Gas deal done right

Recent data revealed massive leaps in China-Russia gas trade, as global diversification challenges compound energy crises rather than resolve them. Beijing’s import of Russian gas has hit the $410 million mark, reportedly the highest since at least January 2017. The takeaway for key regional powers, including those on the lookout for affordable gas, couldn’t be clearer: access is everything.

That necessitates focus on how smart currencies have helped diversify gas engagements away from dollar dominance. To Moscow and Beijing, it is what represents their bilateral interests best – and no nation should dictate how those interests are served. Regional aspirants, follow suit.

Now let’s draw attention to the crucial deal signed between Russia’s Gazprom and China’s National Petroleum Corporation (CNPC). It entailed a focus on switching gas supply payments to China to rubles and yuan. “The new payment mechanism is a mutually beneficial, timely, reliable and practical solution. I believe it will speed up business transactions, set an excellent example for other companies and give additional impetus to the development of our economies,” said Alexei Miller, Gazprom CEO, following a video conference meeting this month.

Optimism for the payment switch is well-founded, and those aspiring to benefit from yuan’s regional transformation should pay particular attention. After all, the forecasted growth in gas volume from Russia is considerable, and a shift to national currencies significantly insulates Russia-China gas supplies from financial interference, mainly through a dollar-centric sale mechanism. Broader concerns about the dollar’s ‘weaponisation’ have rung bells and raised alarms. Pakistan too has been sceptic of the dollar spike as demand for energy increases manifold.

The China-Russia trade relationship itself enjoys substantial diplomatic support in both capitals, with the interests of their economies promoted through simplified payment solutions, and a two-way trade estimated to reach around $250 billion by 2024.

Now with the European market – a key recipient of Russian gas supplies – facing headwinds on the back of a controversial price cap on Russian oil, China’s imports of pipeline gas are likely to increase further. That underlines the value of the deal in prioritising resilient currencies for core energy supplies, another opening for China’s core allies to express their strategic interests. It is a major win for the landmark $37.5 billion gas supply deal extension that was signed earlier between Beijing and Moscow, given that gas trade surges and numerous reports speak to its potential.

As futile Western efforts to sanction Russian oil continue unabated, it is increasingly important for Beijing and Moscow to make an example out of their mutually accommodating approach to gas payments. The Group of Seven (G7) remains adamant on further dividing global energy markets by lobbying for a controversial price cap on Russian oil, despite fears that it can backfire on major consumers. To some degree, it already has.

For these reasons, a model of simplified and practical gas payment solutions in ruble and yuan sets a positive precedent for energy cooperation that is sought by several economies around the world. It also represents a welcome departure from the risks of increased price volatility as dollar-centric payments play an outsized role in creating risk exposure, ignored by the West as the goal is to take Russia down, quite literally. Even on a bilateral level, the deal confirms that China-Russia oil engagements remain untethered to the politics of bloc-led price caps and unilateral oil sanctions. This is what the future of smart, people-centric engagement should look like. Wars create divisions, while national interests – including affordable energy supplies – are central to public relief. Both short-term and long-term.

Interestingly, the Gazprom deal arrived at a time when both China and Russia were keen to consolidate their time-tested partnership even further, building on what is seen as a ‘new model’ for the world. Such optimism has accompanied Russia’s status as China’s top oil supplier for a third month in July. Both countries are delivering on their commitment to opening up, and are expecting heightened prospects of direct yuan-ruble settlements in key areas of free trade arrangements.

It is here that future pipeline gas exports to China will benefit by entering a major growth market suited to settlements in national currencies. On the one hand, payment settled 50% in rubles and 50% in yuan invites upward momentum to strengthen currencies, as seen in the ruble’s own test case in recent months. And on the other hand, the deal provides a very concrete basis to expand the scope of energy supply cooperation between China and Russia. Part of that scope includes opportunities to upgrade Russia’s pipeline gas export capacity to China to over 130 billion cubic meters (bcm) a year in the future. A simplified payment mechanism facilitates that pursuit, as it demonstrates price efficiency and could pave the way for adding more gas supply routes.

“Additional agreements were signed to a long-term gas purchase and sale agreement along the ‘eastern’ route — the Power of Siberia gas pipeline,” said Gazprom in a statement.

Past and present trendlines agree that China-Russia arrangements to steadily increase contracted gas supplies have proven successful, and they deserve to be bolstered by giving more play to yuan and ruble settlements. Regional interests can extract vital lessons from this pragmatic engagement.

The writer is a foreign affairs commentator and recipient of the Fulbright Award