The $4 Billion Annual Discount: How China Exploited Russia’s Loss of European Gas Markets to Secure a 30 Per Cent Price Cut on Power of Siberia 2

Expert Comment — Eurasia Programme

2026-05-18

TBefore February 2022, Russia sold approximately 150 billion cubic metres of natural gas to Europe annually at prices indexed to oil, generating over $50 billion in annual revenue. By early 2026, pipeline gas exports to Europe had fallen to near zero. The loss of the European market has forced Russia to find alternative customers for its gas. The only viable alternative is China. And China has used this leverage ruthlessly. In negotiations for the proposed Power of Siberia 2 pipeline, China is demanding a price of approximately $5 per million British thermal units, compared to the $7-8 that Russia initially sought. The difference of $2-3 per million BTUs, applied to 50 billion cubic metres annually, represents a transfer of value from Russia to China of approximately $4-5 billion per year.

The pricing dispute reflects a fundamental structural asymmetry. Russia has lost its primary market for pipeline gas and has no alternative to China as a customer for new pipeline exports. China, by contrast, has multiple sources of gas: domestic production, pipeline imports from Central Asia and Myanmar, and LNG imports from Qatar, Australia, and the United States. Russia is a seller with a single buyer. China is a buyer with multiple sellers. The asymmetric bargaining dynamic has allowed China to extract favourable terms not only on price but on financing, ownership, and transit arrangements. The Power of Siberia 2 pipeline, initially envisioned as a strategic partnership between equals, has become a transaction in which China dictates the terms.

The infrastructure dimension reinforces the dependency. The Power of Siberia 2 pipeline will cost an estimated $30-40 billion, with the cost shared between Russia and China. The investment locks Russia into supplying the Chinese market for decades, reducing its strategic flexibility. Russia will become dependent on a single customer for a significant share of its gas export revenue, creating a vulnerability that China can exploit in future negotiations. The infrastructure investments that were supposed to give Russia energy security have, paradoxically, created new forms of strategic dependence.

The same asymmetry is visible in the oil market. Before the war, Russian Urals crude traded at a discount of $1-2 per barrel to Brent, reflecting its slightly lower quality and transport costs. By 2025, the Urals discount had widened to over $12 per barrel, reflecting the additional costs of shipping to Asian buyers and the market power of Chinese and Indian refiners who now serve as Russia’s primary customers. The discount represents an annual revenue loss for Russia of approximately $25-35 billion. The oil discount and the gas price discount together cost Russia approximately $30-40 billion annually — a permanent transfer of wealth from Russia to its Asian customers that reflects the fundamental shift in power in the energy relationship.

China has become Russia’s primary supplier of dual-use technologies essential for sustaining its military-industrial complex. Chinese companies have shipped advanced chips, microelectronics, and machine tools to Russia in quantities sufficient to partially offset the impact of Western export controls. The technology relationship is as one-sided as the energy relationship. Russia’s growing dependence on Chinese technology for its defence industry gives Beijing leverage over Moscow that extends far beyond the economic dimension.

The Russia-China partnership has fundamentally altered the global balance of power. The two countries coordinate their positions in the UN Security Council, support each other’s diplomatic initiatives, and cooperate in military exercises. The partnership provides both countries with diplomatic cover and economic support. For the West, the Russia-China axis represents the most significant strategic challenge since the Sino-Soviet split of the 1960s. Developing a strategy for dealing with the partnership that recognises the asymmetry in the relationship and seeks to exploit its vulnerabilities is one of the most important challenges facing Western policymakers.

The shift in the energy relationship between Russia and China reflects a broader shift in the balance of power between the two countries. Russia has traditionally been the senior partner in the relationship, providing energy, arms, and diplomatic support to a China that was still developing economically and militarily. The balance has shifted dramatically. China’s economy is now over ten times larger than Russia’s. China’s military is modernising rapidly. China’s diplomatic influence is expanding across the globe. Russia, weakened by the war in Ukraine and Western sanctions, is increasingly dependent on China for economic survival and diplomatic cover. The shift in the balance of power has profound implications for the future of the relationship and for the international order more broadly.

Despite the deepening of ties, the Russia-China partnership has limits. The two countries have different strategic priorities, different worldviews, and different long-term interests. China’s focus is on economic development and technological advancement. Russia’s focus is on security, great power status, and opposition to US-led international order. The partnership is instrumental rather than organic, based on shared opposition to the United States rather than shared values or shared interests. The instrumental nature of the partnership means that it is vulnerable to changes in the strategic environment. If the United States were to reduce its pressure on Russia or China, the incentives for the partnership would diminish. The Russia-China axis is a product of the current strategic environment, not a permanent alignment.

Russia’s loss of the European gas market has had a devastating impact on its fiscal position. Gas export revenues have fallen from over $50 billion annually before the war to approximately $20 billion in 2025. The budget deficit has widened, and the government has been forced to draw on the National Welfare Fund, which has lost nearly half its value since early 2022. The combination of the revenue decline and the costs of the war is putting severe pressure on the Russian budget. Russia’s ability to maintain its current level of defence spending while sustaining social spending and servicing its debt is limited. The fiscal pressure will force difficult choices in the coming years, and those choices will have implications for the sustainability of Russia’s economic and political model.

The shift in the balance of power between Russia and China is most visible in Central Asia. Russia has historically dominated the region through its security presence, economic ties, and political influence. China has now surpassed Russia as the dominant economic power in Central Asia. The Belt and Road Initiative has funded roads, railways, and pipelines that connect Central Asia to Chinese markets. The Central Asian states have welcomed China’s engagement as a counterbalance to Russian influence. The geopolitical shift in Central Asia has significant implications for both Russia and China and for the broader balance of power in Eurasia.