War has many layers. There is the outermost layer, comprised of both sides’ soldiers and artillery power. Moving inward, there are more stealth components, and once that onion is fully peeled, you get to the financing. Someone has to pay for all that stuff, and in the case of Russia, they rely on gas and oil sales to finance their activities in Ukraine.
The world’s response to the Russian invasion of Ukraine was swift. Major governments and companies sought to cut ties, ending trade and commercial ties with the hopes of imperiling Mr. Putin’s advances. To some extent this worked, although recent developments have shown just how resilient and dogged Russian forces are. At this time last year, China was a major buyer of US natural gas. Fast-forward to today, and that has shifted dramatically. Post-invasion, Europe cut Russian gas imports which provided US gas providers a new clientele base. Simultaneously, China’s energy demands declined due to a slowing economy, but it also found a cheaper gas provider in Russia due to the deep discounts the Kremlin had to offer based on decreasing European demand for Russian gas.
Digging into the numbers it’s been an astonishing turn of events. Between February and April of this year, China’s natural gas imports from the US plummeted by 95% (compared to the same period in 2021). To make up for this, imports of Russian gas grew by roughly 50%. Chinese-Russian relations have a complex history. The two powerhouses share a 2,700-mile land border and have been involved in countless skirmishes both locally but also through proxy wars abroad. Yet, most analysts agree that Russia and China are currently enjoying their best relations since the 1950s.
In 2014 a pipeline was approved linking China with eastern Russian gas fields. Approximately 38 billion cubic meters of gas were slated to be sold annually. It’s a large number, but nothing compared to the 155 billion cubic meters that the European Union purchased from Russia just last year. China will likely learn from Europe’s stumbles not to place all their gas imports in one basket. Major European countries such as Germany were overly reliant on one supplier country (Russia), and that has not turned out well.
The war in Ukraine has undoubtedly moved Russia and China closer. Think tanks around the globe are hashing out whether this is a good thing for global stability. If anything, having Russia supply a larger portfolio of natural gas imports than before while simultaneously receiving US imports from small suppliers is certainly advantageous for China. Producers such as Dallas-based Energy Transfer LP have just inked two Chinese buyers for 3.4 million metric tons per year. This represents 60% of the total natural gas output from Energy Transfer’s Lake Charles, Louisiana project.
If this war has taught us anything it’s that the things all our economies require to function will continue to hold the greatest leverage.
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