China Watches as Russia’s Economy Teeters
More sanctions could push Moscow over the edge and serve as a deterrent to Beijing.
By Thomas J. Duesterberg
Russia's President Vladimir Putin in his office during a video conference meeting with China's President Xi Jinping in Moscow, Jan. 21. Photo: Gavriil Grigorov/Zuma PressXi Jinping has been a close observer of Russia’s three-year old war in Ukraine.
China’s president has been supplying his “dear friend” Vladimir Putin with advanced technologies and helping to prop up the Russian economy, and he is studying Russia’s ability to withstand Western sanctions.
Mr. Xi is searching for clues on how the West might try to punish China for crushing Taiwanese independence.
Mr. Putin claims the Russian economy is doing fine, but it isn’t.
The combined effects of conscription, defense-production increases and a mass exodus of working-age men have led to labor shortages that are driving up wages and weakening the defense industrial sector.
Officially inflation is 10%, though most economists think it’s much higher.
Rents in major cities are beyond the reach of most middle-class residents.
Interest rates on commercial loans are 21% and expected to rise further, sapping the financial viability of Russian companies.
Banks are challenged by Kremlin requirements to provide below-market rates and almost unlimited levels of credit to military-related firms.
Moscow is cutting social spending to meet its war needs.
The ruble is highly unstable.
With U.S. leadership, sanctions have cut off Russia’s ability to raise capital from Western sources.
In 2023 and 2024 several auctions of ruble bonds failed.
This suggests that Russian banks and oligarchs are increasingly reluctant to take on debt issued by the stressed Kremlin.
Bond yields for 10-year sovereign issues have soared.
The entire stock of sovereign debt has declined by 35% since the war began.
China has also grown leery of buying Russia’s war bonds as it fears sanctions on its own banks.
Beijing doesn’t want to lose access to the dollar-denominated financial system.
Russia’s only remaining sources of funding are its national wealth fund and revenues from oil and gas exports.
The fund has been forced to liquidate holdings to pay for current needs.
It held about $300 billion in foreign reserves before the war, which are now frozen.
Its prewar domestic holdings, also about $300 billion, have been drawn down by two-thirds.
At current rates the liquid reserves will be depleted sometime in 2025.
Since the war’s start, Russia has been sending 90% of its oil exports to China and India, but ports in both countries have begun refusing to take delivery for fear of sanctions on their banks and other companies.
Northern European countries are also pulling back.
The last gas pipeline source from Russia to Europe closed at the end of 2024.
Without access to new liquidity, Mr. Putin has few good options to meet his budget.
He can print money, which could lead to hyperinflation, or he can raise taxes, which could lead to social unrest.
The already-stressed Russian people have signaled their opposition to both options.
China has done what it can to help, increasing exports to the Russian market of electric vehicles and other manufactured consumer goods.
But Chinese banks have been subjected to sanctions for facilitating Russian acquisition of military goods.
China’s economy is also slumping.
Further sanctions could put Beijing’s appetite for conflict with the West to the test.
President Trump recently threatened Moscow with new sanctions unless Mr. Putin agrees to a quick peace in Ukraine.
The Russian president should take the threat seriously because his country’s ravaged economy is teetering on the edge.
Another round of severe sanctions could push it into outright crisis.
If that happens, Mr. Xi will certainly get the message.
He’ll be forced to think about the price of his own aggression against Taiwan.
Mr. Duesterberg is a senior fellow at the Hudson Institute.
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