May 19, 2014

China Has Russia Over a Barrel

By Elizabeth Rosenberg and Ely Ratner

Chinese officials are notoriously tough negotiators, especially when they know you're in a pinch. Just ask Gazprom, Russia's natural gas giant, which is on the brink of capitulating to Beijing on a massive energy project, 10 years in the offing. Gazprom and China National Petroleum Corp., one of China's oil giants, are gearing up to sign a 30-year multibillion-dollar deal to send natural gas from Russia to China through a colossal new pipeline network.

A week before Russian President Vladimir Putin was set to meet his Chinese counterpart, Xi Jinping, in Shanghai on May 20-21, Russia's deputy energy minister described the deal as "98 percent ready." However, a Chinese deputy foreign minister was far cagier, noting in mid-May: "We are still exchanging views with Moscow, and we will try our best to ensure that this contract can be signed and witnessed by the two presidents."

On the surface, this seems the kind of win-win outcome that Chinese diplomats regularly tout as the solution to nearly every international problem. Russia sits on the world's largest natural gas reserves, much of it buried in the Siberian hinterland north of its border with China. As the world's largest energy consumer, China is an obvious partner for Russia's economy, in which natural resources make up 70 percent of exports and over 50 percent of government revenue.

But energy trade between Russia and China is surprisingly limited, with only 9 percent of China's oil imports and 1 percent of its gas imports coming from Russia. China is eager to increase and diversify its energy supplies away from overreliance on expensive  and volatile sources in Africa and the Middle East that have to pass through precarious sea lanes in the Strait of Hormuz and the South and East China seas. (Beijing really does worry about all the talk among U.S. strategists on how to blockade China's energy supplies in the event of armed conflict.)

Yet China has been unwilling to pay the premium prices that Russia has traditionally charged in Europe. Now, with Russia's worsening economy and an increasingly competitive Asian energy market, Beijing holds most of the cards -- and time is not on Moscow's side.

Read the full op-ed at Foreign Policy.

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