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China and Russia Relations: Politics in the Pipeline

by Suzanne Edwards

October 7, 2014

Sino-Russia

Anthony Liu from CKGSB and Martin K. Dimitrov from Tulane University explore the impact of the $400 billion natural gas deal on China and Russia relations.

In May of this year, China and Russia finally signed a deal 10 years in the making. Russian state-owned enterprise Gazprom and Chinese state-owned enterprise China National Petroleum Corporation (CNPC) signed off on the construction of a pipeline from Russia to China that would deliver Russian gas to the Chinese market over the next 30 years, all in all worth $400 billion according to initial reports. But uncertainty over the particulars of pricing and contributions from either side has raised several questions over the dealʼs ultimate impact on the two regions in play. Further complicating matters is Russiaʼs aggression in Ukraine, Russian President Vladmir Putinʼs own unstable political capital, and Chinaʼs various other pipeline deals in Central and Southeast Asia. To wade through the aspects and implications of the pipeline deal for both countries, CKGSB Knowledge goes to the experts.

Firstly we have Visiting Economics Professor Anthony Liu from Cheung Kong Graduate School of Business in Beijing. In 2012, Liu received his Ph.D. in Economics from the University of California at San Diego. Secondly we have Associate Political Science Professor Martin K. Dimitrov from Tulane University in New Orleans. Dimitrov is also an Associate at the Davis Center for Russian and Eurasian Studies at Harvard. Dimitrov received his Ph.D. in Political Science from Stanford in March 2004, and has since authored two books: Piracy and the State: The Politics of Intellectual Property Rights in China and Why Communism Didnʼt Collapse: Understanding Authoritarian Regime Resilience in Asia and Europe.

Despite approaching the issues from different angles, insights from either professor align on certain aspects of the deal as we know it today.

 

Russia Needs the Deal More than China

[pullquote]Martin-Dimitrov [/pullquote]

“The whole timing of the deal of course reflects Putinʼs erosion of international standing, the fact that he is afraid that Europe will no longer be buying Russian gas and so heʼs looking for new export markets.

For Putin, it was extremely important to bolster his domestic standing by finding an alternative export market for Russian gas at a time when Europe was threatening to impose sanctions on Russia. So the conclusion of this deal gave him domestic political leverage.

China has the upper hand in this negotiation given the moment when the deal was signed—the idea was that the deal would be completed in time for Putinʼs visit, so it would have been embarrassing for Putin to go to China and come back home empty handed, and China knew this.

Russia is becoming increasingly export-dependent. Russia needs the cash and China may be able to keep the price low in future. But given Russiaʼs history in terms of gas negotiations, I do not rule out Russia trying to increase the price in the future. But Russia, right now, is in a very weak position.”

Martin Dimitrov

[pullquote]Anthony-Liu[/pullquote]

“Western countries reacted poorly to Russiaʼs recent moves in the Ukraine, and imposed a series of sanctions on Russian firms which are beginning to bite. Certainly in the case of natural gas, which requires massive spending on capital infrastructure that may require years of sales to recoup, price certainty and risk avoidance are extremely important.

As a result, the perception is that Russia moved to decrease its reliance on European exports and was willing to give a bit more to China to assure itself of an independent trade partner and source of hard currency which has shown a willingness to overlook possible bad behavior.”

Anthony Liu 

 For Better or Worse, China’s Deal is the Region’s Deal

[pullquote]Anthony-Liu[/pullquote]

“Initial reports are that China has gotten a good price, around $360 per 1,000 cubic meters. This is around the price that Germany pays, $366 per 1,000 cubic meters, which is already quite cheap for Europe.

Importantly, it is considerably lower than other East Asian countries currently pay. So that will set a new market level for energy imports to China. A second major supply of natural gas to China, liquefied natural gas (LNG) will now have to beat the price of Russian piped natural gas or suffer demand shortfalls from China.

If the price of natural gas to other East Asian countries drops as well, this is a good thing environmentally. Cheaper natural gas means less reliance on coal, which will lead to less pollution and lower carbon emissions.”

Anthony Liu

[pullquote]Martin-Dimitrov[/pullquote]

“Chinaʼs importing gas from Central Asia, [and] on June 15th the Central Asia-China pipeline became operational. This is very important, and 80% of Chinaʼs natural gas

needs can be met by this Central Asian gas, so this is something that China can and will use as leverage on Russia.

The fact that the price at which this gas will be delivered to China has not been revealed suggests that China has managed to extract a very good price and you know of course China knew that Russia wanted the deal more desperately than China wanted it.

One thing that will be interesting to watch is what is happening in Myanmar because there is a pipeline thatʼs in the process of being built from Myanmar to China. So Myanmar would be quite nervous about this deal, but I think for these other countries in Europe, I mean given Russiaʼs record of actually not delivering on deals on time, perhaps some of this nervousness could be alleviated.

Long term of course, China is the motor of the world, so to the extent that these other countries are competing for these natural resources, they would feel nervous that most of the natural resources are going to China and China can dictate the price. One important question to ask is ʻwill China use its access to Russian gas to renegotiate its prices from Central Asian suppliers?ʼ”

Martin Dimitrov

Will the Deal Impact Sino-Russian Relations?

[pullquote]Anthony-Liu[/pullquote]

“The deal will ensure that powerful business interests have an interest in the ongoing relationship between China and Russia. If incidents threatening the relationship between the two countries occur, these business interests will help push each side to come to the table and at least communicate.

Since China has the money, some analysts think that it will have the upper hand, but I think having reliable energy supplies is a very important issue to it, giving Russia a strong hand as well.”

Anthony Liu

 

[pullquote]Martin-Dimitrov[/pullquote]

“The gas deal strengthens an already existing alliance between China and Russia at the UN Security Council. Does it mean that the two countries will no longer be rivals and that relations between the two countries will be amicable for the foreseeable future? Absolutely not, and I think one example of that is the pipeline that goes from Russia to Ukraine, this pipeline is used as a political weapon by Russia.

So frankly the pipeline doesnʼt change that much in the existing relationship. Except of course that at the time of signing the deal it gave Mr. Putin a major domestic political boost. ”

Martin Dimitrov

 China Must Diversify 

[pullquote]Martin-Dimitrov[/pullquote]

“China is very interested in diversifying. China is also extremely interested in reducing its dependence on oil that is transshipped in tankers.

There is a problem with piracy [in terms of shipping crude], and then another consideration is that the tanker routes go through the Strait of Malacca, and the Strait of Malacca is a choke point, there are lot of tankers that pass through, so the delivery of oil is slow.

Another consideration with tankers is should the relations with Taiwan deteriorate, which right now doesnʼt look likely but one never quite knows, then the tankers would have to go around Taiwan, theyʼd have to pass around the Taiwan Strait. So to the extent that China relies on oil, it cannot be entirely certain that it will have access to oil given certain contingencies in the future.

One element of the master plan is to move away from coal—using alternative energy resources such as solar and wind, producing nuclear energy—and beyond these resources China is very interested in natural gas because there are uncertainties with all of Chinaʼs trade partners.

The other very interesting and recent development is [the] fracking that is happening in China. There is this joint venture between Sinopec and FTS International, and there are ambitious plans on the Chinese side in terms of producing gas domestically, so both of these developments could give China significant leverage over time.”

Martin Dimitrov

[pullquote]Anthony-Liu[/pullquote]

“So the clearest benefit of a natural gas deal to China will be an ability to meet its ravenous energy needs without relying as heavily on highly polluting coal. It consumed 170 billion cubic meters of natural gas in 2013 and has targeted 420 billion cubic meters by 2020. The National Development and Reform Commission (NDRC) wants China to shift the role of natural gas in its energy mix from 4% now to 10% by 2020.

Although China has successfully begun the exploitation of its domestic shale gas resources, the Russia energy pipeline will go a good way to meeting these ambitious goals, possibly supplying as much as 10% of Chinaʼs 2020 energy demand.

Environmentally, diversifying its energy mix is only a good thing for China. Natural gas is much less pollution-intensive and carbon-intensive than coal, so the increases in pollution wonʼt be as severe as they would be if China used only coal to meet its energy demand.”

Anthony Liu

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