Russia has become so economically isolated that China could order the end of its war in Ukraine

As Russia's list of allies dwindles to just North Korea and Iran, both of which are themselves subject to heavy economic sanctions, the country's increasing isolation on the global stage has left it with few options but to rely on China's continued support, potentially giving Beijing the leverage to dictate the terms of its war in Ukraine.

Jul 11, 2024 - 07:54

Russia has become so economically isolated that China could order the end of its war in Ukraine

Putin China economic dependence

Western leaders are becoming increasingly frustrated by China’s role in enabling the war in Ukraine. Some have even openly threatened to sanction the country if it continues to provide Russia with the materials it needs to build more weapons.

And they are right to focus on China’s position of power. Russia is now so dependent on the only major economy still taking the risk to support its regime, that China could effectively force Vladimir Putin to end the war.

The extent of Russia’s economic dependence became apparent fairly quickly after its full-scale invasion of Ukraine in February 2022. Just a few months later, things were not going to plan.

In the hope of putting pressure on European countries supporting Ukraine, Russia decided to cut almost all of its gas exports to the West.

Before the war, Russia had provided about 40% of Europe’s gas.

While that decision initially provoked an energy crisis and a surge in bills across the continent, Europe eventually managed to wean itself from Russia’s supply. They did this in part by replacing gas with other sources of energy and also by substituting Russian imports with gas from other countries, including the US.

Electricity prices in Europe are now roughly back to pre-war levels. While gas prices are still high, they have dropped, and storage facilities are expected to be almost full later this year.

So now Russia faces a massive problem of its own: selling its gas.

In 2023, the Russian state-owned energy giant Gazprom sustained a financial loss for the first time in over twenty years. Until then, the company’s customs and tax revenues contributed around 10% of the country’s budget.

Revenue from oil exports has also decreased. As Western countries have banned Russian oil, the country is forced to sell it for less, absorbing the additional costs of transporting production to the likes of China and India, while mainstream transporters refuse to risk carrying it.

As for natural gas, geography makes things even worse for Russia. China is the only potential customer large enough to justify a new pipeline to replace the ones which used to deliver to Europe. But given this privileged position, China feels able to demand the gas at a huge discount.

In this kind of bargaining situation, China has the upper hand.

China can buy gas from anywhere in the world, but Russia can only sell it (at the volumes it needs) to China. Then there is the question of urgency – Russia needs to finance a war now, while China has no pressing energy need it cannot fulfill.

Bargaining basement

Russia’s dependence on China applies to other sectors of the economy, too.

Since the Chinese yuan was cut off from the global banking system in 2022, it has now accounted for 54% of trades in Russia’s stock exchange. If China starts to apply similar sanctions, there is no credible alternative to replace that money.

Even more crucial for the war, China is responsible for around 90% of Russia’s import of “high priority” dual-use goods – electronic components, radars, sensors – without which it could not build advanced military hardware.

Again, there is no alternative supplier.

It is hard to win a war with only North Korea and Iran – two countries themselves subject to heavy economic sanctions – on your side.

In short, this means that China is now in a position to demand anything from Russia.

And in potential negotiations between China and the West, both have much to gain – and a similar bargaining position to each other.

For example, China is facing considerable domestic economic problems of its own. One of these stems from industrial overcapacity and the need to find buyers for all the products it manufactures.

But the US has just imposed a 100% border tax on electric cars from China, and 50% on solar cells. The EU is doing something similar and considering asking Chinese firms to make electric vehicles in Europe, sharing their technology.

Taxing cheap products that could reduce carbon emissions may seem self-defeating, given the urgent need to finance the energy transition. So perhaps the West wants to avoid becoming too dependent on China for the same bargaining reasons that make Russia’s current position so weak.

But the balance is not the same. China needs Western markets, and the West needs China’s green industrial capacity and know-how, as the country now installs more renewable capacity every year than the rest of the world combined.

Europe is still facing difficult economic times, and a tariff is essentially an extra tax burden on European consumers. Everyone would benefit from the trade war toning down, and China has something very valuable to offer.

For all intents and purposes, it now owns Russia and could use this power to end the war in Ukraine.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Editor’s note. The opinions expressed in our Opinion section belong to their authors. Euromaidan Press’ editorial team may or may not share them.

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