Russia-China energy deal: Geopolitical tectonic shift

Late last month, Russian President Vladimir Putin and his Chinese counterpart, Xi Jinping, agreed on an unprecedented 30-year energy agreement, estimated at $400bn. By signing this historic deal, the Chinese state oil company CNPC and its subsidiary PetroChina – one of the world’s ten largest companies – both secured essential natural gas supplies to fuel future Chinese economic growth and further increase Beijing’s influence on the Russian economy.

In parallel, this agreement firmly strengthens the strategic Russian-Chinese cooperation ties and guarantees a much needed source of income for an ailing Russian economy currently experiencing the first signs of a recession worsened by US and European sanctions to curb Russian policy towards Ukraine

Recent developments in Ukraine have triggered the conclusion of this accord. The economic and geopolitical consequences of the conflict for Russia have been paramount in softening Russian demands in a deal whose conflictive negotiations lasted for more than ten years.

Capital outflow

Capital outflow, resulting from the perspective of sanctions, has indeed become a major concern for the Kremlin. Since the beginning of the year, $50.6bn dollars have already left the country triggering both the plummeting of the ruble exchange rate – down by 9 percent since January – and a surge in inflation decreasing the Russian purchasing power by 7.3 percent from a year earlier.

Confronted with such economic degradation, Russian authorities had no choice but to admit that the best case scenario for 2014 would be a stagnation of the country’s GDP, a staggering slackening that contrasts with Putin’s triumphant declarations after the 4.2 percent growth rate registered in 2011, immediately labeled the “world’s third highest growth rate among leading economies”.

Moscow has therefore become eager to attract new investors. Increasing the scale of relations with its eastern neighbor, hoping to pull from the Chinese record balance of payments surpluses, has thus become a priority. The gigantic energy deal is indeed only one of a series of recent investments and joint financial initiatives between Moscow and Beijing.

Both countries are about to announce the creation of a joint investment authority, the Russia-China Investment Fund, which will increase the countries’ interdependence in three strategic sectors: infrastructure, real-estate and minerals. The expected volume of operations will represent as much as twice the total amount of assets purchased by China over the last five years. It will also offer significant inroads into the development of much needed joint investments in a Russian economy that will have to finance the colossal projects scheduled for the hosting of the Football World Cup in 2018 and new energy infrastructures to supply the growing eastern markets. Beijing for example already announced it would contribute up to $20bn for the completion of the needed pipelines to ensure deliveries in 2018.

Shift to the East

The details of the energy deal between Moscow and Beijing illustrate the weakening of the Russian position over the last few months. It also shows how eager Putin was to seal a long term alliance with the Asian giant that will very quickly challenge the US influence in the region and beyond. Negotiations over gas prices had been the main stumbling block during the long negotiation process, as Beijing refused the conditions demanded by Moscow.

Yet, while Moscow held the upper hand in the negotiations considering the high price currently paid by Beijing for its LNG supplies, the final price agreed on demonstrate how the Ukrainian crisis has modified the balance of power between the two countries. According to CLSA, a leading Asian energy analyst firm, the price of Russian gas delivery to the Chinese border could be estimated in this deal as low as $335 to $350 per thousand cubic meters. This number should be compared with the current offer made by Russia to Ukraine, labeled as a fair offer by Russian foreign minister Sergey Lavrov: $385.

Cooperation between China and Russia in formulating joint foreign policy initiatives has seriously intensified recently. From tacit agreements against western liberal ideology and interventionism in Syria, relations between the two countries seem to have now reached a more active level both militarily and economically. Rumors have indeed intensified over the sales of Russian fighters and surface-to-air missiles (SAMs) to China, the type of military equipment that would strengthen Beijing’s position in its feud with Tokyo over the Diaoyu/Senkaku islands.

Similarly, Moscow and Beijing have conducted joint naval drill in the East China Sea, sending clear messages to Japan, Vietnam, the Philippines and the Obama Administration. Finally, as China faces a rise in attacks from Uyghur Muslim separatists in Xinjiang, Putin “resolutely condemned the bloody crime” and offer to strengthen cooperation with Beijing “in fighting all forms of terrorism and extremism”. The Russian savoir-faire in crushing the rebellions in Chechnya could rapidly become a blueprint for Chinese authorities.

Economically, last month, both presidents signed a common declaration supporting their respective economic integration initiatives over their shared neighbourhood: the Chinese Silk Road Economic Belt and the Russian-led Eurasian Union. The final text of the Shanghai Conference officially stated that both parties were committed to the convergence of their respective projects, demining past tensions regarding antagonistic influence over Central Asia. Both pledge to double the level of their bilateral trade between 2015 and 2020, to reach $200bn before the next decade. Both countries also agreed to set up a joint international rating agency to rival the western institutions, a first step towards the instauration of an independent regional economic architecture and be eventually opened to the remaining BRICS countries.

On paper, a renewed alliance between the energy and military giant on one side and its economic and financial powerful neighbour on the other makes more than a lot of sense. Some believe that a China-Russia axis is now emerging and could eventually propose an alternative towards a multi-polar world order. Others have argued that historical mistrust, competition over their shared neighbourhood and above all the absence of a common threat have limited the interests of both actors in engaging in an ambitious cooperation. The conflict over Ukraine and the US pivot towards Asia might have reaffirmed this common threat for Moscow and Beijing and the 30-year energy contract signed last month would then be the backbone of a long-lasting alliance strong enough to challenge the current US hegemony.