Policy Article

It is not (just) about friendship: closer cooperation with Russia in the energy sector is in the interest of China

Kiel Focus

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In view of its economic interests and the new geopolitical situation, China is very likely to increase its engagement and investments in Russia’s energy sector. The foundations for this have been laid in recent years. In the short run, China would certainly not be able not help Russia mitigate or even compensate for the substantial economic losses, if there was a large-scale oil and gas embargo from the West. If, however, the West, and Europe in particular, do not impose a strict energy boycott on Russia, but try to gradually reduce its energy dependence on Russia, China and Russia will gain time to implement (new) joint energy projects. This would, in the long run, enable China to better fill the demand gap left by Europe on oil and gas from Russia, while benefiting itself without risking its own stability or sanctions from the West.

Since February 24, 2022, Russia and Ukraine have been at war. The West led by the European Union and the United States condemned Russia’s invasion and imposed a historically unprecedented broad spectrum of sanctions on Russia. In contrast, China, the other major power, stayed relatively silent on this topic for a while. Although the Russia-Ukraine conflict and the sanctions imposed by the West will strongly affect the world economy and thus will certainly impact China’s own future economic development, the Russia-Ukraine conflict and its possible implications on China were hardly addressed during the „Two Sessions (annual meetings of the National People’s Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC))” that ended on March 11, where the Chinese government, amongst others, specified the economic and social development goals for China in 2022.

The most high-level and direct message as to the sanctions imposed by the West on Russia during the “Two Sessions” came from Wang Yi, China’s Foreign Minister, when he emphasized China’s strategic partnership and the rock-solid friendship with Russia as well as a bright cooperation perspective in the future at the Press Conference on China’s Foreign Policy and External Relations (Xinhua News, 2022). This, however, should not be misunderstood to imply that China would (or even could) provide as much support as Russia would need to compensate for the potentially substantial loss caused by the sanctions from the West.

In fact, although the Foreign Ministry of China has repeatedly criticized one-sided sanctions in the past days, it did actually only promise to continuously engage in “normal” trade and economic cooperation with Russia (e.g., Foreign Ministry of China, 2022(a); 2022(b)). This implies that despite its aim to maintain the friendship and partnership with Russia, China will not blindly provide any support to Russia, without considering first China’s interests and benefits.

Considering the upmost importance of “stability first” as China’s overarching development goal clearly underlined at the “Two Sessions”, a likely interpretation of proceeding “China’s normal trade and economic cooperation with Russia”, is to encourage, facilitate and support more Chinese engagement and investments in Russia’s energy sector. Main reasons are as follows.

First, for China, energy goods are the most important products imported from Russia and their importance increased over time. The bilateral trade between Russia and China exceeded for the first time US$145 billion in 2021. This 36%-growth in bilateral trade from 2020 was mainly driven by the strong increase in China’s imports from Russia that grew at a rate of almost 38% to more than US$79 billion in 2021 (General Administration of Customs of China, 2022(a)). Among China’s imported goods from Russia, mineral products (73%), and more concretely, mineral fuels, mineral oils and their products etc. (68%), accounted for the lion’s share. Their share was even much higher than in 2020, a result of the more than average growth rates of imports of mineral products (57%) in general and of mineral fuels, oils etc. (60%) in particular (General Administration of Customs of China, 2022(b) and 2021). Moreover, according to the recently co-developed “Roadmap for High-quality Development of Trade in Goods and Services between China and Russia” that plans to boost the bilateral trade to US$200 billion before 2024, China’s imports of energy products from Russia shall further increase by 50% by then (Shanghai-Belt and Road, 2022).

Second, Russia is not just one among several energy sources for China but actually it is China's most important foreign energy source. It is ranked first as China’s source of general energy imports, first as a source of electricity imports, second as a source of crude oil imports, second as a source of coal imports, second as a source of pipeline gas and sixth as a source of liquified natural gas (State Council Information Office, 2022; China International Import Expo, 2022). Considering the power supply shortage shock China faced last year, it is of substantial importance for China to ensure stable and affordable energy supply from Russia to satisfy its increasing domestic energy demand in the long run and thus to help achieve its economic development goals. Increasing, in particular, the supply of natural gas from Russia serves an additional important goal of China as well, namely its goal to reach the peak of CO2 emissions by 2030 and strive to achieve carbon neutrality by 2060.

Third, China clearly recognizes not only the crucial importance of securing energy supplies, particularly the supply of gas, from Russia but also the increasing need for more investments in Russia in this field. This is reflected in three aspects. First, China’s direct investments in Russia reached US$12 billion in stock in 2020 (ranked 13th compared to US$14.6 billion in Germany (ranked 11th)), with a dominant share of 41% going to the mining sector (MOFCOM, et al., 2021), which encompasses, generally, the extraction of coal, crude oil and natural gas. Second, focusing on China’s large-scale investments, with a transaction value of no less than US$100 million each, that were made directly in Russia or indirectly via third countries to Russia, 21 out of 49 such projects in total from 2006 to 2021 were investments in the energy sector. These energy projects accounted for even 67% of the value of all China’s large-scale investment projects in Russia in the same period. The energy projects covered various subsectors, incl. coal, oil, gas, hydro and alternative energy. About 62% of these energy projects (in number and in value) were initiated over the past eight years since the launch of the Belt and Road Initiative in October 2013 (AEI and Heritage Foundation, 2022). Third, 19 of China’s 21 large-scale energy projects in Russia were initiated by state-owned enterprises or government bureaus. China National Petroleum Corporation (CNPC) alone invested in five such energy projects in Russia – both in oil and gas segments.

Fourth, extended or new joint energy projects are in progress. During Putin’s visit in China in early February 2022, China and Russia signed three agreements, aiming for promoting stable operation of the oil and gas pipelines to help further increase Russia’s gas and oil supply to China in the next years: (1) CNPC and Gazprom Far East Gas Purchase and Sale Agreement, (2) Supplementary Agreement to the Crude Oil Purchase and Sale Contract to Secure Oil Supply from Western China Refineries and (3) Memorandum of Understanding between CNPC and Rosneft on Cooperation in the Field of Low-carbon Development (Foreign Ministry of China, 2022(c)). Additionally, Gazprom announced already in late January that the construction of the Soyuz Vostok Gas Pipeline (an extension of the Sila Sibiri-2 Pipeline) to China via Mongolia is recognized as economically feasible. If completed, it is expected to further increase the delivery capacity of gas from Russia to China by another 50 billion cubic meters per year (Global Energy, 2022).

Thus, when it comes to carry out “normal trade and economic cooperation with Russia”, one area where the Chinese government would very likely proceed is to encourage, facilitate and support further investments in and cooperation with Russia in the energy sector. It is not (just) because of friendship between these two countries, but rather because of China’s own interests in doing so:  Ensuring stable and affordable energy supply to satisfy the increasing demand in China is essential to help achieve China’s economic development goals. The expansion of reliable energy supply in natural gas from Russia is also in line with China’s ambitious climate goals as to the reduction of CO2 emissions. The fact that the Chinese investors in the large-scale energy projects in Russia are mostly state-owned enterprises makes it also easier for the Chinese government to exert influence on the initiation, negotiation and implementation of the investment cooperation projects, with possible backup funding support from the state. Moreover, with a looming oil and/or gas embargo from the West on Russia, Russia’s negotiation power in general and in the energy sector in particular would be weakened, thus favoring China in related negotiations. At the same time, with increased engagement in the energy sector, China is less likely to face secondary sanctions from the West than in other areas.

So can China’s increased cooperation with Russia in the energy sector help mitigate or even compensate for the substantial economic losses caused by Western sanctions on Russia? In the short run, certainly not. China would not be able to absorb the volumes of oil and gas that Russia usually exports to Europe, if there was a strict large-scale oil and gas embargo from the West. The existing transportation facilities, incl. pipelines, between Russia and China also have their capacity constraints. And past experience in co-developing and co-building the China–Russia East-Route Natural Gas Pipeline actually shows that it took years from signing the corresponding joint agreement (2014) to launching a pipeline with an expanded capacity for gas transportation (2019) and to reaching its planned maximum possible capacity upon completion (expected in 2023).

However, if the West, and Europa in particular, do not impose a strict energy boycott on Russia, but try to search for alternative energy sources to gradually reduce its energy dependence on Russia, China and Russia will gain time to initiate, develop, expand and realize their (new) joint energy projects. This would eventually enable China to better fill the demand gap left by Europe on oil and gas from Russia and thus allow China to better support Russia economically, while benefiting itself without risking its own stability or sanctions from the West.

Acknowledgement: I would like to thank Frank Bickenbach and Holger Görg for their valuable comments and suggestions that helped improve the article.

References

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Coverfoto: © President of Russia

The Kiel Focus series presents papers on current economic policy topics. Their authors are solely responsible for their content and their views or any policy recommendations they may make do not necessarily represent the views or recommendations of the Institute.