Last week, US President Donald Trump landed in China aiming to secure the kind of blockbuster trade deals he championed nine years ago – spanning everything from soybeans to aircraft and energy.
By the time he departed, it was clear that reality would fall far short of expectations. Despite Trump hailing a “fantastic deal”, China did not announce the massive buying spree that many had anticipated.
Now, just days after Trump’s exit, Russian President Vladimir Putin is arriving in China with similar ambitions. At a press conference earlier this month, Putin said Russia was close to a “serious, very substantial” oil and gas deal with Beijing.
But just like his American counterpart, Putin may find the talks in China tough going. Though the US-Israel war on Iran would appear a “golden opportunity” for Russia to sell more energy to China, analysts warn a host of factors could complicate a potential agreement.
Russia’s goal for any negotiations is simple: shore up its domestic economy by selling more oil and gas to China. But Beijing has other considerations – from avoiding overreliance on a single energy supplier, to reducing its dependence on the US dollar by settling transactions in yuan.
What’s more, there are practical obstacles to ramping up Russian energy flows, including the looming return of US sanctions and the threat of Ukrainian drone attacks. The question is: can Putin overcome all these barriers and secure the kind of deal he wants from China, Russia’s largest energy buyer?
Murky prospects for an oil deal
China’s need for Russian oil may be less acute than some assume. Despite the closure of the Strait of Hormuz, Chinese imports of crude from Russia have only risen modestly since the outbreak of the war, according to Emma Li, lead China oil market analyst at market intelligence firm Vortexa.
Seaborne imports have averaged about 1.6 million barrels per day in recent weeks, up from roughly 1.5 million barrels per day in the six months before the conflict. Pipeline volumes, meanwhile, have held steady at around 800,000 barrels per day, Li said.
“The [war’s] impact on Russia-China energy ties has been relatively limited,” she said. “Russian crude – both seaborne and pipeline – was already part of China’s baseload supply before the conflict.”
So far, Russia has mainly benefited from the war due to higher oil prices and the US’ decision to temporarily waive sanctions on Russian oil, according to Erica Downs, a senior research scholar at the Centre on Global Energy Policy at Columbia University. Washington announced a 30-day extension to the waiver on Tuesday.
“The crisis also strengthens Moscow’s argument that it is a more reliable and secure supplier of oil and natural gas to China than Persian Gulf exporters that depend on the Strait of Hormuz,” Downs said.
“Putin undoubtedly is hoping that the conflict will lead to an expansion of China-Russia energy ties,” she added. “But whether, when and to what extent, if any, the conflict leads to a deepening of China-Russia energy relations will largely be up to Beijing.”
The summit between Putin and President Xi Jinping is likely to be filled with positive rhetoric about deepening energy ties, but actual deals may be thin on the ground, according to Xu Muyu, senior research analyst for crude at Kpler.
Russian oil currently flows to China via the Eastern Siberia-Pacific Ocean pipeline and tankers dispatched from the Kozmino port near Vladivostok – and both channels are already operating at near maximum capacity, according to Xu.
Ramping up exports further may be a challenge, she added. Though Russia has plenty of extra tankers available, it has limited ability to expand upstream production and faces heightened security risks at its Baltic and Black Sea ports from Ukrainian drone strikes.
There are also potential constraints on the Chinese side. Beijing could instruct China’s state-owned enterprises to purchase more Russian seaborne oil, but that might not happen as firms are concerned about being targeted by US sanctions, Xu said.
Furthermore, there are limits to how much Russian oil China ultimately needs. The country’s consumption of petrol for transport has been declining in recent years due to its rapid deployment of electric vehicles. That is already leading Chinese oil refineries to pivot from low-margin bulk fuels to higher-value petrochemical intermediates.
“In other words, the prospect of [China] fulfilling announced targets for import volume is low,” said Zha Daojiong, professor of international political economy at Peking University. “The world is not short of oil. It is just the supply chains that are being disrupted and realigned. Suppliers, Russia included, adapt to these changes.”
Then, there is the issue of supply diversification. Though Russian oil has become more attractive to China amid the Iran war, Beijing is concerned about becoming too dependent on Russia for energy shipments, according to Wang Zhuwei, director of oil trading research at S&P Global Energy.
“For China, the lesson [of the Strait of Hormuz crisis] is clear: diversify away from chokepoints,” Wang said. “Beijing will use Russia as insurance, not as the sole answer.”
As a result, Beijing would prefer more overland pipeline flows and settlements in yuan, according to Wang. China has been pushing to reduce its reliance on the US dollar in recent years to hedge against the potential weaponisation of American sanctions.
“Russia-China trade is already heavily de-dollarised,” Wang said. “More oil and gas trade will deepen that system and create more yuan recycling inside Russia’s financial market.”
In a video recorded ahead of his visit to China, Putin said that bilateral trade settlements between the two countries were now conducted almost entirely in roubles and yuan.
For Beijing, energy trade with Russia is more than an energy security issue – it also carries “symbolic and practical significance” for its push to internationalise its currency, according to Matteo Giovannini, a senior finance manager at the Industrial and Commercial Bank of China.
“Historically, international reserve currencies gained influence not only through trade, but through their role in pricing and settling strategic commodities such as oil and gas,” he said.
Any new long-term energy agreement between China and Russia is now more likely to include a stronger yuan settlement component, even if the deal stops short of formally denominating all transactions in yuan, said Giovannini, also a non-resident associate fellow at the Centre for China and Globalisation think tank.
“Moscow is now far more comfortable using yuan for trade settlement, reserves and financing than it was a few years ago,” he said.
“From Russia’s perspective, settling more oil and gas transactions in yuan reduces sanctions vulnerability and dependence on Western financial infrastructure.”
Meanwhile, Russia faces a long-term threat to its position in the oil market following the United Arab Emirates’ recent exit from the Organisation of Petroleum Exporting Countries (Opec). For decades, the cartel has helped keep oil prices stable, benefiting major exporters like Moscow.
“The influence of Opec on market share and pricing decisions is expected to weaken without the UAE, raising concerns about a potential future price war that could affect both Russia’s market share in key Asian countries and its oil pricing,” Kpler’s Xu said.
Pathway to a new gas pipeline?
For analysts, there is more potential for a China-Russia deal on natural gas than oil. Many expect Power of Siberia 2 – a second gas pipeline project that has been in limbo for years – to be high on Putin’s agenda for the summit.
China appeared to send a positive signal in March, when Beijing’s new five-year plan included a pledge to “advance preparatory work for the central route of the China-Russia natural gas pipeline” – a phrase that market observers interpreted as a reference to Power of Siberia 2, which would also pass through Mongolia.
“The conflict in the Middle East provides Putin with a golden opportunity to argue that overland pipeline gas from Russia is much more reliable and secure than [liquefied natural gas] imports, especially those that transit the Strait of Hormuz,” said Downs from Columbia University.
Beijing, however, will need to weigh whether the extra security provided by a new overland pipeline is worth the risk of becoming more reliant on Russian energy imports. This week’s summit may provide some insight into how China is thinking about that conundrum, Downs said.
Still, the two sides are unlikely to sign a final agreement on Power of Siberia 2 this time, according to Downs. Apart from the strategic considerations, there are still plenty of practical issues that need to be resolved before the project goes ahead.
In September, Russia’s Gazprom and China National Petroleum Corporation signed what Gazprom CEO Alexei Miller described as a “legally binding memorandum” regarding Power of Siberia 2. But the two sides have yet to agree terms on several issues, including pricing, financing and construction responsibilities, according to Nelson Xiong, senior market analyst for LNG and natural gas at Kpler.
A major sticking point is over price. Russia gave China a better deal than other suppliers for the original Power of Siberia pipeline, and will be reluctant to do so again, said Sergey Vakulenko, a senior fellow at the Carnegie Russia Eurasia Centre, in an article published in September.
For Russia, the break-even price for gas at the Chinese border would be about US$125 per thousand cubic metres. The main alternative product, LNG, costs China about US$370 per thousand cubic metres, so the two sides have a wide margin for negotiation, according to Vakulenko.
For Xiong, Putin’s visit to China “could advance contracting and commercial discussions” over the pipeline. That said, gas is unlikely to begin flowing along Power of Siberia 2 before the late 2020s, he said, although the two sides could agree to expand Power of Siberia 1 by 2027.
Elizabeth Wishnick, a senior research scientist at US research organisation CNA, said Beijing’s appetite for Power of Siberia 2 remained slim, especially since Putin might not be willing to provide a discount on the gas price due to current elevated global energy prices.
“China already agreed to build a fourth gas pipeline from Turkmenistan, so I’m not convinced that Xi will agree to a second Power of Siberia pipeline at this time,” she said. “No doubt energy security is on Xi’s mind, but I don’t expect any major deals with Russia.”
But Li Lifan, a Russia and Central Asia specialist at the Shanghai Academy of Social Sciences, said Russia might now be willing to move on pricing, as it urgently needs to sell more natural gas to China to offset a plunge in exports to Europe.
“Previously, Mongolia’s [proposed] transit fees were relatively high, but these will likely be adjusted under Russian pressure,” Li said.
Additional reporting by Kandy Wong, Xinyi Wu and Sylvia Ma -- SOUTH CHINA MORNING POST
