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Sino-Russian energy relations reversed: a new little brother

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Don’t be fooled. Russia’s growing ties to China may not be what they seem. 

 

Morena Skalamera
22 December 2015

In the year since Russia and China signed a landmark $400bn natural gas pact in May 2014, rapid developments in the energy sector and the geopolitical situation offer a chance to re-examine the deal. Indeed, the aftermath of the pact saw a return to a world of cheaper oil—a situation driven by a number of factors outside of Russia’s control. The buffeting winds of broadbrush western sanctions have deepened the uncertain fiscal outlook for Russia’s hydrocarbon-driven economy, calling its financial resilience into question.

We must ask whether Russia’s aspirations to make itself into an Asian power are doomed to failure. In lieu of infusions of vital technology from the west, Moscow’s ability to honor the existing contracts with China remains unclear. In fact, despite grandiose plans, great political fanfare and the narrative of an emerging strategic alliance between Beijing and Moscow, any benefits of the progressively deepening trade integration will be increasingly uneven—and in China’s favour.

Russia resurgent?

After the Sino-Soviet split came to an end in 1991, Beijing began to express interest in Russian oil. In 1996, Boris Yeltsin visited China for the second time. The atmosphere was cordial, but no energy deals accompanied the florid rhetoric. Only with time—the gradual onset of domestic calm for post-Soviet Russia and the unbridled growth of China’s gas-guzzling economy—did trade in oil increase to significant levels. Between 2000 and 2010, Sino-Russian trade increased nearly tenfold, reflecting an increased demand for Russian oil. 

Meanwhile, the long-anticipated Sino-Russian gas deal was still delayed. Then, abruptly, Gazprom and CNPC inked a deal in 2014 to deliver 38bcm of natural gas a year through the Power of Siberia pipeline. Considering the long and strained history of Sino-Russian gas relations, it seemed a sudden and astonishing turnaround.

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Andi Gentsch / Flickr. Some rights reserved.Since then, Chinese demand for Russian hydrocarbons has intensified faster than many expected—with the prospect of eventually outpacing the energy trade between Russia and the EU. Many have speculated that the eventual deal was facilitated by Russia’s desire to quickly strengthen its lifeline to the east in the face of western opposition to Russia’s Ukrainian adventurism and the attempts by the US and the EU to isolate Russia economically.

Despite the geopolitical crisis, I contend that there were other powerful drivers in place to make the deal happen in May 2014. These incentives were in place long before the Ukraine crisis. The shift reflected a combining of two parallel circumstances: in 2013, Russia’s long-standing business model in Europe started to crumble; and just at this time, China, under the effect of disruptive air pollution needed additional gas, a cleaner fossil fuel.

The deal seemed a geopolitical victory for Russia, which was searching for tangible political victories in the wake of mounting opposition over its actions in Ukraine. However, there were significant strings attached by the Chinese. The long-running price dispute that had stymied the deal for years was resolved in China’s favor, most likely bringing the price down to the levels that China enjoyed from its main Central Asian supplier, Turkmenistan. The deal is also notable for the troubling trends it predicts for Russia, given Moscow’s traditional reticence to allow investment in its upstream.

Ironically, as the Russian economy degenerates, Russian power brokers are increasingly convinced that energy reform should be postponed

Closer Russo-Chinese energy ties mean that China may agree to take up the slack of investment in the wake of sanctions, pouring money into energy field development in exchange for increasing stakes in Russia’s upstream, already seen in CNPC’s recent acquisition of a 10 per cent stake in Rosneft’s subsidiary Vancorneft. In practice, China is committed to provide the financial liquidity that Russian companies desperately need in light of collapsing investment and severe recession. 

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Thus, Russia’s geopolitical victory offered Putin a desired dose of grand visuals to bolster the regime’s narrative of an easy Asian pivot. But the realities of Russia’s position vis-à-vis China belie a different and less advantageous set of emerging paradigms. Any equity stakes that China may see as a result of the deal will weigh significantly on the profitability of the deal in practice. Vladimir Putin meets Xi Jinping at the 2015 BRICS summit in Ufa, Russia. Photo CC: Barvenovsky/Kremlin.ru  Since China does not depend on Russian gas the way Europe does, price guarantees and upstream stakes will most likely become sine qua non in future deals. The same is likely to be true for making Russia’s pipelines conform to preferred Chinese routes, as seemed to happen in October 2014 when Gazprom announced the potential cancellation of Vladivostok LNG. This giant project is likely to be substituted with a third gas pipeline to China, in addition to the agreed Power of Siberia and the planned Altai pipeline, thus greatly refocusing Russian resources on bolstering supplies to China.

In turn, this would signal the abandonment of Gazprom’s strategic aspirations to diversify its energy ties to the Asian-Pacific market to service Japan as well as South Korea, putting all of the proverbial eggs in the China basket.

All of this points to a scenario in which Russia will come to operate as a resource appendage to China—one that, in order to supplant western partnerships, accedes to China’s seniority in the energy partnership in exchange for the loans and investments necessary to drive energy development and production. Thus, the picture of what is likely to happen if the price of oil stays low, if western sanctions against Russia do not abate, and if China continues to develop at a relatively robust pace, is not a pretty one for Russia.

Ironically, as the Russian economy degenerates, Russian power brokers are increasingly convinced that energy reform should be postponed: what Russia needs instead are powerful corporations closely tied to the Kremlin in order to negotiate from a position of strength. In such a situation, Russia’s state-owned giants like Gazprom and Rosneft may gain even higher status and political clout.

There is a growing resemblance between Putin’s Russia and Brezhnev’s Soviet Union, associated with rising economic stagnation but also political stability. This does not mean that Russia is flirting with the end of the Putin era. Yet it does bode ill both for the stability of the Sino-Russian relationship and for Russia’s broader geopolitical influence. Russia will be more hostage than ever to movements in the price of oil (where Russia is a passive price-taker) and its strategic partnership with China.

Looking to the future, if the price of oil stabilises for some time ($35 a barrel at the time of writing), Beijing may well continue to assist in Russian resource development, but will also worry about Moscow’s ability to deliver on existing agreements.

This situation could gradually modify the Sino-Russian energy relationship in ways that could increase China’s energy angst and galvanise tensions in their still strengthening though unbalanced bilateral ties. Such a state of affairs, as a result, points to an environment that is unlikely to foster any strategic alliance that could alter the balance of power with the United States.

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