How a $400 Billion Gas Deal Reveals China’s and Russia’s Pathologies

A Closer Look at the New Energy Economy
May 22 2014 3:53 PM

Poisoned Gas

The $400 billion China–Russia deal reveals a lot about the two countries’ pathologies.

Putin Jinping
Xi Jinping and Vladimir Putin toast with vodka during a signing ceremony in Shanghai on Wednesday to celebrate a 30-year contract for supply of gas.

Photo by Sasha Mordovets/Getty Images

On Wednesday, Russia and China inked a massive natural gas deal. Beyond the impressive numbers—Russia will sell China $400 billion of gas over 30 years starting in 2018—the symbolism was portentous. The two strongmen, Vladimir Putin and Xi Jinping, strolling across the huge stage, shaking hands under giant flags, and taking ceremonial shots of alcohol. To Cold Warriors, it signifies a resurgence of the old Sino-Soviet bloc against the West. To foreign policy realists, it augurs a fearsome alliance of two essentially non-democratic giants eager to dominate Europe and Asia. Now that Putin has a new, deep-pocketed customer in his pocket, Europeans are fretting that he’ll do to them what he did to Ukraine—wield natural gas exports as a weapon and start meddling.

And yet. I can’t help but think that, rather than signaling a new era of strength, the deal highlights some essential weaknesses and pathologies in China’s and Russia’s respective economic and energy models.

Simply put, China is desperate for energy. For all the awe it inspires, China remains a poor country, in which a large chunk of the population has yet to join the ranks of global energy consumers. China in 2011 had 54 cars per 1,000 people, compared with 403 in the U.S. And it simply doesn’t have the resources—water, arable land, energy—to bring its massive population into the 20th century, much less the 21st. China’s government derives its legitimacy not from the consent of the governed, but from its ability to deliver rapid growth—the current target is 7.5 percent per year—that improves living standards. China’s growth comes largely from energy-intensive industrialization and construction. And for this, it needs power: electricity to run new cities, elevators, and mass-transit systems, gas to run cars and trucks, and coal and other fuels to run its power plants.

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As a result, China is scouring the world in a search for fuel it can import. The country produces 4.2 million barrels of oil a day, which isn’t bad. But in 2013 it gobbled up 10.1 million barrels per day. As the Energy Information Administration notes, China is the world’s largest net importer of petroleum and other liquid fuels.

China’s main domestic fossil fuel, coal, is a remarkably dirty one. China derives about 80 percent of its electricity from coal, and coal-fired electricity-generating capacity is expanding rapidly. “China now burns as much coal as the rest of the world combined,” as Clifford Krauss and Keith Bradsher noted in the New York Times. This heavy reliance on domestic coal is causing an environmental and public health disaster. Since renewables can’t scale up quickly enough, China’s only prospect for reducing its dependence on coal is bringing in huge quantities of natural gas. But the infrastructure for transporting liquefied natural gas by ship is slow to develop. China, an inpatient nation, had no choice but to do this deal; Russia is its only source of sufficient supply.

But this long-term deal is hardly a long-term solution. The Times noted that the amount of gas that will flow from Russia to China would be about 20 percent of the nation’s current demand.

To a large degree, when it comes to energy, China is the mirror image of the U.S. Just a few years ago, the U.S. economy was hamstrung by its dependence on foreign oil and heavily reliant on coal. But thanks to massively increased production of natural gas and oil on the one hand, and advances in efficiency on the other, the U.S. has flipped the narrative. With each passing day, the U.S. is less reliant on imported natural gas and oil and its economy is becoming less energy-intensive. And, increasingly, renewable sources and natural gas are displacing coal as a means of generating electricity.

As for Russia, we’ll likely never know whether it got a good deal, a great deal, or a poor deal because of the lack of transparency. But the basics of the transaction—Russia will part with a goodly chunk of its natural resources patrimony in exchange for cash—highlights a problem in Putin’s Russia. Yes, Russia is blessed with lots of natural resources—not just gas and oil, but timber and iron and minerals. But lots of countries have lots of natural resources. What differentiates successes from failures is what countries make of them economically. Norway has used prodigious oil exports to create a giant sovereign wealth fund that supports social spending and a high quality of life. In the U.S., increased production of natural gas has displaced coal as an electricity-generating source, and has encouraged efforts to use natural gas as a transportation fuel as well as massive investment in factories that make chemicals and fertilizer.

In Russia, it’s not quite clear what happens to all the oil and gas revenues. Rather than bolstering qualify of life or inviting investment in new industries, the cash tends to disappear into the maw of Gazprom or other behemoths, or to find its way into state coffers, and into the hands of vendors, officials, and employees. (Russia said it could spend up to $55 billion on gas-related infrastructure to supply China. But most of those funds will be spent on pipelines and conduits, not on factories that will add value to Russia’s natural gas.)

Indeed, Russia often has difficulty retracting and retaining hard currency. Foreign companies that have rushed in to help exploit the resources have often gotten burned. Since capital is treated poorly in Putin’s Russia, it leaves—in the first quarter alone, $67 billion left the country. Rather than invest locally, Russia’s moneyed class tends to take the money overseas: to condos in Miami, mansions in London, basketball and soccer teams around the world, and of course, Swiss banks. Given that people aren’t exactly lining up to invest in Russia, China represented one of the few potential customers that could commit to spending such a large sum of cash over a long period.

It’s tough to be a great independent power if you’re beholden to a single source of foreign energy, as the U.S. learned in the ’00s. And it’s tough to be a great independent power if all you do with your massive energy reserves is sell them to a neighbor who will use them to build up its local economy.

Correction, June 4, 2014: This article originally located the Kashagan oil field in Russia; it's actually in Kazakhstan. The reference has been deleted.

Daniel Gross is a longtime Slate contributor. His most recent book is Better, Stronger, Faster. Follow him on Twitter.