Ukraine Crisis Deepens Russia-China 'Bromance'

The Issue

China and Russia began their geopolitical rapprochement aimed at defending themselves against the Western world in the wake of Russia's 2014 annexation of Crimea. This includes tighter energy ties, via inking a deal for the Power of Siberia gas pipeline. As the Ukraine crisis unfolds, the relationship has grown even tighter, with China explicitly supporting Russia in its denunciation of Nato expansionism and again signing up for more Russian oil and gas supplies. But there are still question marks over how far Beijing is willing to go in its support for Moscow should Russia be slapped with yet more Western sanctions.

Your Enemy Is My Enemy

The Russian-Chinese joint statement earlier this month on "International Relations Entering a New Era" was symbolic not only for its content — announcing a relationship with “no limits” — but also for the circumstances surrounding its release: the inauguration of the Beijing Olympic Games, boycotted diplomatically by the US and its main allies. Russian President Vladimir Putin came to Beijing in a grand show of support for China and was rewarded with the reaffirmation of the two countries’ deepening relationship in the face of an intensifying standoff with the US and Nato.

"[President Xi Jinping] understands that if the West prevails [in the Russia-US rivalry], China will be the US' next target after Russia," Alexander Korolev from Australia’s University of New South Wales told Energy Intelligence. “It is in China’s interest to support Russia. The China-US confrontation is structural and maybe even more deeply rooted than the Russia-US confrontation,” he added. The joint statement shows Russia and China allied in their opposition to the US' Indo-Pacific strategy. Both China and Russia firmly reject the possibility of an independent Taiwan.

Energy Deals in the Bag

Putin returned to Moscow with a series of agreements ranging from lower agricultural tariffs to military and energy cooperation. At a time when fears of a conflict over Ukraine is prompting Europe to scramble for alternative gas supplies amid its still-heavy dependency on Russian imports, Moscow was able to trumpet two oil and gas supply deals to China that highlight its “pivot to the East." Russia last year was China’s second-largest oil and third-largest gas supplier.

The renewal of a 10-year deal for 200,000 barrels per day of oil supplies to western China via Kazakhstan is only a fraction of the 1.6 million b/d of Russian crude that was sold to China in 2021, according to Chinese official customs data. But state China National Petroleum Corp. also signed up to buy 10 billion cubic meters of gas per year with Russian gas giant Gazprom over 25-30 years — albeit far less than the 50 Bcm/yr deal Russia had been seeking through a proposed new Power of Siberia 2 pipeline.

Still, a 10 Bcm/yr piped gas deal is still quite remarkable for a country in the energy transition. And China has many alternative supply options, Verisk Maplecroft’s Kaho Yu told Energy Intelligence, signaling that the deal was more a show of support for Russia than driven by energy needs. And while the deal allows Russia to show Europe that it can find new buyers for its gas, it also suits China’s market strategy, Yu argues, leaving it in a better position to bargain with other major suppliers such as the US, Australia, and Central Asia.

The new deal increases Russia’s total contracted piped gas supplies to China to 48 Bcm annually, up from the 38 Bcm/year through the Power of Siberia pipeline, which is progressively ramping up with 8.7 Bcm of exports last year. It would also require a new cross-border pipeline, likely linking to the Yuzhno-Kirinskoye field off Sakhalin Island. "This is immovable infrastructure,“ Korolev told Energy Intelligence, meaning that once the pipeline is built, there is a strong incentive to use it. Additionally, piped gas may seem safer than LNG tankers going through the Straits of Malacca and the South China Sea at a time of rising tensions with the US.

But Sanctions Would Be a Test

While there is little doubt that the bromance between Russia and China is going strong, the real test will come should Russia be hit with new economic sanctions in reaction to any Ukraine conflict. Will China, and its companies, step up? Chinese companies have long complained that investing in Russia is no easy feat, while Russian firms also find their Chinese partners difficult. Still, while listed Chinese companies may fear a sanctions backlash, state companies, especially if ordered to, will consider investments in Russia.

Any further sanctions would speed up Russia’s opening of its energy and resource sector to Chinese investors, Verisk Maplecroft’s Yu says. “Although financial and technology sanctions since the Crimea crisis had made it challenging for upstream investment in Russia, Chinese companies with a high-risk appetite will continue to move in. It illustrates Russia and China standing together against Western sanctions.”

If the US-China relationship deteriorates further, Chinese companies may look to Russia’s energy bounty with even more interest. China National Offshore Oil Corp.'s 10% stake in Arctic LNG 2, its first foray into Russian LNG, was finalized just after China started imposing import tariffs of 25% on US LNG in 2019.

The two countries may also redouble efforts to stay away from the dollar. The Chinese yuan currently accounts for more than 17% of Sino-Russian bilateral trade settlement, and more than 12% of Russia's international reserves, China's state People's Daily reported last week. State-owned Gazprom Neft earlier this month said it had switched to using the Chinese yuan for sales of jet fuel to Russian airlines at Chinese airports, although most non-dollar oil trade between the two is conducted in euros.