Russia does not really need China’s help just yet – Natixis

The unprecedented sanctions imposed on Russia in the wake of its invasion of Ukraine are likely to have devastating consequences. Alicia Garcia Herrero, Chief Economist Asia Pacific at Natixis, makes the point that Russia’s situation in terms of access to foreign currency is not yet so desperate that needs to resort to China but we may soon get there.

How much can Russia rely on China to mitigate the impact on the economy?

“Russia does not really need China’s help just yet. However, if the West were to increase the pressure by blocking energy exports, the Russian economy would suffer even with Chinese help. China’s lacks the ability to offer immediate support.”

“It is hard to imagine that the Bank of Russia will be keen to foster the circulation of a non-convertible currency at a time when the ruble is tanking. In fact, the process of renminbi-isation of the Russian economy would make monetary management in Russia even harder.”

“China could aid Russia by converting Russia’s renminbi reserves into hard currency. But the reputational risk of breaching western sanctions would be huge.”

“Over time, China will be able to support the Russian economy as new pipelines are built to redirect gas from Europe to China and CIPS becomes a credible alternative to CHIPS. But this is clearly more appealing for China than for Russia.”

“China has an economic incentive to support Russia as long as it does not fall afoul of Western sanctions. For Russia however, strong dependence on the Chinese economy and its financial system is to be avoided.”