Ukraine war: US spells out sanctions on Russia, heaping more pressure on China to comply

• Among the various restrictions, if a Russia-bound item was made using American tools or equipment, it could be covered by Washington’s sanctions
• But while Chinese firms may try to avoid running afoul of US sanctions, overall China-Russia trade should remain strong because most products will not be affected

The United States has warned that exports to Russia – including China’s – in which US content accounts for more than 25 per cent of the overall value, must first be licensed by Washington to avoid running afoul of sanctions, according to a senior US commerce official.

Matthew Borman, deputy assistant secretary for export administration with the US Department of Commerce, said during a teleconference on Tuesday that possible sanctions, such as those cutting off US sources, could “have a significant impact” on companies that misuse “US input in some way – US-origin input”.

Companies found breaching restrictions could face fines or even jail time if they are subject to US jurisdiction, or a complete ban on any kind of transactions if they are not, Borman said, marking the first time a senior US official has spelled out conditions of the sanctions in the wake of Russia’s invasion of Ukraine that began on February 24.

And even if a Russia-bound product does not contain US content, it could still be subject to Washington’s restrictions if based on US software or technology, or if it was produced on an assembly line that uses American tools or equipment.

Beijing, which has refrained from publicly condemning Russia, has been growing increasingly concerned about the risk of potential secondary sanctions as Washington and its allies keep pressing it to take a tougher stance on Moscow, according to diplomatic sources and observers.

During a summit between President Xi Jinping and US President Joe Biden on March 18, Biden warned of unspecified consequences if China supports Russia. That came about two weeks after China said it “firmly opposes any illegal unilateral sanctions”.

A trade adviser for the Chinese government also told the Post that the US pushed China to comply with the sanctions during the summit.

And pointing to Borman’s comments, the adviser, who asked not to be identified due to the sensitive nature of the issue, said: “The US has laid out details and shown its hand on its specific requests.”

“The strength and foundation of cooperation between China and Russia is still quite good – the US is trying to break it … and is forcing China to give a clear-cut response [on whether it will comply with the sanctions on Russia],” the adviser said, adding that failing to comply would result in sanctions on China.

Borman added that the US has held discussions about “the scope of the controls” with China’s trade officials at its embassy in Washington.

He also cited the previous case of Chinese telecoms company ZTE being fined US$1.4 billion in 2018 for allegedly violating sanctions by selling products to Iran and North Korea. That, he said, is an example of what Chinese firms could face if found in violation of sanctions on Russia.

“The denial order that was imposed on ZTE and then suspended as part of their settlement agreement … is the most severe sanction we can apply in the export-control area,” Borman said.

A US judge ruled last week that ZTE should be allowed to end its five-year probation on the final day of the penalty for breaching sanctions.

Borman also called for Asian countries to align their trade restrictions against Russia and make them even more effective.

The impact of sanctions on the world economy “really depends on how this plays out and whether Russia draws back from what it’s been undertaking”, he said.

Borman said the US has not seen any indication of non-compliance in Asia, with the restrictions being in place for more than a month, and he said there has been some “self-sanctioning” as hundreds of companies have stopped doing business in Russia.

He added that major players are aware of the risks to their business, and that the US has held discussions with businesses in the region, including from China.

Meanwhile, experts warn that geopolitical tensions are casting a shadow over China’s pressing issues such as food and energy security, while jeopardising projects under the China-centred trading network known as the Belt and Road Initiative.

Lu Xiang, a US expert with the Chinese Academy of Social Sciences (CASS), said Washington’s actions could affect some Chinese enterprises such as handset or computer producers, forcing them to halt exports.

“Affected enterprises will take measures to avoid the risk [of being sanctioned],” he said. “However, it won’t derail overall China-Russian trade, because a vast majority of products won’t breach the criteria.”

Russia’s invasion of Ukraine has triggered waves of sanctions against Moscow, including moves against various Russian financial institutions and individuals and far-reaching export controls on a wide range of items to Russia.

In Asia, Japan, South Korea, Singapore and Taiwan have also followed the US by supporting sanctions.

“We are always willing to work with any government in Asia to explain in more detail our actions,” Borman said. “We continue to talk to other countries about potentially joining alignment on sanctions.”

Lu with the CASS noted that such long-arm jurisdiction will backfire, and that Russia has shown no sign of compromise.

While there could be a further expansion of Western sanctions, Lu said that China, which buys tens of millions of tonnes of crude oil from its northern neighbour each year, will not concede on energy issues. “It’s a matter of sovereignty.”

Borman indeed warned that more sanctions were likely to come if Russia’s invasion continues.

“In terms of exports, there are some categories of items that are currently only subject to restrictions if they’re going to named military end-users in Russia; those could be expanded to all users in Russia,” he said.

He also said that the additional measures could include restricting more categories of imports from Russia and more measures in the financial sector.

China was doing its best to avoid suffering collateral damage from the Western sanctions against Russia, as not only does it need to continue exporting to the US and European markets, but it also depends on Western inputs to produce goods, especially chips, seeds and aviation items, according to Wang Dan, an analyst with Gavekal Research.

“Such continued dependence should encourage Western confidence in China’s geopolitical restraint, as the sanctions against Russia have given China a hint of what it could face in a confrontation with the West,” Wang wrote in a note last week.

Author: Orange Wang, SCMP