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Russia-China Energy Relations: A Long-awaited Partnership Develops

July 1, 2015
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In the early 2000s, advancements in Russia-China energy collaboration were slow. Russia sought to maintain its standing as a dominant energy provider in European markets, while China searched for greater energy security among its energy suppliers. China consistently showed an interest in a cross-border oil pipeline to its refineries from Russia, but Russia remained focused on the West.[1] Despite their differing interests, both countries saw the potential economic and strategic benefits of an energy relationship in 2004 when Gazprom and CNPC signed a strategic cooperation agreement centered on natural gas delivery to China.[2] While this marked a potential strengthening of relations in the energy sector, the following years were characterized by unresolved agreements and low priority given to intergovernmental energy deals on either side. For example, plans discussed in 2006 to build two gas pipelines through eastern and western Siberia were suddenly abandoned when Gazprom managed to sign new deals with European companies and China consequently turned to Turkmenistan for supply.[3]

 

 

More recently, however, Sino-Russian interests have intersected and concrete cooperation in the energy sector has grown significantly. Many intergovernmental projects, which were previously discussed, yet left unsettled, have been ultimately realized. Most notable is the $400 billion gas deal signed in May 2014, in which Gazprom agreed to deliver natural gas to Chinese markets for the next 30 years via the Sila Sibiri pipeline.[4] All parameters of this deal, save the price, were discussed and agreed upon in 2010, yet a final agreement had been delayed. Gazprom’s and CNPC’s signing of the deal in 2014 reflects Russia’s realization of its long-awaited energy operations in the East and the alignment of its interests with China’s regarding the development of energy supply, infrastructure, transport in the east. Furthermore, it will provide China with more than one-fifth of its present-day annual consumption of some 170 bcm, giving Russian gas a sizable stake in China’s intake.[5]

 

 

Considering Russia’s long history of activity and dominance in European markets, its recent shift in attitude towards China as a partner is thought provoking and worthy of examination. In order to understand Russia’s turn to eastern energy markets, it is necessary to analyze the economic and political environments that existed in both countries when these agreements were finalized. Amid the Ukraine crisis, Western sanctions and astonishingly low oil prices have caused Russia’s economy to suffer immensely.[6] Economic sanctions have strained Russia’s relations with the West; the ban on Russian exports of high-tech energy equipment, among other restrictions, imposed by the EU has undoubtedly encouraged Putin to extend his hand invitingly to China.[7] In addition, the EU is seeking alternative markets to diminish its dependence on Russian oil imports, which has led Russia to look east for oil exports. Opportunely, China’s oil demand is robust, and still growing, and it is in China’s interest to engage Russia in satisfying that need, in order for Russia’s economy to remain afloat. A further damaged Russian economy could threaten stability on Russia-China borders.[8] Additionally, closer ties with Russia bolsters China’s energy security by decreasing its dependence on crude oil imports from the Middle East, which could be easily disrupted by political crises.

 

 

As a result of these circumstances, Chinese crude imports from Russia increased by 36% in 2014, while imports from other major OPEC nations plummeted.[9] Russian energy data from January to September 2014 showed a nearly 45% increase in crude exports to China and 20% decrease in its exports to Europe.[10] On the natural gas front, deliveries from Russia via the Sila Sibiri pipeline, expected to start in 2019, will diminish China’s reliance on other source countries for gas.[11] However, the volume China will receive is only one-fourth of the amount of gas Gazprom currently sells to Europe.[12] While the numbers show promising increases in imports and exports on both sides, it is evident that a definite energy partnership between Russia and China is only in its primary stages, for a majority of their existing energy contracts remain grounded in Europe and Central Asia, respectively.  

 

 

Russia’s frosty relations with the West and desire to expand its energy exports and China’s interest in diversifying its energy suppliers have played active roles in the overall progression of Sino-Russian cooperation in energy projects. However, the Ukraine crisis has been the driving force behind Russia’s recent full-fledged pivot to the East. The economic and political isolation, which Russia experienced as a direct result of the crisis, has acted as a catalyst for Russia-China collaboration and interactional advancement in the energy sector. But is this close relationship completely dependent on the crisis and Russia’s tense relations with the EU? While more cooperative bilateral relations on both oil and gas fronts arose from a situation where Russia was very weak economically, the trajectory of future relations does not depend solely on Russia’s ability to revive its economy within the next few years or the resolution of the Ukraine crisis. It is similarly contingent on China’s internal affairs, such as any changes in its domestic energy demand and energy efficiency developments. Although Russia is the more vulnerable player, the countries are nevertheless cultivating an interdependent, and thus durable, relationship, which is beneficial for both nations.

 


  

[1] Gabuev, Alexander. “A “Soft Alliance”? Russia-China After the Ukraine Crisis,” European Council on Foreign Relations Policy Brief. Feb 2015. Page 2.

[2] Gazprom News Release, Gazprom. Feb 2013. URL: http://www.gazprom.com/press/news/2013/february/article157027/

[3] Gabuev, Alexander. “A “Soft Alliance”? Russia-China After the Ukraine Crisis,” European Council on Foreign Relations Policy Brief. Feb 2015. Page 3.

[4] Alexeev, Igor. “Russian Gas Provides Lifeline to Chinese Expansion,” Oil Price. Jan 2015. URL: http://oilprice.com/Energy/Natural-Gas/Russian-Gas-Provides-Lifeline-To-Chinese-Expansion.html

[5] Weitz, Richard. “The Russia-China Gas Deal: Implications and Ramifications,” World Affairs. Sept/Oct 2014. URL: http://www.worldaffairsjournal.org/article/russia-china-gas-deal-implications-and-ramifications

[6] Sakwa, Richard. “Plunging oil prices have rocked Russia, but Putin may yet surprise us,” The Guardian. Jan 2015. URL: http://www.theguardian.com/commentisfree/2015/jan/08/oil-prices-russia-putin

[7] “Council of European Union extends economic sanctions against Russia until Jan 31, 2016,” Russia Beyond the Headlines. June 2015. URL: http://rbth.co.uk/news/2015/06/22/council_of_european_union_extends_economic_sanctions_against_russia_unti_47120.html

[8] Spegele, Brian. “Russia, OPEC Jostle to Meet China Oil Demand,” The Wall Street Journal. Jan 2015. URL: http://www.wsj.com/articles/russia-opec-jostle-to-meet-china-oil-demand-1421987738

[9] Ibid.

[10] Soldatkin, Vladimir. “Russia signs deals with China to help weather sanctions,” Reuters. Oct 2014. URL: http://www.reuters.com/article/2014/10/13/us-russia-china-banks-idUSKCN0I20WG20141013

[11] “UPDATE 1-Gazprom says China starts building part of Power of Siberia,” Reuters. June 2015. URL: http://www.reuters.com/article/2015/06/02/russia-china-gas-idUSL5N0YO1XM20150602

[12] See Footnote 5.

 

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