The continued pricing dispute over the Power of Siberia II gas pipeline might lead to Russia prioritizing its new gas MoUs with Iran and Azerbaijan to pioneer a southern-directed pipeline for facilitating Russian-Iranian gas swaps with India.
The Russia-China discord is much deeper than disagreement on gas pricing. The short term factors includes China's exhaustion of foreign reserve (to pay for the gas pipe line) and dwindling domestic needs for Russian Gas. In the very short term, col, hydraulic power, and nuclear power are better choices. it is a cash management problem. But there are larger and deeper problems: rumors about Xi losing power or at least losing domination in economic policies have not stopped after Xi's meeting with Vietnam's General Secretariat (and Chairperson ?). If anything, the rumors get worse.
Then you have to consider the very recent announcement of virtually all China's bank stopped financial transactions with Russia. I am sure some other paths have been worked out, but the "taste" is simply not good for a strategic alliance "without upper limit". Also note the last term has disappeared from the last major Russia-China joint communique on strategic matters. Without Russian technology and experience, and perhaps Russian-made weapon systems as well, China would have a really hard time to attack Taiwan, and the soft-attack approach does require a credible military threat to work. Sabre-rattling by sending airplanes and ships to circle Taiwan can get people in Taiwan bored, if not yet so already.
As Ukraine War goes into the final stage, Russian leaders should have clearly perceived that China is a weak partner. At the time of strengthening relationship with India and Iran, Russia needs to help North Korea to improve its domestic economy, not just military, and to strengthen the military in Far East as PLA is simply not that dependable. Sending two Frigates to the British Channel, yeah, sure. But Russia does not need China to perform that trick to make Russia's case for a pan-European security arrangement.
"...If it musters the political will..." "...in spite of the US’ sanctions..." "...it’s worth risking more of the US’ wrath by ignoring its sanctions for the sake of receiving more discounted energy via a Russian-Iranian swap..." "...potentially leading to PoS-2 beginning construction..."
Yeah, I get all that — makes (just) good (natural) sense.
The question which keeps popping up from the back of my mind is, 'Just how much damage have the Americans done to their water table by fracking, and when will the gas they've got as a result run out?'.
I can't help remembering the debate of all those years ago, e.g. the Hollywood film, 'Promised Land'. I understand it is, as IT has always been in America — all about big business and money, and it all got forgotten when Trump came to power, BUT "The portrayal was first reported in April 2012 by filmmakers raising funds for the pro-fracking documentary FrackNation. They said, "Promised Land will increase unfounded concerns about fracking." (https://www.imdb.com/title/tt2091473/)" (https://en.wikipedia.org/wiki/Promised_Land_(2012_film)) I can't believe all that fracking didn't cause SOME irrevocable damage, nor all that glorious gas is going to last forever.
Seems to me, once it's run out and they can't squeeze any more blood out of their stones, the stuff that just seems to spurt out of the ground all by its own natural self from that vast, vast land that is Siberia and the North of Russia is going to give the Chinese good reason to have a little re-think about compromising.
Andrew, India isn't going to purchase energy from Iran right now. The risk of Indian banks getting sanctioned and frozen out of the global financial system isn't worth it, especially given the low LNG prices at the moment.
I wonder if China's pivot towards so-called 'green energy' might be just a sop to western critics in order to avoid carbon based sanctions? Surely they must realize 'green energy' is just as unworkable in China as everywhere else? At best it's a stop-gap along the way to a nuclear based economy. I notice China is developing next generation nuclear technology, including portable modular reactors which can be positioned along major rail networks, so no need to burn diesel. On the liquid fuel side, China has abundant coal reserves which can be converted to fuel via nuclear energy powering the Fischer-Tropsch process, thus reducing their dependency on imports. Haven't heard anything to that effect, but I'm sure they're looking into it.
A few things don't make sense to me here. There's been a clear policy since at least the Magnitsky Act to source as much food, material and technology as possible from inside Russia, as opposed to importing it. One of the key inputs to do that is of course energy, which Russia has in abundance, so why trade that away? It won't last forever, and you'll need it to transition smoothly to a nuclear based economy somewhere down the road.
Not just the aircraft, but the Russian built engines can be sold as a replacement for Pratt & Whitney engines. Then there's Kamaz, which arguably makes the best trucks in the world. Heavy machinery, machine tools, rail equipment, same thing, and of course the big ticket item, nuclear power plants and the fuel to run them. Japan became a major industrial nation with virtually no domestic energy sources simply by concentrating on high quality technology for export - notably autos and electronics. Why not follow their example, as China and Korea have done? Russia has a natural advantage since most of the raw materials, and ALL of the energy required can be domestically sourced.
Likewise, I don't understand China's position. I thought a key point of the Belt & Road program was to secure an inland route for energy, thus eliminating the threat of a maritime embargo. Why quibble over price when the advantage of the B&R is not just in energy security but in opening new markets, not just at the end point, but all along the new route? It's going to be a long time (if ever) before Central Asian republics can meet all their manufacturing needs, so as growth proceeds along that route, so does the demand for steel, cement, heavy machinery, machine tools, electronics and eventually consumer goods as incomes rise as a result. So why play hardball on a single part of the deal when there are so many benefits to be gained from the whole program? Just eat the damn costs and once you're an established partner, then start bargaining. Much easier to do that once the pipeline's up and running. Strikes me as penny wise pound foolish, which doesn't seem like the Chinese at all, given their policy of long term planning. What am I missing here?
I think Putin invading Ukraine was ultimately about the MC-21. What America discovered about China is China wants every value added industry for their own…so when they partnered with an American company that was merely a temporary relationship to learn from them and reverse engineer technology in order to develop that industry for their own. What China inevitably wants from the rest of the world is just energy and agricultural products.
So the Ukraine War was about securing a market for Ladas and Yotaphones and military equipment…and so Putin already knows he has failed to achieve the primary goal as Ukraine is more aligned with the EU than ever.
With respect to China a naturally gas China wants a robust global LNG market which they will game using their huge hydro resources. So when LNG is cheap they will store water in their hydro reservoirs and when it is expensive they will max hydropower.
Correct in the sense that China followed the post-war Japanese example. Start at the low value end of the export market (Made in Japan once meant low quality) with toys and cheap consumer items, then as you gain experience and knowledge, move up the value chain to compete on electronics, autos, steel and so on. Korea did the same thing, using cheap labour to gain a foothold. You can't depend on cheap labour in the longer term though. India, Indonesia and other poorer nations had the same idea and are now catching up. One thing that comes with economic growth as seen in China is the rising expectations that it drives, starting with higher wages. I think China understands this, which is why you're seeing higher quality export products now. Higher wages also means more demand for consumer items, so some of China's early exporters are now focusing on the domestic market.
I'm a strong believer in what David Ricardo called 'comparative advantage.' We each do what we're best suited for, and trade with nations that do likewise. In that model, there's no stigma attached to being an agricultural or energy producer as long as you get a fair price for what you produce, such that you can trade for items you need but can't make yourself at affordable prices. Not every nation can be a high-tech behemoth, and not every nation has enough arable land to feed itself.
On the question of military equipment, Ukraine was the major centre of military and aircraft production in the USSR. Likewise for steel and coal. Basically most of Ukrainian industry was established by Russia and geared towards markets in the USSR. As such, there was no way they could hope to compete in European markets, so the promise of joining the EU was just bait to draw them into the same unequal relationship as Russia had with western capital in the 90's and Poland has to this day.
If you look back to 2010-14 you see that sentiment among the youth of Ukraine leaned heavily towards the EU, thanks to the efforts of western NGOs to steer them in that direction. But what was the underlying motive of those young people? Increased economic development at home (which would take years) or an EU passport that would allow them to get out of Ukraine, which was a basket case from day one of independence? If you're going to sell into that market you need people with purchasing power, and Ukraine has none, so I doubt Russia's motive was to capture that market. I take them at their word that their position is defensive in nature, following the encroachment of NATO in former Warsaw pact nations.
China may be poised to arbitrage the LNG market as you say, I haven't really looked into that, but taking the longer view I believe China's future is nuclear.
I could write an entire essay on the subject, but to keep it short, in a few years China will be exporting modular nuclear reactors all across Central Asia and Africa, as well as using nuclear power to convert their huge coal reserves into motor and aviation fuel, using the Fischer-Tropsch process, or something similar. That will reduce their dependency on Middle East and Russian oil and gas while cleaning up the air in their cities and industrial centres with the major health benefits that brings. If I was still in the investment game, I'd definitely have money in Chinese nuclear technology with a 10-15 year horizon. Identifying these sorts of trends is what I did for over 20 years and this one seems clear as a bell to me. It's still early too, which is when you want to get in. Along the same lines, I'd be looking to buy Rosatom today, or any high tech Russian corp. for that matter. They are under sanctions right now, so their shares are wildly undervalued. You might have wait a few years, but that's the whole point of long term investing - looking to the future, not the present. It's how fortunes are made, not by trading the day to day moves. Be right and sit tight is the operative mantra.
"Not just the aircraft, but the Russian built engines can be sold as a replacement for Pratt & Whitney engines."
American and European airline regulators won't certify it, regardless of how reliable it is. As a consequence, no airline will find an insurer willing to insure their aircraft. And even if they somehow find one - a Chinese firm, perhaps - those aircraft won't be allowed to fly to the United States or Europe.
These things are true right now, but the inconvenience of not being able to overfly Russia is starting to hurt the bottom line of western airlines. My guess is at some not too distant point those restrictions will be lifted, as well as flights in and out of Russia resumed. Same goes for the energy flows, which will eventually resume. I base my reasoning on the point that multinational corporations are the real power in the West, not the politicians who simply follow their orders. At some point the idea of breaking up Russia will be abandoned because it simply can't work and the cost to the West is too high. Part of that resumption will include some sort of deal involving aircraft certification, but even if it takes longer than expected, in the interim you have quite a few new nations lining up to join the BRICS or SCO, and those are potential customers, especially if Boeing can't turn their situation around, which I believe is institutional in nature and harder to correct than simple technical issues.
On the insurance issue, Russia is already insuring its own ships, I see no reason aircraft can't be similarly insured. Insurance is not something complicated like building a spaceship, which Russia also does, so I don't really see an obstacle there.
Also bear in mind we've seen real-life performance testing of Russian weapons systems, and you can bet every nation that buys arms has taken notice of the superiority of Russian systems, so that industry will also play a major role, and the production levels are already there to meet that demand.
Aircraft aside, look at what Kamaz is producing these days.
Notice they now accept crypto currency as payment, so buyers don't need the Swift system to make their purchase. Now think of all the future development projects in Africa. In 1988 I took a trip down the Pearl River through what was to become the Shenzhen Special Economic Zone. Even that far back the place was a forest of construction cranes. I'd never seen anything like it. I think something similar will happen in Africa, but it will be Chinese and Russian investment driving it, not western, as was the case with China.
I was a stock investor for many years, retired now, but I keep my hand in because it's such an interesting field - figuring out where the next 10 or 20 years of economic growth are going to come from, unlike most western traders whose vision hardly extends beyond the next quarterly statement. As one example, look at Apollo Hospitals in India which started in 1983 with a single hospital catering to western patients. https://www.apollohospitals.com/
They now have some 24+ hospitals across India and are expanding into neighbouring countries. A massive success story which was on nobody's radar at the time, and over the life of the investment has made a lot of people very wealthy. That's the sort of thing I look for, and I see that potential today in Russia. Restrictions on investment capital are an obstacle right now, just as it was with China and India back then, but institutional money will always find a workaround, and private investors have their means as well if you look hard enough. I regard Iran in much the same way, albeit on a smaller scale. That's why Iran is so reviled in the West - not because it's an Islamic Republic, but because it's a potential major competitor in western markets, including high tech.
Part of why the West is failing is that its capitalists no longer take the long view but prefer to play short term games based on leverage, not actual real capital investment. They aren't really capitalists in the strict sense of the word, preferring to ride on the accumulated wealth of the post war era instead of investing for the future, as is the case with China, India, Russia and Iran, all of whom see capital investment in terms of social development, not just profit potential.
OK, that was almost an essay. Sorry to be so long winded but it's something I'm passionate about, even though I'm not an active player anymore.
The Russia-China discord is much deeper than disagreement on gas pricing. The short term factors includes China's exhaustion of foreign reserve (to pay for the gas pipe line) and dwindling domestic needs for Russian Gas. In the very short term, col, hydraulic power, and nuclear power are better choices. it is a cash management problem. But there are larger and deeper problems: rumors about Xi losing power or at least losing domination in economic policies have not stopped after Xi's meeting with Vietnam's General Secretariat (and Chairperson ?). If anything, the rumors get worse.
Then you have to consider the very recent announcement of virtually all China's bank stopped financial transactions with Russia. I am sure some other paths have been worked out, but the "taste" is simply not good for a strategic alliance "without upper limit". Also note the last term has disappeared from the last major Russia-China joint communique on strategic matters. Without Russian technology and experience, and perhaps Russian-made weapon systems as well, China would have a really hard time to attack Taiwan, and the soft-attack approach does require a credible military threat to work. Sabre-rattling by sending airplanes and ships to circle Taiwan can get people in Taiwan bored, if not yet so already.
As Ukraine War goes into the final stage, Russian leaders should have clearly perceived that China is a weak partner. At the time of strengthening relationship with India and Iran, Russia needs to help North Korea to improve its domestic economy, not just military, and to strengthen the military in Far East as PLA is simply not that dependable. Sending two Frigates to the British Channel, yeah, sure. But Russia does not need China to perform that trick to make Russia's case for a pan-European security arrangement.
"...If it musters the political will..." "...in spite of the US’ sanctions..." "...it’s worth risking more of the US’ wrath by ignoring its sanctions for the sake of receiving more discounted energy via a Russian-Iranian swap..." "...potentially leading to PoS-2 beginning construction..."
Yeah, I get all that — makes (just) good (natural) sense.
The question which keeps popping up from the back of my mind is, 'Just how much damage have the Americans done to their water table by fracking, and when will the gas they've got as a result run out?'.
I can't help remembering the debate of all those years ago, e.g. the Hollywood film, 'Promised Land'. I understand it is, as IT has always been in America — all about big business and money, and it all got forgotten when Trump came to power, BUT "The portrayal was first reported in April 2012 by filmmakers raising funds for the pro-fracking documentary FrackNation. They said, "Promised Land will increase unfounded concerns about fracking." (https://www.imdb.com/title/tt2091473/)" (https://en.wikipedia.org/wiki/Promised_Land_(2012_film)) I can't believe all that fracking didn't cause SOME irrevocable damage, nor all that glorious gas is going to last forever.
Seems to me, once it's run out and they can't squeeze any more blood out of their stones, the stuff that just seems to spurt out of the ground all by its own natural self from that vast, vast land that is Siberia and the North of Russia is going to give the Chinese good reason to have a little re-think about compromising.
Any idea when that might be?
Andrew, India isn't going to purchase energy from Iran right now. The risk of Indian banks getting sanctioned and frozen out of the global financial system isn't worth it, especially given the low LNG prices at the moment.
This is interesting:
https://www.reuters.com/business/energy/chinas-plunging-coal-plant-approvals-signal-energy-policy-pivot-report-says-2024-08-22/
I wonder if China's pivot towards so-called 'green energy' might be just a sop to western critics in order to avoid carbon based sanctions? Surely they must realize 'green energy' is just as unworkable in China as everywhere else? At best it's a stop-gap along the way to a nuclear based economy. I notice China is developing next generation nuclear technology, including portable modular reactors which can be positioned along major rail networks, so no need to burn diesel. On the liquid fuel side, China has abundant coal reserves which can be converted to fuel via nuclear energy powering the Fischer-Tropsch process, thus reducing their dependency on imports. Haven't heard anything to that effect, but I'm sure they're looking into it.
A few things don't make sense to me here. There's been a clear policy since at least the Magnitsky Act to source as much food, material and technology as possible from inside Russia, as opposed to importing it. One of the key inputs to do that is of course energy, which Russia has in abundance, so why trade that away? It won't last forever, and you'll need it to transition smoothly to a nuclear based economy somewhere down the road.
As an example of what could be sold abroad instead of oil and gas, look at Russia's domestically produced MC-21 aircraft. https://simpleflying.com/inside-the-russian-mc-21/
Not just the aircraft, but the Russian built engines can be sold as a replacement for Pratt & Whitney engines. Then there's Kamaz, which arguably makes the best trucks in the world. Heavy machinery, machine tools, rail equipment, same thing, and of course the big ticket item, nuclear power plants and the fuel to run them. Japan became a major industrial nation with virtually no domestic energy sources simply by concentrating on high quality technology for export - notably autos and electronics. Why not follow their example, as China and Korea have done? Russia has a natural advantage since most of the raw materials, and ALL of the energy required can be domestically sourced.
Likewise, I don't understand China's position. I thought a key point of the Belt & Road program was to secure an inland route for energy, thus eliminating the threat of a maritime embargo. Why quibble over price when the advantage of the B&R is not just in energy security but in opening new markets, not just at the end point, but all along the new route? It's going to be a long time (if ever) before Central Asian republics can meet all their manufacturing needs, so as growth proceeds along that route, so does the demand for steel, cement, heavy machinery, machine tools, electronics and eventually consumer goods as incomes rise as a result. So why play hardball on a single part of the deal when there are so many benefits to be gained from the whole program? Just eat the damn costs and once you're an established partner, then start bargaining. Much easier to do that once the pipeline's up and running. Strikes me as penny wise pound foolish, which doesn't seem like the Chinese at all, given their policy of long term planning. What am I missing here?
I think Putin invading Ukraine was ultimately about the MC-21. What America discovered about China is China wants every value added industry for their own…so when they partnered with an American company that was merely a temporary relationship to learn from them and reverse engineer technology in order to develop that industry for their own. What China inevitably wants from the rest of the world is just energy and agricultural products.
So the Ukraine War was about securing a market for Ladas and Yotaphones and military equipment…and so Putin already knows he has failed to achieve the primary goal as Ukraine is more aligned with the EU than ever.
With respect to China a naturally gas China wants a robust global LNG market which they will game using their huge hydro resources. So when LNG is cheap they will store water in their hydro reservoirs and when it is expensive they will max hydropower.
Correct in the sense that China followed the post-war Japanese example. Start at the low value end of the export market (Made in Japan once meant low quality) with toys and cheap consumer items, then as you gain experience and knowledge, move up the value chain to compete on electronics, autos, steel and so on. Korea did the same thing, using cheap labour to gain a foothold. You can't depend on cheap labour in the longer term though. India, Indonesia and other poorer nations had the same idea and are now catching up. One thing that comes with economic growth as seen in China is the rising expectations that it drives, starting with higher wages. I think China understands this, which is why you're seeing higher quality export products now. Higher wages also means more demand for consumer items, so some of China's early exporters are now focusing on the domestic market.
I'm a strong believer in what David Ricardo called 'comparative advantage.' We each do what we're best suited for, and trade with nations that do likewise. In that model, there's no stigma attached to being an agricultural or energy producer as long as you get a fair price for what you produce, such that you can trade for items you need but can't make yourself at affordable prices. Not every nation can be a high-tech behemoth, and not every nation has enough arable land to feed itself.
On the question of military equipment, Ukraine was the major centre of military and aircraft production in the USSR. Likewise for steel and coal. Basically most of Ukrainian industry was established by Russia and geared towards markets in the USSR. As such, there was no way they could hope to compete in European markets, so the promise of joining the EU was just bait to draw them into the same unequal relationship as Russia had with western capital in the 90's and Poland has to this day.
If you look back to 2010-14 you see that sentiment among the youth of Ukraine leaned heavily towards the EU, thanks to the efforts of western NGOs to steer them in that direction. But what was the underlying motive of those young people? Increased economic development at home (which would take years) or an EU passport that would allow them to get out of Ukraine, which was a basket case from day one of independence? If you're going to sell into that market you need people with purchasing power, and Ukraine has none, so I doubt Russia's motive was to capture that market. I take them at their word that their position is defensive in nature, following the encroachment of NATO in former Warsaw pact nations.
China may be poised to arbitrage the LNG market as you say, I haven't really looked into that, but taking the longer view I believe China's future is nuclear.
https://www.iaea.org/bulletin/how-china-has-become-the-worlds-fastest-expanding-nuclear-power-producer
I could write an entire essay on the subject, but to keep it short, in a few years China will be exporting modular nuclear reactors all across Central Asia and Africa, as well as using nuclear power to convert their huge coal reserves into motor and aviation fuel, using the Fischer-Tropsch process, or something similar. That will reduce their dependency on Middle East and Russian oil and gas while cleaning up the air in their cities and industrial centres with the major health benefits that brings. If I was still in the investment game, I'd definitely have money in Chinese nuclear technology with a 10-15 year horizon. Identifying these sorts of trends is what I did for over 20 years and this one seems clear as a bell to me. It's still early too, which is when you want to get in. Along the same lines, I'd be looking to buy Rosatom today, or any high tech Russian corp. for that matter. They are under sanctions right now, so their shares are wildly undervalued. You might have wait a few years, but that's the whole point of long term investing - looking to the future, not the present. It's how fortunes are made, not by trading the day to day moves. Be right and sit tight is the operative mantra.
"Not just the aircraft, but the Russian built engines can be sold as a replacement for Pratt & Whitney engines."
American and European airline regulators won't certify it, regardless of how reliable it is. As a consequence, no airline will find an insurer willing to insure their aircraft. And even if they somehow find one - a Chinese firm, perhaps - those aircraft won't be allowed to fly to the United States or Europe.
These things are true right now, but the inconvenience of not being able to overfly Russia is starting to hurt the bottom line of western airlines. My guess is at some not too distant point those restrictions will be lifted, as well as flights in and out of Russia resumed. Same goes for the energy flows, which will eventually resume. I base my reasoning on the point that multinational corporations are the real power in the West, not the politicians who simply follow their orders. At some point the idea of breaking up Russia will be abandoned because it simply can't work and the cost to the West is too high. Part of that resumption will include some sort of deal involving aircraft certification, but even if it takes longer than expected, in the interim you have quite a few new nations lining up to join the BRICS or SCO, and those are potential customers, especially if Boeing can't turn their situation around, which I believe is institutional in nature and harder to correct than simple technical issues.
On the insurance issue, Russia is already insuring its own ships, I see no reason aircraft can't be similarly insured. Insurance is not something complicated like building a spaceship, which Russia also does, so I don't really see an obstacle there.
Also bear in mind we've seen real-life performance testing of Russian weapons systems, and you can bet every nation that buys arms has taken notice of the superiority of Russian systems, so that industry will also play a major role, and the production levels are already there to meet that demand.
Aircraft aside, look at what Kamaz is producing these days.
https://kamazexport.com/
Notice they now accept crypto currency as payment, so buyers don't need the Swift system to make their purchase. Now think of all the future development projects in Africa. In 1988 I took a trip down the Pearl River through what was to become the Shenzhen Special Economic Zone. Even that far back the place was a forest of construction cranes. I'd never seen anything like it. I think something similar will happen in Africa, but it will be Chinese and Russian investment driving it, not western, as was the case with China.
I was a stock investor for many years, retired now, but I keep my hand in because it's such an interesting field - figuring out where the next 10 or 20 years of economic growth are going to come from, unlike most western traders whose vision hardly extends beyond the next quarterly statement. As one example, look at Apollo Hospitals in India which started in 1983 with a single hospital catering to western patients. https://www.apollohospitals.com/
They now have some 24+ hospitals across India and are expanding into neighbouring countries. A massive success story which was on nobody's radar at the time, and over the life of the investment has made a lot of people very wealthy. That's the sort of thing I look for, and I see that potential today in Russia. Restrictions on investment capital are an obstacle right now, just as it was with China and India back then, but institutional money will always find a workaround, and private investors have their means as well if you look hard enough. I regard Iran in much the same way, albeit on a smaller scale. That's why Iran is so reviled in the West - not because it's an Islamic Republic, but because it's a potential major competitor in western markets, including high tech.
Part of why the West is failing is that its capitalists no longer take the long view but prefer to play short term games based on leverage, not actual real capital investment. They aren't really capitalists in the strict sense of the word, preferring to ride on the accumulated wealth of the post war era instead of investing for the future, as is the case with China, India, Russia and Iran, all of whom see capital investment in terms of social development, not just profit potential.
OK, that was almost an essay. Sorry to be so long winded but it's something I'm passionate about, even though I'm not an active player anymore.