One Shot Is All You Get

While I disagree with the conclusion that Simon Watkins draws in his post at OilPrice his observations about China’s reactions to the sanctions imposed on Russia are interesting. His conclusion is that China is preparing to attack Taiwan. I doubt it but I’ve been wrong before.

Here are his key observations:

urning a profit is unlikely to be top of President Xi’s agenda in invading Taiwan, but ensuring China’s energy security in such an event will be. However, as analyzed in-depth in my new book on the global oil markets, China has long been strengthening its energy security both through its expanded activities in the Middle East connected to its ‘One Belt, One Road’ program and through its broadening and deepening of its energy links to Russia. Direct infrastructure links between China and Russia have been extremely extensive in recent years, with recent notable examples of this being, in the oil sector, Rosneft signing an US$80 billion 10-year deal to supply the China National Petroleum Corporation (CNPC) with 100 million metric tonnes of oil over the period (slightly over 200,000 barrels per day). In the gas sector, at almost the same time, Gazprom signed a 10 billion cubic meters per year (bcm/y) deal to supply gas to CNPC, adding to another supply contract between the two companies signed in 2014 – a 30-year deal for 38 bcm/y to go from Russia to China. This, in turn, is part of, and augments, the ‘Power of Siberia’ pipeline project – managed on the Russian side by Gazprom and on the China side by CNPC – that was launched in December 2019. In recent weeks, though, China has been buying massive extra quantities of Russian oil, on top of the levels previously required in its regular usage pattern. According to industry data, China bought a record quantity of Russian crude oil in May, increasing purchases by around US$1 billion more than in April, to just under US$7.5 billion, which is more than double the amount China bought from Russia in the same period last year, making Russia China’s largest supplier of crude oil.

Crucially as well, for both China and Russia, China has long seen increased internationalization of its renminbi currency as a fitting reflection of its growing status in the world, and trading between the two countries in their local currencies has increased dramatically in the past few years. Back in September 2018, the chief executive officer of Russia’s Novatek, Leonid Mikhelson, said that Russia had been discussing switching way from US$-centric trading with its largest trading partners such as India and China, and that even Arab countries were thinking about it. “If they [the U.S.] do create difficulties for our Russian banks then all we have to do is replace dollars,” he added. At around the same time, China launched its now extremely successful Shanghai Futures Exchange with oil contracts denominated in yuan (the trading unit of the renminbi currency). Such a strategy was tested initially at scale in 2014 when Gazpromneft tried trading cargoes of crude oil in Chinese yuan and roubles with China and Europe.

I think that China is just insuring itself against sanctions similar to those imposed on Russia being imposed on China, regardless of why they’re imposed. That seems only prudent to me. Said another way if the U. S. had intended for China to makes these moves it could hardly have done so more effectively than by imposing them on Russia.

The lesson here is that we may have blown our only shot at applying such sanctions. They won’t be nearly as effective if we try a second time and they haven’t been extremely effective the first go round.