China has key role to play as sanctions on Russia fuel inflation
- If the West has nothing to offer Moscow but the stick, Beijing may provide the carrot for peace
The world wants peace in Ukraine. If nothing else, the Russian invasion is causing havoc in the global economy. Inflation was already rearing its ugly head well before the conflict. But as Western sanctions intensify against Russia, the prices of oil, wheat and other commodities have been pushed through the roof, translating into higher costs for consumers. China is being affected like everyone else. But it is in a unique, if difficult position in that it could help Russia, a declared close partner, to ease economic pains from the sanctions while playing a role in peace mediation. Amid slowing growth, policymakers in Beijing have some highly complicated calculus in geopolitics, oil trade and economics, both global and domestic, to work through.
Rising commodity prices may start to filter through in China even though inflation has been under control in recent months. Oil prices have sounded a red alert about the increasing risk of imported inflation. In this regard, cheap oil from Russia may look attractive. However, it presents myriad problems in the current hostile environment between Moscow and the West. In the short run, China’s ability to accept more Russian oil is limited, despite or because of British and American sanctions.
Ukraine crisis leaves Asian economies facing ‘disastrous’ price rises
Since the start of the war in Ukraine, some Chinese oil refiners have started using cash transfers to maintain seaborne crude imports from Russia’s Far East. However, Chinese spot buyers of Russian crude have reportedly refrained from closing deals temporarily. Uncertainty, from cargo shipping bottlenecks to fears of retaliation from Washington, have made them cautious.
Despite a bilateral initiative to use more yuan and rouble, most transactions are still conducted in US dollars.
Major Russian banks have been cut off from Swift, the international messaging system for money transfer. While China has developed the Cross-Border Interbank Payment System (CIPS), it will take time for Russian oil suppliers to adjust or even accept wholesale transactions in yuan.
Still, both countries have high incentives to make the oil trade work. Russia was China’s second largest crude oil supplier last year, and has become experienced in absorbing cheap oil from Iran and Venezuela by circumventing US-led sanctions against them.
Similar moves will push the Russian economy closer to China. China has called for ceasefire talks between Ukraine and Russia and rightly warned that the Western-led sanctions could hurt the world economic recovery from the pandemic. If the West has nothing to offer Russia but the stick, China may provide the carrot for peace.
