Russia and China have enjoyed a key economic partnership since the early 2000s, and especially since 2014, when Western sanctions in response to Russia’s annexation of Crimea pushed Moscow closer to Beijing. By 2016, China had become the leading customer of Russian crude oil, and Russia was China’s top oil supplier. Will a similar level of cooperation be achieved in relation to natural gas, which Russia currently supplies mostly to the European Union?
This article argues that although Russia’s gas industry is facing significant challenges at home and in the West, a closer relationship with China may only create further difficulties. China’s ability to rely on other suppliers may in fact prove more costly than beneficial to Moscow. Concerning natural gas, Russia risks being caught between the West and China.
Russia’s Pivot to the East
Energy cooperation between Russia and China is likely to expand as Russia intends to raise its economic and strategic profile in East Asia. President Vladimir Putin declared his intent to encourage exchange between Russia’s eastern regions and neighboring countries in a “pivot to Asia.” Until now, Russia has exported only a limited amount of liquefied natural gas (LNG) to China. On May 21st, 2014, however, Gazprom and PetroChina signed a 30-year deal worth $400 billion to export Russian gas from Yakutia to China via a new pipeline. Its construction has proceeded rapidly – the extension will likely be inaugurated in late 2019.
China is the world’s leading energy consumer but mostly relies on coal, which fueled 60.4% of the nation’s overall energy consumption in 2017. However, the importance of gas consumption has grown, in part because the country desperately needs cleaner energy and “greener” environmental conditions. China is estimated to have the world’s largest reserves of shale gas (361 billion cubic meters of deposits), but extraction costs are high because most of it is extracted in remote and mountainous regions. Consequently, China remains dependent on gas imports.
In 2030, China may have to import 65 percent of its total gas needs. Alarmed by this trend, Beijing started building a number of pipelines in Central and Southeast Asia a few years ago, including the 1,833 kilometer Turkmenistan-China gas pipeline, which was completed in 2009 and became the first pipeline connecting Central Asia to China. Previously Turkmenistan was selling most of its gas to Russia, a fact which made it highly dependent on Moscow’s policies. and ended Turkmenistan’s dependency on Russia. Less than a decade later, Turkmenistan has become China’s major gas supplier, exporting to China a staggering 93 percent of its worldwide supply.
Will Russia cave to Western or Chinese pressure?
China has proven to be a smart and tough negotiator. Commentators estimate that it will pay less for Russian gas supplies than asked, indicating Beijing’s strong bargaining position. Russia understood the 2014 deal mainly in political, rather than economic terms: in the aftermath of the Crimean crisis, finalizing a deal with Chinese companies could be a demonstration of power vis à vis the West. However, China’s bargaining position was strong when it came to choosing the “Power of Siberia” route: the Russians had to abandon plans for the Altai-Xinjiang pipeline, which would have allowed them to use gas as a political instrument by switching between supplying Europe or China at their convenience. Negotiations on the Altai pipeline have resumed recently, but its prospects remain uncertain.
Further, China has a range of other choices. Thanks to the Myanmar-China pipeline, it can import gas from Southeast Asia; it can also import LNG from its plant in the Yamal Peninsula in Western Siberia. China National Petroleum Corporation (CNPC) owns 20% of the Yamal project’s shares, while Novatek, an independent Russian producer, controls an additional 50.1% stake.
Meanwhile, Russia is facing challenges in the West, where the European Union’s energy security strategy aims at diversifying the origins of its fuel imports. New competitors are emerging, especially because of recent Eastern Mediterranean discoveries. Egypt, in particular, aspires to become a regional gas hub. In 2015, Italian energy company ENI discovered a massive offshore gas field, said to contain 850 BCM (billion cubic meters) of gas in Egyptian waters, and in 2018, the company found the Noor field, located off the North Sinai coast and rumored to be three times larger. Moreover, Egypt is enhancing its cooperation with Israel and a new pipeline is expected to connect Egypt with Cyprus, which has gas fields and is an EU member state. Will a pipeline connecting all three countries (Egypt, Israel, Cyprus) with Greece and Italy remain a dream or become a reality? Such an infrastructure project’s completion would be a significant alternative to Southern European reliance on Russian gas.
Another alternative is already taking shape, even if its outcome might be less substantial than what had been initially hoped for. The Southern Gas Corridor will soon connect Azerbaijan’s Shah Deniz II field with the Italian shores on the Adriatic Sea. The Corridor’s main shortcoming is its limited capacity; it would supply just 2.4 percent of Europe’s gas consumption. For all its limits, however, it is still a practical alternative to Russia’s resources hegemony over Southern Europe.
Last but not least, another challenge to Moscow comes from the United States, which intends to sell its gas to the EU – and Germany in particular: after some initial reluctance, Chancellor Merkel has voiced her support.
Movement Toward a Conclusion
Challenges to Russia’s ambitions are coming from many fronts: the U.S., which is poised to become an energy superpower, upstream developments in the Caucasus and Eastern Mediterranean, and China’s growing assertiveness, which may soon put it in a position to further dictate gas prices, pipeline routes, and supply quantities to Moscow.
Russia must avoid over-reliance on China’s fast-growing demand for energy sources. Otherwise, in the long term, it risks becoming a mere resource provider to China and other East Asian countries, which have strong manufacturing and high-tech sectors. Moscow and other Eurasian countries have limited industrial capacity and cannot afford to become energy appendages. Such a “Dutch disease” would seriously compromise their ability to have a say in increasingly competitive global markets and in global politics as well.
Dr Ernesto Gallo received his PhD from the University of Turin. He is currently lecturing International Relations at Regent’s University London and has published on issues of political theory, global democracy, empire, and statehood in Central Asia.
Bruno S. Sergi, PhD, is an instructor on the Economics of Emerging Markets and the Political Economy of Russia and China at Harvard University and an Associate of the Harvard’s Davis Center for Russian and Eurasian Studies and the Harvard Ukrainian Research Institute. He is the Series Editor of Cambridge Elements in the Economics of Emerging Markets.