The Changing Sino-Russian Energy Dynamic

For more than a decade, Russia under Vladimir Putin has played an increasingly important role on the world energy scene. A frequently quoted sound bite from our book, From Soviet to Putin and Back, is this: “What Brezhnev and Khrushchev were not able to do with nuclear weapons, Putin has been able to do with oil and gas in what arguably can be called ‘energy imperialism.’” At the same time, our other book, Energy: China’s Choke Point, made the argument that the emerging superpower is likely to find its come-uppance because of a dearth of indigenous energy sources.

Joined at the Hip
Energy-superrich Russia beckons seductively to China. The two countries are joined at the hip on energy, but the future will not be uneventful or necessarily pretty. But things are changing, and there are signs that Russian energy arrogance, an overwhelming geopolitical phenomenon a decade ago, may be easing.

In February, Russian oil giant Rosneft announced that it was seeking to borrow $30 billion from China in exchange for increasing oil supplies. If finalized, the deal would double oil supplies to China from the current level of 300,000 barrels per day, making Beijing the largest consumer of Russian oil. Commenting on the deal, Reuters said that Rosneft wants to borrow the money as it closes a $55 billion acquisition of rival TNK-BP to become the world’s largest oil producer.

Meanwhile, Gazprom (the Russian natural gas giant) said it had agreed with CNPC to sign a deal by year’s end to supply China with as much as 1.3 trillion cubic feet of natural gas each year. That is about one third of current Chinese natural gas consumption.

These events should not be surprising since China is the world’s largest energy consumer and Russia the world’s largest energy producer. Their geographical proximity makes Russia the logical energy supplier for China. However, there are so many dynamics at play in these disclosures that it takes some unraveling to make sense of it all.

A History of Strained Relations
For starters, China and Russia have a history of strained relations. The two were allies until ideological differences between Moscow (the former Soviet Union) and Beijing created a rift in the early 1960s. For years energy relations between the two were marred by mistrust as well as deadlocked price negotiations, mostly for natural gas.

Until recently, Russia, led by the politically ruthless Vladimir Putin, was an intimidating Russian bear, producing and exporting its energy resources, mostly to Europe, and withholding them for political purposes as it saw fit. It seemed that nothing could slow the uptick in the Russian Federation’s global hydrocarbon ambitions. With Putin at the helm and ever-increasing oil and gas reserves, Russia could win back much of the influence it lost after the collapse of the Soviet Union.

Yet what a difference a few years can make! With most of Europe in an economic tailspin, the recent shale gas revolution in the U.S., and now China posed for its own shale gas revolution, Russia is losing its footing, its mastery over its own fate; and a loss of petrodollars will soon follow. Anywhere between 30 to 50 percent of the Kremlin’s budget is funded by oil and gas, depending on the calculation.

Enter recent Sino-Russian oil and gas developments. Only this time Russia does not hold all the cards. Russia has to look to Asia in the midst of this worldwide energy paradigm shift – and that means the Middle Kingdom. Even Russian media acknowledge this change. Commenting on recent Rosneft and Gazprom news, The Moscow Times said, “Putin, who closely oversees Russia’s big energy deals, has told the state-energy majors to look east as Europe seeks to reduce energy dependence on its former Cold War enemy.” Gazprom’s gas exports to Western Europe fell seven percent last year to 139 billion cubic meters as the Eurozone’s economic crisis sapped demand, the paper added. 

U.S. Shale Gas
China, for its part, isn’t oblivious to Russia’s loss of influence on the energy stage. China’s Global Times said that if the U.S. increases its exports [of gas], it will shake the Russian monopoly in Eurasia, so Russia must “lock down deals with markets like China now.” For Russia, U.S. shale gas discoveries must be the proverbial bogeyman, and worse yet for Putin – they come from the U.S.

Dr. Richard Rousseau, Associate Professor and Chairman of the Department of Political Science and International Relations at Khazar University in Baku, Azerbaijan, told the Energy Tribune that “With its shale gas revolution, the U.S. will very soon be able to compete with Russia on the world energy market and challenge Russia’s dominant position in the energy field. The U.S. is already producing a larger volume of gas than Russia and sells it for a price five times lower than Russian gas.”

Rousseau added that if the U.S. increases its exports, it could negatively reverberate on Russia’s strategy and objectives. Echoing the Global Times analysis, he added that Russia certainly feels pressed to sign energy cooperation deals as quickly as possible.

Increased oil and gas demand from the Asia-Pacific region is also forcing Russia’s hand. “Oil and gas demand is growing in East and Southeast Asia, while Russia’s European energy consumers will decrease their consumption of these resources in the future,” Rousseau explained, adding that the most promising markets are China, Japan, South Korea, Malaysia, Indonesia and India. “Even if it failed in the last decade, Russia still hopes to maximize its investments and energy projects by playing these countries off against China in order to counterbalance China’s power from the standpoint of geopolitical calculations. Russia is also using the China card against the European Union,” he concluded.

However, if there is still mutual distrust between the world’s newest emerging superpower and the broken-down remnants of a 20th century superpower, nobody is telling China’s new President, Xi Jinping. Xi is scheduled to visit Moscow next month amid much fanfare and well-wishes.

Saber-Rattling?
Added to this is news that China’s North Fleet and Russia’s Pacific Fleet plan to launch joint naval exercises in June. Since the exercises will be held in Peter the Great Gulf, the largest gulf in the Sea of Japan, 16 Chinese warships will have to penetrate the La Perouse Strait between the Russian island of Sakhalin and the Japanese island of Hokkaido, perhaps provoking already heated tensions between China and Japan.

According to Russian media, a treaty was signed between China and Russia last year (likely before current Sino-Japanese tensions worsened) to launch naval exercises. Therefore, it’s too early to speculate whether or not this is a move by Beijing to counter Japan with improved Russian relations.

However, if all goes as planned, some of those Chinese ships could be sailing with additional Russian oil in their engines in the near future.