The Sino-Russian energy alliance?
Power of Siberia 2 gas pipeline negotiations reach the end stages, maybe
|China Russia Report||Dec 17, 2018|
It was a big week for Sino-Russian energy ties. Russia’s Ambassador to China, Andrei Denisov, hinted at an “energy alliance” between the two countries; Gazprom, the Russian state-owned gas export monopolist, is reportedly close to inking another gas pipeline deal with China.
[See here for Russia’s Gas, LNG Landscape – S&P Platts]
A Sino-Russian “energy alliance” remains, for now, a vaguely defined concept. Indeed, the “energy alliance” concept and rumors of an agreement over the Power of Siberia 2 (Altai) gas pipeline may have been leaked to gauge likely Western responses.
An “energy alliance” (whatever that means) would likely prove to be a high-risk, high-reward bet by Putin on Russia’s future relationship with China and could prove controversial among Russia’s security and economic elites.
Russia’s outreach to India and Vietnam the past few weeks may indicate some hedging (and intra-elite bargaining) over the future relationship with China.
1) Prospects of a Sino-Russian “energy alliance” and Power of Siberia 2 are real
The Russian Ambassador in Beijing publicly referred to a potential “energy alliance” this week. There are also credible rumors that the Power of Siberia 2 (Altai) natural gas pipeline will move forward. Are the motivations of an “energy alliance” commercial, political, or both?
Russia’s motivations in the 2014 Power of Siberia natural gas pipeline were mixed. Although the terms of the deal are largely secret, most observers believe the Power of Siberia damaged Gazprom’s profitability. Gazprom notably footed the bill for pipeline construction. On the other hand, Power of Siberia provided important domestic political benefits for Putin and demonstrated he wasn’t completely isolated post-Crimea.
The 2014 Power of Siberia natural gas pipeline appears to have been an economic and geopolitical windfall for Beijing. Russia covered pipeline construction costs and agreed to a flexible start date on Beijing’s terms. China was also able to secure energy supplies that could not be interdicted by the US Navy.
A Power of Siberia 2 (Altai) natural gas pipeline has much stronger commercial underpinnings than its predecessor: Chinese natural gas demand has surged as Beijing attempts to switch from coal to gas. The Altai pipeline project may even turn a profit for Gazprom.
2) An energy alliance is a high-risk, high-reward strategic investment by Putin
There are, as of now, many unresolved questions about the “energy alliance”. Does an “energy alliance” imply reciprocal commercial, political, or even military obligations? How will China and Russia split project financing costs? Will Russia once again assume pipeline construction costs? It will be years before the Altai pipeline delivers first gas volumes. Does Russia trust China to adhere to the terms of a contract? Or will Beijing build out more pipeline capacity to Central Asia and re-negotiate Altai contracts on more favorable terms in 5 or 10 years after it secures more economic and geopolitical leverage over Russia? It’s unclear if natural gas production in Central Asia (particularly Turkmenistan) is more economical than Russian gas produced from fields in Urengoy and Noyabrsk. Turkmen gas production fell precipitously in 2017 for unclear reasons.
And, finally, will the project face Western sanctions? The US and the EU have compelling strategic and economic rationale to oppose the project. The Altai pipeline would damage the EU’s monopsony power for certain Russian gas fields; the US is increasingly worried by a Sino-Russian entente. While the Nord Stream 2 pipeline has led to intra-Atlantic squabbling, both the US and EU will likely agree that the Altai pipeline poses an unambiguous threat to Western commercial and strategic interests.
Indeed, Russia and/or China may have publicly hinted at another pipeline in order to assess likely Western political responses.
3) Russian outreach to India: hedging the energy alliance?
Russian Defense Minister Sergey Shoigu visited India this week. The visit follows the Indra exercises, the Indra-Navy exercises, and the Russian Security Council’s consultations with Indian counterparts. Many Russian security elites are highly skeptical of Chinese strategic intentions: outreach to India and Vietnam may serve to placate China skeptics in the siloviki (the Russian force structures).
Some Russian officials are framing discussions with India as an anti-Quad (Australia, India, Japan, US) maneuver. While Kremlin antipathy towards the Quad is genuine, ties with India are one of its few options to hedge against growing Chinese power. By publicly stating that growing security ties with India are directed against the Quad – and not China – Moscow is able to minimize frictions with Beijing.
4) The “energy alliance” Russian domestic politics: Medvedev down… Miller up?
How would an “energy alliance” affect and reflect Russian domestic politics? An Altai pipeline could be a political boon for Russian Prime Minister Dmitry Medvedev, who appears increasingly haggard, despondent, and sidelined in public photos and remarks. Medvedev used to be the Chairman of Gazprom’s board of directors; he’s also reportedly close with Gazprom CEO Alexey Miller. The Altai deal could increase Gazprom’s revenues and prestige, bolstering Medvedev’s clan. Alternatively, Miller might assert his independence from Medvedev.
Observe Rosneft CEO Igor Sechin carefully if an Altai pipeline is announced. Sechin has sought to eliminate Gazprom’s natural gas export monopoly.
China – Russia
“"The development of natural resources requires huge funds and investments, which is why such projects should be planned many years ahead. China as the world’s biggest consumer of energy resources is interested in just the same - long-term, stable and consistent supplies. The People’s Republic of China purchases energy, gas and oil from various sources, while Russia delivers its hydrocarbons to various markets as well, and a connection between us in this field is a kind of a ‘safety network’ both for Russia as a producer and exporter, and for China as a consumer and processer," Russian Ambassador to China Andrey Denisov explained.
Denisov believes that it is necessary to view energy cooperation as a ‘core’ of business collaboration between Moscow and Beijing. "Energy cooperation between our countries is a very promising area, and experts from both countries, China and Russia, are speaking about a Russian-Chinese energy alliance being formed," he stressed.
Both sides are actively working to establish additional ties between energy companies and relevant state authorities, the diplomat said, noting that it has been decided to hold regularly the Russian-Chinese Energy Forum that took place for the first time in Beijing less than two weeks ago, with around 500 people representing almost 100 energy companies participating in it. "Next year it will be held in St. Petersburg," he added.”
“Li Lifan, an associate professor at the Shanghai Academy of Social Sciences, said energy cooperation with China was part of Russian President Vladimir Putin’s Asia pivot, as Moscow sought to diversify its market because of Western sanctions limiting its options in Europe. In addition to the gas pipeline running from eastern Siberia, Beijing and Moscow are also negotiating over a western route that would supply 30 billion cubic metres of Russian gas annually to China.
“Talk of an energy alliance could be a sign that the western route deal may be wrapped up very soon,” Li said.”
“"We have a balanced bilateral trade system and a good investment," said [Russian Ambassador to China] Denisov, adding that the two countries have conducted a large cooperation in the energy sector, including the Yamal liquefied natural gas cooperation project.
People-to-people exchanges saw a major boost during this year's World Cup. Over 100,000 Chinese soccer fans and regular tourists visited Russia during the summer event. Denisov says the two sides are working to further simplify the procedures for visa-free entries.”
“Ties between Russia and China in the sphere of national security and inter-army cooperation signal openness and a high level of political trust between the two countries, Russian Ambassador to China Andrei Denisov said on Wednesday.”
“Gabuev says there are "three elements of geopolitical tinder that allow Russia and China to swipe right every time" — the need for security on their 2,000-mile border, the complementary natures of their economies and the similarities in their authoritarian approaches.
Those elements provide the foundation for a relationship that is growing deeper and is characterized by the phrase, "not necessarily for each other, but never against each other."
The long-standing issues of tension — like competition for influence in Central Asia or China's copycat approach to Russian military technology — have largely been put aside, Gabuev says. On military tech, he says, the Kremlin has decided that "China will get there in 5 or 10 years on their own, so we either sell it to them now or lose out." Likewise, they’re resigning themselves to the reality of China being a dominant economic player in their backyard.
What we're witnessing is not a true alliance, but a partnership defined by pragmatism.
Russia may resent becoming the junior partner in its relationship with a rising power, for example, but it also appreciates the economic and diplomatic cover it gets from China as it faces Western rebukes and sanctions.
The bottom line: I asked Gabuev if there's an existential fear of a China-led world in Moscow, as there is in Washington. He said Russian officials tend to view the U.S.-led world order as "finished," but don't believe China will simply replace America, in part because Europe and Japan won't get in line behind Beijing. In the meantime, Moscow sees U.S.-China competition working to its advantage. If Russia can keep its seat at the table as a second-tier power with a big nuclear stockpile, it can ultimately live with a Chinese superpower.”
Comment: Again, China’s growing economic (and security) dominance in Central Asia could directly damage Russian energy interests. China could sign the Altai contracts today, quietly build out more pipelines to Central Asia, and renegotiate Altai’s deliveries on more favorable terms in 5-10 years. To be fair to Gabuev, however, it’s not clear what Vladimir Putin’s Russia can do about it.
“Trade between China and Russia is on track to surpass $100b threshold this year. In 11 months of 2018, trade volume is $97.23b, +27.8% to 2017. RU export to CN is $53.78b (+44%), CN export to RU is $43.45b (+12%), leaving Russia with a $10b surplus.”
Comment: Russia’s trade surplus this year is, of course, a function of oil prices.
Comment: An interesting perspective on the economics of Russian gas exports to China.
“There certainly will be tension between the two states. Vostok was marred by reports of Russian naval vessels being followed by a Chinese spy ship, and Russian state media printed several critical articles of the Chinese J-15, which is derived from Soviet technology purchased from Ukraine. These spats should not distract from the broader trend that is unfolding, both nations’ security dilemmas on their respective eastern and western flanks. Dilemmas made more pressing by U.S. sanctions and tariffs. The ability to, if not trust their neighbor, at least trust that for the moment their interests are aligned has helped the China- Russia entente build momentum.”
“Proxy wars, however, cannot be ruled out, nor can military skirmishes among lesser states. In fact, the latter are likely to become more frequent, as the two superpowers’ restraint may embolden some smaller states to resolve local conflicts by force. Russia, in particular, may not shy away from war as it tries to regain its superpower status and maintain its influence in eastern Europe and the Middle East.”
Comment: Dr. Yan Xuetong is a highly influential academic in the PRC. The article does not mention Central Asia.
China – Europe
““Xi Jinping mentioned broadening the space for cooperation, and that the "Belt and Road" initiative could provide an important platform for doing so. China is willing to actively explore trilateral cooperation with the EU and Germany, to promote a strategy of European-Asian interconnectivity with regard to the "Belt and Road" initiative and to jointly develop the Asia-Europe market. We are willing to work together with Germany and other countries along the way to jointly build a large-scale trade route between China and Europe.
Steinmeier expressed that he is happy to be visiting China for the first time as the German President. While visiting various places around China this time, it's led him to admire even more the economic and social development achievements of the last 40 years of China's reform and opening up. In particular, successfully lifting hundreds of millions of Chinese people out of poverty and solving the problem of providing basic food and clothing. This achievement cannot be overlooked. After returning to the site of the Sichuan Earthquake 10 years removed, the reconstruction of the disaster area is impressive. Germany is satisfied with the development of Sino-German relations, and is willing to strengthen dialogue with China, enhance understanding, widen consensus, narrow differences, deepen cooperation, closely communicate on international affairs and jointly uphold free trade. Germany opposes any form of protectionism, and will continue to promote mutually beneficial cooperation between Europe and China, as well advance the interconnection of Europe and Asia with China.””
“Since becoming the French president, Macron has hoped to revitalize the French economy by relaxing a rigid labor market and encouraging enterprises to increase investment. However, in order to control the fiscal deficit and cope with climate change, he has adjusted the tax rate of fuel tax and other taxes, which triggered the general dissatisfaction of the middle and lower classes in France.”
“That is dangerously misguided. As Australia’s intelligence chief has pointed out: “5G is not just fast data, it is also high-density connection of devices—human to human, human to machine and machine to machine.” 5G will carry communications we “rely on every day, from our health systems … to self-driving cars and through to the operation of our power and water supply.” 5G will be the backbone of our industries and societies.
“Critical infrastructure” hardly gets more critical. And the security risks are accordingly high. Wherever Chinese technology companies supply 5G infrastructure, they will have access to huge volumes of sensitive data and industrial secrets—and there’s reason to think they would eventually be forced to spy on behalf of Beijing. The Chinese government could also use these companies to disrupt other countries’ infrastructure in a future conflict.
“Given the massive cybersecurity and national security risks, the only responsible decision is for Berlin to follow the Australian, New Zealand, and U.S. lead and ban Chinese providers from the German 5G network. In doing so, Europe’s strongest economy would send a crucial signal to the rest of the European Union members that are grappling with the same decision.””
Comment: Since 5G is so HOT right now, The Report will discuss Sino-Russian 5G networks in the future.
“The foreign delegates, including former Latvian President Vaira Vike-Freiberga, said that China's reform and opening-up have brought about tremendous changes in China and had a major positive impact on the world.”
Comment: Rather unremarkable article except for the somewhat bizarre call-out of a former Latvian President. Not sure what this is about, although apparently Latvia is experiencing difficulties forming a government.
Russia – Asia
“According to our estimates, the ideas promoted by Washington together with Tokyo and Canberra are aimed at containing major regional powers and drawing dividing lines by creating closed groups and interests rather than at positive development and open cooperation in the Indian and Pacific oceans."
Morgulov stressed that the region’s further development depended directly on whether all regional players would be able to build an equal, reliable and sustainable security and cooperation architecture together. "Of course, we would like India to be an integral and, I would even say, the key part of that process," he stressed.”
Comment: This is clever from Morgulov. By framing Russian outreach to India as an anti-Quad maneuver, Moscow may be able to mitigate frictions with Beijing while also quietly hedging against growing Chinese power.
“"They also plan to discuss practical issues of boosting bilateral cooperation in the framework of agreements reached during Russian President Vladimir Putin's visit to India on October 4-5," she added. "In his visit to India, the defense minister is accompanied, along with officials from the defense ministry, by a representative delegation of leaders of Russia's military-industrial complex," Markovskaya noted.
The sides plan to sign a protocol at the end of the session, which will determine promising spheres for cooperation and will specify the ways of implementation of scheduled projects.
The Russian-Indian inter-governmental commission on military-technical cooperation was set up in accordance with the agreement between the two countries' cabinets of ministers from 3 October 2010. The commission convenes once a year, alternating between Moscow and New Delhi.”
“The sea phase of the bilateral Russian-Indian maritime exercise Indra Navy-2018, which involves Russia’s Pacific Fleet ships, starts in the Bay of Bengal today near the Indian port of Visakhapatnam, the Pacific Fleet press service reported on Thursday…
According to the scenario, the training of flights of shipborne helicopters over sea will start on Thursday. "During the flight operations the Russian ships will take the Indian Navy helicopters on board," the Pacific Fleet noted. Refuelling and replenishment under way from tankers and joint tactical night maneuvering will also be trained.
The main theme of the Indra Navy-2018 exercise is naval cooperation between the two countries to protect navigation and economic activity at sea.”
Comment: Wonder if anti-submarine maneuvers were practiced.
“Under the contract worth an equivalent of over $5 billion, India is expected to get five regiment sets of S-400 systems. Settlements under the contract will be made in rubles. As a source in military and diplomatic circles said, India will get all the five S-400 regiments by the spring of 2023.”
Comment: Seems like a long time to receive all S-400 regiments. India is not expected to receive the first shipment until 2020, per The Diplomat’s Franz-Stefan Gady.
“"During the exercise, sailors of Russia’s Pacific Fleet and Indian Navy’s Eastern Fleet improved their practical skills of joint tactical maneuvers, refueling of ships from a tanker while in motion, an inspection of a suspicious vessel," the Russian side said.”
““In order to ensure security of the Far East region and its Pacific fleet nuclear submarine base, the Russian Ministry of Defense has decided to deploy a new submarine brigade on the Kamchatka Peninsula, which will be equipped with the latest 677 model "Lada" class of conventional attack submarine.
Russian "News" reports on the 11th that, the "Lada" class submarines can perform missions underwater for several weeks at a time without needing to surface for recharging. Endurance is not the only advantage for the "Lada" class, it also possesses remarkable stealth characteristics, which makes it almost invisible to sonar. Also, this submarine is equipped with the latest "Lila" ultra-sensitive sonar system, including a detection range far exceeding other submarines. Additionally, this submarine can destroy a large quantity of targets in a short amount of time, and thus has come to be known as the "underwater fighter." Russia reportedly plans to build 12 of these submarines, some of which will be in service for the Northern fleet, and others will be deployed long-term near the coast of the Kamchatka Peninsula.
A Russian military expert explained that "the 677 model submarine carries special significance in its service to the Russian Pacific fleet. The fleet of strategic nuclear submarines that patrol the world's oceans are primarily deployed at Avacha Bay base. Foreign submarines are constantly trying to locate and track them. So, their base needs to be vigorously defended, and the most effective method is to use the "Lada" class.”
“President Gurbanguly Berdymukhamedov is no fan of foreign travel, but he has been doing quite a bit recently. His latest sally overseas was to St. Petersburg on December 6, when he attended a Commonwealth of Independent States, or CIS, heads of state summit. The trip was not a certainty ahead of time since he had snubbed a major CIS get-together in Tajikistan in September. That was a particularly notable no-show since Tajikistan was formally handing over chairmanship of the organization to Turkmenistan…
On the domestic front, Berdymukhamedov on December 3 announced plans to build a new institute of higher learning devoted to the study of all things related to the country’s native Akhal-Tele horse breed. When development specialists worry about how Turkmenistan’s tertiary education sector is in desperate need of attention, this is probably not what they are envisioning.”
“The oath fits with President Shavkat Mirziyoev's effort to position himself as a fighter of corruption since he came to power in September 2016, but stands in contrast to his predecessor's efforts to suppress Islam.”
Comment: Central Asia’s Islamic reawakening has implications for both Russia and China.
“The campaign, which is clearly targeting the Muslims of Xinjiang, has widened and no longer includes just Uyghurs. Kazakhs, Kyrgyz, Tatars, Hui (Han Muslims), and now there are even reports that some Uzbeks are also being taken to the reeducation camps in Xinjiang.
The governments in Kazakhstan and Kyrgyzstan find themselves in an uncomfortable situation. China is a major -- and often the major -- trading partner and investor in the Central Asian states, but the growing resentment among the people of Kazakhstan and Kyrgyzstan over China’s policies in Xinjiang cannot be ignored by officials in Astana and Bishkek.”
“Here's the Trump administration throwing Uzbekistan a very big bone: removing this designation [A Country of Particular Concern]... Part of an continuing effort to pat the Mirziyoev administration on the head.”
Comment: I missed this last week. Perhaps another sign that elections are upcoming.
“In Uzbekistan, the propiska is a compulsory domicile legally tying a person to the address stamped in a passport. An individual is required to live and work in the city or town which their propiska indicates. Children can receive public education only at the location their parents have their propiska. Failure to produce an adequate propiska can lead to a fine. This practice, inherited from the Soviet period, is maintained in other former Soviet countries as well, but the stringency and enforcement of the regulation in Uzbekistan, more specifically in Tashkent and the Tashkent region, is among the most strict.”
Comment: Some obvious parallels to China’s hukou system. For those unfamiliar with the hukou system, please see here.
China and Russia in Energy Markets
"We will try. Each company is in a different situation. Within four months is, of course, realistic," Novak was quoted as saying by the Prime news agency.”
“Russia is the main political ally of Venezuela. Due to factors such as falling international oil prices, hyperinflation and US sanctions, the economic recession in Venezuela and the shortage of food and medicine have contributed to the outflow of approximately 2 million people.”
Comment: Note that Xinhua doesn’t criticize the Russian position in Venezuela but also notes that Russia (and not China) is “Venezuela’s main political ally” while listing the Maduro regime’s economic challenges.
Comment: Several experts explain why the cold war analogy isn't apt in the case of US-China relations.
“Russia’s gross international reserves (GIR) fell slightly as of the end of November to $379.2bn from this year’s peak of $383.4bn set in September, but the sovereign rainy day fund, the National Welfare Fund (NWF), fell more heavily from this year’s peak of $77.16 set in August to $68.55bn as of the start of December.”
“This is not the first time breathless reports have warned that war is about to break out. The image of hundreds of tanks lined up at a new Russian military base on the outskirts of Kamensk-Shakhtinsky in Russia's Rostov Oblast close to the Ukrainian border has been widely circulated on social media and TV shows. It has been used as proof that Russian forces are building up, ready to invade. However, the image is from Google Earth and from October 13, over a month before the clash between Russian and Ukrainian navy on Sea of Azov. It has already snowed in Rostov and there is no snow in the image.”
Comment: Quite good analysis. Worth your read.
The Grapevine with Anna Nadibaidze (@AnnaRNad) for Bear Market Brief
This week in Telegram channels: PM Dmitry Medvedev's TV interview from December 6 was his least politicized since 2012. He did not answer anything on regional elections or political imprisonments, and has rather presented himself as a ‘general manager.’
Comment: More evidence that PM Medvedev is becoming sidelined.
Until next week,
This newsletter was put together with assistance from James DeMarshall.
The China-Russia Report is an independent, nonpartisan weekly newsletter covering political, economic, and security affairs within and between China and Russia. All articles, comments, op-eds, etc represent only the personal opinion of the author(s) and do not necessarily represent the position(s) of The China-Russia Report.