The pipeline comes after China unveiled a plan nearly two years ago called the “Polar Silk Road,” expanding its campaign for influence to the Arctic. The resource-rich region is at the heart of the geopolitical battle and struggle for influence. As Moscow’s relationship with Western countries becomes more frail, Russian business leaders look for more economic opportunities with China, especially in energy. Grace Shao specially for CNBC.
A new natural gas pipeline connecting Russia and China is the latest example of increasing collaboration between Moscow and Beijing in the Arctic Circle.
The pipeline comes after China unveiled a plan nearly two years ago called the “Polar Silk Road,” expanding its campaign for influence to the Arctic. While Beijing has branded itself as a “near-Arctic state,” that far-stretched claim on the region is dependent on its partnership with Russia.
In a $400 billion deal signed in 2014, the 3,000 km long “Power of Siberia” pipeline stretches from Russia’s Siberian fields to China’s historically coal-burning northeast.
″(The pipeline) diversifies import supplies for China. It will be very competitive gas at the border and I think gradually improves gas penetration for the northeast part of China,” said Scott Darling, head of Asia Pacific commodities research at J.P. Morgan.
That region is an attractive market for Russia, as it “has low affordability for high-priced gas” compared with regions farther south which already have “well-established gas markets” with a diverse supply mix, IHS Markit said in a Monday report.
“New exports to this rapidly growing gas market is a growth strategy for the company,” but the European market will still remain a “top priority,” IHS said.
Reuters reported that Russia’s Gazprom expects the LNG pipeline to initially supply 4.6 billion cubic meters (bcm) of gas in 2020 before ramping up to its full capacity of 38 bcm by 2025.
Darling told CNBC’s “Squawk Box” on Monday that one of China’s goals is to find cheaper, cleaner and greener alternatives to meet its high energy demand.
“I actually think what the (Chinese) government is doing at the moment is actually quite logical. We talk about Power (of) Siberian One, if they can actually negotiate reasonable pricing terms, you can actually have Power (of) Siberian Two, maybe longer term,” he added.
Business along the ‘Polar Silk Road’
In return for access to the rich resources of the Arctic, China is offering Russia capital said Zhixing Zhang, senior East Asia analyst at geopolitical intelligence platform Stratfor.
“So far, such cooperation primarily focuses on energy development. Whereas Moscow is satiating China with the access to resources, Beijing offers Moscow the capitals it needed for Arctic development,” said Zhang.
As Beijing pushes its “Polar Silk Road” agenda, Zhang noted that Chinese investors have been buying up stakes in projects and companies operating in the region.
That capital comes as U.S. and EU sanctions have limited Russia’s access to foreign funds. As Moscow’s relationship with Western countries becomes more frail, Russian business leaders look for more economic opportunities with China, especially in energy.
Strafor’s Zhang said Russia’s hope to significantly ramp up transport and port development across the Arctic region “could pave the way for more expanded cooperation.”
As China pursues its Belt and Road Initiative, especially in Central Asian countries, Russia’s transportation expansion in the region could add “another arena of competition between the two powers,” Zhang told CNBC.
The Arctic which neighbors the U.S., Canada, Denmark, Finland, Iceland, Norway, Sweden and Russia has been at the heart of a geopolitical and resource battle. China’s “near-Arctic state” ambitions have sparked some fury from stakeholders.
At the Arctic Council Ministerial meeting in May, U.S. Secretary of State Mike Pompeo questioned China’s claim of being a “near-Arctic state,” stating Washington’s unhappiness with Beijing’s position. The U.S. later refused to agree to climate change demands decided by the Arctic Council, which ultimately failed to issue a common final declaration.
All of which show “an increased assertiveness on the part of the United States, who had previously often been described as possibly the least involved of all Arctic states in Arctic affairs,” said Stephanie Pezard senior political scientist at the nonprofit global policy think tank RAND Corporation.
The Arctic is “easily accessible to all of its neighbours, but none is in a position to control it,” said Jeremi Suri, professor at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin in 2016.
“That is what makes the Arctic a source of strategic rivalry,” he said. “The Arctic provides access to lucrative resources under its waters — especially oil and gas … one of the world’s most coveted regions,” Suri added.
Some countries are already active in many parts of the Arctic, extracting oil, gas and minerals. But deposits in some contested areas “will not be exploitable for probably decades” as nations rely on the UN to examine their claims, said Pezard.
“Russia is keen on maintaining control over the Northern Sea Route, due to its proximity to some important military and economic infrastructure of Russia’s, and the source of revenue it represents,” she said. But it’s not that easy for Russian ships to navigate the route in large numbers due to the hazard of drifting ice, high insurance costs, and other obstacles.
And beyond the fight over rich minerals, there is a growing concern from the U.S. side over China and Russia’s potential “militarization” of the Arctic, said Strafor’s Zhang.
“The narrative is driven by the revival of Great Power competition, a recognition of U.S. degraded capabilities and increased international activity and changing climate,” Zhang said.
Adding that “despite the noise, real U.S. efforts to counter both China and Russia in the Arctic remains thin. But such dynamics will continue to manifest alongside the shift of power balance among the great powers,” said Zhang.