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Russia’s New ‘Energy Alliance’ with China

On the first of this month, Russian President Vladimir Putin and Chinese Vice Premier Zhang Gaoli both autographed a pipe section at a ceremony near Yakutsk, the capital of the Russian Republic of Yakutia. By the beginning of 2019, gas will flow through the section—and the rest of the 3,968-kilometer Power of Siberia pipeline—from Russian fields to Chinese consumers. Putin and Zhang called the endeavor, which connects two existing pipeline networks, the world’s largest construction project. 

Russia and China are fast building an “energy alliance,” as AFP termed it this month. Last October, Moscow’s state-owned Rosneft and Beijing’s China National Petroleum Corporation signed a “breakthrough” deal, giving the Chinese an equity stake in an oil field in Eastern Siberia. This May, Russia’s Gazprom and CNPC entered into a 30-year, $400 billion gas deal, another landmark agreement.

And this month, Putin offered a slice of Rosneft’s Vankor oil field to CNPC. As the Financial Times notes, the deal “represents a stunning change in strategy.” In the past, Russia would partner with a foreign energy company if it needed technology. The country, however, possesses all the expertise it requires for this field, and Vankor is already producing oil. So why offer a stake to China? The Kremlin is hungry for Beijing’s cash.

As the paper noted, “This new rapprochement is more a sign of weakness than strength.” Since 2009, China has been lending money to cash-short Rosneft, and recent sanctions have made the plight of the company even worse, forcing it to seek a bailout so that it can pay debt of more than $30 billion.

Russia looks like it has had enough of the West and is turning East. As Putin said this month about access to his country’s energy resources, “We generally take a very careful approach to the approval of our foreign partners, but of course, for our Chinese friends there are no restrictions.”

Chinese cash will fuel Putin’s ambitions and make him less vulnerable to Western economic pressure, yet his solution creates new complications. First, the Russian leader is going to find out what it is like to be at the mercy of a ruthless counterparty. The Kremlin, playing divide and rule, is used to bullying European gas purchasers, but Beijing is not leaving itself exposed like the Euros. China has used CNPC for all the major deals with Moscow and the smaller Yamal LNG contract as well. Putin will get to know how miserable life can be when there is only one major taker in Asia for his oil and gas.

Second, the Chinese may not need all the hydrocarbons they have committed to take. At first glance, it appears they will have to continue to scrounge for oil and gas, as every forecast shows increasing demand. For example, the US Energy Information Administration projects the country will consume more than twice as much energy as America in 2040. Forecasts like this one are essentially the product of extrapolation, however, and China’s energy demand could go flat if its manufacturing sector continues to decline. There are other customers in Asia—notably Japan and South Korea—but they will bargain prices down if the Chinese walk away from their purchase obligations.

The ultimate problem for Putin & Co. is that China is not a good fit for the Russian economy. Yes, China is Russia’s largest trading partner, with two-way commerce of $90 billion last year, and the pair is shooting for $200 billion in ten years, but there is a limit to this growth.

China just wants Russia’s commodities and military technology, but, unfortunately for long-term ties, the Chinese do not make what the Russians crave, advanced oil refining equipment and luxury items. Europe and the US are still the better economic partners for Russia, as Marlen Kruzhkov of the New York-based law firm Gusrae Kaplan Nusbaum points out.

For geopolitical reasons, Moscow will build its economy on the foundation of energy sales to China. Russia will find in Beijing the support and encouragement that other capitals, troubled by the Kremlin’s external behavior, will deny it. In the long run, however, it’s far from certain that Russia can maintain economic vitality by relying primarily on the Chinese. 

Photo Credit: www.kremlin.ru

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