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Russia-China to discuss growing energy ties amid global trade uncertainty

Moscow — China's President Xi Jinping is set to discuss energy cooperation with his Russian counterpart Vladimir Putin during a state visit to Russia this week, with US sanctions and trade disputes making the partnership seem more valuable than ever to both sides.

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Over the last decade Russia and China have significantly increased their energy links, with Russia ramping up supplies of crude and gas, and attracting Chinese investment into major new energy projects.

Russia is currently subject to sanctions that limit access to Western financing and certain types of oil technology, and faces the prospect of further sanctions being imposed on its use of the dollar and extend limitations on Western companies' involvement in Russian energy projects. Chinese officials are grappling with a similar degree of uncertainty over how to cope with new tariffs and prevent more being introduced in future.

"Trade tensions between the US and China likely please Russia from one perspective, as it helps the Kremlin in its attempts to balance other world powers against the US. But the resulting slowdown in the world economy would be to nobody's benefit, including Russia," Paul Sheldon of S&P Global Platts Analytics said.

Russia-China energy cooperation was initially driven by Russia's desire to diversify markets and capitalize on its strategic location and impressive and cheap resource base to supply growing Chinese demand.

Analysts see little opportunity for Russia to increase pipeline crude flows given that the ESPO pipeline is currently operating at capacity.

"Russian crude shipments to China, and Asia more generally, already flow at maximum levels permitted by existing east-bound infrastructure," Sheldon said.

Russia remained China's top crude oil supplier in 2018, boosting shipments 20% year on year, to 1.436 million b/d, according to Chinese customs data.

One Moscow-based analyst said: "The opportunity for gas is meaningful."

So far this year the most significant development in the Russia-China energy relationship has been China's CNPC and CNOOC agreeing to take 10% each in Novatek's Arctic LNG 2 project. CNPC already owns a 20% stake in Yamal LNG.

Gas cooperation is also likely to be the focus of new deals. Russian gas monopoly Gazprom is in talks over increasing gas supplies to China. It plans to launch the 38 Bcm/year Power of Siberia line by the end of 2019. Gazprom officials have said they are considering adding more capacity to he project, and are also considering another 30 Bcm/year supply route to China.

Many analysts also see a reduction in the use of the dollar in international trade as likely to become more viable if uncertainty and disputes persist.

"The subject of de-dollarization will become an increasingly relevant topic if the US continues to utilize sanctions as its preferred method for waging conflict," Sheldon said, adding that a widespread move to other currencies is, however, many years away.

"Increasingly frequent trade wars and third-party sanctions will focus the minds of many countries to create alternatives to the dollar, but a solution does not yet appear visible," he said.

The primary risk associated with de-dollarization is from volatile foreign exchange rates, making many suppliers and consumers reluctant to switch away from the dollar.

-- Rosemary Griffin, rosemary.griffin@spglobal.com

-- Edited by Alisdair Bowles, newsdesk@spglobal.com