David Dollar on Sanctions on Russia and the Chinese Economy

David Dollar is a senior fellow in the John L. Thornton China Center at the Brookings Institution and host of the Brookings trade podcast, Dollar&Sense. He is a leading expert on China's economy and U.S.-China economic relations. From 2009 to 2013, Dollar was the U.S. Treasury’s economic and financial emissary to China, based in Beijing, facilitating the macroeconomic and financial policy dialogue between the United States and China. Prior to joining Treasury, Dollar worked 20 years for the World Bank, serving as country director for China and Mongolia, based in Beijing (2004-2009). His other World Bank assignments focused on Asian economies, including South Korea, Vietnam, Cambodia, Thailand, Bangladesh, and India. Dollar also worked in the World Bank’s research department. His publications focus on economic reform in China, globalization, and economic growth. He also taught economics at University of California Los Angeles, during which time he spent a semester in Beijing at the Graduate School of the Chinese Academy of Social Sciences in 1986. He has a doctorate in economics from New York University and a bachelor's in Chinese history and language from Dartmouth College.
Jessie Miller CMC '23 interviewed Dr. David Dollar on March 24, 2022.
Photograph and biography courtesy of Dr. David Dollar.


To what extent are the Russian and Chinese economies interconnected? What accounts for their increased integration over the past several years?

There is a great imbalance in size between the Chinese and Russian economies. China is roughly ten times as large as Russia economically. From China's point of view, the economic relationship with Russia is not particularly important. From Russia's point of view, the relationship with China is quite important because of that imbalance. China imports certain specific things from Russia but these are all things that China could easily get elsewhere in the world. The best example is that last year, China imported about 1/6 of its petroleum from Russia. It also imported 1/6 of its imports from Saudi Arabia. There are other countries in the Middle East from which it imported almost as much, including Iraq, Kuwait, Oman, UAE, as well as Brazil and Angola. Petroleum is a globally traded commodity and it is convenient for China to get some from Russia next door. But it's not particularly important. Last year, the US exported twice as much natural gas to China as Russia did. It is hard to argue that this is an important economic relationship. For China, it has intensified a little bit in recent years. For a long time, China and Russia really had quite poor relations which have moved toward more friendly relations in the last few years. There has been some expansion of trade, but not on a very large scale compared to China's economy or to China's overall trade.

How likely is it that Western sanctions will be extended to Chinese firms? What might cause this to happen and what would be the effect of such sanctions for China?

China is in a difficult position. The easy thing to do is the right thing, which in my view is to support Ukraine. Putting that aside, China does have this partnership with Russia. They recently signed an agreement when Putin was in Beijing for the Winter Olympics. Rhetorically, China is supporting Russia and criticizing the US as the foundation of this whole crisis. They are opposed to economic sanctions and are spreading disinformation. Politically, China is all in with Russia. On the other hand, economically China’s interests lie with the West. They have a lot more trade and investment with the West. The trade with Europe, the United States, and Japan combined is ten times as much as trade with Russia. More importantly, what China is importing from Russia is easily replaced, because they are just commodities. What China gets from the West is largely technology, advanced aircraft, high-end semiconductors, and software. If China doesn't follow the Western sanctions then it is likely to see the United States impose some secondary sanctions on its banks and companies. If that persisted for a while it would really set China back because of the large volume of trade. Moreover, it is important trade that would be very hard to replace if the United States, Europe, and Japan stuck together. It would be really hard for China to get the same kinds of technological products anywhere else. 

So far, Chinese banks and companies are following the Western sanctions even while the Chinese government rhetorically supports Russia. China is not providing much support to Russia on the economic side. If Beijing continues that somewhat contradictory approach, there's no reason why they would have Western sanctions turned on them. If they start shifting and providing more support to Russia, the worst case would be sending military equipment. Violating the economic sanctions in a significant way would also probably cause Chinese banks and firms to get sanctioned. For the moment those firms and banks are trying really hard not to get sanctioned because that would have a big effect on their business.

Many Chinese companies have chosen to stay in Russia as Western companies pull out. What will this mean for the long-term presence and market share of Chinese firms in the Russian economy?

It is really hard to predict the long term in this kind of situation. You can imagine a situation where Putin's government collapses and there's a different kind of government and the sanctions are removed. Then all kinds of international firms will return to Russia. You could also imagine a long stalemate where the West keeps its sanctions in place. I think Chinese companies are going to be careful not to violate those, but some smaller companies may find ways around it or may fly under the radar. If Russia is isolated for a long time, China's share of foreign investment and foreign trade will go up. Still, it will be a higher share of a rump economy. 

When Chinese firms Lenovo and Didi announced plans to cease business in Russia they faced intense backlash on Chinese social media. What are the possible differences between mass and elite support for Chinese firms remaining or leaving the Russian market?

Chinese elites likely understand the value of that awkward compromise. Rhetorically, they are supporting Russia and they don't like the American sanctions, but they understand that the big banks and companies are going to honor those sanctions. On the other hand, mass public opinion is probably less supportive of the idea that the banks and firms have to go along with US sanctions. It is hard to know how representative the social media discussion in China is. There are certainly lots of people participating, so I wouldn't completely dismiss it. There is obviously a lot of anti-American hostility and some genuine anger about American sanctions and the United States’ role in the world. We also hear some voices, particularly coming from academia, that are cautiously questioning why China is supporting Putin and the invasion of a sovereign country. It is hard to know how much support there is for that because China is an authoritarian country where people do not have free speech. What gets allowed on the social media networks is not necessarily a representative sample of opinion.

The other thing to remember is it's actually very hard to really have an effective consumer boycott. The major Chinese smartphone producers have cut back on their exports to Russia because most Chinese producers involved have some American technology somewhere in the production process, which is affected by the sanctions. I haven't seen any backlash in China against smartphones; people are still buying and using smartphones. I question how deep some of that popular view is.

There are predictions that the conflict in Ukraine could lead to a bifurcated global economy. What do you think of these predictions? Which countries would stand to benefit or suffer the most from global economic bifurcation?

Bifurcation, or radical decoupling, is not my base case. China is carefully trying to distinguish between rhetorically supporting Russia and supporting in other ways. On the economic side it is actually following the sanctions. That is an acceptable outcome from the point of view of the United States because it will help put a lot of pressure on the Russian economy. The base case is the status quo, with China indirectly supporting the sanctions, kicking and screaming along the way. I could easily be wrong, or the state of the world could change. There are scenarios where China puts a lot more effort into helping Russia. The worst case would be sending military equipment. Aside from that, if China provides really large-scale backfilling as the Europeans and others pull out of Russia, and if China steps in to replace that foreign investment and foreign trade, then of course the sanctions are ineffective. If China were doing that in a significant way then there would be sanctions aimed at China from all the Western economies and China would retaliate. Then we would be heading down that bifurcation road.

It's pretty clear that China would be the big loser from bifurcation because it has a somewhat backward economy. It's converging on the advanced economies, but that process occurs when you have an integrated world economy. If we break it in two, China will not be benefiting from Western technology and Western partnerships. It would have a very significant effect on China’s economic growth. It would also be bad for the United States and Europe, but those are mature economies that are growing at one or two percent. There's not too much you can do to ratchet that up or bring that down from an economic point of view. The trend is pretty well set, but from an economic point of view, bifurcation would be quite significant for China. 

China has long been skeptical of US influence in international institutions. How might China leverage the war in Ukraine to create alternative international finance and trade institutions?

It is a lot harder to create alternative institutions than people may imagine. Institutions tend to be deep seated; there's an efficiency. The fact that most transactions in the world are denominated in dollars is not the cause of dollar primacy, but the result. The cause is a whole set of factors around the United States, including good rule of law, deep capital markets, open capital account, and a flexible exchange rate. People like dollars all around the world because if you are holding a US Treasury bond there's always a liquid market in which you can sell it. There are no capital controls and you can move your money in and out, unless you are a Russian oligarch. 

Leaving aside the politics, the economic efficiency of this is pretty overwhelming. If China wants to replace its economic ties to the West, it would have to do much more to build up its capital markets, the rule of law, and open the capital account, which China doesn’t want to do. The Chinese leaders don't want money to just flow in and out with anybody in the Communist Party controlling that. I don't see China taking the steps that would be needed to make the currency more valuable. Having said that, this kind of geopolitical shock will lead to some small innovations. I read India and Russia may be doing some trade settled in their domestic currencies. Still, the point is the alternatives are pretty costly and bureaucratic, whereas the advantage of operating in dollars is there are no bureaucrats involved. In most open economies you can buy dollars at the bank and you can order products from around the world and make payments relatively easily. I don't see that being displaced anytime soon.


Jessie Miller CMC '23Student Journalist

edward stojakovic from Portland, OR, United States, CC BY 2.0 <https://creativecommons.org/licenses/by/2.0>, via Wikimedia Commons

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