The U.S. is ready to tackle Russia’s war effort by sanctioning its support system. According to reports, the U.S. is drafting sanctions threatening to cut some Chinese banks from the global financial system. Also, sources say Washington’s top envoy has been armed with diplomatic leverage.
While nothing is certain, officials hope the threat will stop Beijing’s commercial support of Russia’s military production. However, as Secretary of State Antony Blinken heads to Beijing on Tuesday, April 23, 2024, several questions come to mind.
The top question is whether the U.S. financial coercion can end the trade between Beijing and Moscow. The relationship between the two countries has allowed the Kremlin to rebuild its military. Notably, the Russian military has been badly abused by more than two years of fighting in Ukraine.
Since the beginning of the war, China has heeded Western warnings not to send arms to Russia. However, since Blinken’s trip to Beijing in 2023, China’s exports of commercial goods with military uses have surged. China became Russia’s primary supplier of circuitry, aircraft parts, machines, and machine tools.
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U.S. officials say Beijing’s aid has allowed Moscow to rebuild its military-industrial capacity. With China on its side, officials worry Russia might win the war against Ukraine. Consequently, Blinken and other top cabinet officials have been sounding the alarm among Western allies.
As Blinken heads to China, this time, officials are counting on the threat of Chinese banks losing access to the dollar. Many wonder what the banks have to do with the war, but they serve as key intermediaries for commercial exports to Russia. Chinese banks handle payments and provide client companies credit for trade transactions.
“China can’t have it both ways,” Blinken said at a recent meeting in Capri, Italy. “It can’t purport to want to have positive, friendly relations with countries in Europe, and at the same time be fueling the biggest threat to European security since the end of the Cold War.”
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However, a spokesperson for the Chinese embassy in Washington described the exports as lawful trade and said the U.S. was making “groundless accusations.” The spokesperson stressed that China is within its rights to trade with Russia and other countries.
“The United States should immediately stop imposing unilateral sanctions on Chinese companies and individuals,” the spokesperson said. However, U.S. officials say the sanction is a backup measure in case the diplomatic efforts fail.
Also, in recent weeks, U.S. officials have pressured Beijing in private meetings and calls. They warn of action against Chinese financial institutions handling trade in such dual-use goods. Officials hope the combined Western diplomatic pressure will avert the need to effect the sanctions.
Cutting banks off from access to the dollar has much broader implications than standard sanctions. Hence, it’s often a last resort. Such sanctions usually force banks to fail, affecting their entire customer and client base. They also represent a particular risk for China as it grapples with growing credit problems.
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However, the mere threat to target banks has had short-lived results. In December 2023, President Biden gave the Treasury Department authority to sanction banks that aid Russia’s military-industrial complex. The executive order, signed by Biden, caused trade transactions between Russia and China to slow down.
Major Chinese banks also backed out of any roles in facilitating the deals. Analysts say the Chinese shipments to Russia have been critical to the country’s invasion of Ukraine in 2022. The trade has also helped mitigate a labor shortage Western officials had hoped would cause the economy to buckle.
However, China’s foreign ministry calls the sanctions against its firms “economic coercion, unilateralism and bullying.” “China will continue to do what is necessary to firmly safeguard the lawful rights and interests of Chinese companies,” the ministry’s spokesman said.
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