EU may sanction Chinese companies for the first time for facilitating Russia’s flourishing trade with friendly countries

EU may sanction Chinese companies for the first time for facilitating Russia’s flourishing trade with friendly countries
The EU is toying with the idea of putting sanctions on three Chinese companies for the first time in its efforts to shut down Russia's flourishing trade with friendly countries. / bne IntelliNews
By bne IntelliNews February 13, 2024

The EU is contemplating the unprecedented step of imposing sanctions on three Chinese companies alleged to be aiding Russia's military actions against Ukraine, Bloomberg reports.

This move, if ratified, would mark the first instance of EU sanctions targeting mainland Chinese entities in the context of the Ukraine conflict.

The proposal is part of the thirteenth sanctions package that is currently being debated, but is highly controversial as China is one of the EU’s biggest trade partners. The proposal is facing strong resistance from countries like France and Germany as China is a major buyer of their goods.

Chinese firms have never before been subjected to EU sanctions related to the Ukraine crisis and EU member states are afraid to disrupt the trade that is worth hundreds of billions of dollars a year.

The draft proposal, seen by Bloomberg, extends beyond China, encompassing companies from Hong Kong, Serbia, India and Turkey.

"The issue is of critical importance to the EU, which counts Beijing as one of its most important trade partners," Bloomberg reported. Notably, the Chinese firms, while unnamed, are primarily engaged in technology and electronics sectors and stand accused of bolstering Russia's military and technological prowess, as well as its defence and security infrastructure.

The West is attempting, in the upcoming sanctions, to tighten its sanction regime on Russia, which has largely failed. As bne IntelliNews reported, not a single barrel of Russian crude oil has been sold below the oil price cap of $60 since the twin oil sanctions were imposed at the start of last year. Likewise, the technology sanctions have also failed.

Despite multiple rounds of sanctions, more than €2.6bn worth of Western-made components that can be used for military production reached Russia in 2023, KSE reports.

Specifically, Russia imported more than $1bn in Western microchips in the first nine months of 2023. These microchips are vital not just for the military-industrial complex’s constant supply of weapons to the frontlines in Ukraine but also for Russia’s manufacturing of cars, smartphones, and household appliances.

This development follows a Bloomberg report on February 8, revealing the EU's plans to introduce new sanctions against 55 corporations and over 60 individuals linked to Russia's aggressive stance in Ukraine. Furthermore, ByteDance, the parent company of TikTok, faces significant fines as the EU gears up for an audit in light of stringent content moderation regulations, amid growing concerns over potential risks to minors.

The threat of disrupting trade with China highlights the dilemma that the EU faces where increasingly sanctions do not reduce Russia’s trade as it has successfully switched markets to trade with friendly countries, while the EU does cut itself off from major trade partners that hurts its own economies more than Russia’s in a boomerang effect.

The share of payments in rubles and currencies of friendly countries is rising the fastest with Asian, Caribbean and African countries, Russia’s Economic Development Minister Maksim Reshetnikov said.

Russia did three-quarters of its trade last year with friendly countries, Russian President Vladimir Putin said in a recent speech.

Exports to European countries plummeted by 68% to $84.9bn in 2023, while imports decreased by 12.3% to $78.5bn. But exports to Asian countries increased by 5.6% to $306.6bn, while imports declined by 29.2% to $187.5bn leaving Russia with a very robust and positive balance of payments with its main partners in the Global South.

Less significant is Russia's trade with Africa and South America. Exports to African countries grew by 42.9%, to $21.2bn, imports went up by 8.6% to $3.4bn. Russian exports to the countries of North and South America decreased by 40.4%, to $12.2bn, imports fell by 11%, to $15bn.

In the structure of exports, the share of mineral products, including products of the fuel and energy sector, decreased by 4.9 percentage points, to 61.2% ($260.1bn). The share of metals and products made from them increased by 2.2 percentage points, to 14.1% ($60bn). The share of agricultural exports increased by 3.1 percentage points and reached 10.1% ($43.1bn).

The largest imports include machinery, equipment and vehicles. Their share increased by 5.1 percentage points, to 51.1% ($145.8bn). They are followed by products of the chemical industry, the share of which decreased by 2.8 percentage points, to 19.5% ($55.7bn). The third place in imports is occupied by agricultural products, the share of which decreased by 1.7 percentage points to 12.3% ($35.1bn), TASS reports.

The upshot is Russia’s economy is currently firing on all cylinders; the IMF this week upgraded its growth forecast for this year and said it is firmly "on positive growth territory" at the current stage, First Deputy Managing Director of the International Monetary Fund (IMF) Gita Gopinath said.

"You know, we are in squarely positive growth territory; it has done better than we expected," she said, commenting on the status of the Russian economy in an open online interview with The Foreign Policy weekly.

The IMF revised upward its forecasts for Russian GDP growth in the January update to the report on global economic growth prospects, she noted. According to new estimates, the Russian GDP will grow by 2.6% in this year and by 1.1% in 2025.

"The question is what happens over the medium term and there is considerable uncertainty," the IMF official noted. The loss of human capital, and the restricted ability for Russia to import high tech products can potentially "reduce growth in Russia into the medium term," she added.