China is slowly joining the economic war against Russia

I recently shared a chart on Twitter showing Chinese exports of ball bearings to Russia. Here it is:

Having accelerated after Putin's invasion of Ukraine to a run-rate of around US$5-7 million per month in 2023, Chinese ball bearing exports to Russia have been ratcheted down to the $2-3 million level in 2024, about where they stood prior to the invasion.

What's going on here? As Russia's closest ally, shouldn't China be sending Putin all the ball bearings he  wants? Russian tanks are being destroyed every day and ball bearings are a crucial component for building replacements.

Before answering this question, we need a bit of background.

We can think of the economic response to Russia's illegal invasion of Ukraine as progressing in two stages. The first stage of the economic war involved a coalition of liberal democracies (U.S., the EU, Canada, Japan, Switzerland, South Korea, Norway, the UK, and more) reducing their own economic linkages to Russia. Europe drastically scaled down its imports of Russian natural gas. Imports of Russian crude oil into Japan and Germany were slashed to bare bone levels. Western corporations like Coke and John Deere decamped. And the U.S. made an effort to cut down on exports of military goods and so-called dual-use items, which have both commercial and military applications. Ball bearings fall into this category, since they are useful not only for civilian vehicles but also artillery and tanks.

The second stage of the economic war has only recently ramped up, and involves the coalition exerting its influence on non-coalition countries like Turkey, United Arab Emirates, China and India in order to get them to cut down on their economic linkages with Russia.

A key component of this next stage are the U.S. secondary sanctions that were introduced in December 2023 by the U.S. Treasury's Office of Foreign Assets Control ("OFAC"). I've written about them here, here and here. 

In short, if OFAC catches a foreign bank in Shanghai, Delhi, or Dubai facilitating transactions involving Russia's military-industrial complex, including dual-use goods, then that bank risks being cut off from the U.S. banking system. Because the U.S. banking system is so vital, foreign banks prefer to cease all offending Russian trade. This effectively stops Turkish or Chinese ball bearing manufacturers (as well as any other businesses that deals in dual-use goods) from dealing with Russian buyers, since these manufacturers are reliant on their local banks for cross-border payments.

Along with OFAC's introduction of secondary sanctions, there has also been a big step-up in U.S. export controls, which are overseen by a different agency, the U.S. Department of Commerce's Bureau of Industry and Security ("BIS"). The BIS maintains a list of U.S.-produced dual-use items. American and foreign entities are required to get a license from the BIS before exporting, reexporting, or importing certain items on its list.

In March 2024, the BIS broadened the criteria that triggers a licensing requirement. The criteria now includes any involvement of entities listed under fourteen different OFAC sanctions programs, the majority of which are linked to Russia and Ukraine. So for example, if a Hong Kong-based wholesaler intends to re-export a BIS-listed item to a country like Armenia, or transfer that item within Hong Kong, and they fail to realize that the recipient is an actor on one of OFAC's Russia-related sanctions list, then that Hong Kong wholesaler has now violated U.S. export controls. To prevent violations, intermediaries like our Hong Kong wholesale must sharpen their screening requirements.

These new rules, which have been described as a BIS "force multiplier" of OFAC's sanctions program, are intended to assert influence over a broad cross-section of dealers that specialize in indirectly re-exporting goods to Russia. These indirect routes often proceed through a labyrinth of pit-stops in jurisdictions like UAE, Hong Kong, and Kyrgyzstan.

Back to ball bearings. How is the second stage of the economic war progressing? The chart at the top of the page suggests the new measures may be working. Recall too that in February I wrote a post tracking what seemed to be some initial anecdotal indications of success. In the rest of this article I want to use another four or five months of data to provide a more complete picture of how China's interactions with Russia have being affected.

China is crucial to Russia because it has a become a key source of goods destined for the battlefield. According to a report from the KSE Institute, some 44% all Russian parts destined for the Ukraine battlefield were linked to producers in coalition nations, primarily the U.S. These include parts that have been branded by American stalwarts like Intel and Analog Devices. Mainland Chinese producers accounted for 47% of battlefield goods (see chart below). However, progressing further down the value chain to country of dispatch, around 56% of all battlefield parts—including the U.S.-produced ones—get to Russia by way of China, and another 22% via Hong Kong, a special administrative region of China. Together, almost 80% of Russia's battlefield parts are dispatched from these two Chinese sources.

Source: KSE Institute

In other words, not only is China producing its own battlefield goods destined for Russia, but it is also responsible for the final re-routing to Russia of most U.S. produced battlefield goods, at least in the period starting in January 2023 and ending that October.

The items that make up the battlefield goods cited by the KSE Institute are derived from the coalition's Common High Priority List, which includes 50 dual-use items that Russia seeks to procure for its weapons programs, one of which is ball bearings. For the rest of this article I will focus my analysis on the four most important goods on the Common High Priority list: Tier 1 items. Tier 1 items consist of microelectronic circuits (processors, memories, amplifiers, and other circuits) that the BIS says play a "critical role" in the production of advanced Russian precision-guided weapons systems. Russia lacks the ability to produce these items and is reliant on a limited number of global manufacturers, according to the BIS, which only amplifies their importance to Russia.

The chart below shows Chinese exports of Tier 1 items to Russia as reported by China's customs authority. Prior to Russia's invasion of Ukraine, these exports typically came in at around $5 million per month. Post-invasion, they rose to a range of $10 million to $34 million per month, suggesting significant military diversion. 

With the arrival of secondary sanctions in December, monthly Tier 1 exports have fallen below the pre-invasion watermark of $5 million.

The above customs data does not include Hong Kong, which along with mainland China has become a major Chinese source of Tier 1 exports to Russia. To provide a more complete picture, the chart below adds Hong Kong customs data to the mainland customs data. Running between $25-$60 million during most of the war, Tier 1 exports to Russia from the Chinese mainland and Hong Kong have collapsed to sub-$15 million levels this summer, lower than at any point in 2021.

That's quite a big plunge, and certainly suggests that the coalition measures are working with respect to China. Skeptical readers may suggest that China has stopped exporting Tier 1 items directly to Russia only to re-route them via third party nations. According to this theory, the $40-$50 million decline in monthly Chinese exports is being made up by a $40-50 million rise in Chinese exports to, say, Kazakhstan, which eventually make their way to Russia.

Below, I've plotted all Tier 1 exports from the Chinese mainland and Hong Kong to a group of Russian neighbours that includes Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, and Uzbekistan.

China's Tier 1 exports to Russia's neighbours rose after the invasion, suggesting significant diversion of exports to Russia, and in March 2024 hit $7 million, their second-highest level over the entire 2021-2024 period. However, over the last three months Tier 1 exports to Russia's neighbours have plunged below even pre-invasion levels.

So no, the theory that third-parties have replaced direct China-Russia trade is not borne out in  the data.

In sum, a variety of U.S. economic tools including secondary sanctions, bolstered export controls, and other types of moral suasion seem to be prying China out of the arms of Russia and into the coalition's effort to economically strangle the Russian war machine.

But there's more to be done. China's exports of high priority goods like circuits and ball bearings have fallen in 2024, but they haven't yet hit zero. That will require more pressure on the Chinese government as well as enforcement against Chinese and Hong Kong companies that violate sanctions and/or exchange controls, as well as against intermediaries in third-party nations like Kazakhstan. To further tighten the screws, the coalition will need to constantly broaden the range of economic activity between China and Russia that it deems off-limits. For now, the coalition says that it is perfectly fine for Chinese companies to export cars and vacuum cleaners to Russia, but there may be a time at which that permissiveness will have to change.

In fact, one of the coalition's biggest escalations in the sanctions war occurred in June, with the U.S. secondary sanctions program being extended to include Russian banks. (I wrote about this here.) In effect, Russian financial institutions are now off-limits for Chinese banks (and banks elsewhere, too), unless these Chinese banks want to lose their access to the U.S. banking system. This blacklisting of Russian banks will make it very difficult for Chinese exporters to continue doing business with their now-unbanked Russian counterparts, further eating into the trade relationship between the two nations.

The trade data in the above charts does not yet include the effects of the extension of sanctions to Russia's banks, but I suspect the effects will be significant.

Welcome to the economic war against Russia, China. We hope you continue to do your part.