August 8, 2023

US report reveals that China has helped Russia offset the economic impact of Western sanctions

The US recently unclassified a report by the Office of the Director of National Intelligence which indicates that the People’s Republic of China has become an critical economic partner for Russia since the invasion of Ukraine in February 2022.  According to the report, the PRC has helped Russia offset the economic impacts of Western sanctions and export controls by increasing its purchase of Russian-origin energy, assisting with the shipment of Russian oil to the PRC, and helping the Russian military obtain dual-use goods and technology that it needs to fuel its war with Ukraine.

The report states that the PRC has increased its purchase of Russian exports by 43 percent, and bilateral trade between the two countries hit a record high of $190 billion in 2022, a 30 percent increase since 2021.  Because of steep oil discounts offered by Russia, the PRC’s purchase of Russian energy – including crude oil, coal, pipeline gas, and liquefied natural gas – increased drastically from $52 billion in 2021 to $81 billion in 2022.   Following the implementation of the G-7 price cap, which restricted Western cargo services and insurance for Russian crude oil and petroleum products, the PRC has also provided Russia with supertankers and insurance coverage to facilitate the shipment of Russian Urals crude to the PRC.

While it has been difficult to determine whether the PRC has actually helped Russia evade sanctions and export controls, Chinese and Western press reports indicate that many Hong Kong-based shell companies and small to medium-sized enterprises have served as receptacles for the secondary sale of chips for military use from the PRC to Russia.  In addition, while the global export of semiconductors to Russia and Belarus decreased by 54 percent in 2022, semiconductor exports from the PRC to Russia increased by 19 percent between January and September 2022 when compared to the same timeframe in 2021.  Furthermore, according to customs records, PRC state-owned defense companies shipped various dual-use items, including navigation equipment and fighter-jet parts, to sanctioned state-owned defense companies in Russia, and, as of March 2023, Russia received more than $12 million drones and related parts from the PRC.  Evidence of these shipments have reportedly been received from Kyiv forces that have increasingly found PRC components in weapons used by Russia.

Further evidence of partnership between Russia and the PRC is reflected in their increased use of the yuan to conduct commercial transactions.  According to the Central Bank of Russia,  Russian exports paid for in yuan increased to 14 percent by September 2022.  In addition, the Russian media reported that more than 20 Russian financial institutions were connected to the PRC’s Cross Border Interbank Payment System (“CIPS”) as of July 2022, and, following the invasion, Russia’s average daily transaction volume through CIPS increased by nearly 50 percent as of January 2023.  The Chairman of the State Duma’s Financial Markets Committee also reported that, as of March 2022, the Central Bank of Russia and the People’s Bank of China were working to integrate the CIPS with Russia’s System for Transfer of Financial Messages (“SPFS”).  In addition, the Chief Executive Officer of state-owned VTB Bank, the second largest bank in Russia, announced in September 2022 that it was the first Russian bank to establish a correspondent banking service with the PRC.

Support Provided by the People’s Republic of China to Russia (July 2023)