By Dr Filippos Proedrou, Vice President KEDISA
China and Russia are considered strategic partners both politically and economically in the post-Cold War era. The energy sector is considered the epitome of such a partnership with geographical proximity, complementary economic roles and interests, and mutual geopolitical views on a multipolar world order pointing to the multi-tiered rationale for energy cooperation. The ‘Power of Siberia’, planned to connect the Siberian gas fields with the industrial northeastern Chinese provinces, and carry 38bcm of gas (that could later increase to 60), hit headlines in spring 2014. The prophesy of Sino-Russian energy rapprochement was taking flesh and bones with the decision to construct a strategic pipeline that would initiate ever closer energy partnership between the two states, driving tectonic changes to the global system. Nevertheless, two years after its signing, progress on the pipeline remains from mediocre to disappointing with first shipments anticipated now in 2021 rather than 2018.
A number of reasons account for this development. Firstly, market developments speak against the materialization of such a project. In particular, Chinese growth has slowed down significantly. Both the timing and scale of a recovery to previous developmental rates remain rather uncertain and fluid; at the same time, massive investments on renewables, mostly solar panels, will cover part of energy demand and thus render the need for gas inflows less urgent for Beijing. China has thus reneged for now on its initial commitments to supply loans for the pipeline.
In the Russian side, falling oil prices and their uncertain future casts significant doubts on the very profitability of the pipeline. What is more, Russia faces severe economic hurdles that have suppressed its liquidity and financial clout. Partially related to Moscow’s financial weakness are also the upstream difficulties in the Kovykta and Chayanda gas fields that are planned to cater for the pipeline.
One should also keep in mind that disagreements on both the political and economic dimensions of the project keep plunging bilateral negotiations. The two sides started discussions on the ‘Power of Siberia’ more than a decade ago; the prices of delivery remained a steady thorn since. Russia allegedly conceded to somehow lower prices amidst the Ukrainian crisis, prioritizing sending political signals to the West that it cannot be encircled and has the capacity to strike high-profile partnerships with the rest, and most emphatically with the rising superpower. However, substituting dependency on the European market for the Chinese does not serve Moscow’s broader energy security goals; neither does Russia like becoming a resource appendage for the ascending engine of the global economy. China, on its part, is looking at the growing LNG market for cheaper gas amidst the persistent global gas glut.
What is more, both countries’ strong geopolitical stand and emphasis on their international image makes them rigid actors. As a result, not only are Russia and China both driving a hard bargain, but they are also disinclined to proceed to the construction of infrastructure that will generate sunk costs and tie them down on an interdependent relation for decades. Trade flexibility, to the contrary, in terms of LNG supply is more promising for China and may yield higher prices for Russian exporters.
In a developing world order progressively characterized by loose alliances, pipeline politics becomes even more complicated. As a result, further delays to the ‘Power of Siberia’ pipeline are to be anticipated. Nevertheless, the pipeline may be too significant to be abandoned altogether. Despite the aforementioned hurdles, Moscow remains committed to the project in order to unlock its eastern assets. Political symbolism for both sides also remains powerful. Economic aspects, then, such as the financing, timing and size of the pipeline may well in the end adjust to the mutual political goal of energy cooperation as part of China’s and Russia’s broader strategic repositioning in the global chessboard.