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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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Is China Preparing To Emulate Russia’s Invasion Of Ukraine?

  • Russia’s invasion of Ukraine has transformed global geopolitical dynamics, and now there are signs that China might soon emulate Russian strategies.
  • China is now heavily focused on ensuring its energy security and pushing the internationalization of its currency, moves that would protect it from sanctions.
  • The director of the FBI and the director of MI5 shared a stage for the first time ever this week to warn of the increasing likelihood of a Chinese invasion of Taiwan.

Up until Russia invaded Ukraine on the 24th of February 2022, it was accepted wisdom that China would not overtly challenge the U.S.’s authority across the world for around 10 years or so, given the perceived technological, economic, and military deficit between the two countries. Then again, up until Russia invaded Ukraine, few believed that the longstanding rhetoric of Russia’s leadership about Ukraine just being one part of Russia rather than a sovereign independent state would turn into the reality of war. As of now, there are just three months or so before China’s President, Xi Jinping, attempts to secure an unprecedented third term as General Secretary of the Chinese Communist Party at the 20th National Congress of the Chinese Communist Party in November. This will be the basis upon which he can secure his premiership for many more years to come and, to achieve this, he will have to make various changes to China’s constitution, and this will require the unwavering support of all elements of China’s military and of the most nationalist politicians in the country. And one thing that both groups agree on is that Taiwan is just a part of China rather than being a sovereign independent state, and always has been. It will come as no surprise to anyone that China has been watching and analyzing every angle at play since Russia invaded Ukraine, particularly the military and economic responses to it of the West. Militarily, many countries in the West – especially those from the North Atlantic Treaty Organisation (NATO) security alliance – have supported Ukraine’s fight against Russia through the provision of weapons, intelligence, and broader logistical resources. However, as far as China is concerned, there has been no direct on-the-ground military support of Ukraine, in Ukraine, by NATO military forces. Indeed, NATO has not even sought to enforce a ‘no-fly’ zone across Ukraine, partly because there is only a fuzzy legal justification to do so – as Ukraine is not a member of NATO – but more appositely because it fears escalation into a nuclear war with a major nuclear power. Both reasons would also apply to the West’s likely response to an invasion of Taiwan by China, First, Taiwan is not a member of NATO or any similar Asia-Pacific version of it; and second, the risk of escalation into a nuclear war with major nuclear power China is real. China knows all of this and is almost certain to have been strategizing a scenario for launching a ‘special operation’- as Russia calls its invasion of Ukraine – against Taiwan.

One key factor that Russia had – and still has – going for it in its invasion of Ukraine that China would not have if and when it invades Taiwan is that Russia possesses all of the energy supplies that it needs to keep its critical infrastructure running, regardless of any and all sanctions brought against it by any country. In fact, for Russia, there has been a positive financial benefit from its invasion, with a report in June from the independent Centre For Research on Energy and Clean Air (CREA), showing that Russia earned just under US$1 billion per day from oil and gas exports during the first 100 days of the war in Ukraine – so around US$97 billion in total – whilst the cost to it of fighting the war over that first 100 day period was just under US$88 billion. Moreover, despite the European Union’s (E.U.) current and intended bans on various of Russia’s energy exports, as of the end of May, the E.U. accounted for the biggest share of Russia’s oil and gas exports.

Turning a profit is unlikely to be top of President Xi’s agenda in invading Taiwan, but ensuring China’s energy security in such an event will be. However, as analyzed in-depth in my new book on the global oil markets, China has long been strengthening its energy security both through its expanded activities in the Middle East connected to its ‘One Belt, One Road’ program and through its broadening and deepening of its energy links to Russia. Direct infrastructure links between China and Russia have been extremely extensive in recent years, with recent notable examples of this being, in the oil sector, Rosneft signing an US$80 billion 10-year deal to supply the China National Petroleum Corporation (CNPC) with 100 million metric tonnes of oil over the period (slightly over 200,000 barrels per day). In the gas sector, at almost the same time, Gazprom signed a 10 billion cubic meters per year (bcm/y) deal to supply gas to CNPC, adding to another supply contract between the two companies signed in 2014 – a 30-year deal for 38 bcm/y to go from Russia to China. This, in turn, is part of, and augments, the ‘Power of Siberia’ pipeline project – managed on the Russian side by Gazprom and on the China side by CNPC – that was launched in December 2019. In recent weeks, though, China has been buying massive extra quantities of Russian oil, on top of the levels previously required in its regular usage pattern. According to industry data, China bought a record quantity of Russian crude oil in May, increasing purchases by around US$1 billion more than in April, to just under US$7.5 billion, which is more than double the amount China bought from Russia in the same period last year, making Russia China’s largest supplier of crude oil.

Crucially as well, for both China and Russia, China has long seen increased internationalization of its renminbi currency as a fitting reflection of its growing status in the world, and trading between the two countries in their local currencies has increased dramatically in the past few years. Back in September 2018, the chief executive officer of Russia’s Novatek, Leonid Mikhelson, said that Russia had been discussing switching way from US$-centric trading with its largest trading partners such as India and China, and that even Arab countries were thinking about it. “If they [the U.S.] do create difficulties for our Russian banks then all we have to do is replace dollars,” he added. At around the same time, China launched its now extremely successful Shanghai Futures Exchange with oil contracts denominated in yuan (the trading unit of the renminbi currency). Such a strategy was tested initially at scale in 2014 when Gazpromneft tried trading cargoes of crude oil in Chinese yuan and roubles with China and Europe.

Related: Natural Gas Will Play A Vital Role In Australia’s Energy Transition

Although China’s initial official response to Russia’s invasion of Ukraine was quite guarded, an early indicator of Beijing’s true feelings on it came at the beginning of April when China’s Foreign Ministry spokesperson, Zhao Lijian, laid the blame for Russia’s invasion of Ukraine squarely at the feet of the U.S. “As the culprit and leading instigator of the Ukraine crisis, the U.S. has led NATO to engage in five rounds of eastward expansion in the last two decades after 1999,” he said during a virtual summit call with leaders of the European Union. China later warned the U.S. against any moves that “adds fuel to the flames” in Ukraine and its Foreign Minister, Wang Yi, called again on the West to take account of Moscow’s concerns about NATO expansion. This rhetoric was echoed again on Xi’s birthday – the 15th of June – when he had a lengthy telephone conversation with Russian President, Vladimir Putin, as reported and analysed by OilPrice.com. During this talk, according to Russian news sources in the first instance: ‘Xi had pledged China’s ongoing support for Russia... [and] President Xi had noted the legitimacy of actions taken by Russia to protect itself in the face of challenges to its security created by external forces.’

Concomitant with all these developments has been a noticeable surge in the number and seriousness of Chinese security threats against Western powers at domestic levels. This was specifically noted in the last week by both the director of the U.S.’s principal domestic security intelligence service, the FBI - Chris Wray – and his opposite number in the U.K., the director-general of MI5, Ken McCallum. On the first ever occasion that the two most senior figures in the U.S.’s and U.K.’s domestic security intelligence services had shared a public platform together, Wray warned that China was “drawing lessons from what’s happening with Russia and its invasion of Ukraine.” McCallum said that MI5 was now running “seven times as many investigations into Chinese activity of concern” than it was as recently as 2018. The FBI’s Wray added that: “[were China] to forcibly take over Taiwan … it would represent one of the most horrific business disruptions the world has ever seen.” He added: “We’ve seen China looking for ways to insulate their economy against potential sanctions trying to cushion themselves from harm if they do anything to draw the ire of the international community. In our world, we call that kind of behaviour a clue.”

By Simon Watkins for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on July 12 2022 said:
    Indeed it is and rightly so against China’s belief that the United States has a tendency to renege on international agreements to which it has added its signature. The list includes the US reneging on agreement in the aftermath of the collapse of the former Soviet Union not to extend NATO’s borders towards Russia to walking away from the Iran nuclear deal.

    There is plenty of evidence of the US supporting trends for Taiwan’s independence through expanding trade relations and supply of weapons with the aim of undermining the existing agreement between China and the United States dating back to the 1970s on the status of Taiwan.

    Is it any surprise that China is preparing to pre-empt a US reneging on the Taiwan accord and return the Island to the motherland?

    China has all the essential ingredients to mount an invasion of Taiwan. It is the world’s largest economy based on purchasing power parity (PPP). In fact China’s economy is more than 22% bigger than the United States’. It also has a powerful and solid strategic alliance with Russia which means that its energy security is assured. Moreover, China has been biding its time while working diligently on developing a military capability to neutralize US military presence in the vicinity of the Taiwan Strait.

    Russia’s ultimate attainment of its strategic objectives in Ukraine and security goals vis-à-vis the United States and NATO in Europe will strengthen and enhance further the Chinese-Russian strategic alliance. China’s tacit support of Russia in Ukraine and its ability to help Russia withstand Western economic and banking sanctions against it will eventually get a quid pro quo from Russia when the time comes for China to restore Taiwan to the Mainland.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • DoRight Deikins on July 12 2022 said:
    Let's see:

    China has consolidated its ties with Central Asia, Russia, and the Middle East/Iran. It almost has complete control of its supply routes from Africa. Just that pesky Singapore stands in the gap. But while Singapore is overwhelming Chinese, it doesn't really kowtow to the Eternal Throne like it should. And as economic friendship with Indonesia and Malaysia builds, the hint that they could have that break-away island city/country once again might be whispered. After all, it's barely more that a 'big bee'.

    And India, of course. But give them plenty of oil and coal and maybe they will come under the benevolent protection of the dragon. And if not, they can bear the brunt of his flames!

    China has run the economic takeover of Africa well. Much of the mineral wealth of central Africa is in their pockets. And they have no qualms about the politics of the ruling juntas with whom they work. As in the Middle East they prefer strong leaders who can hold the populace at bay with a pseudo/placebo form of democracy and an iron fist.

    The bug in all this is do people preferred to be cowed, or do they prefer to be free. China, Russia, and George Orwell are betting on the former. Unfortunately that seems to be the way the West is heading also.

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