Three informed sources revealed that negotiations for a major natural gas pipeline agreement between Russia and China have hit a deadlock. This is because Russia believes that the Chinese authorities have made unreasonable demands in terms of price and supply levels.
For years, Russia and China have been in talks to construct the “Power of Siberia 2” pipeline, with Russia aiming to transport 500 billion cubic meters of natural gas annually from the northern Yamal region through Mongolia to China.
China’s firm stance on the pipeline issue highlights that after the outbreak of the Ukraine war, Russia has increasingly relied on China for economic support.
Sources told the Financial Times that China’s demanded price is nearly the same as Russia’s heavily subsidized domestic price, and China only commits to purchasing a small portion of the 500 billion cubic meters of gas to be exported annually.
Due to a sharp decline in natural gas sales to Europe, Russian state-owned gas company Gazprom suffered a loss of 629 billion rubles (approximately $6.9 billion) last year, marking its largest loss in 25 years. Russia hopes that the pipeline can help alleviate Gazprom’s difficulties.
Sources stated that the pipeline agreement was one of the three key demands proposed by Putin during the recent meeting between Chinese and Russian leaders. The other two demands include wanting Chinese banks to expand activities in Russia and asking China to refuse to participate in the peace conference organized by Ukraine this month.
However, Gazprom CEO Alexei Miller did not accompany Putin on his visit to Beijing.
Tatiana Mitrova, a researcher at the Center on Global Energy Policy at Columbia University, emphasized the symbolic significance of Miller’s absence, stating that Miller is essential for any serious negotiations.
Last Friday, China announced that it would not participate in the summit held in Geneva, Ukraine. However, sources added that the pipeline agreement remains uncertain, and the proposed cooperation scale with China’s banks is still far below Russia’s requirements.
Alexander Gabuev, director of the Carnegie Russia-Eurasia Program in Berlin, believes that Russia’s failure to reach this deal highlights China’s calculations. Gabuev said to the Financial Times, “China (CCP) may strategically need Russian natural gas as a secure supply source. Once maritime conflicts occur around Taiwan or the South China Sea, maritime routes may be affected.”
“However, to make all this more valuable, China indeed needs very cheap prices and flexible purchase obligations,” he added.
Gabuev noted that Russia does not have any other land-based natural gas export routes, which means that Russia may ultimately have to accept Beijing’s conditions.
“China (CCP) believes that time is on its side and can slowly squeeze the best conditions from the Russians,” Gabuev said.
“The gas fields have already been developed, and pipeline construction is progressing rapidly. In the end, Russia has no other choice but to sell this natural gas,” he concluded.
Prior to the Russia-Ukraine war, Russia relied on high-priced natural gas sales to Europe to subsidize the domestic market.
However, Russia’s exports to Europe have rapidly declined from an annual average of 230 billion cubic meters in the decade before the invasion of Ukraine to 22 billion cubic meters in 2023. Export volumes by the end of this year may further decrease.
Failure to increase supply to China would be a significant blow.