Will China Rescue Russia's Economy?

Russia's economy is in a dire situation, thanks to unprecedented sanctions the U.S. and its allies have imposed on Moscow.

Equity markets are shut. The Russian ruble is collapsing, trading at $0.009. Inflation runs north of 20%, while GDP is down 8% in 2022. Most notably, half of the country's foreign reserves are frozen, making it difficult to import essential goods.

Moscow needs help to keep its economy functional, but there are few places to turn to. One of these places is the world’s second-largest economy, China. The sanctions have brought Moscow and Beijing closer, with Russia holding a big chunk of its foreign reserves in yuan.

Will China provide it?

Michael Edesess, managing partner and special advisor at M1K LLC, thinks China will.

"China will rescue Russia from the dangerous and embarrassing situation Putin has gotten it into, but it will do it by rescuing not only Russia, but the whole world from this frightening stand-off," he said.

Nonetheless, helping Russia won't be that easy for Beijing. First, it must depart from its "neutral position" on the Russia-Ukraine conflict and risk a confrontation with the U.S. and the EU.

"China remains Russia's main partner and lifeline in light of the conflict in Ukraine," said Riccardo Cociani, Asia Pacific intelligence analyst at Sibylline Ltd. "However, China is in a difficult position because no matter its choices, it will be met with possible retaliation from either side."

That's why he thinks Beijing should exercise maximum caution and seek a compromise to appease both sides.

Thus far, China's action seems to appease the U.S. side.

"The Chinese-led Asian Infrastructure Investment Bank's [AIIB] decision to freeze lending to Russia and Belarus also reflects that China may not promptly agree to Russia's request for economic or financial support," adds Cociani.

Moscow and Beijing share different views about the world, according to Kunal Sawhney, CEO at Kalkine Media.

"In 2014, when Russia was imposed with different sanctions by the U.S., EU and NATO after its Crimean annexation in Ukraine, China had played a crucial role in supporting investment-starved Russia," he said. "In present circumstances, China's alternative payment methods are already supporting the Russian financial and banking system."

Sawhney doesn't think Beijing is in a position to provide open commercial support to Moscow as its economy is still striving to shake off the pandemic.

"At the same time, Europe remains its biggest trading partner, whose loss cannot be compensated by Russia if it has to face similar sanctions," he added. "Similarly, for Russia, seeking China's support may put it in a disadvantageous position to play a junior partner in later stages. Hence, they may have a need-based partnership and not a formal security alliance, with both protecting their interest in their geographical region."

China must proceed cautiously to keep its commercial partnership with Russia without antagonizing the U.S. and the EU.

"Perception of Chinese 'interference' may be counteracted by retaliatory measures, including economic sanctions," added Cociani. "Restricting market access to Europe and the U.S., for example, would provide China a heavy blow, especially as its economy is seeking to recover from the COVID-19 pandemic."