The steel pact

It takes about 50 tons of steel to produce a modern tank and just over 40 kilograms to make a 155 mm projectile. And while no one knows exactly the extent of Russian shipments of armored vehicles, guns or ammunition to the front, it is clear that Russian heavy industry is still functioning. Russian steel mills churn out body armor, helmets and armor plates for vehicles seamlessly. While Western sanctions may have affected the most advanced weapons technologies, which would have allowed the Russian army to hit a limited number of targets in Ukraine and limit its own military losses, they certainly did not reach their heavy industry.

Currently, military factories and their suppliers are increasing production at a pace unprecedented for Russian industry. Against the background of stagnation or weak growth of most civilian sectors, the military-industrial complex is statistically turning into the locomotive of the entire economy. Russian steel mills are currently producing more than 150,000 155mm projectiles per month, which could increase to 200,000 this year. And who could be the supplier of steel production technology if not the first global producer, China?

Today it is Beijing's technology that keeps Russian heavy industry alive: in a situation “win-win” which sees commercial opportunities for Chinese excess capacity combined with Moscow's need to enable its steel industry to support its war objectives. More and more Russian heavy industries are turning to Beijing's technology, from the aluminum giant Rusal International PJSC to the first global palladium producer Norilsk Nickel PJSC: the Russian mining sector is based on infrastructure inherited from the Soviet era, which is obsolete and highly polluting . The country's mining regions, such as the Norilsk area, where industrial activity dates back almost a century, today find themselves faced with the need, if not to implement a profound change in their obsolete technologies, then at least to maintain the current industrial system.

Today Magnitogorsk Iron and SteelWorks (MMK), Russia's third largest steel company, is switching to Chinese technologies, replacing those of Western companies that left Russia. MMK, one of the oldest steel producers in the country, was bankrupt in the mid-1990s, but only ten years later had recovered thanks to low-interest loans from institutional lenders such as the European Bank for Reconstruction and development (BERS) and to foreign suppliers, many in Italy, for the most modern equipment and technologies. Today Sinosteel Engineering & Technology Co., a subsidiary of Baowu Steel Group, the largest steel producer in the world, is building a new coking plant at the MMK plant in Magnitogorsk, in the Ural Mountains: one of the many examples of the “friendship without limits” between Russia and China.

For Russia, the supply of Chinese equipment is now an obvious choice, however when Western suppliers exited the Russian industry en masse after the 2022 invasion, their exodus caused marginal damage to the Russian steel industry. Control of the steel industry has historically involved almost exclusively Russian contenders: the main Russian steel producers, MMK, NLMK, Mechel, and Severstal, are led by oligarchs competent in their industrial sector, who over time have jealously controlled the sector preventing incursions by foreign companies.

But steel, once produced, must be processed to fuel the war industry, and the quality of the tools used to work the metal affects heavy industry, shipbuilding, the aeronautical industry and the entire defense sector. The Russian machine tool industry was already lagging in the 1980s, but after the collapse of the Soviet Union in 1991, it simply disappeared. Russia's total dependence on imports would make computer numerical control (CNC) machine tools a candidate for sanctions that would be highly effective, as they would bring Russian economic development to a halt, or at least severely slow the pace of growth. A blanket ban on all exports of precision machine tools to Russia would have devastating effects.

But Russian customs declarations show that Chinese manufacturers shipped $68 million worth of machine tools in July compared to just $6.5 million in February 2022, the start of the invasion of Ukraine: again the Russia, deprived of access to European machinery, had no choice but to rely on China. Of course, Chinese technology is not yet at the level of German or Japanese technology and its tools tend to be at the low end of the sophistication spectrum but the government is investing heavily in research and development and the resulting economy of scale could help as an accelerator to Beijing's efforts.

Change in the value and volume of Chinese exports to Russia in some sanctioned goods. The machine tool sector is highlighted in redInstitute for Emerging Economies of the Bank of Finland

Yet this type of technology transfer is not as immediate as one might assume: Russia's high-tech military factories, which have based their production processes on the characteristics of Western manufacturers' tools, cannot, in the short term, replace them with less precise and accurate Chinese tools, based on different specifications, to replicate critical processes. Russian defense facilities are much more likely to exist today just starting to use Chinese CNC machine tools.

The hypotheses that Western sanctions are being circumvented and that the Russian arms industry continues to have machine tools produced in the European Union therefore appear to be well founded: Russian trade data show that machine tools produced in the EU continue to flow to Russia, which indicates that demand continues, despite the restrictions and associated logistical difficulties, exploiting Turkey as a hub for the transfer of Western-produced dual-use goods: a machine tool is a technology that can be used for both military and civilian purposes .

In reality, exports of CNC machine tools are just one example of how China and Russia are progressively involved in an ever deeper military-industrial partnership: recently Xi Jinping stated that annual bilateral trade with Russia has reached an all-time high of almost 200 billion dollars. Chinese exports to Russia rose to $110 billion in 2023: a 125% increase that offsets and exceeds the decline in goods from the West. While Beijing increases purchases at “favorable prices” of Russian energy exports new markets are opening up for Chinese companies to replace Western companies with crucial components for the Russian war machine.