Third countries can benefit from the West’s economic confrontation with Russia. But a special jackpot in this global redistribution will be received by China as the largest economy in the world.
Benefits for Beijing are literally in everything – it can surpass the West in the commodity and financial markets, and even in the field of air travel. The VIEW newspaper has compiled 10 main advantages that Beijing can get from the ongoing redistribution of the world.
First, the Chinese payment system Union Pay will become the beneficiary of geopolitics. Seven major Russian banks have already announced plans to join this payment system after MasterCard and Visa refused to make payments abroad.
At home, Western systems do not stop working, but overseas operations have stopped. For domestic transactions, Russia has its own Mir payment system. You can pay with the Mir card even in a number of foreign countries, but their number is still small. Whereas cards with the Chinese payment system are accepted in 180 countries of the world. Mir will strive to expand the list of foreign partners. Over time, the place of MasterCard and Visa both abroad and within Russia can be taken by these two payment systems – Chinese and Russian. Then the intensifying competition between the two players will lead to cheaper transaction services and card maintenance, which are likely to grow at first.
Second, the Chinese banking system will benefit. The refusal of the West to lend to Russian banks and invest in Russian assets also opens up opportunities for China. After 2014, Beijing has already begun lending to our banks, and now access to Western capital markets has been completely closed, which means that the demand for loans in China may rise sharply. Asian money was originally more expensive than Western money. But the lack of alternatives will accelerate the reorientation of the financial market.
Thirdly, the Chinese yuan will be in positive territory. Blocking access to the dollar and the euro creates a shortage of Western currency for the Central Bank of Russia and Russian banks. Therefore, transactions with these currencies in Russia are limited for everyone. Russian banks, companies, stock investors and ordinary Russians may turn their attention to the Chinese yuan. According to the IMF, the yuan is the fifth largest reserve currency in the world. Central banks hold $319 billion in yuan reserves (data for the third quarter of 2021). The Central Bank of the Russian Federation kept 13% of its reserves in yuan – and this was a salvation, because the reserves in dollars and euros are frozen by the West. Only gold and yuan remained in our piggy bank.
The yuan can also replace the dollar and the euro in the international settlements of Russian companies with foreign partners. In early March, a Chinese state-owned bank with a branch in Moscow saw a surge in Russian firms looking to open new accounts, Reuters pointed out.
The currency of the Celestial Empire is not as liquid as the dollar or the euro, but in the current crisis it turned out to be more stable than Western currencies. The volatility of the dollar and the euro is several times higher than the volatility of the yuan against the ruble. The Chinese currency is also growing against the ruble, but the jump is not as sharp as that of the dollar. And the reorientation of Russia to the yuan will help the Chinese currency to increase its liquidity in the future.
“In addition to purely quantitative metrics, in finance, trust in the system itself is important. Unlike the US and the EU, which applied financial sanctions, China has proven to be a reliable partner that does not politicize financial instruments. So the Chinese financial system also gets moral points,” says EXANTE analyst Vladimir Ananiev.
Fourth, trade with Russia will continue to set historical records. China is Russia’s largest trading partner. Last year, trade between the countries reached a record high and reached almost $147 billion (a 36% increase). This is the data of the General Administration of Customs of the People’s Republic of China. This year we can expect a new record. At least in January and February 2022, bilateral trade grew by almost 39%. This is the highest growth in the first two months of any year since 2010.
Earlier, the heads of Russia and China set a plan to increase trade to $200 billion by 2024, including through online commerce. But in the light of events, trade with China may start to grow much faster than previously expected.
The fifth win is that even more Chinese consumer goods will enter the Russian market. With a deficit of the dollar and the euro, which are used to purchase imported goods, Chinese clothing, consumer goods, including children’s toys, which are often made in China, will become even more relevant.
“In the domestic market of non-food consumer goods, the share of imports was 75%. In the footwear market, one Chinese product occupied 60% (in physical terms). Under the current conditions, it is logical to expect an increase in the supply of consumer goods from China: clothing, footwear, toys, textiles, and furniture. Imports of Chinese food products can significantly increase the growth at the expense of fruits and vegetables, fish and seafood,” notes Maria Dolgova, Associate Professor of the Department of Finance and Prices of the Russian University of Economics named after Plekhanov.
Sixth, Chinese automakers, whom Russia once greatly disliked, will be in an advantageous position.
“Against the background of a shortage of cars of other brands, sales of Chinese passenger cars doubled in 2021,” says Dolgova. This year, sales of both Chinese cars and auto parts will continue to grow. This will be facilitated by a shortage of spare parts and a decrease in effective demand, supplemented by sanctions, as well as exchange rate volatility, Dolgova notes.
According to Avtostat, in January 2022, the share of the Chinese in the market of new passenger cars increased to almost 10%, while a year ago (in January 2021) it was half as much – only 4.8%. In general, last year it amounted to 7.5%. Sales of Chinese brands continue to go against the market, which is falling. The share of the Chinese brand Chery rose to 3.3%, Haval – 3.1%, Geely – 2.1%.
China is likely to help the Russians with the repair of cars of Western brands.
“Not for everyone, but for the bulk of cars, the lion’s share of spare parts can be replaced with Chinese counterparts,” Ananyev points out.
The seventh win is that China can get all the Russian energy and other raw materials that Europe will refuse if it finds the strength for such a suicidal step.
Beijing will gladly buy all the oil and all the coal that Europe potentially refuses. Technically, it will not be difficult to carry out such deliveries by sea. Moreover, the price for them will be attractive.
The same applies to metals and other raw materials.
“China is interested in all raw materials, since it lacks its own,” says Ananiev. Over the past five years, China has already doubled its purchases of Russian energy to almost $60 billion, Bloomberg pointed out.
More serious problems may arise with gas, which is oriented for deliveries to Europe. Transporting it to China would require building new infrastructure, which would take a lot of time and money.
The eighth plus is that Chinese investors can become more active and invest in Russian companies at a discount, because places in the Russian market are freed from competitors. Against the background of the fleeing Western giants from Russia (BP, Exxon, Equinor), China can become the main investor, including in Russian oil and gas companies (but not only). Information has already emerged that China is in talks with its state-owned energy and natural resources companies about the possible acquisition of stakes in Russian energy and natural resources companies such as Gazprom and Rusal, Bloomberg reported, citing sources.
The ninth win – China’s role as a bypass for Russia will only gain momentum. That is, China can become the intermediary through which Russia will get the necessary Western components with the payment of a margin to a third party.
But one must understand that China will not risk its economic interests either for the sake of the United States or for the sake of Russia. With China, as with any other partner, one must be on the alert.
“Both government structures and businesses in China are very pragmatic. They will scrupulously evaluate all the potential benefits and losses from cooperation with Russian partners. This applies to both exports from China and Russian imports to this country. If the threats of sanctions from third countries for cooperation with Russia, in their opinion, are real, then this may outweigh all the benefits from it,” Maria Dolgova believes.
“There may be problems with the arrival of high-tech Chinese businesses, including due to the risk of secondary sanctions. The United States has imposed a ban on the export to Russia of a number of types of high-tech equipment, including semiconductors, not only directly from the United States, but also from any country where products are manufactured using American components and technologies – such supplies will require permission from American regulators. “Violators” may be subject to severe fines or even lose access to the US market,” says Olga Belenkaya, head of the macroeconomic analysis department at FG Finam.
On Thursday, the representative of the Federal Air Transport Agency Valery Kudinov made an unexpected statement that China refused to supply aircraft parts to Russia, so it will have to look for alternative suppliers in India and Turkey.
Soon, however, the Federal Air Transport Agency denied the words of its employee, said at the industry conference. Moreover, he does not have the right to comment on behalf of the Federal Air Transport Agency.
“Kudinov relayed everything incorrectly. Apparently, individual airlines approached several of their Chinese counterparties about spare parts, and they refused. But this is not an official refusal of China to supply spare parts to Russia. Another thing is that China does not produce key Western spare parts for Boeings and Airbuses. And in which country will a company be registered that wants to become an intermediary for the purchase of spare parts and providing them to Russian carriers – does not play any role. China is not a panacea. There are many countries in the world, even the Seychelles can become an intermediary,” explains Roman Gusarov, head of the Avia.ru industry portal.
China can get another benefit from the exchange of sanctions strikes in the aviation sector of Europe and Russia – this is the tenth point. First, Chinese airlines can make money on the Trans-Siberian routes.
“For Europeans, flying over Russian territory is prohibited. And this is the shortest and most profitable route from Europe to Asia and back. European companies will have to fly around Russian territory, so shippers and passengers will go where it is cheaper – to Asian carriers, including Chinese ones.
Asian carriers can completely take over the market for transporting passengers and goods from Europe to Asia and get rich on this,” says Roman Gusarov. Secondly, if Russia has problems with the long-haul fleet and Russian carriers cannot fly long distances at home and abroad, then these routes will also be happy to be taken over by Chinese airlines.
“Last year, Russia served 17,000 transit flights on the Trans-Siberian (from Europe to Asia) and cross-polar routes (from the USA to Asia). This is 1.5 thousand flights per month. Even if European and American companies accounted for only half of the flights, this means a loss of 700 flights per month. This is a huge market loss. This is a very painful blow. Whereas Russia did not even notice the loss of the European direction. Flights abroad last year accounted for only 21% of the total traffic, and Europe accounted for only a couple of percent”, concludes Gusarov.
Of course, the Chinese will calculate the risks of cooperation with Russia and will try to avoid falling under secondary sanctions. However, Beijing and Moscow already have solid experience in doing business and ensuring economic growth in the face of sanctions restrictions.
Olga Samofalova, VIEW