China Reduces Equipment Supplies to Russia for the First Time Since Late 2022

For the first time since December 2022, Chinese companies have reduced direct deliveries of machinery, mechanisms and equipment, including electrical equipment, to RUSSIA. RBC investigated the reason for the decline

In March 2024, CHINA reduced direct supplies of machinery, equipment (including electrical equipment), mechanisms, their parts and accessories (groups 84 and 85 of the HS - in aggregate, in value terms) to Russia, according to statistics published on April 20 by the General Administration of Customs of the People's Republic of China (RBK studied it). Chinese exports of such goods to Russia decreased by 15% (to $2.9 billion) compared to March 2023. The last time before this, a decrease in this category of products was recorded in December 2022 - by 11% compared to December 2021.

It was previously reported that total exports of goods from China to Russia in March fell (year-on-year) for the first time since mid-2022: BLOOMBERG linked this to growing sanctions threats from the United States , which had previously promised to impose secondary sanctions against foreign banks and other financial institutions involved in transactions related to supplies for the Russian defense industry.

Despite global market fluctuations and sanctions pressure from unfriendly countries, economic cooperation with China is showing positive results: in 2023, bilateral trade in goods grew by 23% and reached a historical maximum of $227.8 billion, and in January-February 2024, mutual trade turnover increased by 14.1% compared to the same period in 2023 and exceeded $36.1 billion, Deputy Minister of Economic Development Dmitry Volvach said on April 22 at a meeting of the Council of Heads of Subjects of the Russian Federation.

"The trend towards interaction with friendly countries, and China in particular, continues. It is premature to draw any conclusions based on a comparison of monthly foreign trade indicators with a separate trading partner," the press service of the Ministry of Economic Development believes.

The effect of secondary sanctions

Chinese customs data show a decline in Chinese exports to Russia in March (minus 14.2% compared to last year's level), although moderate growth was observed in February (+9.6% compared to February 2023), according to statistics from Alexander Firanchuk, a senior research fellow at RANEPA (Russian customs statistics are currently closed at the level of specific partner countries). This is partly due to a general decline in China's exports by 7.6% to all countries (compared to March 2023), but detailed data confirms the impact of threats of secondary sanctions - the contraction in supplies is more pronounced in commodity items that are sensitive from the point of view of sanctions, Firanchuk claims.

In addition, Chinese land vehicle exports to Russia (cars, trucks, tractors, their parts and accessories - group 87) in March 2024 decreased by almost 20% compared to March 2023 (to $1.4 billion). However, the decline here began back in February (by 6% compared to February 2023), according to Chinese customs statistics. For the whole of 2023, land vehicle exports from China to Russia in value terms increased by 3.6 times compared to 2022. Since the end of 2023, car dealers have reported warehouses being overstocked with Chinese cars.

To adjust for seasonal and calendar factors, as well as the overall decline in China's trade, we need to look at how the Russian market share in Chinese exports is changing, Firanchuk notes. In March, Russia's share fell by a quarter (to 2.7%, the lowest since December 2022, after 3.4% in February), he says. This means that the dynamics of Chinese supplies to Russia turned out to be significantly worse than to other countries. "Considering the relatively stable dynamics of the ruble exchange rate, one of the key determinants of short-term import dynamics, we can conclude that the reduction that occurred is most likely due to the introduction [of the December institute] of secondary sanctions and the risks of their expansion," Firanchuk believes.

Exports of engineering products from China to Russia dropped significantly in March, but it is difficult to draw conclusions based on one month – China’s exports are often quite volatile at the beginning of the year, clarifies Andrey Gnidchenko, a leading expert at the Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF). “I think that April should be more indicative (partial recovery is possible),” he points out.

In March 2024, Russia's share in supplies of Chinese tractors, water heaters, pumps, electrical equipment for communications, lamps and floodlights, transformers, pneumatic tools, and machines with individual characteristics decreased the most, estimates Firanchuk. Positive relative dynamics are observed for goods that are less affected by sanctions: supplies of metal structures, centrifuges, and stone crushing equipment increased significantly; supplies of passenger cars, motor vehicles, and their parts remained almost unchanged or increased (relative to Chinese exports to all countries).

Features of the new sanctions regulation

The US continues to put pressure on neutral countries, including China and Turkey, experts told RBK earlier. In December, the US announced that it would impose secondary sanctions on banks and financial institutions that facilitate transactions in which Russia purchases CNC machines, semiconductor materials, certain bearings, advanced optical systems, etc. Following this, a number of Chinese banks imposed restrictions on accepting payments from Russian clients. According to experts from the Izvestia newspaper, the market has begun to restructure itself to conduct transactions through third countries and payment agents: for example, money from Russia goes in rubles to a friendly state, and then from a company not associated with Russia, yuan is sent to China.

The December sanctions regulation was unusually broadly worded, international law firm Gibson Dunn noted in a note to clients. Apparently, the reason for American sanctions could be “material transactions” with persons and organizations from any sector of the Russian economy related to the sale, supply or transfer to Russia of goods on the list (certain machine tools, equipment for the production of semiconductors, certain semiconductor materials, test equipment for microelectronics, etc.). This regulation does not require that a foreign financial institution know for certain that it is participating in prohibited transactions (the usual criterion of “knowingly/intentionally” is not present this time).

The list of “critical” goods does not refer to U.S. EXPORT control laws or imply any connection to the United States. That is, “a foreign bank that processes a material non-dollar transaction on behalf of a non-U.S. client that supplies a ‘critical product’ [from the list] of entirely foreign origin to Russia will be at risk of secondary sanctions,” the law firm emphasized.

The provision is “new and particularly broad because it exposes foreign financial institutions to sanctions risk based on their facilitation of transactions with non-sanctioned parties,” says another law firm, Debevoise & Plimpton. According to its interpretation, sanctions could be imposed on a foreign financial institution not only for directly supporting the Russian military-industrial complex (which itself is broadly understood to include Russia’s technology, defense, construction, aerospace, and manufacturing sectors), but also for “indirect points of contact” — such as facilitating transactions for non-Russian clients or providing services to non-Russian clients for the purpose of an onward transaction related to the Russian military-industrial complex.

Trading through intermediaries

China's customs statistics, by definition, only cover direct deliveries to Russia. Bloomberg Economics economist Alexander Isakov argues that US signals about the risks of secondary sanctions lead to the fact that "trade settlements take longer and Russian importers are increasingly forced to rely on Central Asian countries to facilitate this trade." He believes that bilateral trade data in the current conditions have ceased to be representative. China's exports of machinery, equipment (including electrical equipment), mechanisms, their parts and accessories to Kyrgyzstan in 2023 increased threefold compared to 2021 volumes. Exports of the same goods to Kazakhstan increased almost one and a half times compared to 2021, according to data from the General Administration of Customs of China.

Isakov points out that, judging by the available data, some Chinese exporters avoid direct exports to Russia even in cases where the goods are not closely related to sanctions restrictions (for example, clothing, footwear). This may be due to the fact that Chinese suppliers seek to avoid direct relations with sanctioned banks and firms from Russia, he believes. In some cases, there is no connection with sanctions at all: for example, importing cars from China via Kyrgyzstan is apparently explained by the desire to save on import duties, the economist points out.

New evidence supports the hypothesis that trade and investment flows “are beginning to fragment along geopolitical lines,” International Monetary Fund economists wrote in an April paper. They examined how the “US-aligned bloc,” the “China-aligned bloc,” and “nonaligned” countries trade. “There is strong evidence” that since Russia’s military intervention in Ukraine, “trade and foreign direct investment between the blocs have declined relative to trade and investment within the blocs,” the authors wrote.

Indeed, the experience of previous sanctions restrictions shows that bypass routes of supply through third countries are emerging, and the reduction in direct supplies caused by sanctions persists over time, Firanchuk reasons. "It is most likely that the threat of introducing secondary sanctions will significantly limit the volume of direct supplies from China. At the same time, new bypass logistics routes will emerge," he says. This will lead to an increase in the cost of imports, as it will require more complex logistics and covering the "risk premium" for intermediaries. The amount of increase in the cost of imports in previous periods of similar restrictions was estimated at 10% and higher, the expert summarizes.

Even if we are talking about problems with payment due to the threat of secondary sanctions, "it is not a fact that such problems will set a trend for a decrease in imports from China," Gnidchenko believes. "Bypasses, payment schemes through small banks may be found, and then supplies will continue," he confirms.