TSG IntelBrief: Putin's Pivot: Russia and China Move Closer

INTELBRIEF

TSG IntelBrief: Putin's Pivot: Russia and China Move Closer

Putin’s Pivot: Russia and China Move Closer

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Bottom Line Up Front:

• Russian President Putin’s visit next week to China is expected to produce a significant energy deal between the world’s largest energy exporter and the world’s largest energy importer

• While the deal has been a decade in the making, the timing is quite fortuitous for both parties: it reduces the EU’s leverage over Russia in natural gas purchases, and provides potentially reliable and relatively cheap energy for China

• The Central Asian-focused Shanghai Cooperation Organization, with Russia and China the two largest members, will become more important as Russia seeks to maintain its historic sphere of influence while China seeks energy sources and stability along its western borders.

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If the expected energy deal between Russia and China is signed during President Putin’s China visit next, the result will have significant geopolitical ripples. The deal, between Russia’s Gazprom and China’s National Petroleum Corporation (CNPC), will provide China with 38 billion cubic meters (bcm) of badly needed natural gas annually and provide Russia with some badly needed diversification in its customer base.

The deal is the most meaningful sign that Russia and China are seeking a regional alliance centered on Central Asia and energy. Such an alliance, shaped by economic and political tides running through both countries, could upend current policies and planning in the West. Both Russia and China benefit in several ways from a pivot towards each other, and away from the West.

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What Russia Gets

Russia delivers 140 bcm of natural gas annually to the countries of the European Union (EU). This accounts for over 25% of the EU’s natural gas imports but, more importantly, these sales also account for 60% of Russia’s overall gas sales. This unbalanced equation was assumed to give the West some leverage, or at least parity, when dealing with Russia. The expected gas deal with China is for an annual 38 bcm but with the capacity to increase to 61 bcm. To put it into perspective, 38 bcm of gas to China could replace 27% of Russia’s sales to the EU, and the full 61 bcm could replace 43% of its sales to the EU. Moreover, the pipeline that will deliver this gas to China will be operational in 2018, relatively soon for such an immense project.

The speed of the prospective project stems in part from the geographic proximity of a direct Russia-to-China pipeline. This is important, as Western planning after the crisis in Crimea seeks to stress Russia’s dependency on EU gas purchases as a way to keep Russian regional aspirations in check. While EU countries such as Germany don’t have ready-made alternatives, they believe the threat of reduced consumption would keep Russia within some bounds. This deal and the accompanying financing blunt much of the perceived Western leverage.

Additionally, China has agreed to help finance a $27 billion liquid natural gas project in the Yamal Peninsula in northern Russia. Western firms had suspended involvement in the massive project as a result of the Crimea crisis. China’s funding negates this form of sanction as well. And though it is still vulnerable to decreased EU sales in the short term and domestic unrest caused by a weakening economy, Russia appears able to pivot more quickly towards economic and energy alternatives than the EU.

 

What China Gets

Of all China’s growth sustaining needs, reliable and relatively cheap energy likely ranks in the top tier. Closer energy ties with Russia will help satisfy this concern. China imports approximately 30% of the natural gas it consumes. The expected deal with Russia would match that by itself, and the 2030 timeframe would provide a welcome sense of long-term stability that is rare with Russian gas imports. Given its severe pollution concerns, China is determined to reduce its use of coal—it is the world’s largest consumer of coal. Though it will not make much of a difference in the near term, natural gas provides China with the best alternative to coal in the intermediate term.

China already imports 65 bcm of gas from former Soviet republic Turkmenistan, as part of its focus on Central Asia as a source for cheap energy in the neighborhood. To that end, the Shanghai Cooperation Organization (SCO) will play an increasingly important role in China’s regional actions. Of the members (China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan), China is the largest energy importer and very much depends on reliable energy from the other members, who in turn depend on the Chinese market.

With the finalization of the gas deal with Russia, China increases its influence over the SCO, and gives itself some options as it relates to foreign energy concerns. The current tension with Vietnam over China’s placement of an oilrig in a disputed area of the South China Sea provides some insight as to the magnitude of what energy options will mean for China in the coming decade.

Russia has been clear about its desire to solidify its historic role in the region, while China has been clear about its need for non-coal based energy alternatives and a relatively stable western border, where Uighur unrest is an increasing issue. Russia and China have significant interests in manipulating their influence over the SCO. Other countries are interested in joining the SCO, in particular Iran and Turkey. If the SCO can be seen as a regional alternative to NATO militarily and the European Union as an economic collective, both Tehran and Ankara both would benefit from joining. However, Russia and China are highly sensitive to what they consider ethnic tensions and negative impact on their respective spheres. Ethnic Turkmen and Persian influences conflict with China’s concerns in its Western provinces and with Russia’s concerns in the Caucasus region. To that end, regardless of economic imperatives, Russia and China will be unlikely to extend official SCO membership to Iran and Turkey.

The sum of next week’s energy deal could be far more significant than the total of its parts. Russia is pivoting towards the East faster than the West can at this time, given energy imperatives, geopolitical currents, and geographic realities.

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For tailored research and analysis, please contact: info@soufangroup.com

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