Somewhat quiet on the (Far Eastern) front

The 2022 Russian invasion of Ukraine, beginning 24 February, has turned the Russian energy trade upside down. Meanwhile, McKinsey estimates that Chinese demand for gas will double to 526 billion cubic meters (bcm) by 2035. In this blog post I will review Sino-Russian energy in 2022 with an emphasis on developments after 24 February 2022.

I find that Sino-Russian energy deal-making has remained quiet since the 2022 Russian invasion of Ukraine, despite Russian government rhetoric signalling that bilateral trade will double from $100bn to $200bn annually by 2024. Chinese and Russian firms announced a string of significant oil and gas contracts in early February, but the February agreements do not involve gas and oil quantities large enough to substitute for Euro-Russian energy trade. The most significant investment, the Power of Siberia 2 gas pipeline, is still in negotiations and there have been no developments on this front since the Ukraine War.

There are multiple reasons for momentary Sino-Russian quietude. First, it may simply be too early to detect a marked shift in economic ties following the Ukraine war, because gas and oil investments are projects requiring large capital expenditure, and time for negotiations and execution. Second, Chinese leaders may not yet know how they would like to proceed with Russian economic relations, including energy imports. Third, Chinese leaders may desire to pursue a middle-ground path towards Russian economic relations that largely follows pre-war ties, rather than cutting off Russia or forming closer bonds. Fourth, Chinese negotiators may be proceeding at an accelerated pace to secure additional Russian gas and oil supplies, but with an intention to keep such negotiations private for the moment to avoid international backlash.

Nevertheless, Moscow needs to find substitute buyers for exports previously headed to Europe, while China is a neighbouring country with the demand capacity to absorb Russian supply. From Beijing’s perspective, Russian energy imports carry the strategic advantage of overland (pipeline) delivery and potential ocean shipping through the emerging Northern Sea Route, which would decrease Chinese reliance on energy imports that currently transit a southern route vulnerable to disruption.

Consequently, while the muted pace of Sino-Russian energy deal making since the Ukraine war would not alone indicate an acceleration of energy trade, the above-mentioned factors will drive both Moscow and Beijing to increase bilateral trade in gas and oil. Nevertheless, it will be many years before sufficiently large pipelines become operational to deliver Russian energy output to China. In the meantime, shipping may partially compensate to conduct Sino-Russian energy trade.