A Friend in Need is a Friend Indeed? China-Russia Energy Relations in the Wake of the War in Ukraine

Since Moscow launched its invasion of Ukraine on February 24, China has been a friend to Russia in both word and deed when it comes to bolstering Russia’s energy export revenue. In the week following the start of the war, a Chinese foreign ministry spokesman, Wang Wenbin, and the head of China’s banking and insurance regulator, Guo Shuqing, stated that China did not support Western sanctions on Russia and would continue to conduct normal trade with its northern neighbor.[1] In addition, China’s leader, Xi Jinping, reportedly instructed his closest advisors to find ways to support Russia without violating Western sanctions.[2]

Chinese energy importers have done just that. In March-July 2022, China’s imports of Russian crude increased by 10.2% to 1.7 million barrels per day (bpd) and LNG by 40.4% to 2.1 million tons.[3] Gazprom, Russia’s state pipeline monopoly, announced on August 1 that the volume of natural gas exported to China through the Power of Siberia pipeline grew by 60.9% in the first seven months of 2022.[4] (China has not reported the volume of any of its pipeline imports so far this year.) China’s imports of Russian coal, however, fell by 3.7% in March-July 2022 to 24.4 million tons, with monthly volumes decreasing year-on-year in March-May and increasing year-on-year in June and July.[5]

China’s elevated purchases of Russian oil and natural gas combined with higher commodity prices have boosted Russia’s earnings from energy exports to China. In March-July 2022, the amount of money that China spent on Russian crude oil, LNG, pipeline gas and coal increased by 68% over the same period in 2021 to USD 34.3 billion, according to Chinese customs data. A significant portion of this money was used for crude oil, which accounted for 74% of the total, USD 25.3 billion.[6]

It is likely that Chinese buyers are primarily motivated by bargain basement prices rather than altruism. They have been snapping up on the cheap cargoes of Russian fossil fuels shunned by other purchasers. For example, in May, Russia’s Urals crude for delivery to China in June sold at a $9 per barrel discount to Brent crude.[7] Similarly, in July, Russia’s ESPO crude was offered at a discount of $10-12 per barrel to competing crudes from Brazil.[8] Meanwhile, in April, high-quality Russian coking coal traded at an average price of $386 per ton in Chinese ports while Australian coal of the same quality was $473 per ton, according to Chinese traders cited in a Chinese industry press report.[9] Similarly, in July, Russian coal with a heating value of 6,000 kilocalories was trading at around $173-176 per ton compared to more than $400 per ton for benchmark Newcastle (Australia) coal.[10]

The increased procurement of fossil fuels is the latest example of China capitalizing on Russia finding itself in a challenging international environment.  Over the past decade and a half, China has provided capital to Russian energy firms in exchange for long-term supply contract, sometimes at attractive prices:

• In 2009, the collapse in oil prices and credit crunch resulting from the global financial crisis left Russian energy companies short of capital. China agreed to lend them $25 billion in exchange for 300,000 barrels per day (bpd) of crude oil over 20 years and the construction of a cross-border pipeline (a spur from Russia’s East Siberia Pacific Ocean pipeline) with a capacity of 300,000 bpd to deliver them.[11]
• In 2013, China National Petroleum Corporation agreed to lend Rosneft $70 billion dollars, an influx of capital the Russian national oil company needed to pay back the more than $32 billion it borrowed from international banks to help finance its $55 billion acquisition of TNK-BP. In return, Rosneft committed to deliver an additional 2.64 billion barrels of oil over the next 25 years and to double the capacity of the ESPO pipeline spur.[12]
• In 2014, China finalized a supply contract for the delivery of 38 billion cubic meters (bcm) per year of natural gas over 20 years through a new pipeline, the Power of Siberia, during a time when Russia was internationally isolated after its annexation of Crimea. The agreement helped Russia diversify its natural gas exports to the East and allowed Russia to show that it still had a powerful friend on the world stage.[13] It also provided China with a new overland source of natural gas that is less expensive than its imports of LNG and pipeline gas from other countries (See table 1).

Table 1: Prices of China’s LNG and Pipeline Gas Imports in 2021^[14]

As of this writing, Chinese buyers have not signed any new long-term supply contracts similar to those mentioned above since February 4, when CNPC and Gazprom inked an agreement for the supply of 10 bcm per year of natural gas for 30 years through a new pipeline from the Russian Far East to northeastern China.[15] Although Gazprom announced on February 28 that it had signed a design contract for Soyuz Vostok, also known as the Power of Siberia 2 natural gas pipeline, China and Russia do not appear to be close to finalizing the 55 bcm per year project.[16]  Moreover, Chinese companies have not invested in Russian energy companies or purchased any oil and natural gas exploration and production assets from companies exiting Russia despite an interest in doing so.[17]  

There are probably several reasons for this:                                                 

First, Chinese entities are be cautious when it comes to engaging in transactions that might violate any future US sanctions. China’s major state-owned banks and oil companies have global operations and undoubtedly do not want to lose access to the US financial system. For this reason, two of China’s largest state-owned banks, Bank of China and Industrial and Commercial Bank of China, began restricting financing for Russian commodities immediately after the start of the war.[18]

In addition, the use of ship-to-ship (STS) transfers to deliver Russian oil to China may reflect concerns about sanctions on the part of Chinese buyers. STS transfers are often deployed to evade sanctions by masking the origin or destination of the oil. Almost 40% of the 1 million bpd of seaborne Russian oil imported by China in June arrived via STS transfers.[19]

Second, diversification has long been a hallmark of China’s approach to energy supply security. To this end, while Chinese companies have been increasing imports of Russian fossil fuels, they have also been pursuing long-term LNG supply contracts with other major exporters. Chinese LNG importers, which signed a flurry of contracts with US LNG exporters in the fourth quarter of 2021, have continued to ink new deals for US supplies since February 24.[20] Meanwhile, Reuters reported in June that China’s three major national oil companies were in advanced talks with Qatar about securing additional supplies under new long-term contracts.[21] These developments, in addition to diversifying China’s import portfolio, may also provide China with leverage in future supply negotiations with Russia, notably over the Power of Siberia 2 pipeline.

Third, Chinese companies might be holding off on signing new long-term oil supply contracts with Russian firms until they see how changes in how Russian oil is sold on the international market unfold. Specifically, in May, US Treasury Secretary Janet Yellen proposed that oil importing nations cap the price at which Russian oil is sold to reduce Russia’s oil export revenues and lower energy costs.[22]  On September 2, the G7 formally endorsed the idea, which would allow companies that transport Russian oil sold at prices below the cap  to have continued access to UK insurance companies, which cover 95% of the global oil shipping industry.[23]

China’s oil importers are likely to comply with the price cap, especially if it enables them to purchase Russian crudes at even lower prices. However, Beijing is highly unlikely to voice support for the G7’s initiative given its aversion to Western sanctions. Indeed, when a reporter from a Russian news agency asked Mao Ning, a spokesperson for China’s Ministry of Foreign Affairs, if China would support the price cap, he declined to endorse the initiative, stating that “we hope relevant countries will make constructive efforts to ease the situation through dialogue and consultation, instead of doing the opposite.[24]

In the more than six months since the start of the war in Ukraine, Chinese companies have opportunistically purchased discounted fossil fuels from Russia but have stopped short of signing new long-term supply contracts or acquiring stakes in Russian energy companies and projects. As a result, China is providing Russia with an economic lifeline of sorts through its elevated energy purchases, which increase Russia’s energy export revenues. However, the absence of major new energy deals to date has deprived Putin of opportunities to remind the West that it is not completely isolated on the world stage. So, China has been a friend to Russia but perhaps not yet as good a friend as Moscow would like.