China and Power of Siberia II [NGW Magazine]

Moscow has decided to build an additional string of Power of Siberia, named Power of Siberia 2 (PoS 2), this time crossing Mongolia. It will take from four to six years to finish it and will send another 50bn m³/yr to China.

The rationale for the new line appears to be strange – at least at first sight. China seems to have no need of additional gas. As a matter of fact, Beijing has reduced the purchase of gas from central Asia, one of China’s major suppliers, and these former Soviet republics are discussing the voluntary reduction of gas production. Still, a closer look at the broader geopolitical picture explains why both Moscow and Beijing want to increase their gas ties.

First, Beijing is in no hurry to progress the project. It needs more time to develop its industrial, technological and military prowess in order to become not just a rival but an even stronger power than the US. Washington failed to recognise China’s potential threat for a long time, despite having established diplomatic relations with Beijing in 1972. Used to seeing China for a few generations as a useful counterbalance to the USSR and later as a handy provider of cheap consumer goods, Washington has only recently come to realise the economic and geopolitical threat that China poses.

It was Obama who announced the “pivot to Asia,” and China emerged as the major economic and geopolitical threat during Trump’s presidency. His major grievance was that the US was losing a huge amount of money from the trade deficit with China, and he employed tariffs to curb the imbalance flow of Chinese goods to the country. China was not thrilled with the possibility of even larger tariffs and the proposed drastic increase in the purchase of American goods. LNG was among the major American articles proposed for sale. Trump has assigned to LNG, curiously enough, the same role that pipeline gas played for Putin: wealth generation and deficit elimination.

These plans, however, have started to crumble. The trade deficit with China has continued to rise and it has become clear that trade with China threatens to deliver the coup de grace to US industry and implicitly the economy. Reliance on government debt (T-bills) could not continue indefinitely. Consequently, the Washington/Beijing agreement was looking more and more like a temporary truce rather than a permanent peace.

The arrival of the coronavirus pandemic was the tipping-point for the US economy. It declined at a rate not seen since the Great Depression and total collapse was only averted – and possibly just temporarily – by huge bailouts and quantitative easing. Washington was eager to find a scapegoat, and the tension with China was cranked up with renewed vigour. Trump accused China of being responsible for the spread of the pandemic and demanded a trillion dollars in compensation. These threats implied that Washington could refuse to honour $1 trillion-worth of T-bills in China’s possession and the crisis would just be a convenient way to default on the US obligations at China’s expense.

Trump also noted that the US could stop trade with China completely: it tried to block delivery of important computer chips to China and pushed Canada to arrest one of the top executives of Huawei – one of China’s major technology firms – in a Canadian airport. These and other actions showed Beijing that appeasement of the US might not be possible, and both countries entered a new Cold War. As well as economic confrontation, China should expect the possibility of open hostility with the US, including the blockade of China by the US Navy. In this situation, strategic considerations have become more important than purely economic gain. And here, Russia’s geopolitical position has become to play an increasingly more important role than just to satisfy economic considerations. Beijing is willing to buy additional Russian gas as a sign of goodwill and of strengthening ties between the two countries. Moscow clearly appreciates the move and for an obvious reason: it badly needs customers as its major market, Europe, is losing its appeal in terms of price and demand.

Russia’s eagerness to build the additional gas line should also be placed in the context of broad geopolitical design.

Since the split between Mao and Khrushchev in the 1960s, China and the USSR were at loggerheads, especially after Nixon’s visit to China in 1972. The Soviet authorities even considered the possibility of a pre-emptive nuclear strike against China, and some dissidents such as Andrei Amal’rik believed that Red China would take over the decaying Soviet empire just as the vigorous barbarians had overrun decadent Rome.

But after the collapse of the USSR, the relationship between Beijing and Moscow continued to improve cautiously. The post-Communist Soviet elite clearly had no love of totalitarian, Communist China; and China’s economic, geopolitical and demographic pressure became a subject of concern among a considerable segment of Russian analysts. All of these threatened the potential gas deal with China.

China as a potential market for Russian gas had been seriously considered since the 1990s but its refusal to pay European prices for Russian gas was a sticking point and negotiations between Moscow and Beijing led nowhere. The about-face took place in 2014. Turmoil in Ukraine and Russia’s annexation of Crimea had spoiled Moscow’s relationship with the West. It is true that Moscow’s relationship with Berlin was much better than that with Washington. Still, even here not everything was smooth, and the Kremlin realized that problems with Nord Stream II could emerge in the future. Taking this into consideration, Putin immediately turned to the east and an agreement with China was clinched to send Russian gas to China via a new grand pipeline, Power of Siberia. Some Russian observers assumed that Power of Siberia was not economically viable for it would bring nothing to Russia but financial losses and it was constructed for solely geopolitical consideration. 

While Power of Siberia was finally launched, Moscow assumed that it still could finish Nord Stream 2 (NS 2) and not be so dependent on China. There were several assumptions.

First, Moscow assumed that gas prices would be high, and that Germany, as the point of destination, would support the project resolutely, despite all pressure.

Second, Moscow might assume that Washington would follow the simple rules of geopolitics. It would understand that fighting or opposing two major powers would be unwise, and Washington would understand that Russia is much less of a threat to the US than is China. Thus, Washington would not create many problems for Russia. Still, Washington contradicted this logic and confronted both Russia and China, imposing sanctions also on NS 2, the construction of which was stopped, or at least delayed considerably. Consequently, Moscow was to sign a new and humiliating agreement with Ukraine. Gazprom paid $3bn to Kiev and was obliged to send a considerable amount of gas through Ukraine. Kiev allegedly promised not to sue Moscow for more money. Still, Kiev continued to entertain a new suit which could cost Russia $8bn.

In another case, the Stockholm arbitration court demanded that Russia pay Poland $1.5bn, and the court also demanded that Russia pay several dozen billion dollars for taking over Yukos, an oil company, at the start of Putin’s tenure. The EU court also stipulated that Gazprom could use only half of NS 2.

Exports westwards then are no longer the money-making machine of the past – even without considering the crash in the price of gas and uncertain demand. Gazprom’s leadership understands now that their major goal is not so much profit as survival. All of this has pushed Gazprom to eagerly embrace China’s willingness, or at least potential willingness, to accept the additional gas line and Russian gas through Power of Siberia, even when the economic rationale for this is limited. 

Some Russian observers note that China needs Russian gas regardless of China’s discovery of its own large gas fields. Other Russian observers discovered geopolitical, if not economic, benefits of the project. It is noted that Russia’s gas delivery to China would be a serious blow for the US as it would also diminish the market for its LNG.

What could the implications be? Russia will most likely become increasingly economically and geopolitically dependent on China, making the rise of a global pax Sinica more and more certain, despite the warnings of some Russian observers.