China-Russia gas pact heightens Western sanctions risks

The recent negotiation breakthrough for constructing the Power of Siberia 2, which will transport 50 billion cubic meters of Russian natural gas to China via Mongolia annually, is expected to significantly change the geopolitical landscape and energy markets, according to Chinese and Western analysts.

On September 2, China, Russia and Mongolia signed a legally binding memorandum of understanding (MOU) to build the Power of Siberia 2 natural gas pipeline. The development signifies China’s acceptance of Russia’s proposal to route the pipeline through Mongolia, along with Russia’s agreement to offer China a discount on its natural gas.

Chinese commentators had in recent years complained that having the pipeline go through Mongolia would threaten China’s energy security as the landlocked country might lean to the West and shut down the pipeline at a critical moment. Now they praise this deal as a “win-win” for Beijing and Moscow.

“The biggest obstacles in the Power of Siberia 2 negotiations were the route selection and price agreement,” said Li Lifan, Director of the Shanghai Cooperation Organization Research Centre at the Shanghai Academy of Social Sciences. “China and Russia eventually compromised, with China accepting the Mongolian route and Russia offering concessions on gas prices and transit fees.”

Li said the deal has strategic significance as it will raise total annual Russia-China gas trade to 106 billion cubic meters, about one-fifth of China’s current gas demand.

He highlighted three major benefits arising from this deal:

• Broader energy cooperation: The Shanghai Cooperation Organization’s energy roadmap will expand beyond pipeline gas to include diversified energy sources, with future collaboration on liquefied natural gas also envisaged as a key component of China-Russia energy ties.
• Economic gains for Mongolia: The pipeline will give Mongolia a vital opportunity to diversify its economy, bringing in lucrative transit fees, creating jobs, reducing air pollution and raising its geopolitical profile.
• Geostrategic realignment: The pipeline is set to reshape the Eurasian energy map. Once it begins operation around 2031–2032, Russia will become China’s most crucial and reliable energy supplier.

He cautioned that the project still faces risks, citing possible Western influence and Mongolia’s “Third Neighbor” policy for building relationships with countries other than China and Russia. He added that cooperation among China, Russia and Mongolia could enhance regional stability and economic growth.

Why the deal happened

The signing of the MOU was first disclosed by Gazprom and Russian state media, which said Moscow had agreed to supply China with 50 billion cubic meters of gas annually via the new Power of Siberia 2 for 30 years. Gazprom Chief Executive Alexei Miller told the news media that separate commercial arrangements were also reached to expand deliveries on existing routes. 

Beijing has so far avoided directly commenting on the deal or releasing further details. Chinese Foreign Ministry spokesperson Guo Jiakun said on September 2 that “China and Russia carry out practical cooperation in various areas, including energy, under the principles of mutual respect and mutual benefit.”  

On September 3, Russian President Vladimir Putin met with Chinese President Xi Jinping during the China Victory Day parade in Beijing.

A Hebei-based energy columnist argues that China secured the upper hand in the negotiations because Russia was under mounting pressure from its faltering economy, Western sanctions and the protracted war in Ukraine. 

“The key reason China softened its stance this time is that Russia made an unprecedented price concession,” the writer says. “If the gas becomes cheap enough, then using the Mongolian route makes economic sense.”

He also notes that this land route via Mongolia could lower potential geopolitical risks as it would allow China to reduce its heavy reliance on LNG shipments through the vulnerable Strait of Malacca. He says having a secure overland corridor is seen as a major strategic gain for China in today’s uncertain global environment.

“Russia guarantees that if Mongolia causes trouble, China will use an alternative route – Russia will shoulder the extra cost to redirect the gas via Kazakhstan,” a Hunan-based columnist known as “Little Jiaxin” writes. “With this fallback clause in place, China finally felt assured. Without it, the talks could never have progressed this far.”

She adds that this promise effectively removed the geopolitical risk that had haunted negotiations for over a decade.

Last year, China proposed a Kazakhstan route as an alternative, but Moscow saw it as too long and expensive compared with the shorter, cheaper Mongolian route.

Geopolitics and Western response

Some Western analysts say Beijing’s unwillingness to confirm the deal showed that the Chinese side is not in a hurry to reach a final agreement. However, some observers believe China is simply keeping a low profile to avoid Western sanctions and tariffs. 

In fact, the Power of Siberia 2’s planned capacity of 50 billion cubic meters a year is similar to that of the now-defunct Nord Stream 1 pipeline, which once supplied Europe with 55 bcm annually. 

Before invading Ukraine in February 2022, Russia exported more than 150 bcm of gas to Europe each year through a web of major pipelines, including Nord Stream across the Baltic Sea, Yamal-Europe through Poland, TurkStream under the Black Sea and the older transit route via Ukraine. 

After the invasion, Germany has halted the Nord Stream 2 project, which would have doubled direct Russian gas flows to Germany to 110 bcm per year. The EU has slashed its reliance on Russian energy. As a result, EU imports of Russian gas fell from 150 bcm in 2021 to 52 bcm last year, with the share of Russian gas in Europe’s energy mix collapsing from 45% to 19%.

The decline has prompted Moscow to pivot east, primarily toward China. Beijing welcomes cheap gas, but it does not want to upset the EU, which suffers from high energy and defense costs due to a prolonged Ukraine war. 

The latest Power of Siberia 2 deal came after US President Donald Trump last month pushed for a ceasefire deal between Moscow and Kyiv. Trump also imposed a 25% tariff on India for its purchases of Russian oil. The US did not do the same to China, as both sides were negotiating chip and rare earth supply deals. 

Two analysts from the Atlantic Council’s Global Energy Center — Joseph Webster and Landon Derentz — co-write that the Power of Siberia 2 deal could undermine Western efforts to contain Russia’s war in Ukraine.

“China is Russia’s most important trade partner and provides indispensable defense industrial base support to Moscow,” they wrote. “Any further natural gas tie-in risks prolonging the war in Ukraine by sustaining Russia’s economy and bolstering Putin politically.”

They say “the United States and its European allies should jointly consider targeted secondary sanctions against Russian energy companies, Chinese firms aiding the Russian war effort, or both.”

Meanwhile, US officials have reportedly signalled that Washington will urge G7 partners to consider imposing sweeping tariffs of 50% to 100% on both Chinese and Indian purchases of Russian oil, seeking to curtail the energy revenues sustaining Moscow’s war effort. 

Read: Power of Siberia 2 to close deal – or re-route?

Follow Jeff Pao on Twitter at @jeffpao3