Russia to China gas deal is more than just a story of global markets and geopolitics (see my colleague Ken Medlock’s piece on the deal’s impact on global and Asian gas markets, and Jim Krane’s piece on global geopolitical implications of the negotiations). The gas pipeline between China and Russia also represents concrete personal achievements that Vladimir Putin and Xi Jinping can point to in defending their authoritarian policies against criticism from home and abroad. Meanwhile, behind the scenes, the gas deal is a game of spigots: a well-timed effort by both Russia and China to simultaneously inject resources in to ailing national oil and gas companies (NOCs) in exchange for new political control over these flagship state enterprises.
The comrades in both Beijing and Moscow have not been happy campers in recent years. Last year’s belated amnesty for Pussy Riot protestors and the freeing of the Russian oligarch who first planned to take Siberian oil and gas to China, Mikhail Khodorkovsky, in the run-up to the Sochi Olympics was soon followed, after the athletes had returned home, by crackdowns on Russia’s most prominent protest leaders who took to the streets in 2014 to denounce Putin’s invasion of Ukraine. Key protest leaders such as Alexei Sakhnin have had to join Khodorkovsky in exile in Western Europe. Putin’s negotiations with China that will take otherwise unused Siberian natural gas and ship it first to Russia’s far eastern port, Vladivostok, and then to China, represents one shining enterprise that Putin can show to his critics. The lesson will be: strength and determination can create valuable jobs for Russians, especially in historically impoverished and under-developed Siberia, and the Russian strong man can bring home the bacon even after negotiations with “the wily Chinese”.
Xi Jinping’s clout will get a comparatively greater boost from the Russia-China gas deal, because his policies since he took leadership of the Chinese Communist Party have turned his idea of a “Chinese Dream” in to a nightmare for most Party members. Vowing to end the image of the party as a network of corrupt cadres, Xi has led wave after wave of investigations that have prosecuted tens of thousands of Party members at all levels of the Party and government, often subjecting them to internal Party investigations that effectively deprive the cadres of any due process rights. The prosecution of former Politburo member Bo Xilai last year, the foreign reports alleging the corruption of former Prime Minister Wen Jiabao, and the ongoing investigation of former Politburo Standing Committee member and intelligence czar Zhou Yongkang, have left many Chinese wondering if there are any “honest and upright” officials left in Beijing. The Russia-China gas deal is a sign that Xi Jinping is stronger than past Party leaders, who have tried and failed for many years to diversify critically-needed energy supplies to include Siberian oil and gas.
In both Russia and China, the national oil and gas companies are commonly viewed as corrupt and incompetent, even as they are key sources of revenue for central governments. The Russia-China gas deal is thus a win-win for both Xi Jinping and Vladimir Putin: a chance to clean house within and at the same time strengthen these key central enterprises by demonstrating their critical importance to the energy security of both export economies.
China’s CNPC has lost its most important political patron, Zhou Yongkang, in the ongoing investigations that have already brought down many senior leaders in the oil company, and its incompetence has deprived it of other senior leaders. Carcinogenic benzene leaks from CNPC facilities in April this year forced the 2 million inhabitants of Lanzhou in Western China to switch to bottled water, a sad reminder of the CNPC benzene link at a factory in Harbin in Northeast China in 2005 that forced 5 million Chinese and many Siberian Russians to seek other sources of clean water. Meanwhile, in their desire to jump-start shale gas production, central planners in China have brought local and provincial state firms, and even private firms, in to the energy exploration and production sector in order to put competitive pressure on CNPC and its two NOC sisters, Sinopec and CNOOC. CNPC has been losing credibility and resources to competitors in recent years, but Xi Jinping’s approval of the Russia-China gas deal can help revive its much-tarnished reputation. Because massive investments in China’s state enterprises always leads to tighter control over leadership appointments within these companies, the Russia-China gas deal is both an economic and a political shot in the arm of an ailing energy giant.
Putin is playing a similar game of spigots with Russia’s energy companies. Gazprom, the state-owned gas giant and pipeline monopoly, has long been losing domestic market share to state-owned competitor Rosneft and private-owned Novatek. And as with shale gas incentives offered to domestic competitors in China, Russian legislators in 2013 empowered these two companies to compete with Gazprom by granting them authority to export gas from Russia via LNG, although they maintained Gazprom’s monopoly over gas pipeline exports. Putin’s Russia-China gas deal will certainly bring new resources to Gazprom through access to the lucrative Chinese market. And in return we will likely see more Putin control over Gazprom, which is now dependent on the strongman to maintain its very important ties to the enormous Chinese market.
And this is likely to be the most visible long-term impact of such a high-profile economic deal struck by two strong political figures: they will likely shuffle leaders and restructure Gazprom and CNPC management as they see fit in order to make this deal strengthen their reputations as firm, decisive national leaders. We must wonder: will Russia continue its policies to encourage Novatek and Rosneft to export LNG to Asia, or will it double down and try harder to protect Gazprom? Will China now go ahead with gas pricing reforms that pass on international gas market prices to Chinese enterprises and consumers, who are accustomed to price controls that benefit them, or will it continue to make CNPC and the other NOCs foot the bill for cheap domestic gas? Now that China has one more major pipeline source of natural gas, will it allow CNPC, Sinopec and CNOOC to continue their aggressive search abroad for sources of LNG? Finally, if North China gets most of its gas from Russia and Central Asia, will military leaders in Beijing come to think that the national economy is less dependent on LNG coming through the South China Sea, and thus they can be more bold and adventurous in that contentious arena?
Post by Steven W. Lewis, C.V. Starr Transnational China Fellow, Rice University’s Baker Institute
