The immediate impact of the Russia-Ukraine conflict on foreign invested enterprises (FIEs) in China is limited, but the fallout from the conflict may hold various direct and unintended consequences for foreign businesses operating in China. From disrupting trade and global supply chains to causing tension between overseas and domestic consumers, we discuss the obstacles FIEs in China may face in the context of the conflict and international sanctions on Russia.
The outbreak of the Russia-Ukraine conflict on February 24, 2022, sent shockwaves throughout the world and led to an unprecedented response from countries around the world in the form of sanctions and bans. In doing so, western countries and allies are sending a clear signal that they want to cut off Russia from the global financial system and isolate Putin politically.
Throughout this, China has maintained a neutral stance, refusing to either directly condemn or condone Russia’s actions, opposing the use of sanctions, and calling for a diplomatic resolution to the conflict.
Despite China’s neutral stance, it is inevitable that some China-based businesses will be caught in the crosshairs. Although the Ukraine-Russia conflict and the sanctions placed upon Russia will have a limited impact upon Chinese companies, there are still several indirect consequences that could impact foreign-invested companies in China.
Impact of Russia-Ukraine conflict on trade
FIEs engaged in direct trade with Ukraine, Russia, and Belarus will feel the most immediate impact of the conflict. Ukraine is now essentially closed to trade and business, and only essential goods and supplies are entering the country through the Polish border.
The situation with Russia and Belarus is more complicated, as parsing which sanctions will impact companies in China can be difficult. Whereas Chinese companies will be able to continue to do business with Russia – providing it remains commercially viable – FIEs will be subject to the sanctions of their countries of origin and will have to shut down many China-based Russia operations in order to comply with them.
However, in some cases, western sanctions could affect third country companies as well. US and EU technology sanctions on Russia, for instance, essentially bans any product containing US and EU-made technology from being sold to Russia.
The list of EU and US technology sanctions is wide-ranging and includes critical technologies such as semiconductors (chipsets), telecommunications equipment, and software. Chinese companies and companies from a non-EU third country could therefore be forced to stop selling products that contain any of these US- or EU-made technology to Russia in order to comply with the sanctions.
In addition to the sanctions, the conflict is expected to significantly impact China-EU bilateral trade as developments on the ground and sanctions disrupt the main Eurasian rail freight routes. The EU is China’s second-largest trade partner and China is the single largest trade partner for the EU. In 2021, trade volume between the EU and China surpassed US$800 billion, a year-over-year growth rate of 27.5 percent.
The Russia-Ukraine conflict has disrupted key rail routes from the EU to China. Some companies have suspended rail freight from Europe to China due to concerns over disruptions at the border between the EU and Belarus and Russia. Maritime shipping will be an alternative for businesses seeking to reroute shipments away from Russia and Belarus, but these routes will also face significant delays as discussed below.
The Russia-Ukraine conflict has further exacerbated the shipping and supply chain crisis that the world has been grappling with since the outbreak of the COVID-19 pandemic. This will continue to impact companies that engage in shipping and depend on long-route logistics.
COVID-19 lockdowns in China and elsewhere, at different points in 2020 and 2021, led to sudden factory closures or significantly reduced production. However, as initial pandemic shocks subside, consumption rises sharply, even as factories operate at reduced capacity and idle ships on the back foot are unable to meet demand or are stuck amid delayed shipments in congested ports.
The logistics bottlenecks and imbalance in supply and demand have significantly slowed average shipping times and resulted in a severe shortage of shipping containers worldwide. Fierce competition between companies to lease or purchase containers has driven up costs of freight containers and freight services to sky-high rates.
The conflict in Ukraine is likely to impact China-EU trade in the coming months and could put further strain on European companies that rely on goods from China. Since the conflict broke out on February 24, the Ukrainian military has suspended commercial shipping at the port of Odesa, Ukraine’s largest port. Maersk, the world’s second-largest container shipping company, has begun diverting cargo to Port Said in Egypt and Port of Karfez in Turkey.
In addition to the immediate impact of the conflict on ports, actions taken in retaliation against Russia for the invasion of Ukraine have led to sanctions and bans on the operations of Russian companies. Russian ships have been barred from docking in European ports, and several shipping giants have also announced they are suspending non-essential shipping to Russia in order to comply with sanctions.
The global supply chain crisis underscores the need for companies to diversify their supply chains in order to mitigate against force majeures and geopolitical risks. The Russia-Ukraine conflict is only the latest example of this; the disruption of the COVID-19 pandemic and volatility in global markets due to US-China tariff escalation are other recent examples.
Moving away from a single-country sourcing strategy and identifying alternative suppliers and sources can help future-proof your business against uncertainty. To learn more about supply chain reengineering, contact us at China@dezshira.com.
Banking and finance
The US, EU, and the UK, as well as other countries, have banned individuals and citizens from interactions with the Central Bank of Russia, Russia’s Ministry of Finance, and the National Wealth Fund.
Seven Russian banks have also been barred from the global payments system, SWIFT. These banks are:
- VTB Bank
- Bank Otkritie
- Rossiya Bank
- VEB.RF (state development bank)
Other banks and financial institutions, although not excluded from SWIFT, have also been subject to sanctions. These include:
- The Black Sea Bank
- IS Bank
- Russian Agricultural Bank
- Credit Bank of Moscow
International payments for foreign businesses operating in Russia using sanctioned banks may still make and receive payments, however there may be transfer delays. We recommend opening accounts with non-sanctioned banks, ideally the Russian subsidiaries of international banks who use financial agent services to process international payments.
More recently, VISA and Mastercard suspended operations in Russia. This means any Mastercard issued in Russia cannot be used for transactions outside of the country, whereas any VISA card issued in Russia cannot be used inside the country either. China’s UnionPay cards are in regular use throughout Russia, while numerous Chinese banks provide business account services in Russia.
There has been some discussion as to whether China’s CIPS payment system can act as a stand-in for banks that have been banned from SWIFT. However, it appears unlikely that it will be able to pick up the slack left by SWIFT in the short term given its limited scope.
It has a much lower number of participating banks than SWIFT – 1,280 financial institutions in CIPS across 103 countries and regions, of which just 75 are directly participating banks, compared to SWIFTS’ 11,000 across 200 countries and regions. It is also still reliant on SWIFT for information exchange with indirect participants, as only direct participants can transfer information.
Although limited in scope, CIPS could become a viable option for companies in the longer term should the SWIFT ban remain in place for a long time. This would also require the adoption of the RMB, as CIPS only settles transactions in this currency.
Managing public opinion and employee sentiment on the Russia-Ukraine conflict
Another consideration for FIEs in China is how to handle internal and external communications on the conflict. There is a growing rift between the opinions of the western and Chinese public, which many in the west may be unaware of.
Whereas the mainstream view in much of the western world and elsewhere is all-out condemnation of Russia’s actions, Chinese public opinion – broadly speaking – largely shares the government’s neutral stance on the conflict and the belief that it was mainly instigated by western countries – and the US in particular – through NATO expansion. This position is also upheld in Chinese media.
While it is not possible to summarize the sentiment of all Chinese people, who have diverse opinions on the issue, it is clear that in general there is more sympathy among the public toward Russia’s position, especially as it pertains to national security (the US’ THAAD missile defense system in South Korea, for instance, has drawn widespread ire from both the Chinese public and officials, and parallels are often drawn between this and NATO expansion).
For this reason, FIEs that make public statements against Russia or take measures such as proactively ceasing operations in Russia or donating resources to the Ukrainian cause may be met with a backlash among Chinese consumers, which could, in turn, hurt their business in the country. Chinese ride-hailing app DiDi Chuxing was met with online backlash after it decided to pull out of the Russian market following the outbreak of the conflict, even though the decision was more likely made due to a business need rather than a moral stand. DiDi later reversed its decision due to the backlash.
Some multinational companies have faced internal pressure from overseas employees to take a stand on the issue, putting the company in a tricky position. In general, it is advisable to maintain a neutral stance and avoid appeasing one side at the expense of another.
A (new) new normal?
The situation in Ukraine and across the globe is still unfolding and there is the distinct possibility of more sanctions and export trade restrictions, especially as the possibility of a quick resolution to the conflict appears increasingly unlikely. Moreover, it is becoming increasingly clear that the conflict will fundamentally change the way countries interact and may lead to an increase in protectionism and pursuit of self-sufficiency, which will have long-term consequences for global trade and business.
It is therefore imperative that companies and investors stay up to date with the latest developments and ascertain whether sanctions or technology export bans apply to their businesses in China.
We can provide such risk analysis. Please contact us at firstname.lastname@example.org for advice on China’s ability to service the Russian market and China@dezshira.com for advice on operating in China under the current situation.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at email@example.com.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.