'The conclusion is simple: [Russian] gas supplies to China—either as pipeline gas or LNG—are not economically viable under normal commercial conditions (e.g. being taxed at the same level as gas supplies to Europe). Another conclusion can be drawn from this—without heavy subsidies from the government (which is motivated by geopolitical ambition and other factors, including corruption and enriching the affiliated construction contractors owned by Putin’s inner-circle oligarchs, such as Gennadiy Timchenko and Arkadiy Rotenberg), new China-oriented projects will most likely not emerge, as there is little commercial feasibility behind them. Gazprom specifically stated in its addresses to the Russian government asking for tax exemptions for the Power of Siberia pipeline that, without such exemptions, the project would not be profitable.
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Despite the massive surge in Russian oil exports to China described above, most of the ambitious Sino-Russian oil projects announced in 2013–14 have never materialised .. none of the Chinese upstream investments in the Russian oil industry that were announced in 2014 has actually happened.
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Why did Russia’s hopes for China as a major lender not come to fruition? First, the Chinese financial system is much smaller than the Western financial system. The total assets of the Chinese financial system are four times smaller than those of the US, and three times smaller than those of the EU. Second, the Chinese financial system was not built and is not intended to be operated as a major international lender—it is mostly focused on providing credit to the Chinese economy, and supporting the Chinese export of goods and services, which was the key reason for the provision of the Chinese loans to Russian oil and gas companies..
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..the Russia–China arms trade is still dominated by a great degree of mistrust and exists only on a limited scale, mostly for the Chinese procurement of the newest Russian armaments for potential cloning and export to third countries, where such weapons directly compete with Russian exports..
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In assessing the earlier expectations raised by the intensive Russia–China dialogue of 2014, the main takeaway is clear: mutual economic cooperation is not working to the extent widely expected and announced seven years ago..
..the incorrectly assessed prospect of Sino-Russian economic integration. This integration is simply not happening to the extent that the media hype surrounding it suggests. And it will not: the obstacles are just too high. Despite some modest growth in trade in recent years, Russia and China remain far apart economically, and will not get much closer.''Economic cooperation between Russia and China is widely seen as the backbone of an emerging global alliance between Moscow and Beijing. Since 2014 and the emergence of the current rift with the West over Russia’s aggression against Ukraine, the Kremlin has been eager to promote the idea of strengthening economic ties with China as a viable alternative to strained relations with the West, and as a sign that a new, less West-centred global economic order is emerging. Concerns about this growing Sino-Russian economic activity have scared many Western politicians, who have rushed to appease Moscow to prevent its further integration with China. However, a cross-check of the implementation of the ambitious economic agenda set out in 2014 by Russian President Vladimir Putin and Chinese President Xi Jinping shows that no real integration is happening and that fundamental problems lie behind this failure. This paper explains why Russia and China’s economic cooperation plans have failed since 2014 and are not likely to succeed in the future.
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In May 2015, exactly a year after the Power of Siberia contract was signed, Gazprom announced that it had signed a heads of agreement with CNPC to supply 30 bcm of gas annually through the Western route via Altai. However, a year later, CNPC Chairman of the Board Wang Yilin said live on Russian TV that he was unaware of this agreement, and had only heard about the 30 bcm figure from the media.23 Since then, negotiations on the Western route have not moved—in March 2020, Gazprom Chief Executive Alexey Miller told Putin that Gazprom had decided to scrap the Altai project in favour of a new route from Western Siberia through Mongolia; later, Gazprom announced that was it pursuing both projects simultaneously. But there has been no sign of any progress on either of these routes, and no confirmation from the Chinese side whatsoever that they are interested in these projects.
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In terms of economic benefits for Russia, these projects are questionable at best. The official estimate of the cost of construction of the Power of Siberia pipeline stands at 1.1 trillion roubles (around $15 billion). The initial price of the gas after the pipeline began transporting in early 2020 was reported as $202 per thousand cubic metres (tcm). However, since then the price has consistently fallen, and in the first financial quarter of 2021 it had reached a low of $121 per tcm, slightly bouncing back to $171 per tcm in the third quarter of 2021.25 This is substantially lower than the price publicly promised in May 2014 when the project was announced ($350–$380 per tcm), and notably lower than the price of both Chinese gas imports from Myanmar and Central Asia and LNG imports. Although Gazprom will not disclose the actual economics of the Power of Siberia project, given its announced costs and known conditions (it is 2,200 km from the Chayanda gas field to the Chinese border, mostly through uninhabited taiga without any infrastructure), it is most likely that the current gas supply prices (an average of $150 per tcm in 2020 and significantly less in 2021) generate substantial losses for Gazprom.
Gazprom has been officially exempted from the payment of any taxes—including mineral extraction tax, export duty and property tax—during the production and supply of gas to China via the Power of Siberia pipeline. The Russian budget receives zero income from the project. The same is true of Novatek’s LNG exports from Yamal: they have received a 12-year exemption from payment of mineral extraction tax and export duties. A special intergovernmental agreement with China was concluded on the Yamal LNG project, which stipulated that China would only join the project if the tax exemption guarantees were provided, and if Chinese equipment and technologies imported for the use of Yamal LNG were also exempt from any taxes and duties (project implementation was heavily dependent on the import of Chinese machines and equipment).
The conclusion is simple: gas supplies to China—either as pipeline gas or LNG—are not economically viable under normal commercial conditions (e.g. being taxed at the same level as gas supplies to Europe). Another conclusion can be drawn from this—without heavy subsidies from the government (which is motivated by geopolitical ambition and other factors, including corruption and enriching the affiliated construction contractors owned by Putin’s inner-circle oligarchs, such as Gennadiy Timchenko and Arkadiy Rotenberg), new China-oriented projects will most likely not emerge, as there is little commercial feasibility behind them. Gazprom specifically stated in its addresses to the Russian government asking for tax exemptions for the Power of Siberia pipeline that, without such exemptions, the project would not be profitable.
Another question is whether projects such as the Power of Siberia, Yamal LNG or Arctic LNG contribute to multiplying economic activity and mutual commercial turnover. In reality, there is little evidence of this. The Power of Siberia project has created about 2,000 jobs, with another 3,000 jobs generated at the associated Amur gas processing plant on the Chinese border. This is not a huge number. There is no evidence that this pipeline will boost the development of new infrastructure—it largely passes through remote and barely inhabited regions—or generate significant additional demand for goods and services. The same is true of the Novatek projects: pumping the gas in remote, barely inhabited areas of the Yamal Peninsula and shipping it for export does not generate many additional jobs or associated commercial activity.
In this regard, all the ambitious statements about how transporting LNG supplies through the Arctic Sea would boost the economic potential of the North Sea Route (NSR) seem to be unfounded. Exporting gas from Yamal in itself will not increase NSR competitiveness in any way—yes, some auxiliary infrastructure will be developed across the route, but all the icebreaker capacity will be busy supporting the LNG exports, and the NSR has yet to prove its competitiveness for cargo delivery compared to traditional maritime routes, given the harsh icy conditions of the Arctic. This makes the project a one-off resource-exports exercise with no real multiplier for broader economic activity.
Despite the massive surge in Russian oil exports to China described above, most of the ambitious Sino-Russian oil projects announced in 2013–14 have never materialised .. none of the Chinese upstream investments in the Russian oil industry that were announced in 2014 has actually happened. (pp. 9 - 12)
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Why did Russia’s hopes for China as a major lender not come to fruition? First, the Chinese financial system is much smaller than the Western financial system. The total assets of the Chinese financial system are four times smaller than those of the US, and three times smaller than those of the EU. Second, the Chinese financial system was not built and is not intended to be operated as a major international lender—it is mostly focused on providing credit to the Chinese economy, and supporting the Chinese export of goods and services, which was the key reason for the provision of the Chinese loans to Russian oil and gas companies. Chinese banks are much less willing to take the risks of providing loans to international borrowers, and have limited experience and ability to assess and manage those risks—which results in the conditions of Chinese loans being much less attractive for borrowers. That China failed to come to Russia’s aid during the major credit crunch caused by Western financial sanctions leaves little hope that Chinese money will in any way be capable of supporting Russian economic growth in the future.
Sino-Russian military cooperation has raised many concerns worldwide, mainly due to the intensification of joint military exercises, which have also greatly increased in frequency since 2014. However, many experts point out that these exercises have limited practical implications and are often carried out for public relations purposes, with overall military and defence cooperation remaining largely at the previous moderate levels. Military expert Alexandr Khramchikhin argues that these joint exercises mostly achieve political goals and have little defence value. Russian defence exports to China have been stable at a level of $1.5–$1.6 billion in the past few years, and China remains one of the major importers of Russian arms, following Egypt and Algeria. But defence experts point out the key limitation of this arms trade: China prefers to buy a limited number of examples of advanced Russian weaponry, which it is not capable of producing itself, and then tries to replicate them and produce its own copied weapons. The most famous examples include the Shenyang J-11 fighter jet, which was copied from the Soviet-designed Sukhoi Su-27, and the HQ-9 air defence system, which is a reengineered version of the Russian S-300 air-defence unit. Some Russian experts believe that China may soon copy the newest Russian S-400 air defence system. The Russian elite was particularly annoyed when Serbia, traditionally a Russia-dominated arms market, chose to switch to purchasing advanced Chinese weapons. Thus the Russia–China arms trade is still dominated by a great degree of mistrust and exists only on a limited scale, mostly for the Chinese procurement of the newest Russian armaments for potential cloning and export to third countries, where such weapons directly compete with Russian exports. This situation has not significantly improved since Russia’s pivot to China in 2014—with the exception of the highly publicised joint military exercises. (pp. 18 - 20)
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It is important to note that, in Central Asia, the natural gas trade is developing with a firm Chinese FDI presence—Chinese companies are major participants in upstream gas and pipeline projects in Central Asia, which is one of the reasons why China prioritises Central Asian gas imports over Russian supplies. This cannot be seen positively by Moscow, which views Central Asia as a key zone of its exclusive influence. Another damaging factor is that the separate relations between China and the Central Asian countries are helping to develop a major competitor to Russian gas supplies to China. According to sources familiar with the Sino-Russian negotiations on gas supplies, the major obstacle to reaching an agreement on a viable natural gas price has always been the Chinese position of being able to buy gas from Central Asia at cheaper prices. It can be seen from the 2021 price data that Russia has agreed to sell gas to China at a price which is ultimately cheaper than China pays to the Central Asian countries, which seems to be the only condition under which the Power of Siberia contract works at all.
ConclusionsIn assessing the earlier expectations raised by the intensive Russia–China dialogue of 2014, the main takeaway is clear: mutual economic cooperation is not working to the extent widely expected and announced seven years ago. Progress has been very limited beyond simply expanding the supply of Russia’s basic mineral resources—primarily oil and gas—and no additional economic activity or synergy has been generated by the current structure of the SinoRussian economic relationship. And it is not just about delays: most elements of the comprehensive Russia–China economic agenda announced seven years ago have proven not to be economically feasible, and even the feasibility of the oil and gas supplies is conditional on extreme tax exemptions provided by the Russian government. Without these tax benefits, oil and gas exports to China would not be commercially viable.
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In an environment where obstacles to mutual economic integration are significant, the countries’ resources do not match (Russia is a significantly smaller economic player), and the alignment of political interests is only tactical and not strategic, it is not really wise to have expected a serious deepening of Russia–China economic ties in the past seven years. Analysing these developments is important, because a lot of Western politicians seem to be under the impression that ‘Russia may fall into the Chinese orbit if we do not appease it.’ The key foundation for such thinking—which leads to the incorrect conclusion that concessions need to be made to Putin’s Russia to prevent its integration with China—is the incorrectly assessed prospect of Sino-Russian economic integration. This integration is simply not happening to the extent that the media hype surrounding it suggests. And it will not: the obstacles are just too high. Despite some modest growth in trade in recent years, Russia and China remain far apart economically, and will not get much closer.' (pp. 21 - 25)
- Vladimir Milov,
Ambitions Dashed - Why Sino-Russian Economic Cooperation Is Not Working (
pdf), November 26, 2021
Context(Russia) - 'The new National Security Concept .. the most primitive Soviet ideological vocabulary..'Could the West have saved Russia from itself? No.'..global corruption as being the root cause of many of the world's big problems.'