The immediate impact of the Russia-Ukraine conflict on foreign invested enterprises (FIEs) in China is limited, but the fallout from the conflict may hold various direct and unintended consequences for foreign businesses operating in China. From disrupting trade and global supply chains to causing tension between overseas and domestic consumers, we discuss the obstacles FIEs in China may face in the context of the conflict and international sanctions on Russia.
The outbreak of the Russia-Ukraine conflict on February 24, 2022, sent shockwaves throughout the world and led to an unprecedented response from countries around the world in the form of sanctions and bans. In doing so, western countries and allies are sending a clear signal that they want to cut off Russia from the global financial system and isolate Putin politically.
Throughout this, China has maintained a neutral stance, refusing to either directly condemn or condone Russia's actions, opposing the use of sanctions, and calling for a diplomatic resolution to the conflict.
Despite China's neutral stance, it is inevitable that some China-based businesses will be caught in the crosshairs. Although the Ukraine-Russia conflict and the sanctions placed upon Russia will have a limited impact upon Chinese companies, there are still several indirect consequences that could impact foreign-invested companies in China.
Impact of Russia-Ukraine conflict on trade
FIEs engaged in direct trade with Ukraine, Russia, and Belarus will feel the most immediate impact of the conflict. Ukraine is now essentially closed to trade and business, and only essential goods and supplies are entering the country through the Polish border.
The situation with Russia and Belarus is more complicated, as parsing which sanctions will impact companies in China can be difficult. Whereas Chinese companies will be able to continue to do business with Russia – providing it remains commercially viable – FIEs will be subject to the sanctions of their countries of origin and will have to shut down many China-based Russia operations in order to comply with them.
However, in some cases, western sanctions could affect third country companies as well. US and EU technology sanctions on Russia, for instance, essentially bans any product containing US and EU-made technology from being sold to Russia.
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The list of EU and US technology sanctions is wide-ranging and includes critical technologies such as semiconductors (chipsets), telecommunications equipment, and software. Chinese companies and companies from a non-EU third country could therefore be forced to stop selling products that contain any of these US- or EU-made technology to Russia in order to comply with the sanctions.
In addition to the sanctions, the conflict is expected to significantly impact China-EU bilateral trade as developments on the ground and sanctions disrupt the main Eurasian rail freight routes. The EU is China's second-largest trade partner and China is the single largest trade partner for the EU. In 2021, trade volume between the EU and China surpassed US$800 billion, a year-over-year growth rate of 27.5 percent.
The Russia-Ukraine conflict has disrupted key rail routes from the EU to China. Some companies have suspended rail freight from Europe to China due to concerns over disruptions at the border between the EU and Belarus and Russia. Maritime shipping will be an alternative for businesses seeking to reroute shipments away from Russia and Belarus, but these routes will also face significant delays as discussed below.
Shipping disruption
The Russia-Ukraine conflict has further exacerbated the shipping and supply chain crisis that the world has been grappling with since the outbreak of the COVID-19 pandemic. This will continue to impact companies that engage in shipping and depend on long-route logistics.
COVID-19 lockdowns in China and elsewhere, at different points in 2020 and 2021, led to sudden factory closures or significantly reduced production. However, as initial pandemic shocks subside, consumption rises sharply, even as factories operate at reduced capacity and idle ships on the back foot are unable to meet demand or are stuck amid delayed shipments in congested ports.
The logistics bottlenecks and imbalance in supply and demand have significantly slowed average shipping times and resulted in a severe shortage of shipping containers worldwide. Fierce competition between companies to lease or purchase containers has driven up costs of freight containers and freight services to sky-high rates.
The conflict in Ukraine is likely to impact China-EU trade in the coming months and could put further strain on Europe
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