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Russia’s attempts to sign a major gas pipeline deal with China have stalled because Moscow sees Chinese demands on price and supply levels as unreasonable, three people familiar with the matter said.
Beijing’s hardline stance on the “Power of Siberia-2” pipeline underscores how Russia’s invasion of Ukraine has made President Vladimir Putin increasingly reliant on Chinese President Xi Jinping for economic support.
China is seeking to pay close to Russia’s heavily subsidized domestic prices and has pledged to buy only a small fraction of the pipeline’s planned annual gas capacity of 50 billion cubic meters, people familiar with the matter said.
If approved, the pipeline would link the Chinese market to gas fields in western Russia that once supplied Europe, reversing the dismal fortunes of Gazprom, Russia’s state-run natural gas export monopoly.
Gazprom suffered a loss of 629 billion roubles ($6.9 billion) last year, its biggest in at least a quarter-century, as gas sales to Europe, which has been more successful than expected in moving away from Russian energy sources, fell sharply.
While Russia insists it is confident of reaching an agreement on Siberian Power 2 in the “near future,” two of the people said the impasse was the reason Gazprom’s chief executive, Alexei Miller, did not accompany the Russian president on a state visit to Beijing last month.
Tatyana Mitrova, a research fellow at Columbia University’s Center on Global Energy Policy, said Miller, who was visiting Iran, would have been a key presence in any serious negotiations with China and his absence was “highly symbolic”.
The pipeline agreement was one of three main demands Putin made in his meeting with Xi, the others including expanding Chinese banking activities in Russia and China ignoring a peace conference being held in Ukraine this month, according to people familiar with the matter.
China said on Friday it would skip a summit with Ukraine leaders in Geneva. Two of the people said Beijing and Moscow were in talks to isolate one or more banks that finance transactions of parts for Russia’s defense industry, which would almost certainly face U.S. sanctions and cut them out of the global financial system.
But a pipeline agreement remains a long way off and proposed cooperation with Chinese banks remains much smaller than Russia had requested, the people added.
The Kremlin did not immediately respond to a request for comment, and Gazprom declined to comment.
Russia’s failure to secure an agreement underscores how the Ukraine war has made China a key partner in bilateral relations, according to Alexander Gabuev, director of the Carnegie Russia and Eurasia Center in Berlin.
“China may have a strategic need for Russian gas as a safe source of supply that is not based on sea routes that would be affected in the event of a maritime dispute around Taiwan or the South China Sea,” Gabuev said. “But to make it worthwhile, China really needs very low prices and flexible obligations.”
China’s demand for imported gas is expected to rise to about 250 billion cubic meters by 2030, from less than 170 billion cubic meters in 2023, according to a paper published in May by Columbia University’s CGEP.
The report said 2030 demand levels could still be largely or fully met through pipeline supplies and existing contracts for liquefied natural gas, but by 2040 the gap between China’s import needs and existing contracts will reach 150 billion cubic meters.
Gabuev said Gazprom would probably have no choice but to accept China’s terms because Russia has no alternative land routes for exporting natural gas.
“China believes time is on its side. It can afford to wait to extract the best terms from Russia and wait for the focus on Sino-Russian relations to shift elsewhere,” he said. “The pipeline can be built fairly quickly because the gas fields are already developed. After all, Russia has no other options to sell this gas.”
Before the Ukraine war, Gazprom relied on selling gas to Europe at inflated prices to subsidize Russia’s domestic market.
China is already paying Russia less for natural gas than other suppliers, with an average price of $4.4 per million British thermal units, compared with $10 in Myanmar and $5 in Uzbekistan, CGEP researchers calculated using customs data from 2019-21.
During the same period, Russia exported gas to Europe for about $10 per million Btu, according to data released by the Russian Central Bank.
Gazprom’s exports to Europe fell to 22 billion cubic meters in 2023 from an average of 230 billion cubic meters in the decade before the full-scale invasion of Ukraine. Exports are likely to fall further when a transshipment agreement with Ukraine expires at the end of this year.
A failure to reach an agreement on increased supplies to China would be an even bigger blow.An unpublished report from a major Russian bank seen by the Financial Times recently excluded Power of Siberia-2 from its baseline forecast for Gazprom, cutting the company’s projected profits by nearly 15% in 2029, when the bank expected the project to start up.
China did not immediately respond to a request for comment.
