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----- Forwarded Message ----- From: Jose Rivera <riverajose@xxxxxxxxx>Sent:
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from the Ukraine War
Joe RiveraRiverajose@xxxxxxxxx
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What China Has Learned From the Ukraine War
Even Great Powers Aren’t Safe From Economic Warfare—If the U.S.-Led Order
Sticks Together
By Evan A. Feigenbaum and Adam Szubin
February 14, 2023Russian President Vladimir Putin speaking with Chinese
President Xi Jinping, Moscow, December 2022ADDRESS:
Mikhail Kuravlev / Sputnik / Kremlin / Reuters
When Russia invaded Ukraine in February 2022, China’s leaders attempted to
balance two fundamentally irreconcilable interests. First, they aimed to
bolster China’s entente with Russia to counterbalance American power and
alleviate growing strategic pressure from the West. Second, although they
backed Moscow, they sought to avoid unilateral and coordinated sanctions aimed
at China’s government, companies, and financial institutions.
For a year, China has been performing the “Beijing straddle,” tacking
uncomfortably between these competing objectives under the white-hot light of
international scrutiny. China has generally refused to sell arms to Russia and
to circumvent sanctions on Moscow’s behalf because preserving global market
access is more important to Beijing than any economic link to Russia. Simply
put, China has no interest in being Russia’s proxy. But Beijing has also tried
to have its cake and eat it, too, by endorsing Russia’s rationales for the
conflict, coordinating with Moscow diplomatically while it cautiously abstains
in United Nations votes, taking full advantage of discounted Russian oil, and
enhancing economic linkages to Russia that do not violate Western sanctions.
Indeed, China-Russia trade rose by a staggering 34.3 percent in 2022 to a
record $190 billion.
Beijing has also learned important lessons even as it struggles to maintain
this balance. Specifically, it has closely studied the Western-led sanctions
campaign. And it knows that, if tensions with the West continue to intensify,
these same economic weapons may well be turned against China. Over the last 20
years, China’s leaders have watched as Washington honed and more frequently
deployed economic weaponry, including sanctions, export controls, investment
restrictions, and tariffs. But the major Western sanctions campaigns have
generally not applied to China because they targeted second-tier economies,
such as Iran and Iraq, or more often, marginal economies such as Cuba, North
Korea, and Sudan. The current Ukraine conflict has, at long last, given Beijing
an opportunity to study the strategy, tactics, and capabilities of a Western
sanctions coalition as it works to cripple one of the world’s largest
economies.
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Of course, in some ways, it is too soon for Beijing to draw the full range of
lessons from the Western sanctions effort against Russia. The sanctions include
both measures that have instant effect, such as asset freezes, and those that
are designed to bite ever more deeply in the years to come. Among the latter
are export controls on computer chips and advanced technologies and
restrictions on helping Russia develop the deep-water, Arctic, and shale
resources on which its future energy revenues depend. But China has already
absorbed certain key lessons, some of which are sobering. Perhaps the most
important has nothing to do with payment systems or oil tankers but is rather
about the power of international partnerships.
DO AS I SAY, NOT AS I DO
The lessons China is drawing from the current conflict reflect, in part, the
profound shift that has occurred in its own approach to economic warfare in
recent years. Historically, China has criticized sanctions launched
unilaterally by countries—most notably, the United States—as an illegitimate
incursion on the targeted country’s sovereignty. In Beijing’s view, only the UN
Security Council, where China can and has wielded its veto, sometimes in
coordination with Russia, has the legitimacy to impose sanctions on a fellow UN
member state. In the last two decades, China condemned U.S. sanctions on Cuba,
Iran, Myanmar, and other countries that exceeded the prohibitions of the
council, arguing that they “gravely undermined the sovereignty and security of
other countries . . . and constitute a gross violation of international law and
basic norms of international relations.”
But China wielded its economic might unilaterally against its own adversaries
throughout this period. It just did so quietly, or often by justifying action
on “public health” or environmental grounds, to punish a company from a country
with which Beijing was locked in a diplomatic dispute. China would not
generally acknowledge its punitive measures to be “sanctions” and publicly
denied that these steps had anything to do with geopolitics. For example, when
Chinese dissident Liu Xiaobo was awarded the Nobel Peace Prize in 2010,
Norway’s salmon exports to China not-so-mysteriously collapsed. In 2016, when
the Dalai Lama visited Mongolia, hundreds of truck drivers for the mining
conglomerate Rio Tinto, which owns 66 percent of the country’s leading copper
and gold deposits, found themselves stuck in a massive traffic jam caused by a
“temporary” Chinese border closure. The Philippines’ assertion of maritime
claims in the South China Sea in 2014 led to a sudden Chinese declaration that
tons of Philippine bananas were contaminated with pesticides; the Philippines
temporarily lost the most important market for one of its largest exports.
Similarly, South Korea’s deployment of a U.S. missile defense system provided
by the South Korean conglomerate Lotte led China to shutter 90 Lotte
supermarkets in China in 2017 for “fire safety.” China also quietly instructed
its tourism sector to cut the number of Chinese group tours to South Korea. It
is estimated that South Korea lost $5.1 billion in revenues as a result.
In these cases, Beijing clearly wanted the targeted countries—and the world—to
understand that these were geopolitically motivated measures; it aimed to
punish certain policies by these countries and discourage future choices and
behaviors that would disadvantage China. But the informal nature of these
actions allowed China to dial them up or down without any explanation and
permitted Beijing to cling to its public claim that unilateral coercive
economic measures have no place in the international system.
Beijing’s economic arsenal is now complete.
In the last three years, however, China has shifted course. It has embraced
unilateral economic measures with vigor, establishing its own copies of all the
main weapons in the U.S. economic and financial arsenal. In 2020, China’s
Ministry of Foreign Affairs began to levy targeted asset freezes and visa bans
against officials from Canada, the United Kingdom, the United States, and the
European Union who criticized Beijing’s actions in Xinjiang and Hong Kong—a
page taken from the U.S. Treasury and State Department sanctions on Chinese
officials and groups. That same year, China’s Ministry of Commerce established
the Unreliable Entities List to restrict designated companies from accessing
Chinese goods and investment, mirroring the U.S. Department of Commerce’s own
longstanding Entity List. In its 2020 Hong Kong national security law, Beijing
also added sanctions for those interfering with China’s sovereignty over Hong
Kong, even asserting extraterritorial reach—something Chinese officials have
criticized especially harshly in the past—threatening sanctions against
individuals and companies for activities conducted outside China.
Perhaps Beijing’s most sweeping response came in its anti–foreign sanctions
law, passed in June 2021. This law allows the Chinese government to apply
countermeasures to companies and individuals for a broad range of vaguely
defined actions. Article 15 empowers Chinese officials to impose sanctions on
any foreign individuals or companies that “implement, assist, or support
actions” that “may be deemed to endanger China’s sovereignty, security or
development interests.” The law also borrows from Canadian and EU blocking
laws, making it a crime to implement foreign (typically, Western) sanctions on
Chinese soil.
This Chinese legal architecture is still fairly new, and Beijing has moved
cautiously in implementing it, lest aggressive enforcement scare away Western
businesses and capital flows into China. But Beijing’s economic arsenal is now
complete and boasts a full complement of the unilateral sanctions and controls
it still claims are unlawful.
TOO BIG TO SANCTION?
That is the context for the fresh lessons Beijing has learned since February
2022. When Moscow’s tanks raced into Ukraine, the United Kingdom, the United
States, and the EU scrambled to come up with a punitive response. In the
2014–15 Ukraine crisis, the West crafted careful sanctions over many months to
impose costs on Russia, alter Moscow’s behavior, and obtain leverage for
negotiations. In 2022, when it became clear that Russian President Vladimir
Putin sought not merely more territory in Ukraine but a full takeover of the
country, the scope of the sanctions response shifted to an immediate all-out
economic war. Within days of the invasion, allied governments announced asset
freezes on all of Russia’s foreign reserves across Australia, Canada, Japan,
the United Kingdom, the United States, and the EU; sanctioned Russia’s biggest
financial institutions; and severed their access to SWIFT, the secure messaging
platform connecting banks worldwide.
No economy close to Russia’s size had been subjected to measures like these
since World War II. At the start of the 2022 invasion, Russia had the world’s
tenth largest economy by GDP. Its daily oil production was near 11 million
barrels per day, almost three times larger than the Islamic Republic of Iran’s
oil production at its peak in 2005. Russia was the largest natural gas exporter
in the world and the leading supplier of key global goods and inputs, from
fertilizer and grain to titanium.
From a geopolitical perspective, Russia, like China, is a nuclear weapons state
and a permanent member of the UN Security Council. Also like China, Russia has
been a member of a wide variety of global institutions. It is true that China’s
economy is still ten times larger than Russia’s, and China’s footprint in the
global economy—in terms of trade, investment, and capital flows—dwarfs
Russia’s, particularly in its ties with the United States. But if Chinese
decision-makers once believed that a first-tier economy was too big to
sanction, this past year has been disconcerting.
Beijing has been surprised by the ferocity of the Western response to Russia’s
aggression.
No longer can Beijing simply assume that the West will never risk economic
shocks over, say, a Chinese invasion of Taiwan. Beijing has just witnessed the
United States and its European allies take on considerable national and global
risks for Ukraine, an exponentially smaller and less global economy than
Taiwan’s, which has the seventh largest economy in industrial Asia and provides
a pivotal link in global supply chains. And Washington has greater historical,
legal, and emotional ties with Taiwan than it does with Ukraine. China can no
longer presume that the West will impose major sanctions only on marginal
countries and marginal sanctions only on major countries.
Beijing has been surprised, too, by the ferocity of the Western response to
Russia’s aggression. In the wake of the 2014 Donbas invasion, Putin and Chinese
President Xi Jinping walked away with the lesson that the West—and especially
risk-averse U.S. allies, of which there are many in both Asia and Europe—would
not support costly sanctions on behalf of a third party. This time, that lesson
does not apply. When Moscow’s tanks charged toward Kyiv, the gloves came off.
An escalation ladder that had taken 18 months in the sanctions campaign against
Iran was collapsed into a weekend. Even Russia’s oil and gas exports, which had
been seen as too important to touch in 2014, were sanctioned. The West has
moved more quickly than many thought possible to wean itself off Russian oil,
and the G-7 recently rolled out a price cap system aimed at depressing the
price Russia receives for its crude oil and petroleum products elsewhere in the
world, at the same time ensuring that energy markets are still well supplied.
These steps required sacrifices. And the West has borne real costs in the form
of inflation, higher energy bills, and gas shortages. But so far, with help
from a mild winter, the coalition has held. The lesson for policymakers in
Beijing is unmistakable: a major threat to international order can incur a very
painful economic response indeed, even if it comes with costs for the countries
imposing the sanctions.
FORTRESS CHINA
Countries make strategic decisions, including for war, because leaders weigh
costs and benefits and then judge that aggression is worth the risk. China will
not, therefore, eschew the use of force against Taiwan merely because it fears
sanctions. China will, however, try to absorb lessons from Russia’s Ukraine
experience about how to plug vulnerabilities, assure resilience, and create
more options.
Since Putin’s difficult experience with sanctions in 2014–15, Moscow has
boasted of a series of maneuvers to “sanctions proof” its economy; it proudly
nicknamed itself “Fortress Russia.” Moscow built up its foreign currency
reserves to $631 billion and largely shifted its reserves out of the U.S.
dollar. By 2021, Russia had reduced its dollar holdings to 16 percent of total
currency holdings, with Russia’s central bank purchasing $90 billion in gold
and expanding its renminbi and other nondollar holdings. Russia introduced its
own Mir national credit card system and an alternative to the Belgium-based
SWIFT interbank messaging system.
If Russia had become “sanctions resistant,” however, it was not at all
“sanctions proof.” As a matter of necessity, many of Russia’s repositioned
dollar reserves had been moved to the highly liquid currencies of Canada,
Japan, the United Kingdom, and Europe. When those jurisdictions moved in
lockstep with the United States to freeze Russia’s reserves, nearly half of
Russia’s foreign holdings—some $300 billion—were no longer accessible. Russia
even saw a portion of its gold holdings immobilized because it had been storing
them in jurisdictions that joined the sanctions effort.
Russia’s other defensive measures proved even less successful. After seven
years of work, the Mir credit card network had secured a few medium-sized bank
partners in Asia. But when the U.S. Treasury announced in September 2022 that
banks working with Mir would be viewed as circumventing Western sanctions,
those banks in Kazakhstan, Tajikistan, Turkey, Uzbekistan, and Vietnam severed
ties with Russia’s card system. Russia fared even worse with its System for
Transfer of Financial Messages, its purported alternative to SWIFT.
Unsurprisingly, there was not widespread demand for a Russia-based financial
messaging system that had limited reach and was more cumbersome and less secure
than SWIFT.
Beijing is bumping up against economic and geopolitical realities that will not
allow it to subvert the global financial system.
In today’s interconnected world, true sanctions-proofing is impossible. China
has had more success than Russia in this respect, but it has also encountered
some cold realities. For one, China’s State Administration of Foreign Exchange
claims that China has reduced the portion of its foreign reserves held in U.S.
dollars from 79 percent in 1995 to 59 percent in 2016. (China stopped providing
a breakdown that year.) But the increasing role of China’s state-owned banks in
foreign exchange purchases—purchases that are not reported—means that China’s
true U.S. dollar holdings are unknown and may not have decreased by the
reported amount. And China’s alternatives are limited. Unlike Russia, it cannot
move any of its foreign reserves into renminbi—to protect against risk and
manage monetary policy, reserves must be held in a different currency than
one’s own. And the economies that have the depth to absorb a meaningful part of
China’s foreign reserves are all part of the coalition that has stood up
against Russia’s violation of international law. It is not clear where China
can go.
China has also rolled out its own renminbi payment system, the Cross-Border
Interbank Payment System and has set up mechanisms in its central bank to clear
bilateral trade with countries such as Russia, skirting the use of the dollar
and the euro. At the end of March 2022, CIPS had 1,304 participating
institutions, a significant number, but about one-tenth of SWIFT’s
participating institutions. China’s defensive steps have made more headway than
Russia’s—China’s weight as the largest trading partner for the majority of the
world gives it substantial clout in bilateral negotiations. But it will be
difficult, perhaps even impossible, for China to convince the world’s advanced
economies to entrust global financial flows to a Chinese-run platform.
So China has more leverage than any other nation to develop workarounds and
alternatives to Western platforms, protocols, and institutions, and it is
working overtime to do so after 2022. But Beijing is bumping up against
economic and geopolitical realities that will not allow it to subvert the
global financial system or to arrange for the renminbi to supplant the dollar
and the euro as the dominant international currency.
BEIJING’S MISSING COALITION
Probably the most important sanctions lesson from the current conflict is the
vital importance of coalitions. Washington has tremendous clout when it takes
advantage of U.S. technology, financial markets, and the dollar. The sanctions
on Russia, however, would have had a fraction of the bite (and Russia would
have had numerous workarounds) had this not been a joint effort with Australia,
Canada, Japan, South Korea, Taiwan, the United Kingdom, and the EU.
China can wield frightening influence over its individual trading partners, but
it does not have a corresponding coalition to muster. This is a liability on
offense and defense. The limitations of China’s offensive economic weapons have
already been seen in recent years. When Beijing targeted Australia and
Lithuania with harsh measures, both countries withstood them thanks to economic
and political support from a number of friends and partners. And China remains
vulnerable to broad, concerted sanctions from the advanced economies of the
world. The threshold for such an economic attack would undoubtedly be quite
high, but another kind of deterrence is the fact that Beijing cannot know
exactly how high.
For Beijing, the lesson is less about economics and more about diplomacy and
relationships. As it reopens its economy after three years of lockdowns, China
is working to rebuild relationships, host foreign leaders from Asia and Europe,
make business deals, and complicate any putative American effort to forge a
counter-China coalition. For Washington, the takeaway is the same—in any
potential confrontation with China, the most valuable weapon in America’s
economic arsenal will be the strength of its international partnerships.
- EVAN A. FEIGENBAUM is Vice President for Studies at the Carnegie Endowment
for International Peace. From 2006 to 2007 and again from 2007 to 2009, he
served as U.S. Deputy Assistant Secretary of State.
- ADAM SZUBIN is a Distinguished Practitioner in Residence at Johns Hopkins
University’s School of Advanced International Studies. From 2015 to 2017, he
served as Acting Undersecretary of the Treasury and from 2006 to 2015 as
Director of the U.S. Treasury Department’s Office of Foreign Assets Control.
