Have Sino-Russian energy relations hit a wall?

Deepening Sino-Russian relations have raised concerns that Western interests may face increasing challenges on the international stage. However, with the energy landscape changing, the boundaries of the “no-limits” partnership are being tested.

Key takeaways:

Since the turn of the 21st century, deepening Sino-Russian relations have become a growing concern for Western policymakers. Given their shared communist histories, authoritarianism, and mutual suspicion of the United States and its allies, some analysts worry about the partnership’s potential to reshape the global order. However, others consider their relationship to be opportunistic, pointing to clashing great-power ambitions, historical tensions, mutual distrust, and a growing power imbalance as reasons to doubt the partnership’s potential to develop into a full alliance. Whatever the perspective, bilateral relations have been on an upward trajectory. With Russia’s abundant natural resources fueling the Chinese industrial machine, energy has been a key pillar of cooperation. However, as the landscape shifts, we are beginning to witness stagnation in energy relations.

A marriage of convenience–energy cooperation prior to the war in Ukraine

Throughout the second half of the 20th century, Sino-Russian relations were strained by ideological tensions and border clashes. However, the Soviet Union’s collapse in 1991 opened the door for both sides to begin resolving their disputes. Vladimir Putin’s appointment as president in 1999 marked a key turning point, as his recognition of China’s growing strategic importance paved the way for increased collaboration. By the mid-2000s, agreements had been signed on major energy projects, including several oil and gas pipelines. Following the 2008 Russo-Georgian War and the 2014 annexation of Crimea, any remaining hope for Russia’s integration with the West faded, making stronger ties with Beijing an increasingly critical component of Russian foreign policy.

China’s unprecedented population growth over the past 70 years and the economic reforms since the late 1970s fueled its rapidly expanding industrial base, driving demand for oil, natural gas, and coal. Despite substantial domestic energy production, particularly in coal and oil, Beijing’s high consumption rates necessitated seeking external sources. Russia proved to be a valuable trading partner, able to export vast quantities of energy through diverse routes, including pipelines, rail, and seaborne shipping. China’s energy security has been bolstered by reduced reliance on energy transported through maritime chokepoints like the Strait of Hormuz and the Malacca Strait, lowering the risk of a blockade disrupting its energy supply and economy.

China and Russia have collaborated on several significant infrastructural energy projects. In 2019, China National Offshore Oil Corporation (CNOOC) and China National Petroleum Corporation (CNPC) acquired a 20% stake in the Arctic LNG 2 project, a liquefied natural gas (LNG) initiative led by Russia’s Novatek. Another prominent example of Sino-Russian cooperation is the Power of Siberia 1 (PS-1) natural gas pipeline, which became operational in 2019 under a $400 billion contract between Russian state-owned company Gazprom and CNPC. Beijing also benefited from using yuan-based transactions for these projects instead of the US dollar, furthering the internationalization of China’s currency.

A multitude of obstacles–bilateral energy relations since the war in Ukraine

When Russia launched its full-scale invasion of Ukraine in February 2022, many expected a swift outcome similar to 2014, when Russian forces occupied Crimea in a matter of weeks. However, Putin did not anticipate the strong Ukrainian resistance and the united Western response. With relations between the West and Russia plummeting to their lowest since the Cold War, Europe rapidly reduced its reliance on Russian oil, coal, LNG, and natural gas. According to the International Energy Agency, the proportion of energy sourced from Russian fossil fuels within the European Union dropped from 20% to 5%. As Europe increasingly sources its energy from the United States, Norway, Qatar, and North Africa, the Russian war machine has lost a critical revenue stream.

On the surface, China seems like an obvious solution to Russia’s need for new markets. However, Russia’s attempts to expand energy ties since the Ukraine invasion have met with Chinese opportunism and caution. Capitalizing on Russia’s predicament, Beijing has increased imports of discounted Russian crude oil, LNG, and coal. An agreement to supply gas along the Far Eastern route by 2027, with a planned initial capacity of 10 billion cubic meters per year, marks additional progress in bilateral energy cooperation. Nonetheless, Moscow had hoped for more substantial agreements. Putin has openly expressed his desire to strengthen energy ties, particularly through the stalled Power of Siberia 2 (PS-2) natural gas pipeline project, under negotiation since 2020. While PS-2 could potentially offset half of the revenue lost from Europe, China has been slow to commit, with several factors impeding progress.

Despite the “no-limits partnership” established between the two countries, China is in no rush to deepen its energy portfolio with Russia. With Moscow’s urgent need to secure new markets weakening its bargaining power, Chinese officials understand that a prolonged conflict in Ukraine increases the likelihood of even steeper energy discounts from Russia. Additionally, the conditions that once spurred China to seek out new energy deals have shifted. Previously, China’s rapidly expanding economy and industrial base drove rising energy consumption and the need for new suppliers. Now, with demand largely met through domestic production and existing imports, China has less need for new ventures. China’s aging population and slowing economy are expected to cause national energy demand to peak before 2030 and decline by 20% by 2050. Moreover, China’s commitment to diversifying its energy supply aligns poorly with increasing dependence on Russia; the combined capacity of both Power of Siberia pipelines would nearly match China’s current total natural gas imports from all other sources.

Though the West is China’s primary international rival, it also remains the country’s largest customer. With an export-driven growth model, the CCP is wary of antagonizing the West, as this could threaten trade relations and economic stability. Following Russia’s invasion of Ukraine, the United States, UK, EU, and other nations imposed over 16,500 sanctions on Russia, including freezing $350 billion of foreign currency reserves, excluding Russian banks from SWIFT (the global financial transactions network), blocking technology exports that could be used for military purposes, and (partly )banning imports of Russian energy. With the ongoing trade war, China is particularly cautious of further US sanctions. In early 2024, the Biden administration imposed sanctions on Beijing and Hong Kong-based banks and companies accused of aiding Moscow. Expanding energy ties with Russia risks triggering additional sanctions, including technology export controls, financial restrictions, trade limitations, and asset freezes. Unsurprisingly, Chinese entities are cautious in their approach to energy relations with Russia.

China’s energy transition adds another dimension to Beijing’s evaluation of business dealings with Russia. As the world’s largest greenhouse gas emitter, China has shown signs of taking its green policies more seriously, with moves that could be detrimental to Russia’s fossil fuel ambitions. Approvals for new coal-fired power plants sharply declined in the first half of 2024, and recent guidelines issued by the CCP in August 2024 set green targets for 2030. China has become a leader in clean energy technology development and production, investing an impressive $890 billion in 2023, with an emphasis on the ‘new three’ industries of solar power, electric vehicles, and batteries. Although the CCP will prioritize economic stability over green initiatives, the growing importance of clean energy in China’s economy is likely to cause concern for the Kremlin.

An uncertain road ahead

China is navigating a complex balancing act: it seeks to support Russia while also exploiting its vulnerabilities and appeasing the West, even as it aims to curb Western influence on the global stage.  As expanding energy relations with Russia remains a possibility for the CCP, Putin has continued to push for the Power of Siberia 2 (PS-2) pipeline and broader energy cooperation during recent state visits. Despite Chinese President Xi Jinping’s October 2024 trip to Russia—his third meeting with Putin this year—no progress has been made on PS-2. Without significant concessions from Russia, likely in the form of discounts, Sino-Russian energy relations will likely remain in a state of ambiguity.

External actors, particularly the US and Europe, will continue to shape the trajectory of the cooperation between Moscow and Beijing in this area. While it is not inevitable that China and the West will remain on a collision course, further deterioration in relations could increase the likelihood of Beijing strengthening its ties with Moscow. Should Western sanctions against Russia escalate to a certain level, Chinese policymakers may judge that the benefits of deepening energy ties with Russia outweigh the risks, which would largely have already materialized at that point. Given the numerous points of contention between the West and China, this scenario remains a tangible possibility.