As Russia reels from low oil prices and western sanctions, it continues to try to pivot to the east.
Russian President Vladimir Putin traveled to China last week to meet with President Xi Jingping and attend China’s military parade. Naturally, energy trade was on the agenda as the two leaders sought to expand their relationship and build off of last year’s $400 billion agreement that called for Russia to export 38 billion cubic meters of natural gas to China each year for 30 years.
Last week’s visit brought Putin several energy deals, including one that could see the development of yet another natural gas pipeline. Gazprom signed a memorandum of understanding with China’s CNPC to build a natural gas pipeline that would bring gas to China from Russia’s Far East. “The memorandum stipulates a third route for gas supplies to China,” Gazprom’s CEO Alexey Miller told reporters.
However, both sides can’t even keep up with previous agreements. The $400 billion Power of Siberia project has barely progressed. A second agreement signed late last year called for a western route to China, bringing gas from Russia’s Western Siberian fields. Gazprom admitted on September 3 that the $170 billion deal will likely be delayed. In fact, the deal faces steep hurdles, not least of which is the high cost and impracticality of exporting gas to China’s west, which is a very long distance from the country’s major cities in the east.
Moreover, two years on from a 2013 deal that called for the joint development of East Siberian Taas-Yuryah project, there has been little progress.
Russia is eager to secure these energy deals, given the terrible state of its economy. The Russian ruble is experiencing a high degree of volatility, and has lost 45 percent of its value since last year. Russia’s GDP contracted at an annualized rate of 4.6 percent in the second quarter.
While Russia has in the past been protective over its energy assets, making it difficult for foreign companies to take ownership stakes, the tough times have forced a more contrite approach. One of the deals signed in China last week included the joint development of two oil fields in which China’s Sinopec would be allowed to take a 49 percent stake. Also, the Silk Road Fund, a Chinese entity, is expected to take a 9.9 percent stake in the Yamal LNG project, an iconic but struggling LNG project on the Yamal peninsula in the Russian Arctic. Western sanctions have made financing the project difficult, forcing Russia to turn to China.
Meanwhile, Putin also met with Venezuelan President Nicolas Maduro while they were both in China. Maduro is desperately seeking cooperation from Russia and OPEC to cut production in order to prop up oil prices. Despite the “initiatives” that Maduro says he and Putin agreed to, very little is likely to come from their meeting. Russia has no room to cut oil production and neither does Venezuela.
To make matters much worse for Russia, the Chinese economy is now showing serious cracks. The Shanghai Composite is down by about 40 percent since hitting a peak in June. China’s financial markets are not necessarily reflecting what is going on in the real economy, but Chinese demand for oil is also softening as the economy slows down. Trade between Russia and China was expected to reach $100 billion this year, but the first half of 2015 disappointed with only about $30 billion in trade. Much of the shortfall was due to weak Chinese demand for Russia’s oil.
Still, Putin presses ahead. On September 4, he convened a conference in Vladivostok to promote energy development in Russia’s Far East. At the Eastern Economic Forum, Putin said that Russia would establish the “best conditions for domestic and foreign investors to conduct business—so that in performance and return on capital, the Russian Far East can successfully compete with leading business centers.” The promises are grand, but many projects likely won’t come to fruition. The Far East gas pipeline may not get off the drawing board.
The relationship between Russia and China is a symbiotic one. However, just as Russia needs to sell more oil and gas to rescue its economy from the doldrums, China is suddenly a lot less hungry for Russian energy.
By Nick Cunningham of Oilprice.com
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