This past year the Institute for Future Conflict launched its first annual essay contest, open to undergraduate students at Colorado State University, CU Boulder, Denver University, the United States Air Force Academy, and University of Colorado-Colorado Springs.
The prompt asked students and cadets: what lessons is the People’s Republic of China taking away from the war in Ukraine, and are these the lessons the United States wants it to internalize?
This week we are proud to publish the three winners of the contest.
In February 2022 Russia initiated a full-scale invasion of Ukraine. In response, many nations threatened severe economic sanctions. Those countries began imposing sanctions shortly after the invasion, and efforts to economically hinder Russia are still in effect and causing the Russian economy to stagger. The Russia-Ukraine War has thus established a platform for understanding the impact of economic warfare on the behavior of potential aggressors. As shown in this case, economic implications will be a major consideration for the future use and deterrence of coercive force.
The People’s Republic of China (PRC) is observing the ability of global actors to employ economic tools of statecraft to punish the invasion of a foreign entity. The PRC will likely apply this knowledge to protect itself from experiencing similar economic downfalls that Russia has faced since its invasion of Ukraine.
In this article I analyze the lessons the PRC is learning about their vulnerabilities and how they might apply insights from Ukraine to a potential conflict with Taiwan. First, I examine the value of economic sanctions as a tool of deterrence. Second, I address the punitive economic measures applied to Russia that could similarly be applied to the PRC. Third, I provide courses of action the PRC will likely to take to safeguard their economic stability and growth if they invade Taiwan. How the PRC chooses to secure its economic well-being could impact the value of sanctions as a method of deterrence and could affect international financial markets and systems.
The Value of Economic Sanctions against Determined Adversaries
Western nations were quick to impose economic sanctions on Russia following the initial invasion of Ukraine. The imposed measures were primarily “smart” sanctions, targeting those tied to or responsible for the reprehensible act. Western states have been the primary implementers of sanctions against Russia, restricting modernization and the possibility of growth while sanctions are in place.
Facing extensive sanctions, the Kremlin has significantly increased military spending and made critical cuts to sectors like infrastructure, health, and education. Russia’s economy contracted 2.1% in 2022 and has since experienced depreciation of the ruble by roughly 20% against the US dollar, increased inflation, and witnessed a tightening of the labor market.
Yet, the Russia-Ukraine case study indicates that threats of economic sanctions were an unsuccessful deterrent, made apparent by Russia's continued efforts two years into the war. While the sanctions were originally imposed to fulfill the West’s punishment-based deterrent threats, they have since evolved to deny Russia from achieving its objectives by limiting their capabilities through the denial of resources.
There are similarities between the way Putin views Russia’s “reunification” with Ukraine and President Xi’s view of Taiwan. Considering Beijing's adamant insistence on a “One China” policy and President Xi’s commitment to reunify Taiwan, it is also unlikely the PRC will change course under the threat of coercive economic policies. In the event the PRC invades Taiwan, it will be prepared for Russia-like sanctions that are meant to slow the PRC’s march through Taiwan. It seems unlikely that, even if Western countries were forewarned of the PRC’s invasion schedule, that they would immediately raise economic sanctions high enough to deter the PRC from invading. Beijing should expect a wave of constraining economic sanctions similar to those that have been applied to Russia and will attempt to safeguard their economic success given their determination to eventually claim Taiwan.
The Chinese Communist Party (CCP) has long vowed to reunify Taiwan and is unlikely to back out of their promise and President Xi benefits most from his economic policies. Beijing will likely attempt to avoid the impact of economic sanctions through non-Western partnerships and the use of alternative financial systems.
The Russian Sanctions Model
The sanctions levied on Russia were meant to disrupt and slow Putin’s war efforts. The Group of Seven (G7)—an informal group of industrialized economies including countries from North America, Europe, and East Asia—employed a variety of economic tools to force the Russians out of Ukraine.
Currently, Russia has over $300 billion in frozen assets overseas, belonging to individuals and the Russian government. The G7 has stated that they will not relinquish these assets until Russia stops the war, returns all wrongfully gained territory, and provides reparations. Additionally, access to Society for Worldwide Interbank Financial Telecommunications (SWIFT)—a global financial messaging system—has been revoked from several Russian banks. This removed access to the universally accepted and secure shuttling system for funds across borders, severely restricting Russia’s access to international markets.
Similar tools would likely be employed against the PRC. According to the China National Knowledge Infrastructure, discussions on US sanctions and foreign financial policy surged following the invasion of Ukraine, indicating the PRC is looking to Russia to navigate future economic rifts.
Even if insufficient in completely deterring PRC aggression, economic sanctions would have major consequences that the PRC would seek to counter. Chinese foreign reserves amount to over $3 trillion, which if frozen would severely limit the PRC’s ability to support its economy while under sanctions. The PRC could presumably seek to decrease reliance on the US dollar and promote the use of local currencies in trade and investments which would help maintain access to global financing and trade. Additionally, removing the PRC’s access to SWIFT would seriously restrict international business. Approximately 77% of the PRC’s goods and services trade is settled in foreign currencies—primarily the euro and US dollar —and the PRC economy would experience major disruptions without secure cross-border transfers provided through SWIFT.
The PRC will be forced seek out alternative financial systems to decrease reliance on Western financial systems. But what are their options?
Chinese Solutions to Economic Sanctions
It is apparent that the PRC is already preparing their financial systems for similar sanctions to Russia and, in some respects, following Russia’s lead on how to manage them.
Russia has steadily increased their gold reserves after being denied access to the dollar and the euro. Already China has spent months increasing their gold reserves, having obtained 287 tons from October 2022 to December 2023. Increasing gold reserves diminishes the power of the dollar and the euro within the PRC, indicating a desire for financial flexibility in the near future and consideration of alternative financial systems.
To alleviate the disastrous results of being locked out of SWIFT, the PRC will probably switch over to a Chinese alternative: the Chinese Cross-Border Interbank Payment System (CIPS). CIPS is a clearing and settling agency that currently relies heavily on SWIFT for communication services. However, CIPS does maintain some secure communication capabilities and, according to an unclassified report from the ODNI, Russia and the PRC have utilized CIPS to transfer money on a yuan-based denomination.
Considering CIPS success in Russia, the PRC would want to expand the yuan-driven alternative and establish alternative access to international banking channels, which could be appealing to countries separated from the West and seeking a less dollar dominated-system. An increasing number of Russian banks have signed up for CIPS and daily transactions utilizing the service increased 50% in 2022 and an additional 25% by September 2023. CIPS has been utilized by third countries to settle payments with Russia in yuan, presenting an opportunity for further growth of the Chinese payment system. In April 2023, Bangladesh approved a $318 million loan payment to a Russian nuclear developer to be settled in yuan and transacted through CIPS.
The PRC’s second strategy has been underway since 2022, when it began to increase its trade with non-Western nations to decrease its reliance on the United States. As of 2023, the PRC’s most significant trading bloc is the 10-country Association of Southeast Asian Nations (ASEAN), which serves to diversify its supply chains as well as bolster its regional influence.
The PRC has also made apparent shifts preferential to non-Western nations, like those in the Global South. For example, Iran’s imports from the PRC from 2019-2022 were $800 million monthly, but sharply increased to $1.7 billion by March 2023. While the Global South maintains less economic power than the West, it is likely to become more reliant on the PRC’s economic presence because of their developing economies. These economic alliances serve as a balancing mechanism to counteract economically isolating sanctions from the West because such coalitions, including with Russia, are less likely to commit harsh sanctions against the PRC for fear of damaging their own economies.
The PRC is increasing the appeal of yuan-based international transactions in these countries by improving liquidity in overseas markets through concessionary lending for infrastructure projects. The Belt and Road Initiative (BRI) is an ambitious Chinese project that seeks to expand the PRC’s economic influence through infrastructure projects spanning 147 different countries. Expanding economic relationships presents an opportunity for the PRC to seek leverage over partnership countries. Many BRI contracts include clauses that restrict restructuring with the Paris Club- a group of twenty-two major creditor nations including the US- and retain the PRC’s right to demand payment at any time leaving countries more vulnerable to Chinese influence on political issues like Taiwanese sovereignty.
Making Sanctions More Effective
The PRC is learning from the economic sanctions that have been applied to Russia since the invasion of Ukraine and how to avoid them as they lock onto Taiwan. The threat of economic sanctions was already unlikely to deter a PRC invasion of Taiwan, and recent efforts to protect the PRC economy from sanctions further reduces the deterrent value of sanctions. After observing the imposition of significant economic sanctions against Russia, the PRC would certainly expect to experience similar economic pressures in the event of a Taiwan invasion. In addition to learning these lessons, the PRC is attempting to immunize its economy from Western sanctions by intertwining itself with the Global South and Russia. As such, Beijing will continue to prioritize non-Western dominated financial systems that have been utilized by Russia.
The PRC’s distancing from Western financial institutions in anticipation of sanctions will have broad implications for the global economy and for US policy. If the global economy is split into two spheres—one led by the PRC and the other by the United States—this could result in massive losses in output and global GDP. US foreign policymakers are facing the difficult task of balancing the status quo in Taiwan and enforcing the weight of an economic threat against the PRC while maintaining global economic order. As such, sanctions must be embedded in a broader strategy to deter Chinese aggression.
The US approach to Taiwan requires a delicate balance of leveraging international partnerships in the Indo-Pacific region, shows of military capabilities, and nuanced diplomacy. Despite its efforts to reduce economic vulnerabilities, the PRC remains highly dependent on international financial systems and access to global markets. It is crucial for the US to enhance its strategy by forming robust security-based partnerships that serve to amplify the threat of economic sanctions and increase the deterrent impact on the PRC while constraining its ability to develop viable alternatives to Western financial systems.
Alissa Marie Beehler is an undergraduate student majoring in political science at the University of Colorado, Colorado Springs.