Russia Has the Hydrocarbons, but China Has the Cash

Russia has been a crucial energy source for China for years, including the construction of massive oil and gas pipelines in Siberia that have kept China’s industrial heartland humming and Russia’s energy-export diversification strategy alive. What never dropped was the other shoe.

Russia has long championed a second hulking pipeline project that would stretch south through the Altai passes of western Siberia, shipping some 50 billion cubic meters (bcm) of natural gas a year to China by the back door. If developed, the new pipeline, called the Power of Siberia 2, would cement the two countries’ energy ties—and pave the way for an increasingly intertwined economic future.

There’s just one catch: Moscow can’t get Beijing to buy in after nearly a decade of false starts, big words, and broken pledges. Even after Russian President Vladimir Putin hailed it as his “deal of the century,” Chinese President Xi Jinping didn’t even mention the pipeline after their meeting this week. Despite Putin’s comments that the two leaders were nearing a deal, their joint statement only included lofty, noncommittal language—a far cry from what the Russian leader wanted.

The Russian side had “prepared all the documents, all the project documentation, [the] feasibility study, everything,” said Tatiana Mitrova, a research fellow at Columbia University’s Center on Global Energy Policy. It was “absolutely up to the Chinese side to give the green light to this project, and it didn’t happen.”

The stark split screen in the Power of Siberia 2 talks underscores the growing asymmetry in Russia and China’s economic relationship, even during a high-profile visit designed to showcase their unified stance. Russia started looking east for energy buyers a decade ago; that need has only grown more acute with the avalanche of Western sanctions and loss of Western markets after last year’s full-scale invasion of Ukraine. With Russia severed from Western markets, experts warn that Moscow has been digging itself into a hole of dependence on China—one that gives Beijing greater leverage in dictating prices and conditions.

“Russia and China can try to make a narrative that it’s a so-called comprehensive partnership, a strategic partnership,” said Alexandra Prokopenko, a visiting fellow at the German Council on Foreign Relations and former Russian Central Bank official, who noted that the balance in their economic relationship is rapidly shifting in Beijing’s favor. But “Russia needs China more than China needs Russia, and that’s the reality.”

Just weeks before Russia invaded Ukraine in February 2022, Putin and Xi famously declared their “no limits” partnership in a 5,000-word statement that rattled Western countries. As they drew closer politically, so too did their economies. Trade between Beijing and Moscow skyrocketed by more than 30 percent to nearly $190 billion in 2022, particularly as China bought up Russian crude oil at heavily discounted volumes. That year, Moscow was also Beijing’s second-biggest supplier of crude oil, coal, and pipeline gas, according to Columbia University’s Center on Global Energy Policy.

Since invading Ukraine, Russia has been deeply reliant on China, at least in part because it doesn’t have many other options. Largely isolated in the global marketplace and facing sweeping Western sanctions, Russia has found in China one of the few countries with the heft and market power to help keep its economy afloat. That has given Beijing the upper hand in negotiating favorable deals and contracts, while leaving Moscow vulnerable to its whims and preferences. In November 2022, Chinese buyers were able to gobble up Russian crude oil at a nearly 40 percent discount.

China is the one “who can dictate the price, who can dictate the conditions,” said Prokopenko. “Russian leadership understands this well, but their options are limited.”

The uneven dynamic was clear in the mismatch between how Moscow and Beijing characterized what came out of this week’s talks. While the Russian side (and media) framed China as a key customer, the Chinese side’s comments consisted of “very vague, general statements without any concrete business proposals,” said Maria Shagina, a senior fellow at the International Institute for Strategic Studies. “That really shows a skewed picture of how asymmetry has evolved over time.”

“One can’t hide the fact that Russia is a junior partner,” she added.

There are plenty of reasons why China has slow-walked the second Siberian gas pipeline. It gets more gas by sea these days, for one. And the Altai pipeline would ship gas precisely to where it isn’t quite needed. That aside, by holding out on the Power of Siberia 2 pipeline for now, energy experts say that China is taking full advantage of this asymmetry to negotiate the most favorable terms and prices.

“China is sending a very clear bargaining message,” said Mitrova. “You have to provide additional discounts, additional attractive conditions in order to make this deal [happen].”

It could also suggest that China, which is already set to receive 22 bcm of Russian gas via the first Power of Siberia pipeline in the far east of Siberia this year, is wary of investing further in Moscow’s supply in the long run. Pipelines are lengthy, time-consuming projects, and if Beijing signed on now, it would be locked in for years to come.

China has been happy to snap up discounted Russian oil, cheap by virtue of the relatively poorer quality of Ural crudes, but also due to Western sanctions. But oil is fungible. Pipelines, like diamonds, are forever. (Well, almost.)

In purchasing cheap Russian oil, “you’re not committing to really deepen your relationship over the long term,” said Erica Downs, a senior research scholar at Columbia University’s Center on Global Energy Policy. “Whereas I think signing an agreement for a Power of Siberia 2 pipeline, that implies that you are really doubling or tripling down on Russian energy.”

Last year, European countries got their latest reminder of the dangers of becoming too dependent on one energy supplier when Russia choked their supply of natural gas, skyrocketing energy prices and leaving countries grappling with blackouts and soaring inflation. Chinese leaders are acutely aware of the importance of diversifying their supply, experts said, and have focused on securing multiple contracts beyond what Russia can offer. Beijing imports more liquefied natural gas from Australia, Qatar, and Malaysia than it does from Moscow.

“A hallmark of [China’s] approach to energy supply security has been not to become too dependent on any one supplier,” Downs said. While Beijing is buying more energy from Moscow, she added, “They’re not putting all their eggs in the Russian basket and they are looking elsewhere.”

Russia, for its part, is still attempting to expand its partnerships outside of China, including by deepening cooperation with India, the United Arab Emirates, Saudi Arabia, and Turkey. Many have bucked or dodged Western sanctions and deepened energy ties with Russia over the past year. Their markets, though, aren’t as sizable. Beijing is still the biggest player—and Moscow’s dependence only appears set to grow in the foreseeable future.

“They are closer than ever in history,” Shagina said, yet “their relationship is as asymmetrical as never before.”