As China And Russia Grow Closer, The U.S. Is The Odd Man Out — At A Big Cost To The U.S. Energy Sector

During a media visit to China last fall, one participant pulled me aside to explain that the Chinese have never really liked Russia and Japan, although they are fond of Americans. In the intervening months, that Chinese executive has probably had a change of heart: Presidents Xi and Putin say that they are best friends while President Trump has sprayed nothing but venom at the Chinese government. 

As U.S.-Sino relations digress, the benefits are accruing to Russia and hurting American businesses. China is now looking to Russia to quench its insatiable thirst for oil and gas while it considers relinquishing ties to U.S. oil and gas producers. Will this dynamic stand? A lot can change given that, historically, China’s relationship with Russia has been fraught with challenges. But the more immediate factor is the U.S. presidential race and what a Joe Biden victory would mean. 

Before Trump, the U.S. had a constructive relationship with China based on engagement and international order, says Daniel Yergin, vice chairman of IHS Markit
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, in a discussion hosted by the Atlantic Council. “We’ve gone from that kind of view of interdependence to strategic confrontation — and language we have not heard. The two economies are so tightly connected. You can’t just slam the door shut and say we are outta here. China has trillions of dollars of our debt. Chinese equities have given Americans their returns.” 

Yergin, who just authored a book called “The New Map,” says that if Biden is elected, he will have to cross treacherous territory. China is both an economic competitor and an economic partner. Biden will no doubt tone down the rhetoric and the drama and normalize things. Practically speaking, the U.S. energy sector must attract trillions and the Chinese are great prospects. 

About three-quarters of all Chinese imports are tied to oil. There is now a glut of oil and gas and China is free to buy it from whomever it chooses. And right now it is looking to Russia. Why? The trade war started things off. And now that Trump is mislabeling the coronavirus and insulting the Chinese people, it is the icing on the cake. And it is good business for Russia: 60% of its national budget is linked to hydrocarbons while oil and gas make up nearly a third of its gross national product — a number that used to be 50%. 

U.S. Exports Plummet 

While the United States has seen its oil exports to China plummet, Russia has seen its supplies spike. In 2005, Russia provided 5% of China’s oil. The two just signed a 25-year, $270 billion oil deal — and the United States is now the odd man out.

“You would be hard-pressed to hear Russia and China talk bad about each other,” says Robert Amsterdam, an international litigator and host of the Departures Podcast. While Trump is accusing China of “unleashing a plague on the world,” Presidents Xi and Putin are cooking pancakes with each other. That said, Amsterdam says that Central Asia remains a sticking point between the two. 

Historically, the Japanese invaded Chinese territories during World War 11, killing millions of Chinese. And Russia has had a turbulent past with China too: after the first Japanese-Chinese war in the 1890s in Manchuria, the Russians invaded. And in 1969, they fought in the Zhenbao Island. Communist China also considered the United States its enemy after World War 11 but through diplomatic efforts in 1973, the friction faded and the two started a decades-long romance. 

But if the current camaraderie between China and Russia is founded on oil and gas, it may not last. China has pledged to be carbon-neutral by 2060 — a move that centers on the fact that China makes most of the world’s solar panels while controlling the key raw materials that go into electric vehicle batteries: cathodes, anodes, electrolytic solutions/electrolytes, and separators, says the Yano Research Institute. China is also home to one-quarter of the world’s electric vehicles. 

At the same time, China’s economy dwarfs that of Russia’s — about nine times bigger. China may need Russia’s fossil fuels right now. But it needs the United States for other things. And this country needs it, given that 5% of all foreign trade is with China. U.S. multinationals are setting up shop in China and include Apple
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, Boein
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g, Caterpillar, Microsoft
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and Tesla
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.  

“Trump has diagnosed the trade problem but his remedy doesn’t work,” Amsterdam says. “Tariffs are just a tax on American consumers. He has injected uncertainty and weakened American interests by withdrawing from the Trans-Pacific Partnership. The Chinese are well aware that Trump huffs and puffs but that he will never blow the house down. He is a paper tiger. This has cost the U.S. abroad.

“What we have in President Xi is a leader who is serious about putting China in a position where it is not reliant on American technology or American intelligence,” Amsterdam concludes. 

Turning back to Dan Yergin and to where he sees the world headed: “Globalization doesn’t go away. But it is a more fragmented system,” he says, given that supply chains are realigning and the geopolitical paradigm is shifting. Still, cooperation is needed now more than ever, he adds — a tough task because U.S. has turned inward. That is causing “breakdown” and it prevents the resolution of complex — global — problems like the coronavirus and climate change. 

U.S. relations with China have not been this bad in decades. And Russia’s friendship with China has never been better. The U.S. needs to regain its global stature — if American businesses ever want to see a return to normality.