Best Friends

It is often said that to better understand someone you should look at their friends.  In that case what does it tell us about Xi Jinping who claims he is best friends with Vladimir Putin?  The two leaders have met nearly 40 times and always seem very pleased to get together.  The two dictators stand together, united in their belief that America and its allies are in decline and that the future belongs to them.  But they have no positive vision of the future, instead it is criticism of others, complaints, real or imagined of unfairness and threats from others which fuel their thinking.  They are so desperate to claim democratic and human rights credentials that they warp the meanings of those terms that they no longer have any meaning within their world view.

This was on full display only a few weeks ago at the opening of the Winter Olympics.  Putin made his first overseas trip since the pandemic to attend the opening of the games and was the only major country leader to attend the games.  The meeting between the leaders produced a 5,000-word joint declaration of friendship which would have “no limits”.  Russia agreed to fully endorse China’s vision of the future about the multipolar system of world order.  Russia is normally considered the junior partner in this Eurasian alliance by the smaller size of its economy and population, indeed no one could consider Russia as a rising power in the way China is.  Yet when it comes to leaders it is Xi who seems far more enamored with Putin.  Xi who has issued orders to purge the Chinese internet and media of effeminate male popstars and models must be awe struck with Putin’s macho image.  Xi is no Judo fighter, nor would he ever get pictured shirtless while riding a horse.  Instead, Xi gets compared to Winnie the Pooh while Putin looks just like what he is, a Russian gangster.

No sooner had Putin left Beijing than the Chinese leadership disappeared from view to try and figure out what their response should be the increasing warnings about a possible invasion of Ukraine by Russia.  As is fate’s way it wasn’t just Russian geopolitics which caused concern, the most controversial drama at the Olympics surrounded the 15-year-old Russian skating sensation Kamila Valieva.  It was an omen of what was to come.

Putin’s Surprise

Russia’s unprovoked invasion of the sovereign state of Ukraine is shocking but cannot be considered a surprised.  If nothing else the US and NATO has been warning of the buildup of forces for weeks and Putin’s own speeches and language have been moving in this direction for months.  But it is still a surprise because so many around the globe had believed that the days of European borders being changed by force was consigned to history.  The New York Times reported that US officials held multiple meetings with their Chinese counterparts to share intelligence with them about the possible invasion and hoped for Chinese help in pressuring Russia to stand down.  The Chinese response hovered between denial and hostility and the US efforts came to nothing.

Since the invasion the Chinese Ministry of Foreign Affairs has played linguistic gymnastics as it tries to find a path which neither condones nor condemns Russia’s action.  It’s failure to outright condemn the illegal invasion of a sovereign state has not gone unnoticed around the globe with Australia for one calling out the Chinese for their fence sitting.  By way of contrast Taiwan President Tsai Ying Wen issued a very clear statement called the Russia action an invasion, whereas China continues to call it by the Russian term, a special military action.

So all this begs the question, did Putin tell Xi he was going to invade? And if he did how did Xi respond? Did he council against it?  Did he support it?  Did Xi even share it with his cabinet?  All fascinating questions which will not be answered anytime soon.

China’s Support

In 2014 when Russia illegally annexed the Crimea and provided support to rebel groups in Eastern Ukraine the US and Europe imposed sanctions on the Russian economy, those have only help drive the Russian economy to establish more and deeper ties with China.  The strong personal connection between Xi and Putin only helps strengthen these connections but Russia like many countries wants to tap into the China market.  China looks to Russia and sees a country which has many of the commodities it needs to fuel it economic growth.  Closer economic ties would almost certainly have happened even without sanctions, but the sanctions meant the only growth for Russia lay with China, not with the US or even Europe.

With the increased trade ties between the two countries and the rise of China it could be argued that part of Putin’s calculus was that even if Russia suffered further sanctions due to invasion of Ukraine, then he could rely on or at least still develop more ties with the Chinese to dent the pain.  If Putin did assume that then he has been badly misled or deluded himself.  China cannot and will not bail out, nor insulate Russia from the coming economic fallout of his actions.  The recent UN Security Council vote condemning the invasion saw 11 countries in favour, a no and veto from Russia and three abstentions, China, India and the UAE.  An abstention cannot be counted as a sign of “no limits’ friendship.  But what could China do?  Surely it could not vote with Russia.  China places great importance on its “Five Principles of Peaceful Coexistence”, they are, “mutual respect for sovereignty and territorial integrity, mutual non-aggression, non-interference in each other’s internal affairs, equality and mutual benefit and peaceful coexistence”.  Well Putin’s invasion breaches every single one of them.  As this column has mentioned before despite 40 years of economic growth where many countries and it neighbours have benefited China has found itself unable to cultivate good friendships with other countries and its choices of friends, such as Russia, seem to be a continual cause of problems.  Some Chinese commentators suggest that China should support Putin so that they in turn receive support when they make a move on Taiwan.  That supposes that Putin remains in power at the end of this war, his erratic language and behaviour may embolden some in his court to act to remove him.  While they all own him obedience and loyalty his chosen path is condemning all of them to global pariah status.

So, if China is unable to offer direct support in the diplomatic sphere what is the likelihood of China helping Russia to circumvent or blunt the worst of the sanctions proposed or enacted by the US, EU, UK and others?  So far, and the scope of the sanctions if far from over, the sanctions have been expanded to restrictions on banks and asset freezes on senior individuals.  Disconnecting banks from SWIFT, what is called the financial nuclear option is on the table, but Germany remains opposed, as it does to targeting hydrocarbon supply because they have become so dependent on them.

It is worthwhile asking then what support China can give in these areas.  For bank asset freezes there is frankly nothing China can do.  The sanctions effectively stop the targeted Russian banks from doing any business, money cannot flow in or out of accounts which are frozen.  Funds frozen in the US are not going to be made good by China in accounts in Beijing.  Nor will Chinese banks facilitate payment flows for specific entities which have been sanctioned.  Two Chinese banks have already announced they will restrict financing for Russian commodities.  There is a well-established framework for implementing financial sanctions which any global bank takes very seriously for fear of being cut off from the US dollar clearing system.  For individuals whose assets are seized then once again China is not going to make good in any way.  What will likely happen in the coming months is that physical assets of Putin’s oligarchs who spend and hide their billions in London property, luxury yachts and villas in France could well see these assets seized and frozen.  What can China do to replace a 50 million GBP house in Kensington?  Or a chateau in France?  English football club Chelsea is owned by Roman Abramovich who is commonly seen as a front for Putin so it could not be inconceivable to see the football club ownership being seized by the UK Government.

A word on SWIFT would be in order as that has a direct China connection.  SWIFT is simply a messaging system for banks and financial institutions.  When sending instructions to move money or securities is it vital the banks have a secure and trusted network.  This is what SWIFT provides, access to the terminals within a bank is highly controlled, not just anyone can send SWIFT instructions from bank to bank because banks will act on SWIFT instructions.  When transferring money between banks it is the SWIFT instructions which will release funds into the appropriate account.  Almost all banks, and certainly all banks operating in global currencies or doing cross border business are connected to SWIFT.  Its wide usage and secure and standardized framework are what make it appealing.  China has tried to develop its own platform, CIPS, to challenge SWIFT but global uptake has been very slow.  Many countries have localized domestic systems as well but even CIPS still relies on SWIFT for international flows so even here China’s support is partial at best.  China will certainly continue to buy Russian oil, gas and other commodities, they will probably try and increase BRI activities, but they cannot insulate Russia and Putin & his oligarchs from sanctions even if they were brazen enough to try.  China matters to Russia economically, but Russia is incidental to China when compared to the trade between China and, the EU and the US.  And let nobody forget that China is still mired in a debt and credit bubble which it trying to work through.  It simply does not have money to bailout Russia when so many of it own SOEs and regions are in such financial stress.

Angry Russia

Two days into his invasion Putin was clearly feeling the stress.  The military operation does not seem to be going as smoothly as hoped for and he appeared on television looking angry and dead eyed and produced a rambling bizarre speech calling the Ukrainian leaders drug addicts and neo-Nazis.  Was his best friend Xi Jinping watching?  Was China’s State Council watching?  There is already concern in China about Xi’s ever-increasing power and watching Putin’s descent into madness must raise questions about Xi’s own judgement in his choice of friends and strategic thinking.  This year is vital for Xi Jinping to remain head of the communist party and more geopolitical tensions are tensions is the last thing he needs.  If Ukraine wasn’t problem enough the Hong Kong Government has lost control of the Covid outbreak in the city which Xi has said must be controlled.  This is another difficult year for China, in what it their difficult decade.

Europe has sleepwalked into this crisis.  It has failed to realize the dangers of becoming overly dependent on Russia but at last it has awoken to the risk.  The similarities between dependence on Russia and dependence on China has not been lost on many and a realignment of policy and engagement with Russia will undoubtedly have ramifications for engagement with China.  This makes China path’s all the more difficult, it will try and maintain good relations with Russia, it does need the oil and geopolitical support afterall Yet how it responds will colour how other nations view it as a responsible global power.  The crisis is far from over, the sanctions have yet to take any meaningful effect but the long-term impacts will be profound.  Chinese foreign policy has for decades tried to avoid taking sides and yet engaging with all for its own development.  That largely worked and as a developing power many would overlook its less than savoury partnerships.  The world has changed very dramatically in the past week.  China’s old playbook looks very unsuitable for the new realities.