- The Writer holds an MSc in Eurasian Political Economy & Energy from King’s College London and also an MA in European Studies from Sabancı University.
Following the world’s reaction to the annexation of Crimea, a fundamental shift in Russia’s approach towards its Western and Eastern neighborhood emerged. Once perceived as a strategic partner by Russian authorities, Russia’s relationship with the West was sharply shaken, and as a result, many experts deemed Russian President Putin’s historic visit to China back in May 2014 as the country’s pivot to Asia.
Russia’s decision to focus on Asia, as a way of expanding its raw exports to create a powerhouse in neighboring countries, was criticized both at home and abroad. Despite the many years of skepticism between China and Russia, both have tried to develop a favorable relationship based on each party’s strengths and mutual benefits. However, while the ties between Russia and China are now much tighter, there are still various factors, including the U.S.’ role in implementing sanctions, as well as the lack of political trust that still hampers this relationship.
After the imposition of the first sanctions, Putin’s visit to China was seen as the country’s repositioning in the global political arena. Putin’s visit to Shanghai in May 2014, followed with seven more visits with Chinese President Xi Jinping in the next 14 months, indicated Russia’s desire to expand cooperation in many fields. These efforts were to provide Russian energy companies with opportunities to sign new deals with their Chinese counterparts. The long-awaited project between Russia’s Gazprom and the China National Petroleum Cooperation (CNPC) was realized during these visits and a strategic cooperation agreement between Russia’s Rosneft and the CNPC was also signed. Additionally, the CNPC acquired a 20 percent stake in one of the largest and most complex LNG projects in the world, the Yamal LNG project, with a sales contract extending over 20 years. On his return from China, Gazprom’s CEO Alexey Miller had hand a contract worth US$400 billion.
In comparison with many major energy supplier countries, Russia entered the Asia-Pacific market much later. Primarily to supply China and broadly the Asia-Pacific hydrocarbon market, Russia accelerated crucial infrastructure needed in East Siberia and the Far East.
During the Russian President’s visit to China, some Chinese financial institutions, such as the Exim Bank of China, China Development Bank, and the Silk Road Fund, agreed to support Russia’s investment. The fact that these institutions had less connection with the international financial system allowed them to take greater risks despite the sanctions. For instance, the Bank of China gave a loan to Gazprom for $2 billion over a five-year period in 2016. In the following year, Russian Rosneft secured a $15 billion loan from CNPC, which helped the company stabilize its financial position. Despite lengthy negotiations, Novatek’s Yamal LNG project also received funds from Chinese financiers. Other big financial institutions in China, however, remained cautious and decided to comply with the sanctions, and refrained from challenging the U.S.
Political dynamics created with the Ukrainian crises gave China some bargaining power. The U.S. and the EU’s introduction of sanctions forced the Kremlin to seek out new export routes. Consequently, China availed of this opportunity to negotiate very competitive pricing with Russia in the purchase of East Siberian hydrocarbons based on the fact that hydrocarbon assets in East Russia could well be stranded without having a Chinese market to send to.
China used its stronger bargaining position on many occasions by deliberately delaying either the financing of a in signing a deal until it clinched a better deal from the Russian counterparts. Frustrated with Gazprom’s vagueness of and insistence on high natural gas prices, the CNPC used this indecisiveness as an opportunity to create competition between Gazprom and Novatek, which eventually strengthened CNPC’s hand at the negotiation table. Novatek signed a deal with CNPC and sold a 20 percent stake in the Yamal LNG project in 2014. In another agreement signed between CNPC and Gazprom, the parties agreed on 38 billion cubic meters of natural gas with at least a 20-year sale agreement at a price well below what Russia expected.
The apparent mutual dependency in the sphere of energy brought Russia and China closer, but the development of a real partnership in many areas still remains elusive. Given the fierce competition to obtain a market share in China’s energy market, Russian companies need to offer the best price deal to enter the market. While Russia is more willing to form much stronger ties with China, particularly in the energy field, many Russian energy experts believe that this carries a risk in the sense that Russia could become over-dependent on China both for project financing and for its export sales. China, on the other hand, does not appear eager to form a stronger strategic alliance with Russia, nor does it want to tarnish its relationship with other major superpowers by engaging heavily with Russia.
To bolster Russia’s bargaining power, Russian companies have shifted their target markets beyond China. The recent sale of a 15 percent stake in Rosneft’s subsidiary, Vankorneft to Indian multinational oil and gas company, Oil and Gas Cooperation Limited (ONGCindia) and Rosneft’s reciprocal purchase of a 49 stake in the Indian refining company Essar Oil are some examples that demonstrate that Russia wants to send a message that it has other options on the table apart from the Chinese market.
Undoubtedly, there are challenges and contradictions in Russia-China relations. While China uses delaying tactics to extract the best value deal from Russia and to a large extent has a stronger bargaining position, nonetheless, its growing import needs have necessitated a closer alliance with Russia. From Russia’s point of view, China’s energy market offers an escape route from the current confrontation with the West. However, this troublesome relationship with the West has weakened Russia’s hand against China. Many deals signed after the Ukrainian crises suggests that China appears to be a keen supporter of Russia against the West, but China also utilized this friction as an opportunity to seal the best commercial deals without favoring Russian partners. Yet stronger ties between Russia and China have become critical economic and geopolitical factors for the global energy sector.
- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy