China to Russia will be challenging. Attempts will be made, but the leverage is diminishing, and China is behaving and will continue to behave quite cleverly by avoiding certain “red lines.” It would be much more productive for the West today to focus efforts on closing channels of supply of potential military-purpose products from other countries. As we know, a considerable amount of such products continues to be supplied even from EU countries, and there are far better opportunities to influence Central Asian countries, the Middle East, and Turkey. In this regard, China remains a relatively tough nut to crack.

However, one should not forget the main point: the current model of Russian-Chinese relations does not allow Russia to “take off.” China provides Putin with aid only in a “minimal life support” mode and with significant benefits for itself, rather by taking resources away from Putin (which he could otherwise use for war) than by being his donor. Beijing is interested in ensuring that the Putin regime persists and continues to attack the West, but it is not at all interested in its strengthening. China is neither capable nor willing to decisively help Putin win a war or prevent the Putin system from crisis effects. Therefore, the Chinese factor supporting Putin is important but not decisive in determining the course of history.