China cannot carry the Russian economy

As Chinese President Xi Jinping and Russian President Vladimir Putin declare there are "no limits" to Russia-China ties, Beijing has made it increasingly clear it supports Moscow's position on Ukraine. According to China's foreign ministry, Russia's "reasonable security concerns should be taken seriously and resolved." 

For its part, Moscow has directly connected its standoff with the West to its relations with China, with the Russian ambassador to the UK Andrey Kelin claiming on January 30 that pressure from the United States and NATO is "pushing us to be closer" to Beijing.

Russia's relationship with China is in the spotlight this week as Putin attends the opening ceremonies of the Beijing Winter Olympics on February 4, the very Games the United States and a cluster of other Western countries will boycott diplomatically. 

It is these same Games that many (including US officials) have speculated will serve to delay a potential Russian invasion of Ukraine, with the thinking that Putin would not want to upstage and steal the thunder from his increasingly close partner, Xi. 

So what does Putin plan to do in Ukraine once the Olympics end on February 20, and what role could China play in such plans?

In answering such a question, it is necessary to acknowledge some concrete realities amid the escalatory rhetoric that has been taking place by both Moscow and the West in recent weeks. 

Although the United States has continued to warn that a Russian invasion of Ukraine could be imminent, this depends on Moscow's willingness to risk the consequences. The military and political consequences are significant yet hard to quantify, but the economic consequences would be straightforward and dramatic. 

US President Joe Biden has clarified that any offensive actions in Ukrainian territory would be considered as an invasion. This is where the China factor becomes very important.

The biggest question is, whether China can truly serve as an economic substitute for the West, dampening some of the cost of an invasion. After all, the United States and European Union have made clear that Russia would face major Western sanctions if it invades Ukraine, along with the inevitable reduction of trade flows and perhaps even the cancellation of major projects like the Nord Stream 2 natural gas pipeline. 

As such, it is crucial to look at the structural nature of Russia's economic relationships with both the West and with China, both in terms of trade flows and the infrastructure that underpins them.

Russia's economic ties with China have certainly grown in recent years. Bilateral trade hit a record annual high of more than $146 billion in 2021—up from less than $16 billion in 2003 and nearly $110 billion in 2020—with Russia serving as a major source of China's oil, coal, natural gas, and agricultural imports. 

At the same time, Russia has increased imported goods, such as electronics and machinery, from China. Russia has become an important part of China's Belt and Road Initiative (BRI), a signature part being the Power of Siberia pipeline, which has granted China direct access to Russian natural gas—though Western sanctions have reduced the importance of Eurasian rail routes, which the BRI was originally built around.

To be sure, Russian-Chinese trade is far higher than Russia's overall trade with the United States, which was around $34 billion for the same time period. However, Russia's trade with the EU totaled nearly $220 billion in 2021, roughly 1.5 times the size of Russian-Chinese trade. 

Russia serves as a major energy exporter to the EU, accounting for 26% of the European bloc's oil imports and 40% of its natural gas imports. 

Although many have pointed to the EU's energy dependence as a major source of leverage and a geopolitical tool for the Kremlin, the reality is that this dependence goes both ways, with energy revenues accounting for nearly 40% of Russia's budget revenues. And while Russia's energy exports to China have been increasing, the overall volumes are much lower in absolute terms than to the EU.

Of course, Russia could decide to increase its energy exports to China at the expense of its supplies to the EU. 

But that would be a costly project for Moscow. It would mean building expanded infrastructure from its distant Siberian deposits to China to match the extensive oil and gas pipeline network Russia has had in place with Europe for decades—an investment that would cost tens of billions of dollars. 

Another is the price premium for energy exports that Russia would forego, as Europe currently pays much higher prices for Russian natural gas via spot markets than China does via its 30-year contract with Gazprom, signed in 2014 just before the original conflict in Ukraine broke out.

This would certainly be painful for the EU too. Despite efforts to decarbonise and diversify from Russian supplies of fossil fuel gas, abrupt energy transitions have proven to have significant consequences, such as shortages and blackouts. 

This may explain why Germany—Russia's largest gas importer in Europe—is much more cautious about Ukraine than the United States and United Kingdom are and also why Russia is predicted to maintain its role as the dominant natural gas provider to the EU until at least 2040.

The United States could also go well beyond the energy sector as with the "mother of all sanctions" package that the US Senate has threatened. However, this too could go both ways, as cutting off Russia from the SWIFT payment system, the global bank transfer system dominated by the power of the dollar, could heighten concerns about SWIFT's reliability and motivate other powers to create alternatives.

Nevertheless, Putin has to take the threat of Western sanctions and potential for serious economic disruption with the EU seriously. China is in no position to replace the European Union entirely as a partner yet. Thus, if Putin does decide to take military action against Ukraine, he would be doing so with a tremendous risk to the Russian economy. 

By extension, he would be threatening his own domestic popularity and political position, which has been underpinned by oil and natural gas-fueled economic growth since he took office.

Given that domestic political consolidation is the first and most important geopolitical imperative for Russia, this therefore serves as an important constraining factor when it comes to Putin's decision-making on Ukraine. 

Putin would have to weigh not only the military consequences of an invasion but also the possible economic and political ripple effects that would come as a result.

At the same time, the West has to consider the extent of its economic and political isolation from Russia, which could drive Moscow into an even closer relationship with China. 

This could violate a key geopolitical imperative for the United States, which is to prevent the emergence of a hegemon (or alliance of hegemons) in Eurasia that could challenge the United States' global position.

Yet even in the best-case scenario — where war in Ukraine is averted and some kind of diplomatic understanding is reached -- the prolonged standoff between Moscow and the West as well as its associated risks could transform the scale and depth of Russia's ties with China in the long term. 

Putin's visit to Beijing and the subsequent conclusion of the Olympics could well prove to be a symbolic turning point, not of an imminent war but of a deeper geopolitical shift.

Eugene Chausovsky. Illustration: TBS

Eugene Chausovsky is a nonresident fellow at the Newlines Institute. Chausovsky previously served as senior Eurasia analyst at the geopolitical analysis firm Stratfor for more than 10 years. 

Disclaimer: This article first appeared on Foreign Policy, and is published by special syndication arrangement.