China and Russia’s supposed “no-limits” partnership has hit a wall over electricity and natural gas prices, a commercial spat that begs questions about the health of the wider strategic relationship.
Russian state-owned energy firm InterRAO has restricted electricity supplies to China’s northeastern region since the beginning of this month due to China’s refusal to pay a 7% price hike.
Separately, China has also reportedly refused to give final approval for the Power of Siberia 2 pipeline project, designed to ship Russian natural gas to China via Mongolia, while Beijing and Moscow haggle over gas shipment prices.
China is Russia’s largest electricity export market outside of the Eurasian Economic Union, which groups Russia and several other former Soviet states.
Last month, Russia announced the introduction of export duties linked to the rouble exchange rate on a wide range of goods including oil and gas. The duty rate will range from 4% to 7% if the rouble is weaker than 80 per US dollar; it is currently trading at around 98 to the dollar, Reuters reported.
In late September, InterRAO said it would raise electricity prices on October 1 by 7% for customers in China, Mongolia, Azerbaijan and the breakaway Georgian region of South Ossetia.
Some Chinese commentators have opined that Russia’s electricity price hike is unreasonable while noting that Russia sells crude oil to India at a heavier discount than it allows China.
Before the Russia-Ukraine war broke out in February 2022, the Russian rouble had floated at around 75 rubles per dollar for about two years. In March last year, however, the ruble collapsed to 134 per dollar due to Western sanctions but then strongly rebounded to 54 per dollar in June as questions about the efficacy of sanctions rose.
The ruble had eased again to around 80 in April this year and has been trading at around 100 since August.
On October 2, the InterRAO said it had successful negotiations with Mongolia, which agreed to pay the higher prices. The state firm said it was still negotiating with China and has started to impose partial supply restrictions while negotiations are ongoing.
“Although China and Russia are deepening their cooperation in many areas, it does not mean that their interests are completely aligned on all issues,” Lu En, a Fujian-based writer wrote in an article published on October 4. “In addition to electricity prices, we can also see this complex game from Russia’s multiple price adjustments in oil and gas supply.”
“There is a risk for China to rely on a single energy source, especially when it comes to energy supplies that affect the country’s lifeline,” Lu says.
He wrote Russia’s latest electricity price hike is not in China’s long-term interest and has reminded Beijing to adhere to a diversified supply strategy while actively boosting strategic energy reserves.
Some other commentators said it’s normal for China and Russia to disagree on certain trade deals.
“When dealing with external trade, the Chinese government has always been very rational and has a clever mind,” a writer, who uses the pen name “Qianliyan” and claims to be an associate professor at the College of Literature and Journalism at China’s Sichuan University, says in an article.
“Friendship is one thing, business is another. This should be the right attitude,” he says. “In fact, [Russian President Vladimir] Putin did not ask for anything from China. We know that the negotiation about the electricity price hike has not yet been raised to a diplomatic level but has stayed within the power sector.”
Qianliyan says China and Russia’s “good friendship” will not be undermined by a few deals, such as electricity export prices or the pricing of natural gas in the Power of Siberia 2 project, which is designed to deliver Russian gas to China via Mongolia but is still under negotiation. He opines that disagreements in Sino-Russian trade should not be exaggerated.
Power crunch
Since 1992, China’s Heilongjiang province has imported electricity from InterRAO via the Blagoveshchensk-Heihe power cable. Two more cables commenced operations in 1996 and 2006. Combined, the three can ship up to 7 billion kWh of electricity per year.
After China suffered from a nationwide power crunch in September 2021, it opted to buy more electricity from InterRAO. According to the National Energy Administration, Russia’s electricity supplies to China grew 1.4% year-on-year to 2.38 billion kWh in the first three quarters of 2021. But in the last quarter of the same year, the figure surged by 1.64 billion kWh, resulting in 134% more power imports than the planned 700 million kWh.
Russia’s electricity supplies to China reached a record-breaking high of 4.7 billion kWh in 2022, representing 4.1% of Heilongjiang’s total electricity consumption (113.9 trillion kWh) that year.
Chinese media have noted that Russia’s past electricity prices have been highy competitive. They said InterRAO sold 3 billion kWh of electricity to China for 776 million yuan (US$108 million), or 0.26 yuan per kWh, in 2019. Over the same period, Heilongjiang-based power plants sold electricity at 0.374 yuan per kWh, 44% more expensive than Russian imports.
On February 4 last year, Russian President Putin and Chinese President Xi Jinping declared a “no limits” friendship, an announcement that was followed by Russia’s invasion of Ukraine the same month.
But after Russia suffered setbacks on the battlefield with no end in sight to the fighting, Fu Cong, Chinese ambassador to the European Union, recently said that “no limit” was more rhetoric than reality.
Power of Siberia 2
Those bilateral limitations are also seen in the stalled Power of Siberia 2 pipeline project. In July last year, Mongolian Prime Minister Oyun-Erdene Luvsannamsrai said the pipeline’s feasibility study had been completed and that construction would begin in 2024. The pipeline is scheduled for completion in 2028.
However, as of now, China has refused to give its final green light for the project while it remains locked in negotiations with Russia on gas prices.
“The more urgent Russia wants to close the deal, the less confidence the country has. We should better stay calm and wait,” a Henan-based writer says in an article published in August.
“Due to the Ukrainian situation, European countries reduced their dependence on Russian oil and gas while many countries do not dare to have commodity trade with Russia due to pressure from the United States and NATO,” he says.
“China is different. We are the world’s second-largest economy and a military power and are not afraid of the United States’ threat,” the Henan-based writer opines. “We have time and energy to wait until Russia agrees to cut gas prices.”
“Although Russia and China are obviously allies, trade benefits should always come first. Russia also has its own calculations. For example, it sells oil to China at US$80 per barrel and to India at only US$35 per barrel,” he claims, while saying that Russia is taking advantage of China.
A Shanghai-based columnist says that apart from price and cost issues, China also has geopolitical concerns.
“The fact that the gas pipeline will pass through Mongolia is an uncertainty,” he says. “If Mongolia wants to ship rare earths to the US and is rejected by China in the future, will it shut down the pipeline?”
Besides, he says, China should diversify its energy supply sources and not over-rely on Russia, which faces massive economic uncertainties caused by the Ukraine war.
In early August, Mongolia signed an “open skies” agreement with the US, a deal that could facilitate the future air shipment of rare earth minerals to the US. But Chinese pundits have said landlocked Mongolia must seek approval from China and Russia for such a plan.
Read: US-Mongolia aviation pact as a rare earths hedge
Read: Power of Siberia 2 to divert Europe-bound gas to China
Follow Jeff Pao on Twitter at @jeffpao3