China steps into the sanctions trade hole to supply Russia

China steps into the sanctions trade hole to supply Russia
Russo-China trade is on course to hit a mutual trade turnover target of $200bn a year early as Chinese firms step into the hole created by sanctions / bne IntelliNews
By bne IntelliNews February 13, 2023

China was already Russia biggest individual trade partner before the war in Ukraine started, but since then it has expanded its role and stepped into the gap created by sanctions, especially in providing Russia with crucial access to microchips, Institute of International Finance (IIF) reported in a note.

The sanctions were supposed to cut off Russia’s access to revenues used to find its war machine. However, the combination of massive leakage, the opposite happened: Russia earned twice as much cash in 2022 than in 2021, already an all-time-record year. Russia’s current account rose to an unprecedented $227bn in 2022, more than doubling the previous record of $120bn.

The strong expansion of exports, including oil and gas and other commodities, was the main driver of this growth. Despite a contraction of 16% in imports in 2022, this marks a recovery after a decline of 35% was seen in the early weeks of the war following the imposition of a “massive package” of sanctions.

Russia stopped reporting trade data after the war started, but IIF looked at mirror customers data of Russia’s leading partners and validated this data by comparing the pre-war Russian data with the partners customs data. The correlation was good and if anything the partners data probably underestimates the level of imports to Russia since, says IIF.

China's trade with Russia has seen significant growth since Russia's full-scale invasion of Ukraine. Sino-Russia trade has been growing explosively since the $5bn of mutual trade the two had in 1991.

Trade between Russia and China reached a new all-time high in 2022, with a 29.3% increase compared to the previous year, totalling $190.27bn, according to the General Administration of Customs (GAC) of China.

China's exports to Russia saw a 12.8% increase, totalling $76.12bn. Meanwhile, Russia's imports from China climbed by 43.4% to $114.15bn.

Russia's surplus in the trade relationship with China amounted to $38bn, a three-fold increase from 2021. The trade turnover between the two countries equalled $17.8bn in December 2022, which is a decrease of 3% compared to November.

China is now Russia's most significant trade partner, as Russia increasingly relies on China to supply goods banned by sanctions. Despite export controls, Russia has increased its imports of semiconductors and electronic circuits. The total value of chip imports rose from $1.8bn recorded for January-September 2021 to $2.45bn over the same period in 2022.

It remains unclear whether all chips are prohibited for export to Russia by the US, but given the Bureau of Industry and Security (BIS) Rule on September 15, it is believed that the objective is to prevent Russia from accessing chips, particularly advanced technologies or those suitable for military use.

As bne IntelliNews already reported in a pre-war feature on Russia’s crisis in sourcing precision machine tools, Russia had already turned to China to supply more microchips, however, China can’t manufacture the very best and most sophisticated chips so even the soaring import of Chinese chips is a partial solution to the technology sanctions. At the start of the war CBR governor Elvia Nabiullina warned Russian industrialists that they would probably have to downgrade by “two or three generations of technology” as a result of the sanctions.

Nevertheless, China and Hong Kong have successfully replaced other countries as chip suppliers, as countries such as Germany, Netherlands, and South Korea have reduced their shipments to Russia, reports IIF.


Russo-Chinese trade has increased substanially. 

Imports from Russia's friends have increased. 

Imports of microchips to Russia from China have soared.



In a special report published in December, a joint investigation by Reuters and the Royal United Services Institute (RUSI) details some of the schemes used by Russia to import technology put under sanctions by the west. A larger share of this tech trade runs via Turkey, where Turkish firms legitimately import sanctioned technology that then sells it to shell companies that re-export it legally under Turkish law, to Russia.

At least $2.6 billion of computer and other electronic components flowed into Russia in the seven months to Oct. 31, Russian customs records show. At least $777 million of these products were made by Western firms whose chips have been found in Russian weapons systems: America’s Intel Corp, Advanced Micro Devices Inc (AMD), Texas Instruments Inc and Analog Devices Inc., and Germany’s Infineon AG.

One Russian importer, OOO Fortap, based in St. Petersburg, was set up by a Russian businessman in April and has since imported at least $138 million worth of electronics, including U.S. computer parts, according to Russian customs records, Reuters reported. They show that one of Fortap’s biggest suppliers is a Turkish company, Bion Group Ltd Sti, a former textile trader that recently expanded into wholesale electronics.

Similar schemes are run via Hong Kong, reports Reuters, which visited offices there and found boxes of electronics stacked to the ceiling in the premises of one shell company that is selling hundreds of millions of dollar of technology to Russia.