Today is the fourth class of our current March eight class set. We will begin class with a casual conversation. Our material today is about China and Russia. I have included a transcript.
SYLVIE DOUGLIS, BYLINE: NPR.
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DARIAN WOODS, HOST:
This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods.
The Russian invasion of Ukraine is a fast-moving story with a ton of uncertainty. We're barely a week into the invasion, and the full costs that Ukraine will ultimately pay is unclear.
For Russia, there is a cost, too - an economic one - because of all the sanctions being imposed on it right now. As we talked about yesterday, Vladimir Putin saw this coming, though. He has been maneuvering to try to insulate his economy, to kind of sanctions-proof it. But it seems like most of the world's biggest economies are lining up against Russia right now - most, that is, except maybe China.
Today, I'm joined by John Ruwitch, NPR's China affairs correspondent. Welcome, John.
JOHN RUWITCH, BYLINE: Hey, Darian. So these two countries, China and Russia, have grown much closer in recent years, and they're doing it to counterbalance the U.S. and the West. Their economic links have become much deeper, too. So Beijing has not condemned the invasion. They've blamed the U.S. and NATO for pushing Russia into a corner, and officials have explicitly said that China is against the kind of sanctions that are being levied against Russia right now.
WOODS: Yeah, I can imagine that as a kind of thing that Putin is loving to hear.
SUSAN THORNTON: I've heard Russian interlocutors say that they view China as a kind of a strategic cushion.
RUWITCH: That Susan Thornton. She's a retired U.S. diplomat who's a visiting lecturer at Yale University these days. She's a Russia and China expert, speaks both languages fluently, has lived and served in both countries, so she really has a good sense of how both governments think and operate.
THORNTON: But I mean, if I was Russia, I would be a little bit less certain about China serving as a failsafe.
RUWITCH: Today on the show, we explore that very idea of China as a big, fat, fluffy strategic cushion for Russia.
WOODS: I love that image you've created. It's a little bit weird, but it is a serious idea. Will China help blunt the effect of sanctions?
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RUWITCH: China and Russia have had a turbulent relationship over the past century. They were enemies. Then they were close communist brethren. Then they were enemies again, fighting border clashes in the late 1960s that almost went nuclear. And now they're cozying up with each other again.
WOODS: And economic ties are one area where things have been going pretty well. The value of goods traded between the two countries doubled between 2008 and 2020, and now it's over $100 billion. Russia's exports to China of things like gas and oil, coal and food - that trade has boomed. China has become Russia's most important trading partner.
RUWITCH: Russia is less important for China's economy, though. It has helped China to diversify its energy supply and grow its trade in general. But more importantly, China sees Russia as a critical strategic partner. And over the years, it's occasionally stepped up and offered help to Russia in times of need - in particular, when Russia needed money, according to Jakub Jakobowski. Jakub is a senior fellow at the Center for Eastern Studies in Warsaw, Poland. He's done a lot of research on China-Russia economic ties.
JAKUB JAKOBOWSKI: If you look at Chinese direct lending to Russian companies, you'll see that there were two peaks.
WOODS: Two peaks in lending, and both were times when Russia was under pressure from the West. The first was in 2009, when the Russian economy was in recession. This was during the global financial crisis and, it's worth noting, after Russia's war with Georgia. The second time was a few years later after Russia annexed Crimea in early 2014. Both of these military actions triggered Western economic sanctions, so they were times when Russia needed the cash.
RUWITCH: This Chinese money came in the form of loans and credit lines, and it flowed to Russia via government-run Chinese banks that exist to facilitate China-friendly trade and development.
JAKOBOWSKI: Direct Chinese lending to big Russian mostly energy companies provided them with a lot of liquidity.
WOODS: Essentially loans - and Jakub says China could theoretically make similar loans again, but it would be more complicated this time. The Russian government banks that the Chinese worked with before have been targeted with sanctions because of the invasion of Ukraine.
RUWITCH: Yeah. And of course, those Russian banks, they can't use dollars now, which points to another issue that Russia and China have been trying to work on and solve for years.
WOODS: So after the earlier Western sanctions several years ago, the Kremlin decided it wanted to do what's known as de-dollarizing the economy. That basically means you want to reduce the number of times you're using the dollar, whether it's in trade or in banks.
RUWITCH: And the idea is that if you use dollars for trade, if you borrow in dollars and then the U.S. cuts you off from the USD, you've got problems.
WOODS: And China, over the years, had been kind of interested in shifting away from the dollar, too, for a number of reasons. But it got really interested when Donald Trump launched his trade war in 2018. So Moscow and Beijing put their heads together.
JAKOBOWSKI: It's a thing that where - they were meticulously preparing for for years now, and they've been open about that.
WOODS: And they've made progress.
JAKOBOWSKI: In 2013, 90% of their bilateral trade was conducted using U.S. dollars. Now it's less than 40.
RUWITCH: A lot of that trade shifted into euros, actually, away from dollars, which seemed like a safer choice at the time. But it looks vulnerable these days because of sanctions from the EU after the invasion of Ukraine. If they need to, China and Russia can conduct transactions in Chinese yuan and rubles. It's not ideal. They're much less stable. They're not fully convertible. You know, they do some already in those two currencies, but it's not a huge amount.
WOODS: Another thing that China and Russia have been working on is an alternative to SWIFT. We've talked a little bit about this on THE INDICATOR. It's a global messaging system for banks. It helps facilitate transactions across borders. It's basically how banks talk to each other across the globe.
China and Russia, in 2019, agreed to come up with an alternative international payment system. And the idea here is to get around the systems controlled by the West - a common theme. It apparently doesn't have a lot of traction, but it is there.
So that's a lot, John. Where are we in our assessment of China as this kind of cushion for Russia?
RUWITCH: Well, you know, China says they're against sanctions. And as of now, at least, it looks like they're going to continue trading with Russia for things like gas, wheat, other commodities. And that might increase, actually, because with Russia under pressure, China will be presumably able to get pretty good prices for those things.
Also, as you mentioned yesterday, Russia holds $84 billion in Chinese bonds. And at this point, it seems kind of unlikely that Beijing would stop them from cashing those in at some point. But - and there's always a but, right?
WOODS: Yeah. So first, some major state-owned Chinese commercial banks have already indicated that they're not going to do business with sanctioned Russian entities. And the reason is pretty simple - they have too much at stake in the rest of the world to risk being hit with secondary sanctions, like the U.S. going after a Chinese company dealing with a blacklisted Russian firm.
RUWITCH: Oh, yeah. And that's not a hypothetical. That's happened before when Chinese institutions were caught ignoring or flaunting sanctions on North Korea and Iran.
And the second thing to bear in mind, I guess, is that, economically, the relationship is very imbalanced. Russia's share of Chinese trade is less than 3%. Russia simply needs China more than China needs Russia. Also, Beijing has other priorities. Susan Thornton, the former diplomat, summed it up pretty well, I think.
THORNTON: The Chinese, you know, while they are certainly trying to have a close relationship with Russia and we've seen them get closer recently, they also still have a lot more options than the Russians do. And they care, first and foremost, about their economy and their development and, you know, the way that plays into sort of China's great rejuvenation and all of the goals that the Chinese Communist Party has.
RUWITCH: And one final thing to consider here is that even with all those Chinese bonds that Russia has in the trade, and even if China offered loans like it has in the past, it might not really make that much difference, to be honest, given the sheer scale of the sanctions against Russia right now.
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WOODS: This episode was produced by Brittany Cronin with help from Gilly Moon. It was fact-checked by Taylor Washington. Our senior producer is Viet Le. Our editor is Kate Concannon. THE INDICATOR is a production of NPR.
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