China’s lending to Belt and Road Initiative (BRI) projects has dropped significantly, and this has been noticeable in its engagement with Russia. Rather than being a consequence of the war in Ukraine, however, it could be viewed as a window into China’s broader attitudes to international lending.

It has been known by a few names, all grand sounding and pointing to the bold vision that China has for its international development. One Belt One Road – shortened to ‘Belt Road’ – and later known as the Belt and Road Initiative (BRI) are the names that refer to China’s project to develop the world’s infrastructure to connect China – by land and sea – to the rest of the globe.

China’s lending to BRI projects has been huge, but the numbers have suffered a steep decline in recent years. According to research from Boston University’s Global Development Policy Center, China’s international investments are at their lowest level for over a decade. In 2021, for example, the loan commitments from the China Development Bank and the Export-Import Bank of China (Exim Bank) combined were US$3.7bn. This is a paltry sum when compared to the average of US$35.6bn a year between 2008 and 2021.

There have been many news reports about China’s investments running into trouble, and projects being unable to meet the loan repayments. Amid this, China has bailed out BRI projects with emergency rescue lending.

And more recently, a notable trend has been the steep decline in China’s BRI engagement with Russia. In a piece entitled, ‘China’s overseas lending and the war in Ukraine’, economists Sebastian Horn, Carmen Reinhart and Christoph Trebesch write that Russia has been the largest recipient of BRI lending, but the war in Ukraine is likely making Chinese banks more cautious about making new international loans. Russia, they note, has the largest foreign debtor to Chinese state-owned banks. Between 2013 and 2017, the economists write, Russia accounted for 15% of BRI lending and most of China’s investments have been in Russian energy projects.

That BRI engagement with Russia has now, however, dropped dramatically. The Green Finance & Development Center’s (GFDC) BRI investment report, which covers the period until the end of December 2022 found that there was a 100% drop in China’s BRI engagement with Russia.

Christoph Nedopil Wang, Director of GFDC, which is based at Shanghai’s Fudan University, was quoted by the FT as saying that China could have been deterred from investing in Russia because of sanctions in the wake of the war in Ukraine. There is, however, still economic engagement between the two countries, particularly with China buying Russia’s energy exports, he noted.

Also, it might be the case that Chinese investment in Russia has not been recorded as BRI infrastructure projects. Chris Devonshire-Ellis, Founding Partner of Dezan Shira & Associates, a multi-disciplinary professional services firm in Asia, says that the figures about China’s BRI involvement with Russia are misleading.

“There is a huge amount of misinformation coming from the West about Russia,” he tells Treasury Today Asia. “There is a tendency to equate Chinese investment and trade with the BRI and that is wrong,” he adds.

Devonshire-Ellis explains there are plenty of infrastructure projects that China has invested in internationally that don’t fall under the BRI banner. For example, Brazil is not part of the BRI, but this does not mean that China has not invested in Brazil. Similarly, just because China’s BRI engagement with Russia has dropped to zero, this doesn’t mean there isn’t any Chinese investment in Russia. Devonshire-Ellis comments that there are sensitivities on the Russian side about being seen as the recipient of BRI investment; Moscow does not feel comfortable with projects being included under the BRI banner as it could be viewed as Russia needing help with its infrastructure.

There have, however, been plenty of projects where China has invested billions into Russia without it being part of the BRI, including energy investments and the development of rail infrastructure connecting China and Russia.

Rebecca Ray, a Senior Academic Researcher at the Boston University Global Development Policy Center, comments, “The BRI has very fuzzy edges.” There are parts of the BRI that go beyond investment and lending. The BRI, she notes, is a vague concept that can extend to micro level individual projects, to large scale multi-billion dollar investment deals. When it comes to Russia, she says, the drop in lending may simply be a result of China not lending to anyone at the moment. “Chinese lending to Russia has plummeted, but it has to everyone. It is not a good time to lend. Chinese lending in general has dropped,” Ray says.

The waning appetite of China to lend can be seen in the Yamal liquefied natural gas (LNG) project on the Arctic coast of Russia. For the first project, China invested heavily, notes Ray. Now, with the sequel to that project – Arctic LNG 2 – there has been less interest in supporting it, Ray notes. There was a lack of sovereign guarantees for the project, and the Chinese policy banks put in US$2.8bn for this second project, which was much less than the previous figure of US$9.5bn for the first round, notes Ray. This smaller appetite on the part of the policy banks, CBD and Exim, is a pattern that has been repeated in other parts of the world where China has previously had an interest, she adds.

Ray also notes, “China has other priorities for lending,” and this comes amid news reports that Chinese banks are lending at historic rates domestically to stabilise China’s domestic economy. China is now lending in smaller amounts to international projects.

With the lending to Russia, “It is a microcosm of the broader trend that we see,” says Ray. The drop in deals being done with Russia may not necessarily be a consequence of the war in Ukraine, but rather a broader shift of China moving away from lending.

Meanwhile, there has been plenty of economic engagement between China and Russia. A Russia Briefing, published by Dezan Shira & Associates, notes that there has actually been an increase in China-Russia trade. In 2022, Russia became one of China’s top ten trading partners. And in the same year, exports from Russia to China grew by 43% to US$144bn. China is able to buy Russian raw materials at a discount – when compared to the options with other countries – and its oil purchases have boosted Russia’s income, and this accounts for the majority of the trade growth between the two countries in 2022, according to Dezan Shira & Associates. There has also been trade flowing in the opposite direction, from China to Russia, with Russians increasingly buying Chinese electronics and household items.

There is a tendency to equate Chinese investment and trade with the BRI and that is wrong.

Chris Devonshire-Ellis, Founding Partner, Dezan Shira & Associates

Despite the war in Ukraine, there has also been diplomatic engagement between the two countries. In March 2023, China’s President Xi Jinping made a state visit to Moscow and had a series of meetings with Russian President Vladimir Putin. The two leaders described each other as a ‘dear friend’, and Xi also reportedly praised Putin’s ‘strong leadership’. The meeting came at a time when Putin has become an outcast and international pariah, and the US urging China to use its influence to persuade Russia to withdraw from Ukraine. On this point Xi was quoted as saying that China’s relationship with Russia was a “strategic choice and will not change due to a temporary incident.” The diplomatic meetings reaffirmed the economic cooperation between the two countries, with statements from both sides about their intention to develop their relationship.

There are a number of projects underway that cement this relationship. In March 2023, for example, China and Russia agreed to build a second railway bridge over the Amur River, which borders north-eastern China and Russia. And there are also free trade zones that facilitate trade between the two countries, such as China’s Heilongjiang Pilot Free Trade Zone in northern China, which borders Russia.

Another example of China-Russia cooperation is the CR929 project, a joint venture between Russia and China to develop a long-range passenger airliner, which could ultimately challenge the dominance of Airbus and Boeing in the aviation industry. Although there have been some setbacks to the project, the long-term project is reportedly still going ahead and is a large investment that is symbolic of the relationship between the two countries.

Devonshire-Ellis also points to the investment of Chinese companies in the automotive industry in Russia. He explains that the production figures of the factories in Russia show a steep decline as Western companies pulled out of the country because of Ukraine. That, however, is a ‘blip’, he says as Chinese auto companies, such as Geely, are now taking over those factories and have been working on reconfiguring the facilities for their production needs. All of this takes time, which explains the lag in the statistics, and production has by no means stopped entirely, says Devonshire-Ellis.

This indicates that the sanctions have not had the desired impact, and Russia has found other ways to keep its economy moving. On the domestic front, local companies have also benefitted as Russians have switched to Russian brands instead of European ones, for household goods, for example.

Meanwhile, there are still many Western companies that are able to sell goods in Russia despite the sanctions that have been imposed on the country, notes Devonshire-Ellis. One loophole is the Eurasian Economic Union – which comprises Russia, Belarus, Kazakhstan, Kyrgyzstan and Armenia – and companies from other countries can do business with a country in the union, and from there goods can be exported to Russia duty free. This free trade agreement, in effect, is a way for companies to access the Russian market without saying they are in Russia, says Devonshire-Ellis. He comments that the Western media is misreporting what is happening on the ground, with a narrative that the Russian economy is faltering and Russian consumers are suffering. Many Western brands, he notes, haven’t actually exited the market and Russians are still able to buy Western produce in spite of the sanctions.

Devonshire-Ellis has published photos of a typical local supermarket in the surburbs of Moscow. Here the shelves are stocked, and with produce made by companies from Europe and the UK. International wines, spirits, fresh fruit and veg, seafood, meats, household items, coffee, breakfast cereals and cheeses all fill the shelves. And Devonshire-Ellis also recently visited Blackchops, a British-style pub and steakhouse in St Petersburg which had foreign products like Colman’s mustard, HP sauce, Worcestershire sauce, Scottish beer on tap, and other perishable items that must have been imported since the sanctions were imposed on Russia.

At a high level, the sanctions do not mean that Russians don’t have access to foreign goods. Likewise, the drop in China’s BRI engagement with Russia does not mean that there is no economic activity between China and Russia.

The shift in BRI lending may have come as China is now taking a different approach to the BRI project itself – one that doesn’t rely on state-backed lending. Ray comments that the era of China needing development banks to build infrastructure abroad may now have come to an end. In the early days of China’s external development, the policy banks provided the support that Chinese companies needed. These days, however, points out Ray, those businesses have a foothold in foreign markets and can compete for investment projects without that support. These companies now have enough local knowledge in the foreign countries to take on their own risks and don’t need a sovereign lender to back them up. To that extent, says Ray, “Development finance has served its purpose – to support national enterprise going abroad.” Lending was the first crucial step in order to facilitate the entry of firms into foreign markets, where they would typically have a contract for a turnkey project and there was little risk – because they were backed by the development banks – and it didn’t matter if the project was commercially viable. Now there is a pivot to direct investment, explains Ray, and it does matter that these projects are commercially successful because these companies are invested in them.

The idea of BRI as purely a vehicle for lending may actually be a misconception, points out Ray. Part of the issue is that researchers have been tracking the BRI for this information because they are following development finance and how China’s lending compares. This may mean that other aspects of the BRI have been ignored and the fall in lending does not mean the downfall of the BRI, or a decline in its relevance. Rather, says Ray, it shows that the BRI is pivoting to other forms of engagement and the support from China is not primarily through lending. “We are seeing a pivot to market forces,” says Ray.

It is also a mistake to think about the BRI as a centrally-coordinated project. Rather, it is a loose, umbrella term for many projects. Ray comments that it is easy for foreign observers to think of the BRI as a single entity that is controlled by the central government. Rather, it is a label that can be applied to all sorts of projects by many different departments and agencies; and if BRI is deemed to be a priority, it is more likely to be labelled in that way.

The recent news about BRI has been piecemeal and in total, it may seem that the overall project is in decline; that with a drop in lending – and reports that some African countries are struggling to repay their debts – the grand vision for the BRI is also disintegrating. The war in Ukraine has also impacted the overall appetite for BRI lending.

Devonshire-Ellis notes that Ukraine is a member of the BRI and China has invested in the country, for example in the Mariupol port, which is now in Russian hands. Ukraine is a strategic country for China’s BRI investment as it links Asia with Europe and Ukraine has previously been a key country for the transit of Chinese goods into Europe. China’s interest in investing in Ukraine may be reignited once the war is over, and the country’s reconstruction phase begins. Although Ukraine is likely to be allied to European players, China will be able to rebuild Ukraine’s infrastructure at a lower cost than the European competition, says Devonshire-Ellis.

How that plays out remains to be seen and China’s stance towards Ukraine may test its relationship with Russia. The BRI project, however, will continue and although the lending has declined, China is seeking to use its influence and support in other ways and continue the bold vision of its grand-sounding project.