Russia and China’s Growing Energy Relationship

Russia’s economic free fall and isolation from the West has made it increasingly eager to build its relationship with China, even at the cost of lost leverage with Beijing.

But new economic data from China shows that Russia has succeeded in capturing a larger share of the massive — and growing — Chinese oil import market. China’s imports of Russian oil skyrocketed by 36 percent in 2014. The rapid rise in Russian oil exports to China is displacing other sources, such as Saudi Arabia and other OPEC members. The Wall Street Journal reports that China’s oil imports from Saudi Arabia fell 8 percent in 2014, and imports from Venezuela fell 11 percent.

The data suggests that Russia and China are finally forging closer trade ties based on energy. They share a massive border, but have been unable to capitalize on what has long appeared to be a well-matched economic opportunity — Russia is a huge energy producer and China is the world’s largest importer of petroleum products. Historic animosity and mutual suspicion had long left a major deal off the table.

The sticking point had been price. Years of negotiations over major natural gas trade stalled as each side held out for more favorable terms.

Read more: Russian Gas Provides Lifeline To Chinese Expansion

However, the conflict in Ukraine and the near-severing of relations between Russia and Europe led to a breakthrough in the Sino-Russian energy relationship — in Beijing’s favor. They agreed to a major natural gas deal in May 2014 that could see Russia export 38 billion cubic meters per year to China beginning in 2018, with the option of ramping those figures up to 60 bcm per year at a later point. Crucially, the two sides appeared to agree on a price in the range of $9-$10 per million Btu (MMBtu), much closer to China’s preferred price point. The exact terms were not disclosed, but China may have even secured a lower price than Europe pays for Russian gas.

On the other hand, the collapse of oil prices have also forced down the price of liquefied natural gas (LNG), another vital source of imports for China. LNG spot prices have dipped below $10/MMBtu. While LNG prices are highly volatile and may not stay low for long, for now the Russia-China gas deal (if it goes through) looks a bit better for Russia than it did last year, having potentially locked in a price higher than it might have otherwise received after LNG prices collapsed.

Nevertheless, Russia is increasingly at China’s mercy, as it offers a crucial lifeline. Rosneft has received advanced payments from China in exchange for future oil exports, and other Russian firms have obtained loans from Chinese companies, as they are unable to access international financial markets because of western sanctions.

Read more: Russian Sanctions Might Be Obama’s Greatest Blunder

Moreover, not only was price a sticking point in the natural gas deal, but so was the issue over China taking equity stakes in Russian energy projects. Russia feared a geopolitical disadvantage if China acquired ownership in oil and gas fields within Russian borders.

But that too appears to be changing in China’s favor. In 2013, China’s CNPC took a 20 percent stake in the Yamal LNG project, and agreed to jointly develop oil and gas fields in eastern Siberia with Russia’s state-owned oil company Rosneft. And in November 2014, a subsidiary of CNPC gained access to a major oil field in Russia. CNPC will take a 10 percent stake in ZAO Vankorneft (a subsidiary of Rosneft), which is seeking to develop an oil field that could produce 1 million barrels per day by 2020. Such upstream equity stakes were something that Russia had opposed until recently. More upstream acquisitions by Chinese firms in Russia could be in the offing as Russia’s economic and geopolitical position has weakened.

As a result, Russia and China are forming a much stronger symbiotic relationship. Although for very different reasons, that suits both countries just fine.

This article originally appeared on OilPrice.com.

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