The recent imposition of price caps on Russian oil and petroleum products by the United States, the European Union, other G7 countries, and Australia (a group loosely being referred to as the “Price Cap Coalition”) following Russia’s invasion of Ukraine in February 2022 has sent continuous shockwaves across the global energy market. As net importers of fossil fuels, Asian countries have frequently faced rising costs and supply chain disruptions due to unilaterally or collectively imposed sanctions, which have exacerbated issues like poverty, inequality and climate change. 

Effective as of December 5, 2022, the price cap policy, as explained by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), seeks to reduce Russia’s oil revenue following its actions in Ukraine while “maintain[ing] a reliable supply of crude oil and petroleum products to the global market.” The Price Cap Coalition barred support services for select Russian crude petroleum shipments above the price cap. This barring included trading and commodities brokering, financing, shipping, insurance, as well as protection and indemnity, flagging, and customs brokering. In essence, the OFAC Determinations for crude oil and petroleum products permit U.S. individuals to offer these services only if Russian oil or petroleum products are bought at or below the applicable price cap.

As the world’s largest oil importers and one of the biggest buyers of Russian oil, China rejects such a unilaterally imposed price cap. Before the price cap, China’s energy demand had been characterized by its magnitude, growth, import dependence, and geographic dependence on the Middle East. As a consequence of the oil price cap, China has shifted to purchasing Russian oil which were offered at deep discounts, as low as $4 to $10 per barrel below the Brent benchmark. In 2021, China imported $35.8 billion worth of oil from Russia (accounting for 15.6% of its total oil imports). Comparatively, the percentage grew by 50% in 2022. The large move to boost China’s strategic petroleum reserves happened amid weak demand under the ‘Zero-COVID’ policy and poor domestic refining margins. China’s increasing oil reliance on Russia brought  diplomatic pressure from the West, more specifically raged criticism from the Price Cap Coalition. 

One primary motive for China to boost its strategic petroleum reserve, regardless of external expectation, is to avoid taking risks that might upset its economy. To sustain its stable economic development, China not only faced the challenge of transitioning its economic structure, but also of maintaining a peaceful external atmosphere, especially managing a stable relationship with its Northern neighbor, Russia. Energy cooperation hence establishes a cornerstone for a sustainable, peaceful and healthy bilateral relationship between Beijing and Moscow. China seeks to maintain its economic stability and protect its growth trajectory in the face of global geopolitical tensions and economic recession. The country had been consistently preparing for its reopening from the ‘Zero-COVID’ policy that was expected to boost the region’s demand and price for crude oil. 

Such consideration was proven to be fair as expectations of oil price spiked due to increased Chinese consumption over the past quarter. This contributed to the Price Cap Coalition’s decision to lift the oil price cap from $60 to $100 per barrel in early February 2023. Moreover, since Russia oil exports to China mainly go through its Far Eastern port of Kozmino, through the East Siberia-Pacific Ocean pipeline, transition via the Kazakhstan-China oil pipeline and via tankers, these energy lifelines help China bypass the uncertainty surrounding the Strait of Hormuz and the Strait of Malacca, where China is also working consistently to resolve regional geopolitical tensions. In light of this, upholding the Western-imposed sanctions does not align with China’s development priority nor its energy security. Additionally, as China imports more oil from Russia, Beijing is gaining greater leverage in market negotiation with Moscow. Meanwhile, as China and other Asian buyers replace Europe in purchasing the lesser-known Arco-grade crude oil, China is playing a more active role in the resource-abundant, climate-critical Arctic region.

However, as a consequence of rejecting the price cap, China faces several challenges. 

• First, as China purchases more Russian crude oil, it is challenging to balance the affordability and demand of local independent refiners. Substantive import growth may conflict with domestic supply-side reform policy. Chinese oil producers are already planning to increase domestic oil and gas production. Accordingly, competition increases due to excessive supply, while expenditure rises due to shortage in storage. In the latest Xi-Putin meeting from March 20 to 22, though Russia has demonstrated strong motives to increase oil and gas export to China, Beijing  has shown hesitation, implying China’s dilemma on balancing its domestic development priorities versus meeting  Russia’s expectation to recover their energy revenue. 
• Second, as the demand for cheap Russian oil increases, competition among its main buyers, namely, India and China, has pushed up the price. China no longer enjoys a consistent discount from importing large amounts of Russian oil. This development undermines China’s interest in pursuing a longer-term deal with Russia.
• Third, the volatility in oil market could affect China’s original strategy to diversify its traditional energy supply and its plan to transition to renewable energy sources. Diversification is a critical strategy for mitigating energy security risks based on geopolitical reasons, as no country would want to become captive to another power’s energy and geostrategic interests. China’s increased purchases from Russia might compromise its supply chain diversification efforts. In addition, it contradicts China’s long-term plan to transition to pursue environmental sustainability.
• Lastly, China’s deepening reliance on Russian oil will draw more diplomatic pressure, or even sanctions from the West, which may have broader implications for China’s future economic stability and international relations.