US sanctions curb Chinese technology exports to Russia

Major Chinese technology companies have quietly exited Russia in the face of U.S. sanctions threats, despite Beijing’s promise of a “no limits” relationship with Russia. Chinese drone maker DJI openly announced in late April that it was suspending its business operations in Ukraine and Russia. Other firms, laptop maker Lenovo and phone maker Xiaomi, have left Russia with less fanfare, halting shipments to Russia but without explicit announcements that they were doing so.

Chinese technology companies have faced pressure from the Chinese public and government to stay in Russia. The Chinese public has been largely supportive of the Russian war and has vocally called on Chinese tech firms to stand in solidarity with Russia. The Chinese Ministry of Commerce in April called on companies “not to submit to external coercion and make improper external statements.” Despite pressure from the Chinese public and official sources, the exit of these firms shows that Chinese companies have little appetite for running afoul of U.S. sanctions, particularly given that Chinese trade with Russia constitutes only 2 percent of China’s total trade.

The threat of sanctions has had a pronounced effect on Chinese technology exports to Russia, whose consumer economy is highly dependent on Chinese technology. According to a speech from U.S. Commerce Secretary Gina Raimondo on May 10, Chinese laptop shipments to Russia dropped 40 percent in March compared with February, while exports of telecommunications equipment dropped 98 percent. The speech comes amid reports that the Commerce Department is planning on sanctioning additional Chinese companies over export control violations by adding them to the Entity List, a restriction on access to U.S. exports.

While China’s “soft” technology exports like consumer electronics have decreased, Beijing has signaled that it may deepen cooperation on “hard” technology exports. In an interview with Russian state news agency Tass, Zhang Hanhui, China’s ambassador to Russia, stated that China would deepen cooperation with Russia on military technology, energy and space. Though the statement left out specific plans for military support, analysts predict that Russia would likely want space-grade radiation-resident electronic components, cooperation in establishing data centers, and military drones.

U.S. sanctions have also not stopped Sino-Russian trade completely. Chinese state-owned firms not only have continued to purchase Russian oil and gas but also have increased their trade relations. Chinese imports from Russia rose 56.6 percent year-over-year in April to $8.9 billion, helping buoy Vladimir Putin’s government against a flagging economy. The increase in trade follows Russia and China’s announcement on Feb. 4, three weeks prior to the invasion, that the two countries had established a 30-year agreement to supply gas to China via a new pipeline. The agreement would increase their bilateral trade to the equivalent of $250 billion by 2024, a growth rate of 20 percent per year. While Chinese purchases of Russian oil and gas are not technically a violation of U.S. sanctions, the Biden administration has become increasingly exasperated with Chinese support for the Russian economy and may take measures to curb the loophole.

Chinese companies exiting Russia may be a prudent move in the short run, but it is unclear whether these companies will evade harsher action in the long run. In a speech at George Washington University on May 26, U.S. Secretary of State Antony Blinken criticized Chinese surveillance technology and announced a plan to bolster U.S. competitiveness with China by imposing stronger export controls and bolstering cyber defenses. The tenor of the speech may point to more robust U.S. sanctions against Chinese technology companies independent of their involvement in the Russia-Ukraine conflict.

China signals easing of tech crackdown in hopes of lifting economy
Beijing may be preparing to hit pause on its yearlong crackdown on the tech sector as the government faces pressure to boost the country’s economic outlook in the wake of a resurgence of the coronavirus and subsequent lockdowns. Any loosening of regulations for China’s tech giants would reflect the importance of economic stability for President Xi Jinping in a key political year in which he is expected to secure an unprecedented third term in power.

Over the past few years, Xi’s stated campaign to redistribute wealth and drive China toward technological self-sufficiency has taken precedence over almost all other policy goals. The country’s battle against the pandemic, including adherence to a strict “zero-COVID” policy, has complicated Xi’s vision and seen the economy take a back seat to the government’s desire to stop the spread at all costs.

A number of investment banks have slashed their forecasts for Chinese growth this year amid the spread of the omicron variant, which has led to the months-long lockdown of Shanghai and wreaked havoc on supply chains, logistics networks and business operations. In April, the International Monetary Fund said it expected growth of 4.4 percent this year, down from a previous forecast of 4.8 percent, citing risks from Beijing’s “zero-COVID” policy—well below China’s official forecast of around 5.5 percent. Manufacturing output and consumer demand have plummeted, and major companies like Alibaba have been forced to impose significant layoffs.

But a series of high-level government meetings held throughout late April and May have fueled expectations that the end of the tech crackdown may be in sight. On April 26, Xi told officials to ensure that the country’s economic growth outpaces that of the U.S. this year, a mandate that government agencies plan to fulfill by embarking on an infrastructure spending spree in the manufacturing, technology, energy and food sectors. On April 29, the Politburo, the central decision-making body of the Chinese Communist Party, pledged to support the “healthy” development of the platform economy, which includes internet companies in areas ranging from social media to e-commerce.

Acknowledging that the coronavirus and the Ukraine crisis have increased risks and challenges facing the economy, leaders said they would unveil policies to support coronavirus-hit industries and small businesses, shore up employment, protect the smooth operation of domestic logistics and supply chain networks, and ensure that residents have daily necessities. Among the measures is a raft of infrastructure spending. At the same time, however, the Politburo stressed the need to complete the “special rectification” of the tech sector and implement normalized supervision over tech giants.

On May 18, the Chinese People’s Political Consultative Conference (CPPCC) met with some of the country’s top tech executives in further signs of easing. Vice Premier Liu He encouraged platform enterprises to play a constructive role in the national economy by participating in scientific and technological innovation projects. Following the meeting, Liu pledged support for the sector and plans for internet companies to pursue overseas listings, though “significant issues remain” in reaching a deal with the U.S. given the Securities and Exchange Commission’s concerns about the auditing compliance of Chinese companies listed on U.S. stock exchanges.

Chinese tech stocks surged after the public announcements. Following the Politburo meeting, Hong Kong’s Hang Seng TECH Index rose 10 percent, while shares of tech giants Alibaba and Tencent rose 15 percent and 11 percent, respectively. Platform operators have expressed optimism that the government will finally offer clarity over what is and is not forbidden, such as which data can be collected and used, while encouraging them to prosper. Analysts expect the regulatory environment to be less stringent and more friendly to the tech sector in 2022.

But this doesn’t mean that the government’s push to enact antitrust and data privacy protections is over. Xi’s commitment to the “common prosperity” ideology means that the central government intends to maintain some measure of control over the future development of the sector. In fact, Beijing is reportedly expected to push some of its biggest tech companies to offer 1 percent equity stakes to the state and give officials more sway in corporate decisions. The government has already taken 1 percent stakes in ByteDance, the owner of short-video platform TikTok, and microblogging platform Weibo. Now, the plan is likely to be expanded to other tech platforms such as Tencent and Meituan.

Some experts doubt that the government’s renewed promises to ease regulations and boost economic growth will translate to a meaningful shift in policy. The market remains vulnerable to the Communist Party’s opaque and unpredictable decision-making. Traders are so nervous that Alibaba lost $26 billion in value within minutes in May, after an individual who shared co-founder Jack Ma’s surname was accused of endangering national security. It remains to be seen whether the government’s latest moves will restore investor confidence in the economy. Law Fare