Watchman Report Jan. 30, 2022 "China Is Russia's Escape For Ukrainian Sanctions"

 

	Subscribe now Hey there, welcome. Please consider supporting our work with a paid subscription. It’s just $9.95 a month or even better, $99 a year. PS: Follow us also on Twitter @talk_spy. Give a gift subscription China Presents Russia With an Escape Hatch on Sanctions Beijing could help make up for Russia’s lost gas sales to Europe if Putin invades Jonathan Broder Jan 28 Share EVER SINCE the Ukraine crisis began heating up several months ago with the massing of Russian troops on the country’s borders, President Joe Biden has repeatedly threatened Moscow with “enormous” economic sanctions if it invades the neighboring former Soviet Republic. But as the United States and the European Union debate what those sanctions should be, China, now Russia’s most important ally, stands poised to undercut them. One important measure China could take to help Vladimir Putin blunt U.S. retribution for an invasion is to increase purchases of Russian gas to help make up for lost energy sales to Europe.  Putin and China’s Xi Jinping will spend a "lot of time" discussing ramifications of the Ukraine crisis when they meet for talks next week, the Kremlin said on Friday. The Biden administration is pressuring Germany not to give final regulatory approval to open  the Nord Stream 2 gas pipeline from Russia and leaning on other European governments to stop buying Russian energy if Putin invades Ukraine. In 2021, Russia earned $240.7 billion  from oil and gas sales, the bulk of which went to Europe, principally through aging pipes that transverse Ukraine, according to Russia’s Central Bank.   War and Peace Bitter communist rivals who almost went to war in 1969,  China and Russia today are now friends with strategic benefits. Their armies now hold joint military exercises, and their scientists are collaborating on a mission to build a research station on the moon. In their virtual summit last month—one of 37 meetings  since 2013— the Kremlin said Chinese President Xi Jinping told Putin that Beijing supports his core demands for Western security guarantees, which include legally binding pledges that Ukraine will never join NATO and the alliance will pull back its forces from Eastern Europe. Xi confirmed Moscow’s claim. “We firmly supported each other on issues concerning each other’s core interests,” Xi said, according to China's official Xinhua news agency, referring to both Putin’s demands and China’s claim to Taiwan.  Subscribe now Moreover, in a veiled reference to the United States and its allies, Xi added: “At present, under the guise of ‘democracy’ and ‘human rights’, certain international forces are arbitrarily interfering in the internal affairs of China and Russia.” Xi’s support for Putin comes after both Beijing and Moscow have repeatedly butted heads with Washington over these and a host of other issues over the past eight years. It signals a budding alliance of the two countries, grounded in their mutual antipathy toward the United States and the U.S.-dominated rules-based international order.  At its most basic level, the two countries are drawing closer under the old adage that the enemy of my enemy is my friend.  “Almost by definition, the greater the hostility between Russia and the West, the closer Russia has to draw toward China,” Anatol Lieven, an expert on Sino-Russian relations at the Quincy Institute for Responsible Statecraft, a Washington think tank, tells SpyTalk. How close, of course, depends on Russia’s next moves in Ukraine and the extent of Western sanctions in response. But Moscow’s ability to cushion the economic blows from Western sanctions is significant, and its political and trade ties to China will figure prominently in mitigating any sanctions scenario. If a Russian invasion prompts Western sanctions that include kicking Russia out of SWIFT, the Brussels-based messaging network used by 11,000 banks in 200 countries to make cross-border payments, officials in Moscow have warned Russian gas shipments to Europe will cease for lack of payment. “If Russia is disconnected from SWIFT, then we will not receive currency,” Nikolai Zhuravlev, the vice speaker of Russia’s upper house of parliament told the Tass news agency Tuesday. “But buyers, European countries first of all, will not receive our goods: oil, gas, metals and other important components of their imports.” European countries that buy Russian gas depend on SWIFT to facilitate their payments. The Biden administration has portrayed such remarks as a veiled Russian threat and warned Putin that a cut-off of gas supplies to his European customers is a double edged sword: it would jeopardize Russia’s primary source of revenue. But in this scenario, China could easily serve as Putin’s ace in the hole, providing him with an alternative market for Russian natural gas. And Beijing would welcome such additional supplies, particularly at a time when China faces severe energy shortages.   Any major Russian energy pivot to China would accelerate a process that has been in motion for the past several years. Russia already supplies natural gas to China through the Power of Siberia-1 pipeline. Opened in 2019, the 1,300-mile pipeline connects the gas fields of eastern Siberia with northern China, supplying 38 billion cubic meters of gas per year.   With an eye toward future energy needs, Chinese state energy companies are also major investors in several Russian projects to extract natural gas in the Arctic. And Russia and China are also poised to close a deal for a second major natural gas pipeline running from Siberia across Mongolia to China. Dubbed the Power of Siberia-2, the pipeline will be able to deliver 50 billion cubic meters of Russian gas to China annually.  But increased Russian gas shipments to China initially would not be enough to make up for all the revenue it earns from Europe, which gets a whopping 40 percent of its energy needs from Russia, according to EU figures.   Xi could offer Russia financial assistance to offset Western sanctions. Indeed, earlier this week, former CIA Director,  Defense Secretary and veteran Russia-watcher Robert Gates told The Wall Street Journal’s Gerald F. Seib that he’d be “astonished” if the two leaders were not having such conversations. Swift Escape Russia began to take protective measures to mitigate the economic fallout from any SWIFT expulsion back in 2014, after U.S. officials first considered unplugging Russia from the network as punishment for its invasion of Crimea. The Americans later dropped the idea under pressure from the Europeans.  These measures now include Russia’s own version of the SWIFT network, called the System for Transfer of Financial Messages, which isn’t subject to U.S. sanctions. In addition, Russia is flush with cash. According to the Bank of Russia, the country’s foreign currency reserves stood at  $630 billion at the end of 2021. And more hard currency is pouring in from Europe from Russia’s energy sales. Perhaps most significantly for the future, Putin and Xi have agreed to establish an independent trade network that accepts both China’s renminbi and Russia’s rouble currencies, enabling both countries to sidestep the U.S.-led international financial system.  Meanwhile, despite the Biden administration’s repeated declarations of a unified front in the West’s confrontation with Russia, there is still no full agreement between the United States and its European allies on sanctions. Germany, in particular, is heavily dependent on Russian energy supplies to keep its homes warm and businesses chugging in wintertime. The U.S. and Gulf oil states will have a hard time making up for the loss of Russian gas via LNG tanker ships. Give a gift subscription So far, U.S. officials say they’ve readied export bans on various items that use U.S. microchips, software and technology, predicting the measures will hobble critical Russian industrial sectors, fuel a selloff in Russian markets and devalue the rouble. These measures, the officials say, will hurt Putin politically. But European allies are holding off on adopting similar measures until they see whether Washington can successfully secure alternative energy supplies for Europe from the Middle East, North Africa and America’s natural gas-producing states.   Biden is scheduled to meet on Monday with Qatar’s leader, Emir Tamim bin Hamad al-Thani, to discuss a proposal to redirect the country’s natural gas to Europe. Qatar is one of the world’s largest producers of natural gas, but most of its natural gas shipments are locked into long-term supply contracts with Japan and South Korea that can’t be easily broken. Currently, only 5 percent of Qatar’s gas goes to Europe. European governments fear that Putin will respond to Western sanctions by cutting off or reducing Russian gas shipments to the continent, driving prices—already as much as seven times higher than normal levels because of a global shortage—even higher in the middle of winter.  In an indication of how difficult reaching an agreement will be, Germany, Europe’s largest economy, has demanded an exemption for Russia’s energy sector if sanctions include a measure to prevent Russian banks from clearing U.S. dollar transactions, Bloomberg reported, citing official documents it had obtained. Bloomberg also said other major western European countries hold similar views.  U.S. officials declined to comment on the exemption demand. Fiona Hill, an intelligence officer on Russia for Presidents George W. Bush and Barack Obama and a senior director on President Donald Trump’s National Security Council, sees Putin as a smart strategist and master tactician. “He has the United States right where he wants it,” she wrote recently in a New York Times op-ed. “His posturing and threats have set the agenda in European security debates, and have drawn our full attention,” she said. “Unlike President Biden, Mr. Putin doesn’t have to worry about midterm elections or pushback from his own party or the opposition” because there is none.  Hill predicts that the Russian leader “will lock the U.S. into an endless tactical game, take more chunks out of Ukraine and exploit all the frictions and fractures in NATO and the European Union.” And as his standoff with the West continues, Putin now has  Xi in his corner to  reduce the price he’ll have to pay for his ambitions.