On Thursday morning, we woke up to disturbing television footage of Russia’s attack on Ukraine. Not much was clear in the morning; only over the day, it became clear that it was an all-out attack on the country from pretty much every direction. At China.Table, we quickly realized that we have to dedicate a special issue on this military conflict. After all, China is more than a mere bystander in this war.
Official Beijing performed a downright staggering balancing act on Thursday, as Michael Radunski analyzes. It meant sticking to the basic principle of Ukraine’s territorial inviolability while simultaneously sympathizing with Russia’s actions. China’s Foreign Ministry even managed to deny that the attack was an invasion. It sounded as if Beijing had alternative facts at hand. And concerns about an attack on Taiwan still linger.
It is a fact that China could assist Russia, should the West impose sweeping financial sanctions. As Finn Mayer-Kuckuk analyzes, the People’s Republic has already developed an alternative financial system for transactions with the Chinese yuan. China already settles about 17 percent of its trade with Russia in yuan. But there are questions here: Will Beijing undermine Western sanctions in this way? And would Putin actually want to trade in yuan?
Greater cooperation between the two superpowers is also on the horizon in the power sector, as Frank Sieren analyzes. The Power of Siberia 2 gas pipeline signed in Beijing in early February could pump gas to China from oil fields that have so far only fed Europe. Putin is thus creating an alternative for himself in case the EU stops importing gas. And the yuan could also function as a currency in this case.
Several Western politicians stressed that yesterday, Europe has entered a new reality. That nothing was the same anymore. Whether this also applies to China will be seen in the coming weeks.
It is a staggering balancing act that China is currently performing in the Russia-Ukraine crisis. While Russian President Vladimir Putin sends his troops into Ukraine and missile attacks are reported from all parts of the country, the leadership in Beijing is practicing Chinese extreme dialectics. That is, holding on to Ukraine’s sovereignty and territoriality – and at the same time refusing to condemn the Russian attack, which is tearing this very sovereignty and territoriality to shreds.
To pull off such a mental split, the Foreign Ministry in Beijing on Thursday denied that the Russian advance was an invasion at all. “This is perhaps a difference between China and you Westerners. We won’t go rushing to a conclusion,” Foreign Ministry spokeswoman Hua Chunying said at the daily press briefing.
Not even the fact that the Chinese embassy in Kyiv warns its own citizens of explosions at this time and speaks of a state of war could sway Hua from her position. She preferred to speak of a “so-called attack.” “Regarding the definition of an invasion, I think we should go back to how to view the current situation in Ukraine. The Ukrainian issue has other very complicated historical backgrounds that have continued to today. It may not be what everyone wants to see.” On Thursday, it became clear: China certainly has its own unique view of the situation.
Punitive measures against Russia, such as those currently being discussed and imposed by Germany, Europe and the United States, are out of the question for China in any case. On Wednesday, Beijing already stated on the matter: “Sanctions have never been a fundamental and effective way to solve problems.” Also on Thursday, the foreign office spokeswoman reaffirmed that China would maintain trade with Russia – shipments of oil and gas included (You can read how important the supply of these raw materials is for China in another analysis in today’s issue). Remarkably, the basic pillars of Chinese foreign policy – respect for the sovereignty of states, the rule of non-interference and the preservation of territoriality – did not cross Hua Chunying’s lips on this day.
Yet barely a week has passed since China’s Foreign Minister Wang Yi declared at the Munich Security Conference that even in these times, the sovereignty of all nations must be respected. “And Ukraine is no exception,” Wang said in Munich.
The same Wang Yi also spoke on the phone with his Russian counterpart Sergey Lavrov on Thursday to discuss the current situation in Ukraine. The Russian Foreign Ministry in Moscow subsequently relayed the content of the conversation as follows: “The ministers expressed their joint conviction that the reason for the current crisis is Kyiv’s refusal – encouraged by the US and its allies, to implement the Minsk Package of measures approved by the UN Security Council.”
Chinese state television CCTV, on the other hand, maintained Beijing’s balancing act: Accordingly, Wang Yi had made it quite clear that China always respects the sovereignty and territorial integrity of all countries. “China also understands that there is a certain degree of complexity around the Ukraine situation and that Russia has legitimate concerns about security issues. All parties should completely abandon the Cold War mentality and form a balanced, effective and sustainable European security mechanism through negotiation,” Wang is reported to have told Lavrov.
Even if they are only nuances, the discrepancies between the two statements are nevertheless remarkable. They illustrate how hard China is trying to master an almost impossible balancing act. China does not want to turn away from Russia, but it does not want to be completely absorbed either. Feng Yujun, director of the Center for Russian and Central Asian Studies at Fudan University in Shanghai, warned that Russia was trying to exploit the confrontation between China and the United States to further its own goals. China has to be careful because some countries are only pursuing their own geopolitical goals in the current crisis, the academic said in an interview with the Chinese TV station Phoenix.
On Thursday, Russia’s president had given the order to destroy Ukraine’s sovereignty and territoriality – and thus also torpedoed the pillars of China’s foreign policy. If Beijing were now true to its own words, Putin’s offensive would have to be condemned.
But China’s situation is complicated: Russia and China see themselves as strategic partners. When Putin traveled to Beijing for the opening of the Winter Olympics, the two presidents celebrated their boundless friendship. It seemed as if two authoritarian superpowers could hardly grow any closer (China.Table reported). Both two autocratic rulers are united by a deep rejection of the Western order led by the USA.
But at the same time, Ukraine is an important partner of China. Since 2020, the country has been a member of the Chinese Belt and Road Initiative. It also supplies large quantities of grain and corn to China. In addition, Ukraine supplies China with critical defense equipment such as gas turbine engines for guided-missile destroyers or technology for hovercraft landing craft, which are particularly significant concerning Taiwan.
Because this aspect also plays an important role in Beijing’s decisions. Several analysts speculate that Xi Jinping is watching the West’s reaction closely and may use Russia’s actions in Ukraine as a blueprint for a strike against Taiwan. It likely was no coincidence that eight Chinese J-16 fighter jets and a Y-8 reconnaissance aircraft entered Taiwanese airspace on Thursday, according to the Taiwanese Ministry of National Defense.
Hu Xijin, who, as former head of the state-owned Global Times, has the best connections in the Chinese leadership, threatened on Twitter: “Get used to it. There may be more PLA aircraft fly there tomorrow.” And just hours earlier, Ma Xiaoguang, spokesman for the Taiwan Affairs Office of China’s State Council, assured, “China’s national reunification must, will surely be realized.”
As maneuvering as China appeared on Thursday, it was once again clear and unambiguous when it came to naming the main culprit: the United States. “What we are seeing today is not what we wished to see,” Hua Chunying said. “The US is fanning the flames.”
The first voices have already tried to derive an intrinsic benefit for China from this. Geopolitically, the chaos in Ukraine triggered by Russia could distract the US military from the East Pacific region, believes Shi Yinhong. The US would have to “reduce attention and resources on China in the Indo-Pacific,” the professor for international relations at Beijing Renmin University, told the South China Morning Post.
But Beijing should not be mistaken. The US has identified China as a foreign policy priority – and the war in Ukraine will not change that. This is also demonstrated by US President Joe Biden’s announcement not to send US troops to Ukraine. On Thursday evening, Biden at least announced further sanctions, including bans on tech exports and the exclusion of more Russian banks from Western capital and currency markets. When asked whether he would also press China to sanction Russia, Biden refused to comment.
With regard to its economic interests in Ukraine, until recently, Beijing has shown that it was quite willing to accept economic losses to achieve its political goals. Therefore, it is now time to take China at its word. For years, the People’s Republic has confidently presented itself on the international stage as a presumably responsible partner. Dialectical contortions do not fit in with this. On the contrary, now would be a good time for responsible actions.
The single most powerful sanction Western countries could impose on Russia would be to cut it off from SWIFT. On Thursday, neither the EU nor the US could bring themselves to take this step. However, at a special summit, EU countries agreed to expand sanctions against Russia’s financial sector, which would cut off Russian banks from EU financial markets and prevent Russian state-owned companies from refinancing in the EU. More details are expected on Friday.
Shortly before the EU announced sanctions, US President Joe Biden had also announced new punitive measures such as strict export controls for the tech sector and sanctions against four banking institutions – the US also left Russia’s exclusion from SWIFT untouched for the time being. On Thursday, however, EU circles did not rule out the possibility of Russia’s exclusion at a later date.
SWIFT is a data network that is used for almost all international transfers. Without access, neither the Russian government nor the private sector could accept or send payments across borders. Russia could no longer receive payment for gas exports, for example. And Russian companies would not be able to transfer money to a business partner for the supply of parts.
However, China could offer Russia a way out. It could step in as a trading partner where other countries turn away. China’s parallel financial world makes this possible: payment processing in yuan.
As much as 17 percent of trade between China and Russia is already conducted in yuan, even though dollars and euros continue to account for the bulk. In this way, China pays for raw material deliveries with its own currency. On the one hand, Russia adds the renminbi it receives to its own foreign exchange reserves, of which 12 percent are denominated in yuan. In addition, Moscow uses Chinese money to pay bills for industrial goods. Strengthening these yuan payments has long been agreed upon between Presidents Vladimir Putin and Xi Jinping. They have repeatedly confirmed this decision in meetings.
Two years ago, the Japanese newspaper Nikkei already identified the formation of a “financial alliance” between Russia and China when the use of the dollar in mutual trade had fallen below the 50 percent mark. For example, oil and gas giant Gazprom has switched to yuan when charging Chinese airlines for jet fuel at Russian airports, according to a Reuters report.
This is made possible by China’s creation of new financial structures. In 2015, the Chinese central bank launched the CIPS. The Cross-Border Interbank Payment System. The idea at the time was to stretch the international framework for payments in yuan further and further, and to gradually outstrip the dollar. Terms such as “renminbi clearing” and “renminbi settlement” have since become common. This refers to the settlement of trade transactions in yuan.
The yuan never gained a position alongside the dollar and the euro because China under Xi Jinping was not prepared to fully open its own financial markets. However, free convertibility is a prerequisite for the creation of a universal trading currency. Nevertheless, a center for the settlement of yuan transactions has been in operation in Frankfurt since 2014, as well as in other foreign exchange hotspots such as Dubai and, since 2017, in Moscow.
Numerous international banks are involved in the direct processing of yuan payments. In Germany, for example, Deutsche Bank and Commerzbank are involved, and JPMorgan in the USA. In addition, there are 30 banks in Japan, 31 in Africa – and 23 in Russia. In January, the yuan was still the world’s fourth most important trading currency.
But these impressive-sounding figures come with considerable limitations. Indeed, fourth place is already available with a meager three percent share of transfers. The rest is largely shared between the dollar and the euro, with a few more percentage points for the British pound. Most of the yuan transfers are made between China and Silk Road countries like Kazakhstan, with dependent partners in the Global South, or with outsiders to the world economy like Venezuela.
But now Russia is also at risk of becoming a pariah of the global community. With its yuan alternative, China would become Moscow’s most important partner in one fell swoop. After all, the Chinese economy offers all commodity groups of the UN classification. Be it food, electronics, vehicles – China can deliver it all. As is well known, the product range stretches from entire high-tech power plants down to plastic kitchenware. But without SWIFT access, trade with the EU, Russia’s largest trading partner to date, would be lost.
China, therefore, has the potential to absorb some losses Russia will suffer as a result of the sanctions – but by no means all of them. The situation would continue to be very painful for the Russian economy. Another problem is that the yuan centers and participating banks also communicate via the SWIFT network. It is designed for precisely this kind of secure communication of transfers.
After the deactivation of SWIFT connections across Russia’s external borders, the Chinese central bank would have to accelerate its project, creating new data connections. But this is technically possible, and the implementation of the plan of “overcoming dollar hegemony” and “de-dollarization” is only a matter of time anyway. After all, China has already faced financial sanctions in the past. So there has been an interest in casting its own net for a while now.
The question remains whether Putin even wants such close economic ties to China. His actions in Eastern Europe are also a reaction to the fact that Russia, once so powerful, has become less and less important in the wake of China’s rise. Russia wants to be at the forefront again.
A close link to the yuan trade would make Russia a junior partner in the Chinese business model – a major Silk Road country. The ruble’s role as a C-currency alongside the B-currency yuan would become clear. And Beijing could possibly support Russia generously with loans and then dictate its policies.
Making himself dependent on China now does hardly fit Putin’s idea of a return to the significance of the Soviet Union and the tsarist empire. And instead of rather naive EU partners, he would have to contend with power-conscious communists in Beijing.
Europe and the West have to watch helplessly as Russian President Vladimir Putin breaks the peace in Europe and overwhelms Ukraine with military force. War in the heart of Europe? Who could have imagined that just a few months ago?
And before we hear the self-accusations again, especially in Germany, that “the West” has “overdone it with the encirclement of Russia” and that we are to blame for the fact that the “Russian bear is now acting irritably,” it is worth taking a look at Russian President Vladimir Putin’s speech on the reasons for the annexation disguised as “recognition” of the eastern Ukrainian separatist regions. And it is definitely not about the alleged need to protect the Russian part of the population in eastern Ukraine from “genocide” and a “fascist government in Kyiv.”
It is about something quite different: The return of Russia as a superpower, which is more reminiscent of the tsarist empire than of the former Soviet Union. Unlike the former Soviet Union, this Russia is not intended to unite different peoples, but to anchor a hegemonic claim to a supposedly unique Russian civilization, which emerged from the three East Slavic peoples – the Russians, Ukrainians and Belarusians – and which sees itself as fundamentally different from “Western civilization”. The “Russian nation” based on this does not recognize any independent states in Ukraine, Belarus and probably not even in the Caucasus, parts of Central Asia and probably not even in Finland. Therefore, not only Europeans will have heard the speech of the Russian president with both attention and concern. Above all, however, according to Vladimir Putin’s will, this “Russian nation” is also to become a major European power again, which is to have at least a say in deciding the future and fate of Europe. Just as was the case with tsarist Russia for centuries.
The Russian president wants to reverse a development in which Russia has steadily lost influence in Europe since the collapse of the Soviet Union and has since increasingly descended to the role of an energy supplier. Geopolitically, the United States has dominated Western Europe since 1945 and all of Europe since 1989. Russia no longer played a significant role; instead, China has expanded its influence in Europe in recent years. Russia is the big geopolitical loser, both globally and in Europe. The Russian president wants to stop and reverse this trend. And since Russia is neither economically nor politically attractive, “only” the military remains as an instrument to re-establish the country as a European power.
In a sense, the Russian president has already achieved this goal, because the US is again negotiating with him about the fate of Europe. From the Russian perspective, this is a return to normality: Russia negotiated with the US about the future of Europe in 1945, then again in 1989/1990 as part of German reunification, and again in 1997 with the NATO-Russia Founding Act.
Russia wants to reverse this development after 1989/90 and position itself as a major power in Europe, as it did for centuries before. What is at stake is its influence on Europe’s future role in the new world order that is currently underway. After all, the postwar order of World War II has come to an end with a bit of delay. What we were used to as a global order came into being when states like China and India were still developing countries belonging to the so-called “third world”. Decisions were made in the “first world”: in the US, the USSR, and the democratic industrialized nations of the West. The decline of the Soviet Union and the rise of China were also associated – largely unnoticed at first – with the end of the “Pax Americana”. The United States became less and less able to be both the leading economic and technological nation and to maintain the global order.
Long before Donald Trump, the USA began to gradually withdraw from its traditional role as a global regulatory power to be able to focus its strength on the new competition with China. Today, the center of gravity of the world is no longer Europe and the Atlantic, but the Indo-Pacific. This is where the majority of the world’s population now lives, where most of the world’s GDP is generated, and where five nuclear states with the capability to build nuclear weapons have long since emerged. We are witnesses to an almost tectonic shift in the world’s economic, political and military power axes.
Naturally, we can and must now take harsh sanctions against Russia. Harsher and more consistent than anything we could have imagined so far. But we already suspect that Russia has already “priced” these sanctions into the cost of its war: Neither halting the Nord Stream 2 natural gas project, nor freezing the assets of Russian oligarchs, nor decoupling Russia from the European and American financial markets will make the Russian leadership turn back. Sanctions are a kind of “superpower tax” for Russia that it must be willing to pay if it wants to be a geopolitical power factor. And even if we go further and completely cut ourselves off from the Russian energy market and exclude Russia from international payments: None of this will work quickly, especially since China is Russia’s new economic partner.
In fact, Russia’s invasion of Ukraine contradicts China’s principles of non-interference in other states. But the Middle Kingdom will not go as far as to participate in Western sanctions. China’s geopolitical rivalry with the United States is too great. On the contrary, from the perspective of China’s political leadership, this conflict will receive a great deal of attention. Particularly given China’s claim to Taiwan, the political leadership in Beijing will closely study whether and for how long Europe and the US will stand together, or whether this unity may eventually show cracks. China wants to learn from the current conflict between Russia and the West concerning impending US sanctions. On the other hand, from a Chinese perspective, it is a good thing if the US has to refocus parts of its strength on Europe and Russia. This will at the same time hinder the American focus on the Indo-Pacific. The conflict with Russia thus certainly has global consequences.
Read the full version of Sigmar Gabriel’s opinion here.
On Thursday morning, we woke up to disturbing television footage of Russia’s attack on Ukraine. Not much was clear in the morning; only over the day, it became clear that it was an all-out attack on the country from pretty much every direction. At China.Table, we quickly realized that we have to dedicate a special issue on this military conflict. After all, China is more than a mere bystander in this war.
Official Beijing performed a downright staggering balancing act on Thursday, as Michael Radunski analyzes. It meant sticking to the basic principle of Ukraine’s territorial inviolability while simultaneously sympathizing with Russia’s actions. China’s Foreign Ministry even managed to deny that the attack was an invasion. It sounded as if Beijing had alternative facts at hand. And concerns about an attack on Taiwan still linger.
It is a fact that China could assist Russia, should the West impose sweeping financial sanctions. As Finn Mayer-Kuckuk analyzes, the People’s Republic has already developed an alternative financial system for transactions with the Chinese yuan. China already settles about 17 percent of its trade with Russia in yuan. But there are questions here: Will Beijing undermine Western sanctions in this way? And would Putin actually want to trade in yuan?
Greater cooperation between the two superpowers is also on the horizon in the power sector, as Frank Sieren analyzes. The Power of Siberia 2 gas pipeline signed in Beijing in early February could pump gas to China from oil fields that have so far only fed Europe. Putin is thus creating an alternative for himself in case the EU stops importing gas. And the yuan could also function as a currency in this case.
Several Western politicians stressed that yesterday, Europe has entered a new reality. That nothing was the same anymore. Whether this also applies to China will be seen in the coming weeks.
It is a staggering balancing act that China is currently performing in the Russia-Ukraine crisis. While Russian President Vladimir Putin sends his troops into Ukraine and missile attacks are reported from all parts of the country, the leadership in Beijing is practicing Chinese extreme dialectics. That is, holding on to Ukraine’s sovereignty and territoriality – and at the same time refusing to condemn the Russian attack, which is tearing this very sovereignty and territoriality to shreds.
To pull off such a mental split, the Foreign Ministry in Beijing on Thursday denied that the Russian advance was an invasion at all. “This is perhaps a difference between China and you Westerners. We won’t go rushing to a conclusion,” Foreign Ministry spokeswoman Hua Chunying said at the daily press briefing.
Not even the fact that the Chinese embassy in Kyiv warns its own citizens of explosions at this time and speaks of a state of war could sway Hua from her position. She preferred to speak of a “so-called attack.” “Regarding the definition of an invasion, I think we should go back to how to view the current situation in Ukraine. The Ukrainian issue has other very complicated historical backgrounds that have continued to today. It may not be what everyone wants to see.” On Thursday, it became clear: China certainly has its own unique view of the situation.
Punitive measures against Russia, such as those currently being discussed and imposed by Germany, Europe and the United States, are out of the question for China in any case. On Wednesday, Beijing already stated on the matter: “Sanctions have never been a fundamental and effective way to solve problems.” Also on Thursday, the foreign office spokeswoman reaffirmed that China would maintain trade with Russia – shipments of oil and gas included (You can read how important the supply of these raw materials is for China in another analysis in today’s issue). Remarkably, the basic pillars of Chinese foreign policy – respect for the sovereignty of states, the rule of non-interference and the preservation of territoriality – did not cross Hua Chunying’s lips on this day.
Yet barely a week has passed since China’s Foreign Minister Wang Yi declared at the Munich Security Conference that even in these times, the sovereignty of all nations must be respected. “And Ukraine is no exception,” Wang said in Munich.
The same Wang Yi also spoke on the phone with his Russian counterpart Sergey Lavrov on Thursday to discuss the current situation in Ukraine. The Russian Foreign Ministry in Moscow subsequently relayed the content of the conversation as follows: “The ministers expressed their joint conviction that the reason for the current crisis is Kyiv’s refusal – encouraged by the US and its allies, to implement the Minsk Package of measures approved by the UN Security Council.”
Chinese state television CCTV, on the other hand, maintained Beijing’s balancing act: Accordingly, Wang Yi had made it quite clear that China always respects the sovereignty and territorial integrity of all countries. “China also understands that there is a certain degree of complexity around the Ukraine situation and that Russia has legitimate concerns about security issues. All parties should completely abandon the Cold War mentality and form a balanced, effective and sustainable European security mechanism through negotiation,” Wang is reported to have told Lavrov.
Even if they are only nuances, the discrepancies between the two statements are nevertheless remarkable. They illustrate how hard China is trying to master an almost impossible balancing act. China does not want to turn away from Russia, but it does not want to be completely absorbed either. Feng Yujun, director of the Center for Russian and Central Asian Studies at Fudan University in Shanghai, warned that Russia was trying to exploit the confrontation between China and the United States to further its own goals. China has to be careful because some countries are only pursuing their own geopolitical goals in the current crisis, the academic said in an interview with the Chinese TV station Phoenix.
On Thursday, Russia’s president had given the order to destroy Ukraine’s sovereignty and territoriality – and thus also torpedoed the pillars of China’s foreign policy. If Beijing were now true to its own words, Putin’s offensive would have to be condemned.
But China’s situation is complicated: Russia and China see themselves as strategic partners. When Putin traveled to Beijing for the opening of the Winter Olympics, the two presidents celebrated their boundless friendship. It seemed as if two authoritarian superpowers could hardly grow any closer (China.Table reported). Both two autocratic rulers are united by a deep rejection of the Western order led by the USA.
But at the same time, Ukraine is an important partner of China. Since 2020, the country has been a member of the Chinese Belt and Road Initiative. It also supplies large quantities of grain and corn to China. In addition, Ukraine supplies China with critical defense equipment such as gas turbine engines for guided-missile destroyers or technology for hovercraft landing craft, which are particularly significant concerning Taiwan.
Because this aspect also plays an important role in Beijing’s decisions. Several analysts speculate that Xi Jinping is watching the West’s reaction closely and may use Russia’s actions in Ukraine as a blueprint for a strike against Taiwan. It likely was no coincidence that eight Chinese J-16 fighter jets and a Y-8 reconnaissance aircraft entered Taiwanese airspace on Thursday, according to the Taiwanese Ministry of National Defense.
Hu Xijin, who, as former head of the state-owned Global Times, has the best connections in the Chinese leadership, threatened on Twitter: “Get used to it. There may be more PLA aircraft fly there tomorrow.” And just hours earlier, Ma Xiaoguang, spokesman for the Taiwan Affairs Office of China’s State Council, assured, “China’s national reunification must, will surely be realized.”
As maneuvering as China appeared on Thursday, it was once again clear and unambiguous when it came to naming the main culprit: the United States. “What we are seeing today is not what we wished to see,” Hua Chunying said. “The US is fanning the flames.”
The first voices have already tried to derive an intrinsic benefit for China from this. Geopolitically, the chaos in Ukraine triggered by Russia could distract the US military from the East Pacific region, believes Shi Yinhong. The US would have to “reduce attention and resources on China in the Indo-Pacific,” the professor for international relations at Beijing Renmin University, told the South China Morning Post.
But Beijing should not be mistaken. The US has identified China as a foreign policy priority – and the war in Ukraine will not change that. This is also demonstrated by US President Joe Biden’s announcement not to send US troops to Ukraine. On Thursday evening, Biden at least announced further sanctions, including bans on tech exports and the exclusion of more Russian banks from Western capital and currency markets. When asked whether he would also press China to sanction Russia, Biden refused to comment.
With regard to its economic interests in Ukraine, until recently, Beijing has shown that it was quite willing to accept economic losses to achieve its political goals. Therefore, it is now time to take China at its word. For years, the People’s Republic has confidently presented itself on the international stage as a presumably responsible partner. Dialectical contortions do not fit in with this. On the contrary, now would be a good time for responsible actions.
The single most powerful sanction Western countries could impose on Russia would be to cut it off from SWIFT. On Thursday, neither the EU nor the US could bring themselves to take this step. However, at a special summit, EU countries agreed to expand sanctions against Russia’s financial sector, which would cut off Russian banks from EU financial markets and prevent Russian state-owned companies from refinancing in the EU. More details are expected on Friday.
Shortly before the EU announced sanctions, US President Joe Biden had also announced new punitive measures such as strict export controls for the tech sector and sanctions against four banking institutions – the US also left Russia’s exclusion from SWIFT untouched for the time being. On Thursday, however, EU circles did not rule out the possibility of Russia’s exclusion at a later date.
SWIFT is a data network that is used for almost all international transfers. Without access, neither the Russian government nor the private sector could accept or send payments across borders. Russia could no longer receive payment for gas exports, for example. And Russian companies would not be able to transfer money to a business partner for the supply of parts.
However, China could offer Russia a way out. It could step in as a trading partner where other countries turn away. China’s parallel financial world makes this possible: payment processing in yuan.
As much as 17 percent of trade between China and Russia is already conducted in yuan, even though dollars and euros continue to account for the bulk. In this way, China pays for raw material deliveries with its own currency. On the one hand, Russia adds the renminbi it receives to its own foreign exchange reserves, of which 12 percent are denominated in yuan. In addition, Moscow uses Chinese money to pay bills for industrial goods. Strengthening these yuan payments has long been agreed upon between Presidents Vladimir Putin and Xi Jinping. They have repeatedly confirmed this decision in meetings.
Two years ago, the Japanese newspaper Nikkei already identified the formation of a “financial alliance” between Russia and China when the use of the dollar in mutual trade had fallen below the 50 percent mark. For example, oil and gas giant Gazprom has switched to yuan when charging Chinese airlines for jet fuel at Russian airports, according to a Reuters report.
This is made possible by China’s creation of new financial structures. In 2015, the Chinese central bank launched the CIPS. The Cross-Border Interbank Payment System. The idea at the time was to stretch the international framework for payments in yuan further and further, and to gradually outstrip the dollar. Terms such as “renminbi clearing” and “renminbi settlement” have since become common. This refers to the settlement of trade transactions in yuan.
The yuan never gained a position alongside the dollar and the euro because China under Xi Jinping was not prepared to fully open its own financial markets. However, free convertibility is a prerequisite for the creation of a universal trading currency. Nevertheless, a center for the settlement of yuan transactions has been in operation in Frankfurt since 2014, as well as in other foreign exchange hotspots such as Dubai and, since 2017, in Moscow.
Numerous international banks are involved in the direct processing of yuan payments. In Germany, for example, Deutsche Bank and Commerzbank are involved, and JPMorgan in the USA. In addition, there are 30 banks in Japan, 31 in Africa – and 23 in Russia. In January, the yuan was still the world’s fourth most important trading currency.
But these impressive-sounding figures come with considerable limitations. Indeed, fourth place is already available with a meager three percent share of transfers. The rest is largely shared between the dollar and the euro, with a few more percentage points for the British pound. Most of the yuan transfers are made between China and Silk Road countries like Kazakhstan, with dependent partners in the Global South, or with outsiders to the world economy like Venezuela.
But now Russia is also at risk of becoming a pariah of the global community. With its yuan alternative, China would become Moscow’s most important partner in one fell swoop. After all, the Chinese economy offers all commodity groups of the UN classification. Be it food, electronics, vehicles – China can deliver it all. As is well known, the product range stretches from entire high-tech power plants down to plastic kitchenware. But without SWIFT access, trade with the EU, Russia’s largest trading partner to date, would be lost.
China, therefore, has the potential to absorb some losses Russia will suffer as a result of the sanctions – but by no means all of them. The situation would continue to be very painful for the Russian economy. Another problem is that the yuan centers and participating banks also communicate via the SWIFT network. It is designed for precisely this kind of secure communication of transfers.
After the deactivation of SWIFT connections across Russia’s external borders, the Chinese central bank would have to accelerate its project, creating new data connections. But this is technically possible, and the implementation of the plan of “overcoming dollar hegemony” and “de-dollarization” is only a matter of time anyway. After all, China has already faced financial sanctions in the past. So there has been an interest in casting its own net for a while now.
The question remains whether Putin even wants such close economic ties to China. His actions in Eastern Europe are also a reaction to the fact that Russia, once so powerful, has become less and less important in the wake of China’s rise. Russia wants to be at the forefront again.
A close link to the yuan trade would make Russia a junior partner in the Chinese business model – a major Silk Road country. The ruble’s role as a C-currency alongside the B-currency yuan would become clear. And Beijing could possibly support Russia generously with loans and then dictate its policies.
Making himself dependent on China now does hardly fit Putin’s idea of a return to the significance of the Soviet Union and the tsarist empire. And instead of rather naive EU partners, he would have to contend with power-conscious communists in Beijing.
Europe and the West have to watch helplessly as Russian President Vladimir Putin breaks the peace in Europe and overwhelms Ukraine with military force. War in the heart of Europe? Who could have imagined that just a few months ago?
And before we hear the self-accusations again, especially in Germany, that “the West” has “overdone it with the encirclement of Russia” and that we are to blame for the fact that the “Russian bear is now acting irritably,” it is worth taking a look at Russian President Vladimir Putin’s speech on the reasons for the annexation disguised as “recognition” of the eastern Ukrainian separatist regions. And it is definitely not about the alleged need to protect the Russian part of the population in eastern Ukraine from “genocide” and a “fascist government in Kyiv.”
It is about something quite different: The return of Russia as a superpower, which is more reminiscent of the tsarist empire than of the former Soviet Union. Unlike the former Soviet Union, this Russia is not intended to unite different peoples, but to anchor a hegemonic claim to a supposedly unique Russian civilization, which emerged from the three East Slavic peoples – the Russians, Ukrainians and Belarusians – and which sees itself as fundamentally different from “Western civilization”. The “Russian nation” based on this does not recognize any independent states in Ukraine, Belarus and probably not even in the Caucasus, parts of Central Asia and probably not even in Finland. Therefore, not only Europeans will have heard the speech of the Russian president with both attention and concern. Above all, however, according to Vladimir Putin’s will, this “Russian nation” is also to become a major European power again, which is to have at least a say in deciding the future and fate of Europe. Just as was the case with tsarist Russia for centuries.
The Russian president wants to reverse a development in which Russia has steadily lost influence in Europe since the collapse of the Soviet Union and has since increasingly descended to the role of an energy supplier. Geopolitically, the United States has dominated Western Europe since 1945 and all of Europe since 1989. Russia no longer played a significant role; instead, China has expanded its influence in Europe in recent years. Russia is the big geopolitical loser, both globally and in Europe. The Russian president wants to stop and reverse this trend. And since Russia is neither economically nor politically attractive, “only” the military remains as an instrument to re-establish the country as a European power.
In a sense, the Russian president has already achieved this goal, because the US is again negotiating with him about the fate of Europe. From the Russian perspective, this is a return to normality: Russia negotiated with the US about the future of Europe in 1945, then again in 1989/1990 as part of German reunification, and again in 1997 with the NATO-Russia Founding Act.
Russia wants to reverse this development after 1989/90 and position itself as a major power in Europe, as it did for centuries before. What is at stake is its influence on Europe’s future role in the new world order that is currently underway. After all, the postwar order of World War II has come to an end with a bit of delay. What we were used to as a global order came into being when states like China and India were still developing countries belonging to the so-called “third world”. Decisions were made in the “first world”: in the US, the USSR, and the democratic industrialized nations of the West. The decline of the Soviet Union and the rise of China were also associated – largely unnoticed at first – with the end of the “Pax Americana”. The United States became less and less able to be both the leading economic and technological nation and to maintain the global order.
Long before Donald Trump, the USA began to gradually withdraw from its traditional role as a global regulatory power to be able to focus its strength on the new competition with China. Today, the center of gravity of the world is no longer Europe and the Atlantic, but the Indo-Pacific. This is where the majority of the world’s population now lives, where most of the world’s GDP is generated, and where five nuclear states with the capability to build nuclear weapons have long since emerged. We are witnesses to an almost tectonic shift in the world’s economic, political and military power axes.
Naturally, we can and must now take harsh sanctions against Russia. Harsher and more consistent than anything we could have imagined so far. But we already suspect that Russia has already “priced” these sanctions into the cost of its war: Neither halting the Nord Stream 2 natural gas project, nor freezing the assets of Russian oligarchs, nor decoupling Russia from the European and American financial markets will make the Russian leadership turn back. Sanctions are a kind of “superpower tax” for Russia that it must be willing to pay if it wants to be a geopolitical power factor. And even if we go further and completely cut ourselves off from the Russian energy market and exclude Russia from international payments: None of this will work quickly, especially since China is Russia’s new economic partner.
In fact, Russia’s invasion of Ukraine contradicts China’s principles of non-interference in other states. But the Middle Kingdom will not go as far as to participate in Western sanctions. China’s geopolitical rivalry with the United States is too great. On the contrary, from the perspective of China’s political leadership, this conflict will receive a great deal of attention. Particularly given China’s claim to Taiwan, the political leadership in Beijing will closely study whether and for how long Europe and the US will stand together, or whether this unity may eventually show cracks. China wants to learn from the current conflict between Russia and the West concerning impending US sanctions. On the other hand, from a Chinese perspective, it is a good thing if the US has to refocus parts of its strength on Europe and Russia. This will at the same time hinder the American focus on the Indo-Pacific. The conflict with Russia thus certainly has global consequences.
Read the full version of Sigmar Gabriel’s opinion here.
