If Russia Invades Ukraine, Sanction China

Faced with the threat of further Western sanctions against Russia if it invades Ukraine, Russian President Vladimir Putin has been seeking shelter in China. On Feb. 4, the opening day of the Beijing Winter Olympics, Putin and Chinese President Xi Jinping announced a new strategic partnership between their two countries. A joint statement described the Chinese-Russian relationship as a “friendship” with “no ‘forbidden’ areas of cooperation.” Putin expressed support for China’s opposition to Taiwanese independence, and Xi seconded Russia’s demand that NATO end its eastward expansion.

They also unveiled plans for broader economic cooperation, particularly in the oil and gas sectors. The timing is no coincidence: At least in the short term, strengthened Chinese-Russian ties provide Putin an opportunity to lessen the blow from potential Western sanctions.

This puts the United States in a serious bind. If Washington expects to convey a credible deterrent against a Russian invasion of Ukraine using financial and economic sanctions, it will need to signal its resolve to impose secondary sanctions against China in the same breath. The problem is that the United Kingdom and the European Union, key U.S. allies, do not have the same legal or regulatory frameworks to impose secondary sanctions against Chinese banks or state-owned enterprises.

U.S. secondary sanctions, which target a third-party entity or country for conducting business with the primary subject of sanctions, rely on broad interpretations of jurisdiction. Most countries adopt some form of a territorial or nationality standard, meaning that its national borders define its jurisdictional reach. The United States, however, considers its citizens, companies, and property as falling under its jurisdiction even if located abroad.

Because the U.K. and EU lack this framework to apply secondary sanctions, it leaves Washington alone to flex its extraterritorial muscle against China. And though the United States is unlikely to suffer any significant domestic economic blowback from imposing broad financial and economic sanctions against Russia, it is a different story with China.

There are still significant disagreements in Washington on when to apply sanctions against the Nord Stream 2 natural gas pipeline linking Russia and Germany. The pipeline is owned by the Russian state-backed energy corporation Gazprom and has become a focal point among NATO allies because of its role in increasing Germany’s energy dependence on Russia. Democrats, including Menendez and Biden, prefer to wait for Russia to invade Ukraine before putting sanctions in place, while Republicans are in favor of imposing sanctions on the pipeline immediately. Nevertheless, Menendez’s proposed legislation is sweeping and includes options to target Russia’s energy and finance sectors as well as key Russian government officials and even to boot Russia from SWIFT, the global financial messaging system that connects banks around the world.

The pieces for a broader, multilateral approach to sanctions are finally coming together. This should scare Putin. Responding to criticism that Germany was not doing enough to bolster Ukraine’s defenses, Scholz provided reassurances during his visit to Washington that Berlin is committed to imposing costs on Russia if it invades Ukraine. It remains to be seen, however, whether that includes ditching Nord Stream 2. Although Scholz has been vague about the pipeline’s fate if push comes to shove, he did note that Germany was prepared to take “all necessary steps” in the event of a Russian invasion of Ukraine, noting the need for strategic ambiguity to head off an attempt by Russia to preemptively fortify itself against Western sanctions.

European leaders are fearful that an all-out barrage of sanctions against Russia could result in severe economic pain for their own economies. Unlike the United States, many large European banks have close ties to Russia. Europe’s energy sector is particularly at risk—relying on Russia for more than 40 percent of its imported natural gas.

The United States is trying to prevent a potential energy crisis in Europe should Putin weaponize Russia’s oil and gas exports. Amid already rising energy prices, U.S. Secretary of State Antony Blinken has been working to assure European leaders that the Biden administration is committed to easing “any disruptions to Europe’s energy supply.” Specifically, he pointed to discussions with governments and major global suppliers of liquefied natural gas (LNG) to shore up supply. The United States has ramped up its LNG exports to Europe as an alternative to Russian gas. As of January, some 75 percent of U.S. LNG exports were bound for Europe. Last year, that figure stood at only 23 percent.

Meanwhile, this month, Putin unveiled his new oil and gas deal with China, worth more than $117 billion. The terms of the 30-year contract call for Russia to supply an additional 10 billion cubic meters of gas to China per year via a new pipeline.

The implication is that deepening economic cooperation with China would help Russia absorb some of the shock if the West did impose severe sanctions against its banking and energy sectors. Russia is one of China’s largest oil and gas suppliers.

But although these deepening economic ties might dampen the blow of U.S. sanctions, they are not completely out of reach of secondary U.S. sanctions.

There is precedent for such a move, but times have changed. China has become wise to the reach of U.S. extraterritorial sanctions and developed its own legal frameworks to push back.

In July 2012, the U.S. Treasury Department levied secondary sanctions against China’s Bank of Kunlun for knowingly facilitating transactions on behalf of designated Iranian banks. This designation caught many experts and industry insiders by surprise, as it was an unprecedented escalation in the use of extraterritorial sanctions against a third party. A Chinese Ministry of Foreign Affairs spokesperson chided the United States for “invoking its domestic laws to impose sanctions against the Chinese financial institution” and urged the United States to reverse the sanctions. While the designation ruffled Beijing, the two countries avoided any substantial political or economic fallout, with China opting to isolate the small bank from broader financial markets.

Later, in 2017, the United States imposed a $1.19 billion fine against another Chinese entity for violating U.S. sanctions against Iran: China’s largest telecommunications company, ZTE. In addition to paying the fine, ZTE would also be required to develop internal policies to avoid future sanctions violations and undergo a corporate restructuring, according to a settlement reached with company. To force ZTE to comply with the settlement terms, the U.S. Commerce Department threatened to place the company on its Entity List—effectively shutting the company out of U.S. markets. When ZTE did violate the terms of its settlement, though, the Trump administration opted to issue a waiver despite objections from senior advisors, thereby tossing the company a lifeline and preventing it from going under. Although there are differing theories as to why then-President Donald Trump reversed the designation—whether for personal political gain or to entice China to remain engaged in trade negotiations—the cases show the reach of U.S. extraterritorial sanctions policy.

The U.S. dollar accounts for nearly 60 percent of global foreign currency reserves—and the Chinese renminbi does not.

China, however, has started to push back against foreign extraterritorial sanctions. Last year, the country established an anti-sanctions law—similar to the EU’s “blocking statute,” which attempts to curb the extraterritorial application of third-party sanctions by prohibiting compliance with extraterritorial laws. China’s law notes that the country explicitly opposes “hegemonism and power politics” and “opposes any country’s interference in China’s internal affairs under any pretext and by any means,” giving authorities broad powers to impose penalties against Chinese businesses that adhere to U.S. sanctions policies. These penalties could include fines and even confiscation of assets.

Many see the law as putting multinational banks in a quagmire: caught in a legal limbo between violating U.S. sanctions and being held liable for adhering to them. Large multinational banks comply with U.S. sanctions due to the hegemony of the U.S. dollar in the global financial system. In 2014, for example, U.S. authorities levied a record $9 billion fine against the French bank BNP Paribas for violating U.S. sanctions against Iran, among others. Although China has yet to use its new anti-sanctions laws against U.S. interests, the opportunity will undoubtedly arise if Washington aims secondary sanctions at China. In this case, banks may be forced to choose between U.S. fines for violating sanctions and Chinese fines for adhering to them.

So, if Washington is going to impose secondary sanctions against Chinese institutions, it must be prepared for retaliation. In addition to the potential for putting scores of multinational entities in legal limbo, perhaps even forcing them to choose sides, more than $615 billion worth of bilateral trade will also be put in jeopardy. (China accounts for nearly 19 percent of all U.S. imports.)

Thus far, there have been no indications that Washington is considering specific secondary sanctions against China, beyond mere posturing. U.S. State Department spokesperson Ned Price recently told reporters: “We have an array of tools that we can deploy if we see foreign companies, including those in China, doing their best to backfill U.S. export control actions, to evade them, to get around them.”

Deploying these tools against China will have repercussions for U.S. businesses and economic interests—a burden Washington has thus far not had to grapple with and has instead asked its European allies to bear.

Nonetheless, the United States must be prepared to cut off all avenues for Russia to escape Western sanctions. This includes preparing to wield secondary sanctions against Chinese institutions as well as working to limit blowback to U.S. interests. The simple truth is that the U.S. dollar accounts for nearly 60 percent of global foreign currency reserves—and the Chinese renminbi does not. That is a big stick to wield.