Following Russia’s invasion of Ukraine on February 24, 2022, China has become more important to Russia as an energy partner. As Russia’s traditional customers have shunned Russian energy and Western oil companies have exited the country, Russia has looked to China to help fill the gap. In this Q&A, the authors assess the state of the bilateral energy relationship one year after the start of the war.
In 2022, China imported increased volumes of Russian energy (Figure 1):
There was no substantial increase in Russia’s dependence on China’s buyers in 2022 largely because during the first half of the year, both Russian sellers and Western buyers were trying to maximize Russian volumes before the announced Western embargoes took effect (August 10, 2022 for coal and December 5, 2022 for crude oil). Looking ahead, this could mean that Russia may rely more heavily on demand from China in the coming months.
China spent $81.3 billion on imports of Russian oil, coal, LNG, and pipeline gas in 2022, up from $52.1 billion in 2021. Most of this money—71.8 percent (about $58.4 billion)—was spent on oil (Figure 2). In 2022, the average price of crude imported from Russia was $92 per barrel, whereas the average price of China’s total crude imports excluding Russia was $99 per barrel.
The European Union’s (EU) embargo on imports of Russian seaborne crude oil on December 5, 2022 and the G7, the EU, and Australia ban on the shipping of Russian crude oil unless sold at or below $60 per barrel are accelerating the redirection of Russian seaborne crude oil exports from West to East. Although Beijing has not endorsed the price cap, China’s independent refiners are using it for leverage in negotiations with Russian counterparties. They are purchasing Russia’s Eastern Siberia–Pacific Ocean (ESPO) crude on delivered basis from traders who arrange shipping and insurance, insulating the refineries from any secondary sanctions related to the price cap.
In 2022, Russia’s seaborne crude exports to China averaged about 1 million bpd. In the two months following December 5, there was no increase in disclosed Russian exports to China, but the share of Russian exports with an “unknown destination” increased considerably, with news reports suggesting that most of this crude is likely to end up in China or India.
In August 2022, China’s ambassador to Russia, Zhang Hanhui, told Russian media that the use of China’s currency in bilateral trade settlement increased from 3.1 percent in 2014 to 17.9 percent in 2021. He also said that, against the backdrop of Western sanctions on Russia, China will continue to support the expansion of local currency settlement in bilateral trade. In September 2022, Russian President Vladimir Putin announced that China would pay Gazprom for natural gas based on a 50-50 split between the ruble and the yuan. In November 2022, Russian Prime Minister Alexander Novak said that payments for oil, oil products, and coal are also shifting to national currencies.
The share of Chinese equipment in Russia’s drilling rig market is likely to grow, steadily increasing from a baseline of around 25–30 percent in 2021, as Western companies leave the country. According to the former deputy director of the Department of the Ministry of Industry and Trade of Russia, Sergey Kononenko, Chinese equipment is increasingly entering Russia’s oil service market as a result of Western sanctions. Moreover, China is developing the capacity to produce equipment that Russia cannot make in sufficient quantities, such as equipment for drilling wells with a horizontal ending and for hydraulic fracturing. That said, China is not supplying sophisticated technologies such as gas turbines, electronics, or tankers.
However, China is supplying LNG modules to Russia’s Arctic LNG-2 project. In May 2022, there were reports that Chinese companies would have to stop work on the project due to EU sanctions. In October 2022, observers reported that Chinese manufacturers were trying to deliver modules before their contracts expire.
PoS-1: On December 7, 2022, a new section of the PoS-1 pipeline connecting the Chinese cities of Tai’an and Taixing began operation, allowing Russian gas to reach Shanghai. On December 22, 2022, Gazprom launched the operation of the Kovykta field, which will supply gas to the PoS-1 pipeline. Previously, the sole source of supply for this pipeline had been the Chayandinskoye field, which alone was not enough to fill PoS-1 to its full capacity of 38 bcm.
PoS-2: Little progress has been made on Soyuz/Vostok since January 25, 2022, when Gazprom announced that it had completed the feasibility study of the proposed 960-kilometer pipeline, which is intended to deliver up to 50 bcm of gas to China through Mongolia. On February 28, 2022, Gazprom announced that Soyuz/Vostok had entered the design phase after its chairman met with the prime minister of Mongolia. During the meeting, the two sides signed an action plan for 2022–2024. However, Gazprom has not signed a supply agreement with China, where there have been concerns about the pipeline transiting a third country that is not a gas supplier.
PoS-3: On January 31, 2023, Moscow and Beijing signed an intergovernmental agreement on the delivery of gas to China via the “Far Eastern Route.” The agreement defines key parameters of a 10 bcm per year gas supply contract inked by Gazprom and China National Petroleum Corporation (CNPC) on February 4, 2022. The new agreement notes that Russia and China support the use of their national currencies for payments under the contract.
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