An interesting thing happened late this summer: Russia and China dramatically deepened their energy relationship, less for economic reasons than for geopolitical ones.
The ramifications, not so much for energy markets but for international relations, could be quite significant—especially for China, a little less so for Russia, and certainly for the United States—as the “no-limits” friendship between Beijing and Moscow has now been lily-gilded and locked in for decades to come.
What China did, starting at the end of August, was simply receive deliveries of liquefied natural gas (LNG) from Russia at an obscure port. That, coupled with the announcement that Russia would greatly increase its pipeline exports of gas to China, including by the construction of the long-fabled but never actually finalized Power of Siberia 2 pipeline, indicate that the Russia-China axis is on a stronger footing than ever before and will be around for a while.
The LNG shipments are controversial because they came from a Russian project—Arctic LNG 2—that has been so hobbled by U.S. sanctions that it had been unable to deliver a single molecule of gas since it was finished two years ago.
U.S. President Donald Trump has chastised India for buying Russian energy. He has also tried and partially managed to browbeat Europe into giving up the habit. But China seems willing and able to offer a lifeline to Russian energy projects that have no other outlet. To date, at least seven tankers full of sanctioned Russian gas have arrived at a Chinese port that doesn’t even need the stuff. Analysts view the purchases as a trial balloon of U.S. willingness to enforce secondary sanctions on Russian energy exports, even if it means tangling with a powerful adversary.
“China seems to have a get-out-of-jail-free card regarding U.S. Russia-related energy sanctions,” said Jack Herndon, of the Center for European Policy Analysis in Washington. “I think China thinks it has the upper hand because Trump wants a trade agreement, so they think they can get away with this for now.”
“For now” is about all they are going to get in terms of Russian gas from the Arctic, because of winter and a lack of ice-class Russian LNG tankers. If the shipments become regular next spring, and especially if they land in more ports than the sacrificial lamb in the far south, that will be significant, said Michal Meidan, head of the China energy program at the Oxford Institute for Energy Studies. (Meidan, along with a co-author, wrote a stellar piece on the subject.)
“That is the question. There have been no U.S. sanctions so far. The volumes of LNG are not huge, but they are starting to add up,” said Meidan, who noted that China’s overt defiance of U.S. threats of secondary sanctions contrasted with the country’s historically cautious approach to doing business with sanctioned regimes. Chinese imports of Iranian oil, for example, are often destined for “teapot” refineries that Beijing can disavow, or which are insulated from the global financial system and the pain of U.S. sanctions.
Taken in conjunction with new pipeline plans that would lock in cheap natural gas for years to come, and priced in rubles and yuan at that, it seems like China is battening down the hatches.
“It’s an optionality play. The Arctic LNG, and Power of Siberia 2 if it happens, that would take a chunk of China’s gas supplies and insulate them from global markets, global prices, and foreign currencies,” Meidan said.
China has not bought any U.S. LNG since February because of the trade war, but its deeper ties with Russia should not be that big of an issue for an export industry that Trump hopes to turbocharge; according to his own trade framework with the European Union, every drop and more of U.S. LNG will have to make its way to Europe in any event.
The impact is bigger for Moscow. The fact that Russia has finally found a buyer for some of its stranded LNG is a help, especially now that Europe is getting slightly more serious about weaning off its own purchases of Russian gas, and now that even Russia’s friends—such as Hungary—are taking steps to diversify their energy imports. It’s not clear if the limited volumes of Chinese purchases of Russian LNG will be enough to refloat Russia’s dream of riding seaborne gas exports into a new energy future, but consider the alternatives.
The pipeline announcements, while anticipated for years, are also interesting. Russia will increase the amount of gas it sends to China through existing pipelines, especially Power of Siberia 1, a landmark energy tie-up that was Russia’s first big pivot east when it saw the European market start to falter. Of more significance would be the construction of Power of Siberia 2, which has been talked about for a decade but which may now be close to actually happening, even if through a different route. (Russia says it is all but a done deal; China is silent on the matter.)
But a deeper energy relationship with China does not solve all of Russia’s problems. Expanding the existing Siberian pipeline just moves more gas that was already earmarked for Asia. What needed a new market was the gas in western Siberia that Europeans no longer buy (and the Arctic gas that nobody was buying). Gazprom, a big Russian gas company, has staggered from record-making losses a year ago to iffy profits this year, partially on the back of sales to China.
The only downside from Russia’s point of view is that China drives a hard bargain, and the price for piped gas will almost certainly be discounted and with built-in flexibility for a buyer who now has more gas lined up than it may ever need.
Russia’s “pivot to the East was long in the cards because they knew that European demand was going to decline, and then the Ukraine invasion accelerated that. That hasn’t changed, but maybe what Russia hopes is that Power of Siberia 2 is a lifeline. China is the only market, so this is as good as it gets,” Meidan said.
One thing that is jarring about China’s new energy deals is that they threaten to trade energy diversification for energy dependence. Meidan calculated that by 2035, between LNG and expanded pipeline trade, China could get 40 percent of its gas from a single source: Russia. China may figure, since it has the upper hand in the bilateral relationship, that it is less a question of resource dependence and is more nakedly resource extraction.
Taken together—the energy deals, the September summit between Russian President Vladimir Putin and Chinese President Xi Jinping, the greater cooperation on display in the aptly-named Shanghai Cooperation Organisation, and the bromance between the two countries embodied in their membership in the BRICS grouping—this all points to a greater, if still unequal, alliance between China and Russia.
Whatever hopes Trump had of pulling off a “reverse Kissinger” and using closer ties to Russia to isolate China now seem moribund, buried under thousands of miles of pipe and a handful of tankers.
“It does feel like the Chinese have become more willing to commit to supporting Russia,” Meidan said.
The post The China-Russia Axis Is Getting Firmer, and It’s Built on Gas appeared first on Foreign Policy.
