EUROPE POLICY PAPER 2/2014

UKRAINE, RUSSIA, AND THE CHINA OPTION

The Geostrategic Risks Facing Western Policy
ANDREW SMALL
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On the cover: Chinas president Xi Jinping (lef) and Russias president Vladimir Putin ahead of a group photo ceremony
at the Fourth Summit of Conference on Interaction and Confdence Building Measures in Asia. ITAR-TASS/ Mikhail
Metzel/Corbis.
Ukraine, Russia, and the China Option
The Geostrategic Risks Facing Western Policy
Europe Policy Paper
May 2014
By Andrew Small
1
1
Andrew Small is a Transatlantic Fellow with GMFs Asia Program based in Washington, DC. He is the author of The
China-Pakistan Axis: Asias New Geopolitics, forthcoming with Hurst/Oxford University Press, 2014.
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Chinas Impact on the Wests Ukraine Policy . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Sino-Russian Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
China and Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Ukraine, Russia, and the China Option 1
Executive Summary
1
The Issue
B
eijing has sought to take a neutral stance in
the stand-off between Russia and the West.
Yet as the recent $400 billion Sino-Russian
energy deal illustrates, Chinas economic decisions
will inevitably have major implications. The
question is not whether Beijing will tilt definitively
toward one or other party but the extent to which
China will prove to be an enabling or a constraining
factor for different facets of Western and Russian
policy. In a crisis that has hinged to an unusual
degree on trade deals, loans, energy exports,
financial assets, and sanctions, the worlds second
largest economy cannot avoid becoming politically
embroiled.
Policy Recommendations
In some areas, there are opportunities for the
European Union, in cooperation with the United
States, to leverage Chinas growing geo-economic
interest in Central and Eastern Europe, where
Beijing and Moscows interests are far from
identical. But the principal challenge will be
navigating Chinas role in mitigating the impact of
Western sanctions on Russia. At present there is the
risk that the EU and the United States will end up
with the worst of all worlds: sanctions that are not
strong enough to change Moscows behavior or to
deter China from further military assertiveness in
its own neighborhood, yet just potent enough to
push Russia into a closer relationship with China,
and to persuade Beijing that it needs to immunize
itself against exposure to the Western financial
system.
Ukraine, Russia, and the China Option 3
Chinas Impact on
the Wests Ukraine Policy
2
Emphasis on the
unlikelihood of a
Sino-Russian alliance
underestimates just how
much mutual support
the two sides can give
each other without
any deeper political or
security alignment.
W
ithin the space of two months, three
presidential visits marked a defining
period for Chinas relationship with
the West: Xi Jinping in Europe, Barack Obama in
Asia, and Vladimir Putin in China. Hanging over
all of them has been the crisis in Ukraine. Much
of the best recent commentary has focused on
pronouncing China the winner,
1
explaining why
Beijing will refuse to choose between Russia and
the West,
2
or arguing that a China-Russia axis is
unlikely to ensue.
3
Yet despite the supposedly pervasive mistrust
between Moscow and Beijing, Putins visit to China
at the end of May saw the conclusion of major
economic deals, which, coupled with the relaxation
of restrictions on Chinese investment and Russian
arms sales, has significant implications both for
Russias scope to weather the Wests economic
squeeze and for Chinese military capabilities.
Emphasis on the unlikelihood of a Sino-Russian
alliance underestimates just how much mutual
support the two sides can give each other without
any deeper political or security alignment.
Chinas economic presence will also weigh
increasingly in Europes eastern neighborhood. This
has already been evident in Ukraine itself, whether
1
See for instance Artyom Lukin, The Winner of the U.S.-
Russia Conflict in Ukraine: China, The Huffington Post, Apr 17,
2014, http://www.huffingtonpost.com/artyom-lukin/us-russia-
china_b_5168015.html and Dmitri K. Simes and Paul J. Saun-
ders, And the Winner in Ukraine IsChina, Mar 12, 2014,
The National Interest, http://nationalinterest.org/commentary/
the-winner-ukraine-ischina-10034, last accessed May 6, 2014.
2
Jin Canrong, Chinas Policy Would Avoid Thucydides Trap
in Ukraine, The Huffington Post, Mar 24, 2014, http://www.huff-
ingtonpost.com/jin-canrong/chinas-policy-ukraine_b_5018708.
html, last accessed May 6, 2014.
3
Samuel Charap and Ely Ratner, China:Neither Ally nor
EnemyonRussia, The National Interest, Apr 2, 2014, http://
nationalinterest.org/commentary/china-neither-ally-nor-enemy-
russia-10168, last accessed May 6, 2014; for an extended treat-
ment of these issues, see Lo, Bobo, Axis Of Convenience: Moscow,
Beijing, and the New Geopolitics, Brookings Institution Press &
Chatham House, 2008.
it be former President Viktor Yankuvoych flying
to Beijing to seek a top-up for Kyivs $10 billion of
Chinese credit
4
just days after walking away from
the EU association agreement, or Russias touting
of Chinese investments in Crimea as providing de
facto legitimacy for its annexation.
5
But China has
certainly not signed up to facilitate the perpetuation
of Moscows economic and political dominance,
and has shown few qualms about systematically
displacing Russian economic influence in other
parts of the former Soviet Union. As Chinas
geo-economic strategy accords an increasingly
important role to a region that now finds itself as
a vital link in the Silk Road Economic Belt a
wide-ranging set of plans to develop Eurasian
infrastructure, energy, and commercial connections
between Chinas Western provinces and European
markets Chinese investment, financing,
and trade is a potential asset for the West in
undermining Moscows efforts to keep Central and
Eastern Europe under its thumb (see Figure 1).
An issue with even wider implications is Beijings
reaction to the first use of sophisticated financial
sanctions against a large, globally integrated
economy and fellow P5 member rather than a
classic rogue state. U.S. officials have warned
in barely-veiled terms that these measures could
be replicated if China were to mirror Russias
behavior in its own neighborhood.
6
In principle,
this might be expected to act as a deterrent for
4
Neil Buckley and Roman Olearchyk, Yanukovich seeks China
backing as unrest as imperils Ukraines economy, The Financial
Times, Dec 3, 2013, http://www.ft.com/intl/cms/s/0/5c435284-
5c25-11e3-931e-00144feabdc0.html#axzz30mebZHwB, last
accessed May 6, 2014.
5
Arten Zhitenev, China De Facto Recognizes Crimea as
Part of Russia, Ria Novosti, May 5 2014, http://en.ria.ru/
world/20140505/189592723/OPINION-China-De-Facto-Recog-
nizes-Crimea-as-Part-of-Russia.html, last accessed May 6, 2014.
6
David Brunnstrom, U.S. warns China not to attempt Crimea-
style action in Asia, Reuters, Apr 4, 2014, http://uk.reuters.
com/article/2014/04/04/uk-usa-china-crimea-asia-idUK-
BREA3300020140404, last accessed May 6, 2014.
The German Marshall Fund of the United States 4
Chinese policymakers, who are less prone than
their Russian counterparts to affecting nonchalance
about the repercussions of becoming embroiled in
economic warfare. But over the longer term, there
is the risk that the Wests financial sanctions could
hasten Chinese efforts to strengthen the resilience
of the non-dollarized financial system. Current
debates in Russia about expanding the issuance
of yuan-denominated bonds
7
and the use of the
Chinese payment network, UnionPay, in place
of sanctions-hit Visa and Mastercard
8
appear to
be small fry given the scale of capital flight from
the Russian economy. But they are a foretaste of
what a more sustained such push would look like.
As Barry Eichengreen notes, the dollar moved
from a negligible role in international trade
and payments to surpass sterling as the leading
international reserve currency in just ten years.
9

7
Ksenia Galouchko and Elena Mazneva, Putin Turn to China
Heralds New Look at Yuan Debt: Russia Credit, Bloomberg, Apr
14, 2014, http://www.bloomberg.com/news/2014-04-14/putin-
turn-to-china-heralds-new-look-at-yuan-debt-russia-credit.
html, last accessed May 6, 2014.
8
Camilla Hall and Kathryn Hille, Visa and MasterCard fear
sanctions fallout, The Financial Times, Mar 1, 2014, http://www.
ft.com/intl/cms/s/0/7a015708-d14b-11e3-bdbb-00144feabdc0.
html#axzz30ZcGOlRH, last accessed May 6, 2014.
9
Barry Eichengreen, The Renminbi as an International
Currency, January 2010, University of California, Berkeley,
http://eml.berkeley.edu/~eichengr/renminbi_interna-
tional_1-2011.pdf, last accessed May 12, 2014.
Like the United States in 1914, when the dollars
internationalization first accelerated, China in 2014
has become the worlds largest trading nation, and
Beijing certainly has the wherewithal to develop
a robust alternative to the Western-dominated
banking and financial transaction networks, parts
of which it now has greater cause to fear might be
weaponized against China.
Counting Crimeas Costs for China
In the early phase of the crisis, China studiously
avoided any perception of a tilt toward either Russia
or the West, whether through its UN abstentions
or a series of opaque official pronouncements.
The Chinese foreign ministrys insistence on
repeating cryptically that there are reasons
that the Ukrainian situation is what it is today
was only topped by Xis own elliptical statement
that the situation seems to be accidental but
has the elements of the inevitable.
10
A more
frank summary from an advisor to the Chinese
government was that were going to lie low on this
10
Xi Jinping Holds Telephone Talks with Russian President
Vladimir Putin, Embassy of the Peoples Republic of China
in the Peoples Republic of Bangladesh, Mar 4, 2014, http://
bd.china-embassy.org/eng/zgyw/t1134590.htm, last accessed
May 6, 2014.
Figure 1: Chinese Trade with Eastern Partnership Countries
Source: National Bureau of Statistics of China (2005-12) and China Customs Statistics (1999-2004)
0
20000
40000
60000
80000
100000
120000
140000
160000
180000
U
S
D

1
0
0
0
0
Total Trade with China, 1999-2012
Georgia
Armenia
Azerbaijan
Moldova
Belarus
0
200000
400000
600000
800000
1000000
1200000
U
S
D

1
0
0
0
0
Total Trade with China, 1999-2011
Ukraine
Ukraine, Russia, and the China Option 5
As nervous U.S. allies
in Asia have raised
a steady drumbeat
of concerns that
Russian success could
embolden China, Beijing
has struggled to escape
the taint of Putins
actions.
issue, wait and see how it plays out, and at the end
well be friends with everybody.
11
The Ukraine crisis certainly appears to afford
Beijing a number of advantages. It finds itself being
courted by Moscow, Washington, and European
capitals. There is the prospect that the United States
will be distracted yet again from its Asia pivot. The
EU debates over plans to reduce its dependency on
Russian gas came at just the moment when Chinas
own long-running negotiations with Gazprom
reached a decisive stage. Yet the view that Beijing
emerges as a comfortable winner from the crisis in
Ukraine, and can simply choose not to choose sides
while reaping benefits in its relations with all of
them, does not capture the full picture.
As nervous U.S. allies in Asia have raised a steady
drumbeat of concerns that Russian success could
embolden China,
12
Beijing has struggled to escape
the taint of Putins actions. The Japanese Prime
Minister was one of the first off the mark, noting at
the March G7 meeting in the Hague that [w]hats
happening in Crimea isnt merely an issue for this
region, but it could happen in Asia.
13
Senior U.S.
policymakers made the link as well, with the State
Departments top Asia official stating, during his
congressional testimony on the South China Sea,
that the retaliatory sanctions imposed on Russia
should have a chilling effect on anyone in China
who might contemplate the Crimea annexation
11
Jamil Anderlini, Ukraine standoff puts China on the spot,
The Financial Times, Mar 12, 2014, http://www.ft.com/intl/
cms/s/0/19d35e2a-a988-11e3-b87c-00144feab7de.html?siteediti
on=intl#axzz2xlX2QVLP, last accessed May 6, 2014.
12
Aamer Madhani, Ukraine crisis shadows Obamas Asia trip,
USA Today, Apr 20, 2014, http://www.usatoday.com/story/
news/world/2014/04/20/obama-asia-trip-ukraine/7938701/, last
accessed May 6, 2014.
13
China criticises Japans Abe over Crimea remarks,
Yahoo Finance, Mar 28, 2014, https://au.news.yahoo.com/
world/a/22234725/china-criticises-japans-abe-over-crimea-
remarks/, last accessed May 6, 2014.
as a model.
14
Ahead of Obamas Asia visit, U.S.
officials briefed the press that the U.S. military
had prepared options for a muscular response
to any future Chinese provocations in the South
and East China seas, ranging from displays of
B-2 bomber flights near China to aircraft-carrier
exercises near its coastal waters, a menu of options
that reflects concerns that U.S. allies in Asia have
about the Obama administrations commitments
to its security obligations, particularly after Russias
seizure of the Crimean peninsula.
15

Evidently there were already anxieties in the
region about how much appetite the United
States had to defend friends and allies under
threat, but Ukraine has further raised the stakes.
With the Putinization of the debate about great
power behavior, China now faces an even more
exacting level of scrutiny. An assortment of Chinas
techniques expanding sovereignty claims,
economic coercion, the use of non-military actors
to provoke confrontations, salami-slicing tactics
take on a different resonance in the context
of the Eurasian Union, self-defense units, and
Novorossiya. And while many of these analogies
are unfair, in private conversations in Western and
14
David Brunnstrom, U.S. warns China not to attempt
Crimea-style action in Asia, Reuters, Apr 4, 2014, http://
uk.reuters.com/article/2014/04/04/uk-usa-china-crimea-asia-
idUKBREA3300020140404, last accessed May 6, 2014. This was
quickly followed by the National Security Staff s senior director
for Asian affairs, Evan Medeiros, who noted that: The United
States has questions raised by Chinas position on Ukraine,
given Chinas stated commitment to territorial integrity and
sovereignty, but yet its de facto support for Russias position on
Ukraine. See Yoichi Kato, Interview: Evan Medeiros: Chinas
attempt to isolate Japan worsens bilateral relations, The Asahi
Shimbun, Apr 6, 2014, http://ajw.asahi.com/article/views/
opinion/AJ201404060018, last accessed May 6, 2014. Also see
Chairman of the U.S. Senate Foreign Relations Committee,
Remarks at Brussels Forum, March 22, 2014 http://www.
menendez.senate.gov/newsroom/press/chairman-menendez-
remarks-at-german-marshall-funds-brussels-forum.
15
Adam EntousandJulian E. Barnes, U.S. Beefs Up Military
Options for China as Obama Reassures Allies in Asia, The
Wall Street Journal, Apr 27, 2014, http://online.wsj.com/news/
articles/SB10001424052702304163604579528122105809740, last
accessed May 6, 2014
The German Marshall Fund of the United States 6
Asian capitals, they are coming thick and fast. The
spectacular turnaround in Putins polling following
his Crimea gambit has prompted consideration
of the circumstances in which the temptation for
the Chinese Communist Party to galvanize public
opinion behind a populist escalation of disputes in
Asia might be too great to resist. Beijing may not
have sought to instrumentalize overseas Chinese
populations, but Western officials have been moved
to wonder what degree of public pressure China
would come under if there were to be a repeat of
the anti-Chinese riots, expulsions, and pogroms
that have occurred in parts of Southeast Asia in
recent decades.
China could, of course, have drawn the distinction
with Russia very clearly by taking a public stance
against the first forcible annexation of territory in
Europe since the end of World War II. But Beijing is
not keeping its head down simply because it wants
to reap rewards for its neutrality. It is also deeply
uncomfortable with elements of both Western and
Russian behavior over the course of the crisis.
Ukraine, Russia, and the China Option 7
Western-inspired
popular movements
of the Maidan variety
spook China far more
than any Russian
military adventurism,
and it shares Moscows
anxieties about strategic
encirclement and its
sense of ideological
threat.
Sino-Russian Relations
3
A Limited Sino-Russian Partnership
C
hina is certainly not a fan of the tactics that
Russia has employed in its neighborhood.
Sudden referendums, declarations of
independence, and small breakaway republics
are still the stuff of nightmares for the Chinese
leadership as they cast apprehensive glances at
Taiwan, Tibet, and Xinjiang. Chinas unwillingness
formally to legitimize the Crimea annexation
echoed its previous refusal to back Russias
recognition of Abkhazia and South Ossetia in
the aftermath of the 2008 Georgia invasion.
However, Beijings sympathies essentially lie with
Russia. Western-inspired popular movements of
the Maidan variety spook China far more than
any Russian military adventurism, and it shares
Moscows anxieties about strategic encirclement
and its sense of ideological threat. Vladimir
Putins speech lamenting the historical injustice
visited on a Russia that had been incapable of
protecting its own interests, fulminating against
Western-led color revolutions and containment,
and demanding respect
16
reflected the private
thoughts of many Chinese leaders. Xi himself has,
in the words of one leading Sinologist, spent the
first year of his rule demonstrating a palpable
obsession with the demise of the Soviet Union.
17

Echoing Putins description of the fall of the USSR
as the greatest geopolitical catastrophe of the
century, Xi gave one of his first speeches as leader
urging party officials to learn the lessons of its
untimely end: Finally, all it took was one quiet
word from Gorbachev to declare the dissolution of
the Soviet Communist Party, and a great party was
16
Full English-language translation of Putins speech claiming
Ukraines Crimea for Russia, Kyiv Post, Mar 19, 2014, http://
www.kyivpost.com/content/ukraine/putin-justifies-russian-
annexation-of-ukraines-crimea-339815.html, last accessed May
6, 2014.
17
Joseph Fewsmith, Maos Shadow, China Leadership Monitor,
No. 43, p. 7, http://media.hoover.org/sites/default/files/docu-
ments/CLMJF.pdf, last accessed May 6, 2014.
gone In the end nobody was a real man, nobody
came out to resist.
18

In the eyes of senior Chinese officials, Putins
bona fide real man efforts at resisting the West
have elicited a mix of fascination, attraction and
horror. For over a decade, he has been a standing
counterpoint to Chinas more measured, cautious,
and weaker collective leadership, tougher, bolder
and more reckless in his exercise of power.
At times of high political anxiety, Chinese leaders
have been drawn to Putins Russia by a sense
of ideological affinity that has even offered the
glimmer of hope that the two sides strategic
differences might be bridged. A decade ago in
particular, when the Tulip Revolution in Kyrgyzstan
and the Andijian uprising in Uzbekistan seemed
to be bringing the color revolutions of Ukraine
and Georgia disturbingly close to Chinas borders,
some of Beijings geopolitical caution was thrown to
the wind. The 2005 China-Russia Joint Statement
on New World Order
19
and subsequent demands
from the Sino-Russian-dominated Shanghai
Cooperation Organization (SCO) for the United
States to set a timetable for the closure of its Central
Asian bases, looked distinctly like China dabbling
with a defensive political alliance.
Yet like many of his predecessors in the Kremlin,
Putins moments of strategic boldness have
conspicuously failed to take Chinese interests into
account. The Georgia invasion was an embarrassing
spoiler for the 2008 Olympics, Chinas coming
out party, and Putins post-9/11 decision to give
the U.S. military access to the Central Asian bases
18
Chris Buckley, Vows of Change in China Belie Private
Warning, The New York Times, Feb 14, 2014, http://www.
nytimes.com/2013/02/15/world/asia/vowing-reform-
chinas-leader-xi-jinping-airs-other-message-in-private.
html?pagewanted=all, last accessed May 6, 2014.
19
China, Russia issue joint statement on new world
order, Peoples Daily, Jul 4, 2005, http://english.people.com.
cn/200507/01/eng20050701_193636.html, last accessed May 6,
2014.
The German Marshall Fund of the United States 8
in the first place stunned Beijing. Moreover, the
longstanding obstacles to a deeper relationship
showed little sign of being overcome. Russia has
deep-seated concerns about becoming an energy
appendage of the Chinese economy and sliding
into junior partner status in the relationship,
fears about Chinas encroachment in the Russian
Far East, and a residual sense that China may yet
become a military rival again. As a result, Moscow
has been unwilling to sell its most advanced
military equipment, close major pipeline deals, or
allow significant levels of Chinese investment in
the Russian economy. While the two sides forged
a close partnership at the UN Security Council,
Russia has given little backing to Chinas position
in East Asia, selling superior arms to Chinas rivals
India and Vietnam, and playing Beijing and Tokyo
off against each other on energy contracts. Even
when Chinese leaders have been quietly cheering
Putin on for standing up to the West, they have
seen little advantage to involving themselves in
an overt confrontation that could drag them into
a Cold War style contest or put Chinas economic
relations with its largest trading partners at risk.
Despite lively debates among Chinese foreign
policy strategists about the potential value of
forging a quasi-alliance with Russia against U.S.
hegemony,
20
geo-economics has generally
trumped geopolitics.
For these and other related reasons, the prevailing
view among Russia and China analysts has been
that the Ukraine crisis is unlikely to catalyze deeper
political bonds between Beijing and Moscow.
A Deepening Sino-Russian Partnership
However, there is ample evidence that the two
sides do not need to enter into a process of closer
political and military alignment to have a decisive
impact on each others interests. With the Russian
20
Zhang Feng, Chinas New Thinking on Alliances, Survival:
Global Politics and Strategy, 54:5, 2012, p.129-148.
economy already in recession, hemorrhaging
capital (the IMF expects at least $100 billion in
investment to be lost this year
21
) the rouble and
stock market plunging, its credit rating marginally
above junk status, and the profitability of major
Russian companies taking a hit, the rationale for
turning to China was clear. If Moscow showed
the political willingness and economic flexibility
to seal various long-negotiated deals, it had the
opportunity to unlock substantial Chinese capital,
while Beijing in turn stood to benefit from energy
and weapons deals of considerable value. Following
Vladimir Putins visit to China, that is exactly what
happened.
The most significant breakthrough was the $400
billion agreement on gas exports, over which talks
between China and Russia had been deadlocked
for over ten years. While Chinese oil imports from
Russia have already grown significantly, Gazprom
had long been unwilling to budge from its demands
for European pricing levels. China has been able
to fulfill many of its needs from Central Asian
suppliers, Turkmenistan in particular, but remained
eager to strike a deal if the Russians moved closer to
the Turkmen price. Even before the Ukraine crisis,
the balance of power in these negotiations had
started to shift. While China was finding a variety
of alternative suppliers, Russian companies faced
the prospect of major new LNG supplies being
added to the global market, long-term reductions
in European demand, and a variety of short-term
financing issues. Xi Jinpings visit to Russia in 2013
set the stage for a mutually beneficial solution. In
one of the largest-ever global energy contracts,
China National Petroleum Company (CNPC)
agreed upon a $270 billion supply deal with Rosneft
21
Carol Williams, IMF says Russian economy already in reces-
sion, bleeding capital, Los Angeles Times, Apr 30, 2014, http://
www.latimes.com/world/europe/la-fg-wn-russian-economy-
recession-imf-20140430,0,3964367.story#axzz30UjXDLkr, last
accessed May 6, 2014.
Despite lively debates
among Chinese foreign
policy strategists about
the potential value of
forging a quasi-alliance
with Russia against
U.S. hegemony,

geo-economics has
generally trumped
geopolitics.
Ukraine, Russia, and the China Option 9
to double oil exports to the Chinese market.
22

Crucially, it included a $60-70 billion prepayment
agreement, allowing the state-owned company
virtually to eliminate its net debt.
23

Gazproms huge 30-year deal with CNPC, at
volumes equivalent to one-quarter of its total sales
to the European market, appeared set to apply the
same model. Indications were that, thanks to the
Ukraine crisis, Russias newfound flexibility on
price
24
would bring the number closer to Chinas
target figure, but that the pill would be sweetened
with another Chinese prepayment to pay for many
of the capital costs.
25
The final details of the pricing
arrangements for a deal that ended up going to
the wire during Putins visit were not publicly
released. Yet indications were that Gazprom had
ultimately secured a price that was not too far
below the European average,
26
and the extended
rally in the companys stock price
27
continued
after the announcement. Coming at precisely the
22
China Energy Developments, Forum, The Oxford Institute
for Energy Studies, Issue 95, Feb 2014, p. 19-22, http://www.
oxfordenergy.org/wpcms/wp-content/uploads/2014/04/OEF-95.
pdf, last accessed May 6, 2014.
23
Jake Rudnitsky and Stephen Bierman, Rosnefts $270 Billion
Oil Deal Set to Make China Biggest Market, Bloomberg, Jun 21,
2013, http://www.bloomberg.com/news/2013-06-21/rosneft-s-
270-billion-oil-deal-set-to-make-china-biggest-market.html, last
accessed May 6, 2014.
24
Vladimir Soldatkin and Chen Aizhu, Ukraine crisis seen
speeding Gazprom deal with China, Reuters, Apr 23, 2014,
http://uk.reuters.com/article/2014/04/23/ukraine-crisis-russia-
china-idUKL6N0NF3DW20140423, last accessed May 6, 2014.
25
Vladimir Soldatkin, Ron Bousso, and Oleg Vukmanovic,
Gazprom eyes tradeoff between price, prepayment in
China talks, Reuters, Jan 22, 2014 http://www.reuters.com/
article/2014/01/22/gazprom-china-idUSL5N0KW16J20140122,
last accessed May 6, 2014.
26
Alexei Anishchuk, As Putin looks east, China and Russia
sign $400 billion gas deal, Reuters, May 21, 2014, http://www.
reuters.com/article/2014/05/21/us-china-russia-gas-idUS-
BREA4K07K20140521, last accessed May 22, 2014.
27
Angus Grigg, China, Russia set to sign $100 billion gas deal,
Financial Review, May 19, 2014, http://www.afr.com/p/world/
china_russia_set_to_sign_us_gas_xqkFQyP0ywUOwYCk-
wvR9JM, last accessed May 22, 2014.
moment when the West is looking to squeeze
Russias economy, Chinese energy experts privately
acknowledged that this would go down badly in
the United States and Europe, but considered the
temporary opprobrium a price worth paying for
a long-desired deal that will have an impact on
Chinas domestic gas market, and on regional and
global trading [that is] substantial and well beyond
previous expectations.
28
The gas deal was coupled with a relaxation of
informal restrictions on Chinese investment in
the Russian economy across a variety of sectors,
from natural resources to infrastructure and real
estate,
29
reflecting the fact that Moscow can no
longer afford to be quite as picky about the source
of its financing. And economic considerations have
also stimulated Russias new-found willingness
to sell advanced defense equipment to the
Chinese. For the best part of a decade, Moscow
had been cautious about giving China access to
military technology that could either be used to
augment its capabilities in a future conflict with
Russia or reverse-engineered and sold on in third
markets. After 15 years of being Chinas biggest
arms supplier following the end of the Cold War,
purchases had dwindled to virtually zero, and
Chinese defense companies were turning up at
international arms fairs with cloned versions of
Russian fighter jets.
30
But last year, faced with
budget restrictions, the Russian military embarked
28
China Energy Developments, Forum, The Oxford Institute
for Energy Studies, Issue 95, Feb 2014, p. 19-22, http://www.
oxfordenergy.org/wpcms/wp-content/uploads/2014/04/OEF-95.
pdf, last accessed May 6, 2014.
29
Evgenia Pismennaya, Yuliya Fedorinova, and Ilya Arkhipov,
Putin Going After Chinese Money to Sustain Sagging Russian
Economy, Bloomberg, May 9, 2014, http://www.bloomberg.
com/news/2014-05-08/putin-said-to-seek-chinese-money-with-
limits-on-platinum-gold.html, last accessed May 12, 2014.
30
Jeremy Page, China Clones, Sells Russian Fighter Jets, The
Wall Street Journal, Dec 4, 2010, http://online.wsj.com/news/
articles/SB10001424052748704679204575646472655698844, last
accessed May 6, 2014.
Coming at precisely the
moment when the West
is looking to squeeze
Russias economy,
Chinese energy experts
privately acknowledged
that this would go down
badly in the United
States and Europe,
but considered the
temporary opprobrium a
price worth paying.
The German Marshall Fund of the United States 10
Not only is Chinese
economic backing an
increasingly important
base of Moscows
support, but there is the
prospect that Russian
military technology
sales will directly
influence the balance of
power in Asia.
on a multi-billion dollar set of agreements that
promise to provide Beijing with some of its highest-
grade equipment. These include the Su-35 fighters,
Lada-class diesel submarines, and the S-400 air
defense missiles. The Su-35s, described by one
defense analyst as the best non-stealth fighter in
the world today, are superior to any plane currently
available to the PLA Air Force, with the potential
to strengthen Chinas enforcement and deterrence
capabilities in the East and South China Seas.
31
The
S-400s would for the first time give China complete
air dominance of Taiwan, as well as air defense
coverage of the SenkakuIslands (which China calls
the Diaoyu Islands), and the capacity to defend
against Indian ballistic missiles. Between them, the
systems provide the Chinese with a substantial
boost in combat quality.
32
Until recently, there
were doubts about whether some of these deals
would actually go through, but the Ukraine crisis
again seems to have tipped the balance further
31
Peter Wood, How China Plans to Use the Su-35, The
Diplomat, Nov 27, 2013, http://thediplomat.com/2013/11/
how-china-plans-to-use-the-su-35/, last accessed May 6, 2014.
32
Stephen Blank, The Context of RussoChinese Military
Relations, American Foreign Policy Interests: The Journal of the
National Committee on American Foreign Policy, Oct 7, 2013,
http://www.ncafp.org/ncafp/wp-content/uploads/2013/12/
Blank-Context-of-Russo-Chinese-Military-Relations.pdf, last
accessed May 6, 2014.
announcements stating that the contracts would be
signed this year came in March and April.
33
Energy sales, new investments, and arms supplies
do not require China or Russia to provide
reciprocal political backing for each others stances
in Europe and Asia, and they are certainly still
consistent with Beijing maintaining close ties to
the United States and the European Union. They
do, however, amount to a mutually enabling Sino-
Russian partnership that is qualitatively different
from the form it has taken in the post-Cold War
period. For many years, the prospect of Western
policies pushing China and Russia together, and
encouraging a Russian tilt away from Europe,
was too unlikely to merit serious consideration.
Now not only is Chinese economic backing an
increasingly important base of Moscows support,
but there is the prospect that Russian military
technology sales will directly influence the balance
of power in Asia, with an adverse impact on the
Wests friends and allies in the region.
33
Zachary Keck, Putin Approves Sale of S-400 to China, The
Diplomat, Apr 11, 2014, http://thediplomat.com/2014/04/putin-
approves-sale-of-s-400-to-china/ and http://www.ruaviation.
com/news/2014/3/19/2231/, last accessed May 6, 2014.
Ukraine, Russia, and the China Option 11
Chinas Presence in Europes Neighborhood
T
he picture looks somewhat different in
Europes eastern neighborhood, where the
contest between Russia and the West is
playing out over the stabilization, integration, and
economic struggles of the region. As Ukraines
second-largest trade partner
34
and a major
financier, China has already become directly
embroiled in the crisis as a result of its economic
relationship with Ukraine, though it has walked
the political line very carefully. Yanukovych hoped
to secure extra credit lines in China to help him
through the crisis induced by failing to sign the
EU association agreement.
35
He left with $8 billion
in investment promises but no new financing.
Following his ouster in February, China was
forced to deny that it was going to sue Ukraine
over a $3 billion agricultural loan.
36
A few weeks
later, a senior China EXIM Bank official made
stronger statements about Chinas commitment
to the country: Chinese companies have a lot
of investments in Ukraine, and the intensity
will increase. We will not pull out or reduce the
investments due to the current situation.
37

Neither in Ukraine nor elsewhere in the region are
Chinas economic objectives in individual countries
going to drive its broader strategic calculations.
The bigger issues at stake in Beijings relationship
34
China becomes Ukraines 2nd biggest trading partner,
Xinhua, Sep 26, 2013, http://www.globaltimes.cn/
content/814075.shtml; last accessed May 6, 2014.
35
Neil Buckley and Roman Olearchyk, Yanukovich seeks China
backing as unrest as imperils Ukraines economy, The Financial
Times, Dec 3, 2013, http://www.ft.com/intl/cms/s/0/5c435284-
5c25-11e3-931e-00144feabdc0.html#axzz30mebZHwB, last
accessed May 6, 2014.
36
Chu Daye, $3b loan OK: Ukraine foreign ministry, The
Global Times, Feb 27, 2014, http://www.globaltimes.cn/
content/845202.shtml, last accessed May 6, 2014.
37
Ukraines Unrest Wont Keep China From Investing, Exim
Bank Says, Bloomberg, Mar 14, 2014, http://www.bloomberg.
com/news/2014-03-14/ukraine-s-unrest-won-t-keep-china-
from-investing-exim-bank-says.html, last accessed May 6, 2014.
with Russia and Europe will not be fundamentally
affected by a crop deal or the sale of an aging, half-
finished aircraft carrier. But Beijing is not willing
simply to subordinate its economic interests to
Russian political objectives. China has spent the
last decade-and-a-half undertaking a dramatic
expansion of its trade and energy ties with Central
Asia, a by-product of which has been a major
rebalancing of the regions center of economic
gravity away from Moscow.
38
Now in Central and
Eastern Europe, there is the prospect of leveraging
Chinas geo-economic ambitions in a similar
fashion.
One of the initiatives that Xi was keenest to tout
during his visit to Europe was the Silk Road
Economic Belt (see Figure 2). The commercial
logic is that road and rail routes would provide a
faster alternative to the cheap (but slow) shipping
corridors, and loop the fast-growing Chinese
interior provinces more effectively into global
transportation routes much as the infrastructure
along Chinas coasts powered the previous phase
of its economic boom. The strategic logic is to
reduce Chinas dependence on the maritime realm
for its trade and energy needs, not least as tensions
with the United States and East Asian neighbors
intensify.
39
Last year, China launched a freight
route running from the central Chinese city of
Zhengzhou through Kazakhstan, Russia, Belarus,
Poland, and on to Hamburg. Hewlett Packard,
DHL, and iPhone manufacturer Foxconn are
among the companies who have developed their
own Sino-European express rail services, which
38
Evan A. Feigenbaum, and Robert A. Manning, The United
States in the New Asia, Council on Foreign Relations, Council
Special Report No. 50, Nov 2009, http://www.cfr.org/asia-and-
pacific/united-states-new-asia/p20446, last accessed May 6,
2014.
39
For a more comprehensive Chinese exposition of the Go
West rationale, see Wang Jisis Westward: Chinas Rebalancing
Geopolitical Strategy, International and Strategic Studies Report
73, Center for International and Strategic Studies at Peking
University, 2012.
China and Europe
4
As Ukraines second-
largest trade partner
and a major financier,
China has already
become directly
embroiled in the
crisis as a result of its
economic relationship
with Ukraine.
The German Marshall Fund of the United States 12
slash weeks from the sea route. Kazakhstan is
planning for 7.5 million containers to be shipped
by rail each year by 2020, versus barely a few
thousand in 2012.
40
As a result, China has started
touting Eastern Europe as the logistics gateway
to European markets, and has been developing
a set of infrastructure projects there to facilitate
these plans. The 2013 China-CEE summit agreed
to build a new international railway transport
artery linking China and CEE countries, and
will encourage the setting up of bonded areas
and distribution centers along the railroad [and]
40
Keith Bradsher, Hauling New Treasure Along the Silk
Road, The New York Times, Jul 20, 2013. http://www.nytimes.
com/2013/07/21/business/global/hauling-new-treasure-along-
the-silk-road.html?_r=0&pagewanted=all, last accessed May 6,
2014.
deepen cooperation in highway, port and airport
construction.
41
Last October, some Central and
Eastern European countries even featured in official
documents under the ambit of Chinas so-called
greater neighborhood.
42
At times, this initiative has raised hackles in the
EU, most notably when China started undertaking
separate meetings with 16 leaders from the region
(many of which are EU members), and established
41
China, CEE countries vow to boost investment, infra-
structure cooperation, Xinhuanet, Nov 26, 2013, http://news.
xinhuanet.com/english/china/2013-11/26/c_132920119.htm, last
accessed May 6, 2014.
42
Mu Chunshan, How Does Europe Rank in Chinas
Diplomacy? The Diplomat, Apr 5, 2014, http://thediplomat.
com/2014/04/how-does-europe-rank-in-chinas-diplomacy/, last
accessed May 10, 2014.
Figure 2: Chinas New Silk Roads
The red line indicates the proposed land-based economic trade route, the Silk Road Economic Belt, and the blue line the
proposed maritime trade route, the Maritime Silk Road.
Source: Xinhua, 2014
Ukraine, Russia, and the China Option 13
For Western
policymakers, and
particularly for
European officials, there
is a clear opportunity
to work with China to
sustain and deepen its
economic engagement
in the region.
a distinct secretariat to manage the process.
43

Deeper Chinese involvement in Central and
Eastern Europe is by no means uniformly positive
from a Western perspective. One of the largest parts
of the $8 billion of Chinas investment pledged to
Ukraine last year was the $3 billion construction of
a deep-water port on the Crimean peninsula, with
a $10 billion airport, LNG terminal, and shipyard
44

planned further down the line, which would
form one of the nodes for the new Sino-European
logistics corridor.
45
Not only have Russian officials
claimed that the investment is still going ahead,
46

but they have been touting new plans for a Chinese-
built transport corridor across the Kerch Strait
47

that Russian analysts claim mean that China de
facto recognizes that Crimea became part of Russia
voluntarily.
48
Russia has a strong interest in being
the primary conduit for Sino-European trade, and
the Eurasian customs union was itself one of the
43
Justyna Szczudlik-Tatar, Does Central Europes Cooperation
With China Undermine EU Policy? Friends Of Europe, Dec
20, 2013, http://www.friendsofeurope.org/contentnavigation/
publications/libraryoverview/tabid/1186/articletype/articleview/
articleid/3638/does-central-europes-cooperation-with-china-
undermine-eu-policy.aspx, last accessed May 6, 2014.
44
Lucy Hornby, China entrepreneur behind plans to build deep
water Crimean port, The Financial Times, Dec 5, 2013, http://
www.ft.com/intl/cms/s/0/04619a7a-5da2-11e3-95bd-00144fe-
abdc0.html#axzz30uall15t, last accessed May 6, 2014.
45
James Kynge, Ukraine a setback in Chinas Eastern Europe
Strategy, The Financial Times, Feb 27, 2014, http://blogs.ft.com/
beyond-brics/2014/02/27/ukraine-a-setback-in-chinas-eastern-
europe-strategy/, last accessed May 6, 2014.
46
Andrew Rettman, Russia and China forge closer ties, as EU
explores sanctions, EU Observer, Apr 17, 2014, http://euob-
server.com/foreign/123879, last accessed May 6, 2014.
47
China-Russia join hands for $1.3 bn Crimea project , The
Brics Post, May 5, 2014, http://thebricspost.com/china-russia-
join-hands-for-1-3-bn-crimea-project/#.U2hyml6bE5s, last
accessed May 6, 2014.
48
Arten Zhitenev, China De Facto Recognizes Crimea as
Part of Russia, Ria Novosti, May 5, 2014, http://en.ria.ru/
world/20140505/189592723/OPINION-China-De-Facto-Recog-
nizes-Crimea-as-Part-of-Russia.html, last accessed May 6, 2014.
measures that encouraged Beijing to develop the
new rail corridor in the first place.
49

There is little doubt, however, that Beijing plans
to spread the benefits and connections around the
region rather than relying on a single artery, much
like the many branches of the historical trade route
that the initiative is modeled on. Despite Chinas
ideological and strategic reasons not to want to see
the West win this particular contest with Russia,
it has certainly not signed up to Moscows agenda
to maintain a sphere of influence that is stuck
in a permanent state of economic and political
dependence. While China still behaves with a
modicum of sensitivity in Russias backyard,
it is also well aware that in East Asia, Russia has
been more than willing to develop commercial
and security relationships with very little regard
for Beijings preferences. Although it will not
say as much in public, as its relationships in the
region move from the bilateral to the strategic,
China increasingly has more to gain from Central
and Eastern Europes integration, prosperity, and
stability than it does in temporarily helping to prop
up Russian-backed kleptocrats and breakaway
criminal enclaves. Chinese officials have even
indicated their willingness to play a discreet role in
assisting with the economic stabilization of Ukraine
itself. For Western policymakers, and particularly
for European officials, there is a clear opportunity
to work with China to sustain and deepen its
economic engagement in the region. Alongside
Western aid and financial support, Chinese
investment, financing, trade, and infrastructure
packages can be actively solicited in the Eastern
neighborhood as a priority for cooperation
between the EU and China. These issues featured
prominently during Xi Jinpings meetings in both
49
Keith Bradsher, Hauling New Treasure Along the Silk
Road, The New York Times, Jul 20, 2013, http://www.nytimes.
com/2013/07/21/business/global/hauling-new-treasure-along-
the-silk-road.html?_r=0&pagewanted=all, last accessed May 6,
2014.
The German Marshall Fund of the United States 14
[Russias case] is the
first time that these
sophisticated financial
sanctions have been
applied to a major
economy and global
power, and the trade-
offs for China are by no
means the same.
Germany which is the end of the road for the
Silk Road Economic Belt and Brussels. While
Western officials will struggle to persuade Chinese
officials to stop making lucrative deals with
Russia, they can press Beijing to counterbalance
this by pushing ahead with major Sino-European
infrastructure initiatives and targeted investment
projects in key countries, including Ukraine.
Applying Financial Sanctions to Major Powers
A more complex balance of considerations applies
when it comes to Beijings handling of financial
sanctions. China has trodden very carefully over
matters of global financial stability and the integrity
of its banking sector. It has not been willing to take
on major economic risks for the sake of geopolitical
gambits nor to have its banks become pariahs
rather than the major global actors it has taken
them some time to develop.
As Hank Paulson recounts in his memoirs, when,
at the height of the financial meltdown in 2008,
Russian officials suggested to China that the two
sides sell their holdings in Fannie Mae and Freddie
Mac to force the United States to use its emergency
authorities to prop them up, Beijing wanted
nothing to do with it,
50
a reflection of the cautious
approach that it took throughout the crisis. When
the U.S. Treasury embarked on the process of using
financial instruments to target rogue states, China
also took a conservative stance. So paranoid were
its banks about handling North Korean funds after
the Treasurys Section 311 designation of Banco
Delta Asia, a Macao bank that facilitated North
Koreas money-laundering, that a ripple of accounts
were quickly frozen by Chinese institutions that
wanted to retain their access to the U.S. financial
system. After a political deal was forged to return
50
Henry M. Paulson, On the Brink: Inside the Race to Stop the
Collapse of the Global Financial System, Business Plus Publisher,
2011; Loc 2583/7125 [IPAD 3rd Generation; MD366LL/A
version].
the North Korean funds, Chinas central bank and
finance ministry still refused to touch them, leaving
the Russian central bank to take on the task.
51

Chinese oil companies slashed their purchases
from Iran in order to receive waivers allowing
them to continue dealing with U.S. banks.
52
While
Chinese diplomats worked to minimize the scope
of multilateral sanctions at the UN, Chinese
companies and economic officials were making
sure that, when it came to matters of financial
legitimacy, they stayed on the right side of the line.
But Russia is a different case from Iran or North
Korea. It is the first time that these sophisticated
financial sanctions have been applied to a major
economy and global power, and the trade-offs
for China are by no means the same. For Chinese
multinationals, the calculation in the case of North
Korea was that the modest volume of business
they transacted with Pyongyang was not worth
the risk of becoming a financial pariah. Iran, a far
larger economy and significant energy exporter,
was a more balanced call, but the threat of U.S.
fines, the difficulties of settling payments, and
the reputational risks ultimately acted as a similar
deterrent not enough to stop China from
sanctions-busting entirely but a major inhibiting
factor. With Russia, an economy more than five
times the size of Iran, not only are the sums
of money at stake far larger, but the process of
unwinding its global entanglements is a far more
complex task. Not only is the likelihood that
Chinese companies will become targets of a U.S.
sanctions campaign consequently far less, and
dealing with Russian firms is a more worthwhile
risk to take.
51
Zarate, Juan, Treasurys War: The Unleashing of a New Era
of Financial Warfare, Public Affairs, 2013, Loc 4122/9698 [IPAD
3rd Generation; MD366LL/A version].
52
Rick Gladstone, U.S. Exempts Singapore and China on Iran
Oil, The New York Times, Jun 28, 2012, http://www.nytimes.
com/2012/06/29/world/us-exempts-china-and-singapore-from-
sanctions-on-iranian-oil.html?_r=0, last accessed May 6, 2014.
Ukraine, Russia, and the China Option 15
Russian firms facing
difficulties accessing
funds in Western
markets are already
turning to China for
financing and access to
payment systems.
The calculations over whether to assist Moscow
in the face of the Wests financial pressure are not
purely economic. Before the Crimea annexation,
targeted financial sanctions had only been directed
at states engaged in classic rogue practices, illicit
nuclear programs, terrorist financing, proliferation,
and counterfeiting. Now they are being used against
a power whose economic size and membership in
virtually every important global club the P5, the
G8, the WTO, and a host of others might have
been thought to protect it. It is a leap to imagine
sanctions being applied to China another five
times Russias economic size, many times more
deeply integrated with the fabric of the global
economy, and with vastly greater retaliatory
capacity but the precedent has been set. Just as
it would have been much harder to contemplate
using these tools against Russia without the Iranian
experience, the warnings from U.S. officials
directed at Beijing sound more credible now than
they would have done a few months ago. These
are not the crude economic weapons that China
faced down in the years after the 1989 Tiananmen
crackdown but precision instruments that operate
as much by engendering a cascade of fear in the
private sector as through any sustained government
actions.
53
The ramifications for Russia have already
been acute, with European Central Bank head
Mario Draghi putting the existing capital flight
figure as high as $220 billion
54
as a result of what
are still a very limited set of EU and U.S. sanctions.
53
The best treatment of the subject is Zarate, Juan, Treasurys
War: The Unleashing of a New Era of Financial Warfare, Public
Affairs, 2013.
54
Ambrose Evans-Pritchard, ECB: capital flight from Russia
has hit $220bn, Daily Telegraph, May 8, 2014, http://www.
telegraph.co.uk/finance/financialcrisis/10817511/ECB-capital-
flight-from-Russia-has-hit-220bn.html, last accessed May 12,
2014.
China on the Rise in the Global
Financial System
Russian firms facing difficulties accessing funds
in Western markets are already turning to China
for financing and access to payment systems. The
issuance of dim sum bonds RMB-denominated
debt issued outside China by Russian companies
has been growing. While the $603 million of yuan
debt they sold last year was a modest sum, and the
overall market remains immature, the rationale for
companies with substantial Chinese revenues to
scale this up is clear. Gazprom has already mooted
the prospect of further yuan bond issues, a curtsey
in front of China, as one Russian asset manager put
it.
55
In the short-term, this would not even be close
to sufficient in helping Russia avoid a sanctions-
induced Lehman moment
56
if its financial
system hits the wall. RMB internationalization
has simply not gone far enough yet for there to be
any reasonable expectation that Chinese capital
markets would be able to compensate Russia for the
diminished access to financing from Europe and
the United States. But with Chinas economic base
and global trading role, Beijing has the capacity to
change that picture quite rapidly over the coming
years. The RMB has already surpassed the euro as
the second most used currency in international
trade finance (see Figure 3), and is expected to push
$1 trillion by the end of 2014.
57
The sanctions on
Russia provide additional geopolitical impetus to
Chinas moving further forward with a process that
55
Ksenia Galouchko and Elena Mazneva, Putin Turn to China
Heralds New Look at Yuan Debt: Russia Credit, Bloomberg, Apr
14, 2014, http://www.bloomberg.com/news/2014-04-14/putin-
turn-to-china-heralds-new-look-at-yuan-debt-russia-credit.
html, last accessed May 6, 2014.
56
Robert Kahn, Putins Lehman Moment, Why Sanctions
Will Work in Russia, Foreign Affairs, Apr 10, 2014, http://www.
foreignaffairs.com/articles/141123/robert-kahn/putins-lehman-
moment, last accessed May 6, 2014.
57
Ansuya Harjani, Yuan trade settlement to grow by 50% in
2014: Deutsche Bank, CNBC, Dec 11, 2013, http://www.cnbc.
com/id/101263663, last accessed May 6, 2014.
The German Marshall Fund of the United States 16
is likely to see the RMB become a major reserve
currency, a take-off in RMB-denominated bonds,
and a Chinese banking sector that grabs an ever
larger share of international business.
China already has the means to assist in other ways.
Russian banks have been hit by service cut-offs by
Visa and Mastercard, which suspended services
to SMP Bank, InvestCapital Bank, and Bank
Rossiya. While the immediate Russian response
was to move forward with plans to establish its
own national payments system,
58
another option
under discussion is to expand the use of the
existing Chinese network, UnionPay, already
the third largest payment system in the world.
59

VTB, Russias second largest financial institution,
58
Megan Davies, Russias card plan seen unlikely to repli-
cate Chinas UnionPay, Reuters, Apr 4, 2014, http://www.
reuters.com/article/2014/04/04/us-russia-cardsystem-idUS-
BREA3310Q20140404, last accessed May 6, 2014.
59
Camilla Hall and Kathryn Hille, Visa and MasterCard
fear sanctions fallout, The Financial Times, Mar 1, 2014,
http://www.ft.com/intl/cms/s/0/7a015708-d14b-11e3-bdbb-
00144feabdc0.html#axzz30ZcGOlRH, last accessed May 6, 2014;
Guest Post, Making a non-western card payment system, in
Russia, The Financial Times, Apr 25, 2014, http://ftalphaville.
ft.com/2014/04/25/1837182/guest-post-making-a-non-western-
payment-card-system-in-russia/, last accessed May 6, 2014.
announced a deal with the Bank of China during
Putins visit to develop cooperation on rouble
and RMB settlements.
60
China is also watching
the debates about SWIFT, the interbank financial
messaging network. When Iranian banks access
to the system was cut off in 2012, Chinese and
Russian banks which are members questioned
whether it had become merely a political tool of
the West.
61
That view would be roundly confirmed
if Russian financial institutions became the next
target, potentially resulting in the fragmentation
of the system and the loss of a reliable source of
intelligence on matters ranging from terrorism to
organized crime.
Operating alone, Russia does not have the
wherewithal to overcome many of the most
egregious effects of financial sanctions, and in the
short-term, China will not move hastily to set in
60
Michael Pizzi, Russia, China Sign Deal to Bypass U.S. Dollar,
Al Jazeera America, May 20, 2014, http://america.aljazeera.com/
articles/2014/5/20/russia-china-bankdeal.html, last accessed
May 28 2014.
61
Zarate, Juan, Treasurys War: The Unleashing of a New Era
of Financial Warfare, Public Affairs, 2013, Loc 4420/9698 [IPAD
3rd Generation; MD366LL/A version].
Figure 3: Global Currencies as a Percentage of Trade Finance and Payments
Source: SWIFT (2014) and Bloomberg News (2013)
40%
32%
9%
2%
0%
17%
Currencies as a percent of world
payments - March 2014
USD
EUR
GBP
CNY
RUB
All rest
9%
7%
81%
1% 2%
Share of letters of credit and collections
October 2013
CNY
EUR
USD
YEN
Other
Ukraine, Russia, and the China Option 17
Unlike Russia,
Beijings underlying
strategy hinges on its
continuing to shepherd
its economic ascent
successfully, not
throwing its weight
around over territorial
disputes or ideological
crusades.
motion changes to the global financial system that
would be difficult to reverse. But there is a risk that
this will be a tipping point. And the implications, if
China decides that its interests are best served by a
move toward de-dollarization, extend well beyond
the long-term sustainability of the Russia sanctions
to encompass the basic architecture of the global
economy.
The Price of Interdependence
Xi Jinpings last stop in Europe was a visit to the
institutions of the European Union, the only
Chinese head of state ever to do so. In recent years,
Beijing had seemed to be backing away from its
earlier support for the EU as another pole in a
multipolar world, happier to play divide-and-rule
and transact the serious business with member
states. But for the first time since the failed effort
to persuade the Europeans to lift the arms embargo
against China, there was a big ask for a Chinese
leader in Brussels. The EU and China are in the
process of negotiating an investment agreement,
but Xi wanted to push reluctant European
officials toward committing to the next step
free-trade talks.
62
China has grown concerned
that it is being left out of the action between the
advanced economies, who are busy negotiating
Trans-Pacific Partnership (TPP), Transatlantic
Trade and Investment Partnership, and major
bilateral deals that some EU officials have privately
described as an Asia-minus-one strategy. There
is even debate in China of using the prospect of
joining a post-TPP agreement with the United
States and a bilateral deal with the EU as a lever
for economic reforms at home, much as WTO
accession negotiations functioned during the Jiang
Zemin and Zhu Rongji era. Europes complete lack
of interest in entering talks with such a difficult
62
Robin Emmott and Francesco Guarascio, Chinas Xi wins
EU pledge to consider free-trade deal, Reuters, Mar 31, 2014,
http://www.reuters.com/article/2014/03/31/us-china-eu-idUS-
BREA2U15J20140331; last accessed May 6, 2014.
economic partner at this stage was evident from
the painful language in the joint statement that
references willingness to envisage broader
ambitions including, once the conditions are right,
toward a deep and comprehensive FTA, as a longer
term perspective.
63
But Xis agenda provided
a marked contrast to the debates underway in
the European Council about how to disentangle
the European and Russian economies. However
challenging the next phase of Chinas economic
reforms is, the basic direction including further
and deeper integration in the global economy is
clear. Unlike Russia, Beijings underlying strategy
hinges on its continuing to shepherd its economic
ascent successfully, not throwing its weight around
over territorial disputes or ideological crusades.
Burgeoning Sino-European economic ties may even
play a discreet role in helping to stabilize Europes
eastern neighborhood if both sides can successfully
push ahead with a major set of joint cooperation
projects on infrastructure and development in the
region.
Yet with Putins visit to China this month, Beijings
less benign instincts have also been on display.
Chinas decision immediately after Obamas ally
reassurance tour to make assertive moves in the
South China Sea by deploying an oil rig in waters
claimed by Vietnam, accompanied by a flotilla of
80 ships, helicopters, and fighter aircraft, caught
many analysts, and the Vietnamese themselves, by
surprise. Relations between China and Vietnam
had been improving and there was no obvious
cause for the escalation.
64
It seemed like a probe
that was almost designed to underline the most
63
Joint Statement: Deepening the EU-China Comprehensive
Strategic Partnership for mutual benefit, European External
Action Service, Brussels, Mar 31, 2014 140331/02, http://
eeas.europa.eu/statements/docs/2014/140331_02_en.pdf, last
accessed May 6, 2014.
64
Demetri Sevastopulo, China U-turn on Vietnam Charm
Offensive, Financial Times, May 12, 2014, http://www.ft.com/
intl/cms/s/0/96267a7c-d9bf-11e3-920f-00144feabdc0.html, last
accessed May 12, 2014.
The German Marshall Fund of the United States 18
difficult questions posed by Russias recent behavior
is the United States drawing a red line around
its allies and leaving everyone else to their fate, or
will the West defend basic international norms in
the face of coercion? Does it have effective means
to do so short of the use of force? Beijing hopes,
and increasingly expects, that the answer to the
latter question is no. While it is easy to dismiss
the brandishing of a China option in Moscow
as little more than a piece of theater, the failure
of sanctions to change Russias course of action
would be a powerful demonstration that for major
non-Western powers, economic interdependence
is no fundamental barrier to military assertiveness.
China has little interest in seeing Russia successfully
destabilize Ukraine, but it does have an incentive to
squash any temptation for the West to believe that
the threat of economic isolation is a viable form of
deterrence. If the purchase of advanced weapons
and a few hundred billion dollars worth of cheap
gas is all that it takes, so much the better. But the
exchanges between China and Russia in the months
leading up to Vladimir Putins next scheduled visit
to China in November will go well beyond that, and
the Ukraine crisis could yet prove to be the catalyst
not just for a new European security order, but a
post-Western financial order, too.
Ukraine, Russia, and the China Option 19
CEE Central and Eastern Europe
CNPC China National Petroleum Company
ECB European Central Bank
EU European Union
FTA Free trade agreement
G7 Group of Seven (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United
States)
G8 Group of Eight (Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the
United States; the European Union is represented within the G8 but cannot host or chair summits)
IMF International Monetary Fund
LNG Liquefied natural gas
P5 The five permanent members of the United Nations Security Council (China, France, Russia, the
United Kingdom, and the United States)
PLA Peoples Liberation Army of the Peoples Republic of China
PRC Peoples Republic of China
RMB Renminbi, the official currency of the Peoples Republic of China
SCO Shanghai Cooperation Organization
SWIFT Society for Worldwide Interbank Financial Telecommunication
TPP Trans-Pacific Partnership
TTIP Transatlantic Trade and Investment Partnership
UN United Nations
US United States
USSR The Union of Soviet Socialist Republics
WTO World Trade Organization
Abbreviations
OF F I CE S
Washington Berlin Paris Brussels
Belgrade Ankara Bucharest Warsaw Tunis
www.gmfus.org