War economy: Money, chips and ball bearings - this is how China lubricates Russia's war machine

Shortly after Putin's attack on Ukraine, Western states decided to impose unprecedented sanctions on Russia.

War economy: Money, chips and ball bearings - this is how China lubricates Russia's war machine

Shortly after Putin's attack on Ukraine, Western states decided to impose unprecedented sanctions on Russia. At the end of February 2002, when the first EU package of economic and financial sanctions against Russia was passed, Foreign Minister Annalena Baerbock confidently judged: "This will ruin Russia."

We now know that nothing is more wrong than Baerbock's assumption. Russia's economy is booming. The entire country has switched to a war economy and it is fed by the Kremlin's enormous revenues. Putin's money makes war attractive. As a soldier in Ukraine and as a worker in the defense industry you can earn a small fortune - by Russian standards. One country in particular ensures that Moscow's revenues from raw material exports bubble up and that Russian industry does not collapse due to a lack of machines and spare parts: China. Immediate neighbor Russia, the strongest economy in the world when adjusted for purchasing power and the challenger to the USA in terms of power politics.

Smarter minds like analyst Velina Tchakarova immediately recognized the problem with the Western sanctions regime. The West had nothing to offer China except obedience to its sanctions. Tchakarova coined the term "DragonBear" for Chinese-Russian relations. She wrote in March 2022: "China has nothing to gain by supporting the US position. But if it helps Russia, Beijing knows that Russia will keep the US busy in Europe. And US attention will be diverted from the Pacific and Taiwan "In addition, China will have access to the most sought-after raw materials like no other in the world." At the same time, the Chinese rival was identified in the West as the main global opponent. Every pro-Chinese channel at the time scoffed: "We're supposed to help you defeat Russia. And when that's done, it'll be our turn."

In terms of power politics, there was only one option for Beijing: to support Russia while maintaining a low profile. This happens in two directions: Beijing offers itself as a buyer of Russian raw materials. For China this means a guarantee of security of supply and for Russia full coffers. Especially since the global south as a whole, and not just China, does not support the Western sanctions regime. And on the other hand, China is ensuring that Russia's economy does not fall out of sync.

Russia's trade relations with the EU and the G7 have effectively been replaced by China. While Chinese exports to the rest of the world have increased by 29 percent since 2021, Chinese exports to Russia have increased by over 121 percent in the same period. Beijing is supplying industrial and consumer goods, filling the gap left by the G7 sanctions. Consumer goods are not crucial to continuing the war, but raw materials and industrial goods are. China has now become the most important supplier of machinery. While Chinese machinery exports increased by $1.9 billion per month in 2023, G7 exports fell by $2.1 billion per month compared to 2019.

In short, one can say that China does not (yet) supply weapons, but the machines and raw materials that Putin needs to produce weapons. There are also “dual-use” goods, i.e. products that can be used civilly or militarily. Or that are exported as a civilian version and then militarized in Russia. These include light all-wheel-drive vehicles used on the front lines, the ubiquitous drones and, of course, semiconductors – the chips that make weapons smart. The Biden administration estimates that about 90 percent of Russia's microelectronics came from China in 2023. Almost 70 percent of Russia's approximately $900 million in machine tool imports in the last quarter of 2023 came from China.

Chinese and Russian companies are jointly building drones in Russia. China supplies the nitrocellulose used to make ammunition. There are also optical components for use in Russian tanks, night vision devices, engines for drones and turbojet engines for cruise missiles. In the West, it was assumed that Russian industry would collapse partly because sanctions had cut off maintenance and spare parts for machinery. In fact, parts and even entire machine tools are re-engineered – i.e. rebuilt. Probably with Chinese help.

Of course, there are problems in this unequal partnership. The Power of Siberia 2 gas pipeline is in limbo, reportedly because both countries cannot agree on gas prices. But perhaps also because Beijing and Moscow have found another way. Russia is said to be planning to send around 35 billion cubic meters of natural gas to China via Kazakhstan every year. There are problems with payment transactions due to fears of US sanctions. Deliveries often have to be disguised by taking detours via Central Asian countries. China's exports of ball bearings to Kyrgyzstan have increased by more than 2,000 percent since 2021, and their final destination is Putin's defense factories. Chinese technology cannot adequately replace the lack of imports from the West in every area. In addition, Moscow has become oppressively dependent on Beijing. However, these factors cannot hide the fact that the West's attempt to bring Putin to his knees with sanctions has failed.

Beijing has already won the power poker game with the West. Chinese industry has simply taken the West's market share in Russia. With access to Russian mineral resources, Beijing has become virtually autonomous when it comes to raw materials. Together with Russia, the country even achieved a dominant position in some strategically important raw materials. Together with the Eurasian landmass, China has escaped strategic containment by the USA and can reach Asia, Europe, the Middle East and the Middle East with its Silkroad Project.

“Even more important is what Russia has to give in return for what it gets from China,” Andrea Kendall-Taylor, director of the Transatlantic Security Program at the Center for a New American Security, told Foreign Policy. Beijing gains access to the Russians' advanced military technology, for example in propelling jets and submarines. It can also be assumed that all knowledge that Moscow gains about Western weapon systems will be shared. The bitter consequence: If Russia has learned in Ukraine to successfully intercept or disrupt Western precision weapons, these systems will be worthless in a confrontation with China.

Ultimately, Beijing determines the outcome of the war in Ukraine. The West is reaching the limits of what is possible in its support - even the use of its own troops is now being discussed. Kiev's supporters are clearly feeling the financial consequences of their help. Beijing, on the other hand, has so far made money from the sanctions and has not invested any money at all. While military magazines in the West are emptying, Beijing has not delivered a single piece of armaments. But there is no guarantee that it will stay that way. What if China, with its huge production capacity, comes to Russia's aid with military goods? And to top it all off, in its attempt to ramp up its own arms production, the West is dependent on Beijing providing sufficient quantities of the raw materials it needs.

Philipp Ivanov (Center for China Analysis) points out that China cannot help but support Russia in its fight against sanctions. "Russia serves as an important laboratory for Beijing to test its economic resilience in the event of a large-scale economic conflict with the West, such as could be triggered by a war in the Taiwan Strait or an escalated trade war."

Quellen: Carnegie Endowment for International Peace, Foreign Affairs, Atlantic Council, Foreign Policy, Nikkei Asia