A partnership born out of despair.. How does China support the Russian economy during the war?

Hong Kong (CNN) — In the year following Russia’s invasion of Ukraine, Moscow was hit by unprecedented Western sanctions and cut off from much of the global economy. But China, which declared that its friendship with its northern neighbor had “no limits”, gave the Kremlin an economic lifeline, mitigating the impact of its exclusion from the global financial system.

Underscoring the close ties, China’s top diplomat Wang Yi met with Russian President Vladimir Putin during his visit to Moscow on Wednesday.

The Wall Street Journal reported that Chinese President Xi Jinping and Putin may hold a summit in Moscow in April or early May.

Here are three ways in which China, the world’s largest buyer of commodities and a financial and technological powerhouse, supports the Russian economy:

Russian energy purchase:

Western sanctions against Moscow include an embargo on oil sales and a price cap on its oil, blocking access to SWIFT, the international messaging system that enables banking transactions, and freezing the assets of Russia’s central bank held abroad.

These moves were aimed at weakening Russia’s ability to finance the war, and they had an effect. The Russian economy slid into recession in 2022, contracting by 4.5%, according to the latest World Bank estimates.

But Moscow’s financial revenues have increased, according to the Russian government. This is mainly due to higher energy prices and Russia’s efforts to redirect exports to other willing buyers, such as China and India.

“China has supported the Russian war economically in the sense that it has intensified trade with Russia, which has weakened Western efforts to cripple Moscow’s military machine,” said Neil Thomas, senior analyst for China and Northeast Asia at the Eurasia Group.

Thomas added that “Xi Jinping wants to deepen China’s relationship with an increasingly isolated Russia,” and that Moscow’s “pariah status” enables Beijing to exert more leverage over it to obtain cheap energy, advanced military technology, and diplomatic support for China’s international interests.

The total trade volume between China and Russia hit a new record in 2022, up 30% to $190 billion, according to Chinese customs figures. In particular, energy trade has increased significantly since the beginning of the war.

China bought $50.6 billion worth of crude oil from Russia from March to December, up 45% from the same period a year earlier. Coal imports rose 54% at $10 billion, and natural gas purchases including liquefied natural gas rose 155% at $9.6 billion.

It is a blessing for both sides. For Russia, it desperately needs new customers as the West shuns fossil fuels, and for China, now focused on pulling its economy out of recession, it needs cheap energy to power its massive manufacturing industry.

“Xi values ​​Putin’s support as a strategic counterweight against the increasingly hostile United States, but he is primarily interested in Russia because of what it can do for China,” Thomas said.

“For Russia, this partnership was born out of desperation,” said Keith Krach, former US Under Secretary of State for Economic Growth, Energy, and the Environment, adding that “Putin is looking for help wherever he can find it and Xi Jinping is very willing to exploit Putin’s desperation.”

“For China, its eagerness to support Russia is the latest in a series of moves that once again expose Beijing as an irresponsible actor,” Krach told CNN.

Both sides plan to expand this partnership further, including a deal between Gazprom and China National Petroleum Corporation to supply more gas to China over the next 25 years.

“With the opening of the Chinese economy in 2023, we can expect a further increase in Russian exports to China, including petroleum and other refined oil products,” said Anna Kireeva, associate professor at the Moscow State Institute of International Relations.

Substitution of Western suppliers:

Beyond energy, Russia is also spending billions buying machinery, electronics, base metals, vehicles, ships and aircraft from China, as detailed in a US Congressional Research Service report last May.

“Despite China’s reluctance to directly support the Russian war, bilateral relations will continue to grow, because Beijing is opportunistic,” said Thomas.

“Xi values ​​Putin’s support as a strategic counterweight against the increasingly hostile United States, but he is primarily interested in Russia because of what it can do for China,” he added.

Russia also needs to find alternatives to its imports from Western markets, such as cars and electronics.

“Here, no other major producer can compete with China in its industrial capacity,” Kyreva said.

The share of Chinese car brands, including Havel, Chery and Geely, in the Russian market rose from 10% to 38% in a year after the exit of Western brands, according to the latest data from the Russian research company Autostat, and this share is likely to grow further.

Providing an alternative to the US dollar:

After some Russian banks were cut off from the SWIFT system, Moscow reduced its dollar transactions to the Chinese yuan account.

According to Kyreva, Russian companies are using more yuan to facilitate increased trade with China. Russian banks also conducted more transactions in yuan to protect them from the risk of sanctions.

The yuan’s share in the Russian foreign exchange market jumped to 48% by November 2022 from less than 1% last January, according to what Russian media quoted, the head of the Moscow Stock Exchange.

Russia briefly became the world’s third largest offshore trading center for the yuan last July, after Hong Kong and the United Kingdom, according to figures released by SWIFT. Since then, it has remained one of the six best markets for trading the yuan, and it wasn’t even among the top 15 before the Ukraine war.

Russia’s Finance Ministry also doubled the share of yuan reserves that the country’s sovereign wealth fund can hold to 60%, after freezing a large portion of its savings due to international sanctions, according to Reuters.

And Russian Finance Minister Anton Siluanov said that Russia will buy the yuan only in 2023 to replenish the country’s sovereign wealth fund, Tass news agency reported.

“It is likely that we will witness a further de-dollarization of Russia’s foreign trade in general, as well as an increasing share of trade in national currencies with all countries friendly or neutral to Moscow,” Kireva noted.