Ukraine attack: freeze on Russia loans reveals fine balancing act from China

China-led AIIB and the NDB have both put activities with Russia ‘on hold’
Beijing is buying time to devise strategy as Russia is hit by West-led sanctions storm over assault on Ukraine, says Moscow-based analyst

Ukraine

Kinling Loin Beijing

Published: 10:02pm, 4 Mar 2022

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The decision by two China-backed development banks to halt “all activities” with Russia shows Beijing is treading a careful line on its close trading partner amid worldwide condemnation of the attack on Ukraine, analysts believe.

This comes after the announcements from the Asian Infrastructure Investment Bank (AIIB) and New Development Bank on Thursday sparked speculation on whether Beijing was altering its position on Russia amid growing international pressure.

China has consistently opposed sanctions against Russia over its military operation in Ukraine, and refrained from calling its actions an “invasion”.

Meanwhile, the United States, Canada, Britain and the European Union have ordered a flurry of financial sanctions on Moscow since its forces entered Ukraine last week, including banning at least seven Russian banks from using the Swift global secure messaging system that enables transactions, and freezing its central bank assets.

00:41

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The Chinese banking regulator on Wednesday asserted Beijing’s opposition to financial sanctions against Russia.

However, both the AIIB and NDB the next day said activities with Russia would be “put on hold”, with the former also including Belarus in the freeze.

The China-led AIIB said it had put “all activities relating to Russia and Belarus on hold and under review” in view of the conflict in Ukraine. Belarus has supported Russian war efforts in their neighbouring country.

Thursday’s statement from the Beijing-based bank also referred to the “war in Ukraine”, going further than many Chinese government-linked institutions that have tended to use the Kremlin’s description of a “military operation” instead.

Russia is a co-founder and No 3 shareholder of the AIIB, with China holding the biggest stake.

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Later the same day, the Shanghai-based NDB, also known as the “BRICS bank” in reference to founding members Brazil, Russia, India, China and South Africa, cited “unfolding uncertainties and restrictions” as a reason for putting “new transactions with Russia on hold”.

Danil Bochkov, an analyst at the Russian International Affairs Council in Moscow, said the banks’ decisions did not signal that China was backing down on relations with Russia, but rather that it was taking time to find ways to avoid risks under the new sanctions.

“I think that it will not have any significant effect on Russia-China relations, because now Russia is more preoccupied with the current escalation with Ukraine rather than tracking the behaviour of its partners,” Bochkov said.

“However, it falls within China’s logic … [and] its attempts to abstain from any direct diplomatic involvement in the crisis while striking [an] extremely cautious line on doing business with Russia.”

01:22

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The BRICS nations are equal stakeholders at the NDB, but China has the biggest share at the AIIB with 26.5 per cent, followed by India at 7.6 per cent and Russia at 6 per cent.

The AIIB’s voting structure is tied to shareholding and it is unclear how it reached the decision to halt activities with Russia. The bank has yet to reply to inquiries from the Post.

François Godement, senior adviser for Asia at the Paris-based Institut Montaigne, said the AIIB’s European members, who make up roughly 23 per cent of its voting rights, had contributed to the decision.

“The decision by AIIB management was literally unavoidable if it wanted to preserve its multilateral membership,” he said. “The issue of continuing operations in and with Russia was already on the floor given previous European sanctions.”

China strives to portray the AIIB as an international institution, but sceptics see it as Beijing’s attempt to exert influence by funding its Belt and Road Initiative projects, and set up a counterbalance to the World Bank and International Monetary Fund.

The bank, which began formal operations in 2016, has 105 members. Its president – Jin Liqun – is Chinese, while the five vice-presidents are nationals of Britain, Indonesia, Russia, India and Germany.

The bank’s statement on Thursday asserted that it was a “multilateral organisation created by an international treaty” which adhered to “international law”.

Godement noted that the choice of the word “war” was telling, but the reminder that the AIIB adhered to international law did not contradict the official Chinese stance.

“This does show that China is not ready to make sacrifices in principled support of Russia,” he explained.

“It does leave the question open of all other Chinese institutions that are not multilateral, and reinforces the idea that the AIIB is a separate experiment, alone in its kind.”

02:25

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Bochkov said he believed that both banks were taking time out to find the best way forward in the current climate.

“So, China [is taking] its time to think [about] how to adjust its behaviour to avoid Western secondary sanctions while not hurting its ties with Russia.

“[The] AIIB move is more decorative since the bank has just two projects in Russia worth US$800 million, which is a fraction [of its total commitments].”

The AIIB has so far approved two Russian projects for US$800 million in all, with another US$300 million deal in the works, out of 168 total approved projects valued at almost US$34 billion.

It is considering two projects in Belarus, for a total of around US$200 million.