Great changes unseen: The China-Russia nexus and European security

Driven by a 'security first' doctrine and strategic rivalry with the U.S., China has solidified its critical partnership with Russia, providing sustained economic, technological, and diplomatic support that enables Russia's prolonged war in Ukraine. This strategic alignment, which views a protracted, unresolved conflict as a 'sweet spot' for Beijing to divert Western attention and enhance its global influence, renders any 'reverse Nixon' strategy by the West ineffective. Consequently, institutional investors should recognize China as a decisive enabler of Russia's aggression, necessitating a re-evaluation of European and broader Western foreign policy towards Beijing beyond mere economic considerations, as China prioritizes strategic gains over short-term economic costs.

Analysis

China's strategic realignment under Xi Jinping's 'security first' doctrine has cemented Russia as its most critical partner in a global rivalry with the United States. This partnership is not tactical but foundational, with Beijing providing material support that is a decisive enabler of Russia's prolonged war in Ukraine. The economic relationship has deepened, evidenced by bilateral trade reaching a record $237 billion in 2024, a 32.7% increase in 2023, yet this relationship is highly asymmetric, with China accounting for 26% of Russia's trade while Russia represents only 3% of China's. Beijing's support is calibrated to avoid direct military involvement, focusing instead on dual-use goods, technological assistance, and creating economic lifelines that insulate Russia from Western sanctions, such as doubling renminbi deposits in Russian banks in 2023. The analysis within the article suggests China views a prolonged, unresolved conflict as a strategic 'sweet spot,' as it diverts Western resources and attention from the Indo-Pacific. Consequently, China is willing to endure economic and reputational costs, signaling that European economic incentives are insufficient to alter Beijing's strategic calculus, which now prioritizes geopolitical gains over purely economic considerations.

Key Decisions for Investors

• Investors should re-evaluate portfolios with significant exposure to China, factoring in a higher geopolitical risk premium due to Beijing's prioritization of strategic security over economic partnership with the West.
• Monitor for an expansion of secondary sanctions targeting Chinese entities involved in supplying Russia, as this could trigger significant volatility and supply chain disruptions for specific technology and industrial sectors.
• Consider strategic allocation to sectors and regions benefiting from the 'de-risking' trend, including defense, cybersecurity, and manufacturing in geographies like Southeast Asia and Eastern Europe that stand to gain from supply chain diversification away from China.
• Watch for the development of non-dollar payment systems and the increased use of the renminbi in international trade as a leading indicator of geopolitical bloc formation and a potential long-term risk to dollar-denominated assets.