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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Energy Was Key In Putin-Xi Meeting

  • The meeting between Russian President Putin and Chinese President Xi Jinping was a necessary check-up of relations between the two countries.
  • Putin made four comments that together perfectly encapsulate what the central problem for Russia is that he wanted to address with Xi.
  • The meeting was an important moment for the two countries to further improve energy ties.

China stated two weeks before Russia invaded Ukraine that “there is ‘no limit’ to how far Russian and Chinese friendship may go” and signed a slew of huge oil and gas deals shortly afterward that provided an additional layer of insulation to both from any U.S. sanctions in the future. However, signaling perhaps that Beijing did not believe that Russia would necessarily launch a full-scale invasion of Ukraine before it did so, only a day after the military conflict spread to Ukraine’s major cities, Chinese President Xi Jinping held urgent talks with Russian President Vladimir Putin and advocated peaceful negotiations between Russia and Ukraine. At the end of last week, just over six months after the invasion and just a week after Ukraine’s lightning counter-offensive re-took swathes of territory earlier captured by Russia, Putin and Xi met again, with the Russian president wanting to find out where Russia now stands in terms of China’s priorities. So, what did Xi tell Putin? Before the first of the series of meetings over the weekend between the two presidents, Putin made four comments that together perfectly encapsulate what the central problem for Russia is that he wanted to address with Xi. First, he laid out what he thinks the broad aim of the Russia-China partnership should be, which is to challenge the U.S.’s ongoing efforts to create a unipolar world. He added: “Attempts to create a unipolar world have recently acquired an absolutely ugly form and are completely unacceptable.” Second, while stating that he “appreciate[s] the balanced position of our Chinese friends in connection with the Ukrainian crisis,” he went on to imply that this balanced position is not what Russia wants from China, as he said: “We understand your questions and concern about this [Ukraine, although this was not specified by Putin].” Third, he expressed some exasperation over China’s unwillingness to not fully support his view of what the Russo-China partnership should be, as outlined in point one, despite previous discussions where he had gone through it all: “During today’s meeting, we will of course explain in detail our position on this issue [Ukraine], although we have talked about this before.” Fourth, he made an offer consistent with his view of what the Russo-China partnership should involve and a signal of what he wants from Xi, in terms of that type of support Russia is willing to give China: “For our part, we adhere to the principle of one China…We condemn the provocation of the U.S. and their satellites in the Taiwan Strait.”

Related: Oil Rig Count Ticks Higher As Gas Rig Count Slips
It is apposite to note at this point that this latest meeting between Putin and Xi – the thirty-ninth since Xi became China’s president in 2013 – was not a specially convened arrangement between the two men but rather took place on the sidelines of the latest meeting of the Shanghai Cooperation Organization (SCO) summit in Uzbekistan. Founded in 2001, although pre-dated by the Shanghai Five group established in 1996 (comprising China, Russia, Kazakhstan, Kyrgyzstan, and Tajikistan), the SCO is the world’s biggest regional organization both in terms of geographic scope and of population. It covers 60 percent of the Eurasian continent (the biggest single landmass on Earth), 40 percent of the world’s population, and more than 20 percent of global gross domestic product (GDP). The operational scope of the SCO ranges from collective security and military cooperation (in the mold of the North Atlantic Treaty Organization, ‘NATO’) to economic union (in the manner of the European Union ‘EU’). In philosophical terms, the SCO can reasonably be said to still believe in the idea and practice of the ‘multi-polar world’ that was the centerpiece of the declaration signed in 1997 between then-Russian President, Boris Yeltsin, and his then-China counterpart, Jiang Zemin. 

Since its foundation, though, the internal balance of power has shifted in the SCO away from Russia and towards China, with the former seeing an ongoing decline in its economic and political power since the fall of the USSR in 1991, and the latter set to overtake the U.S. as the world’s biggest economy in terms of GDP within the next 10 years or so. More specifically, China’s GDP is now ten times the sizes of Russia’s (US$17.7 trillion in 2021 versus US$1.7 trillion), and its military spend annually is over four times that of Russia (US$293 billion last year compared to US$66 billion). One thing that China still does not have, though, which Russia does, is an abundance of energy resources to fuel its continued growth to attain the number one world economy mantle, with all the superpower status that goes with that. 

Related: Fears Of Economic Slowdown Cap Crude Prices

Another key element to factor into this power equation is China’s view on where it is in the arc of its relationship to the U.S. Economically, China is not that far behind the U.S. in terms of a straight head-to-head GDP comparison, with the U.S.’s economy last year totaling US$22.9 trillion and China around US$5 trillion behind that. However, China knows that the U.S. has been an economic superpower for well over 100 years, which means that Washington has been spending a lot more money on a lot of things – military, technology, global political connections - for a lot longer than Beijing. Even now, the U.S.’s military spending per annum is more than double that of China’s, at just over US$800 billion spent last year by Washington, compared to just under US$300 billion spent by Beijing. In short, in a direct non-nuclear confrontation with the U.S., Beijing would lose and would lose quickly, and China knows it must tread carefully until it is in a stronger position to challenge the U.S directly.

Given these factors, then, China’s current “balanced position,” as Putin exasperatedly called it, can be summed up in one phrase: use everything possible to become the world’s leading economic power in as short a time as possible while ensuring no direct confrontation with the U.S. that would threaten that objective. Happily for Beijing, which is that both of them want oil and gas prices as low as they can go without bankrupting the majority of the world’s suppliers. In a neat twist of serendipity, although Russia clearly would like oil and gas prices to remain high, it is not an existential matter if they are not, as Russia has long had an effective budget breakeven price for oil and gas at around US$40 per barrel of Brent equivalent. All the current crisis in Ukraine means for Russia is that its biggest buyer of hydrocarbons will continue to demand oil and gas at reduced rates going forward, but not at rates low enough to cause it any real economic damage.

It is this consideration that Xi focused on during his discussions with Putin on the sidelines of the latest SCO meeting, according to EU energy security sources spoken to exclusively last week by OilPrice.com. Although Russia accounts for only 2.9 percent of China’s total imports, Moscow resolutely stepped up to the plate in 2021 when China faced an energy crunch. As a result, Russia now accounts for 20.1 percent of China’s total coal imports, and its share of China’s imported crude oil has steadily risen to 15.6 percent by end-2021 from 11 percent in 2014. Russia’s strategic energy importance to China was bolstered with the 30-year contract for Russia to supply gas to China through its new Far Eastern pipeline - following the earlier installation of the Power of Siberia-1 pipeline, which began pumping supplies in 2019. Putin is seeking to boost already-high levels of oil and gas exports to China, possibly with a pipeline (a ‘Power of Siberia 2’) to China via Mongolia, and at a meeting with Xi and Putin, Mongolian President, Ukhnaagiin Khurelsukh, said that he supported the construction of such oil and gas pipelines. 

In the meantime, as analyzed in depth in my latest book on the global oil markets, Russia plans to increase crude oil export capacity at the Far Eastern port of Kozmino by over 7 million metric tonnes per year (mtpy) by October to add to the current capacity of 36 million mtpy. This would augment Russia’s main crude export route to Asia - the East Siberia-Pacific Ocean (ESPO) - that has a spur into China and runs to Kozmino. Russian pipeline operator, Transneft, stated recently that the ESPO hit its full 80 million mtpy (about 1.6 million barrels per day) capacity in the first seven months of this year. Russia is also working on developing new oil and gas export infrastructure at ports along the Northern Sea Route, which runs through Russian maritime territory in the Arctic and has shorter delivery times and lower costs than other available routes. 

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on September 20 2022 said:
    Two major strategic objectives underpin the strategic alliance between China and Russia. The first is to accelerate the current transition of the World Order from a unipolar system led by the United States since the collapse of the former Soviet Union into a fairer and less aggressive multipolar one. The second is undermining the petrodollar which underpins the US financial system and the US economy. These two objectives transcend any other strategic objectives shared by China and Russia and are cemented by energy. Therefore, it is inevitable that energy would always figure prominently in any meetings between the two leaders.

    That is one major reason why Western sanctions against Russia, the harshest ever implemented against a country, have failed miserably. Chines and Russian economies complement each other admirably. China’s economy, the world’s largest is wedded to Russia, the world’s superpower of energy. China’s economy at $30.18 trillion in 2022 is 32% bigger than the United States’ at $22.9 trillion based on purchasing power parity (PPP) which is the only reliable measure to evaluate and compare the GDPs of the world. Moreover, Russia’s trade with China has risen spectacularly from $13 bn in 2011 to more than $150 bn in the first 8 months of 2022.

    So when the author says that the US‘s military spending per annum at $800 bn last year was far bigger than China's $300 bn, he ignores two major factors: advances in technology and the comparative purchasing power of the Chinese yuan and the dollar. China has been leapfrogging the US in military technology according to many authoritative sources. And because the real purchasing power of the yuan is far stronger than the dollar, spending $300 bn by China would most probably buy it far more military hardware than America’s $800 bn.

    Moreover, the claim by the author that in a direct non-nuclear confrontation with the U.S., Beijing would lose quickly is fictional and therefore it can be ignored. The recent Chinese siige rehearsal of Taiwan by China’s Navy, planes and missiles albeit in maneuovers, showed the US what China could do in a real war situation with not many US carriers remaining afloat.

    The biggest blow to the petrodollar was delivered when President Putin demanded payment in rubles for his gas and oil supplies to the EU or risk having supplies suspended. He got his way. The ruble is now an energy currency.

    Both Saudi Arabia and UAE are mulling over accepting payment in the petro-yuan for their crude exports to China, a development looking increasingly very probable. Were China to pay for its almost 13.0 mbd of crude imports in petro-yuan, Russia to sell its 8.0 mbd of exports in ruble, Venezuela and Iran to accept the petro-yuan for their exports and India to pay in rupees for its crude imports, the petrodollar will certainly lose an estimated 48% of global oil trade. This could rise to 60% if OPEC follows suit.

    Today, the petrodollar is the core of the US financial system. By undermining it, both the US financial system and the US economy will be undermined. This could possibly lead to a devaluation of the dollar by one quarter to one third of its current value.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert
  • John Paul deOliveira on September 21 2022 said:
    In reply to Mr. Salameh's remarks, some other factors might be considered.

    Yes, China's military is likely progressing faster than expected, due to PPP and tech development. Another positive factor would be they do not have worldwide military base upkeep costs.

    But those costs have distinct advantages, like being able to choke off the majority of China's, with Russia being only able to provide a considerable fraction of their needs. Which would put it in the same boat as Europe - What realistic alternatives would they have?

    As far as China tech advances, they are moving into previously undeveloped areas, for example secure communications, chip production. But the US has been developing R & D for much, much longer. They undoubtedly have undreamt of 'toys' warehoused, just waiting to be brought out on an as needed basis.

    The known elephant in the room is the staggering military and economic potential of individually either SpaceX or Starlink. The first is morphing from potential to boots in the near space. The latter has open ended possibilities; ISR, laser comms, distributed network, EW, think of something and it probably could be incorporated, as it is constantly, intentionally evolving. For instance, it just partnered with T Mobile to provide cell phone coverage.

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