Russian Sanctions Spell Trouble for Chinese Companies
The trade prohibitions that have been placed on Russia in light of its Ukrainian incursion are a burden for US companies that buy or sell in Russia, but they are even more of a conflict for Chinese companies that buy or sell with both the US and Russia. Chinese companies face two problems with the US/Russian sanctions. First, the Chinese government’s distaste for supporting such sanctions, which could lead to pressure from the Chinese government to maintain trade with Russia, and second, the potential for sanctions by the US for those Chinese companies that ignore the sanctions.
When the US placed sanctions on Huawei (pvt) for allegedly doing business with Iran, Canada held Huawei’s CFO under house arrest for 1,000 days once the US asked for extradition, and a multitude of foreign companies that supply tools, software, and production capabilities in other countries have joined with the US in its further sanctions against Chinese companies placed on the ‘entities list’ by the DOC. We expect similar cooperation from foreign companies in reference to the Ukraine conflict, but those Chinese companies that routinely trade with Russia could face severe financial repercussions if they continue to do business in the Soviet Union, both as fines for US trade violations and the loss of business with US companies as a result of such violations.
Lenovo (992.HK), based in Hong Kong, quickly joined the US in halting sales to Russia but faced considerable backlash in country and has yet to confirm its official cooperation with the US, and China’s foreign ministry spokesman commented that ‘China is not in favor of using sanctions to solve problems and furthermore opposes unilateral sanctions that have no basis in international law’, making clear the Chinese government’s official position. That said, while Russia’s semiconductor market is relatively small for Chinese manufacturers, there are many other products, such as high-end computers, automotive parts, and smartphones sold to Russia, amounting to ~$146.9b last year and many such items include parts made in the US, designed with US equipment or based on US IP, and on the other side, Russia is a supplier of a number of energy and agricultural products to China, so the conflict will not be an easy one to solve. Much will depend on the Chinese government’s resolve in maintaining a strong stance against sanctions while looking at the possibility of serious (more serious than those already existing…) problems with the US that could further deflate the Chinese economy and expand the already growing number of companies on the US entities list.
When the US placed sanctions on Huawei (pvt) for allegedly doing business with Iran, Canada held Huawei’s CFO under house arrest for 1,000 days once the US asked for extradition, and a multitude of foreign companies that supply tools, software, and production capabilities in other countries have joined with the US in its further sanctions against Chinese companies placed on the ‘entities list’ by the DOC. We expect similar cooperation from foreign companies in reference to the Ukraine conflict, but those Chinese companies that routinely trade with Russia could face severe financial repercussions if they continue to do business in the Soviet Union, both as fines for US trade violations and the loss of business with US companies as a result of such violations.
Lenovo (992.HK), based in Hong Kong, quickly joined the US in halting sales to Russia but faced considerable backlash in country and has yet to confirm its official cooperation with the US, and China’s foreign ministry spokesman commented that ‘China is not in favor of using sanctions to solve problems and furthermore opposes unilateral sanctions that have no basis in international law’, making clear the Chinese government’s official position. That said, while Russia’s semiconductor market is relatively small for Chinese manufacturers, there are many other products, such as high-end computers, automotive parts, and smartphones sold to Russia, amounting to ~$146.9b last year and many such items include parts made in the US, designed with US equipment or based on US IP, and on the other side, Russia is a supplier of a number of energy and agricultural products to China, so the conflict will not be an easy one to solve. Much will depend on the Chinese government’s resolve in maintaining a strong stance against sanctions while looking at the possibility of serious (more serious than those already existing…) problems with the US that could further deflate the Chinese economy and expand the already growing number of companies on the US entities list.
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