Chinese firms cut ties with Russia as sanctions take toll

Tightening sanctions have already had tangible effects. The Chinese company Wison New Energies, which provides technology for LNG production, has decided to suspend all projects in Russia. This directly impacts the key Arctic LNG-2 project. "Russia is becoming a poisoned fruit," experts say.

Tightened Western sanctions are yielding results. The support provided to Putin by China is becoming too costly. More companies from the People's Republic of China are cutting ties with Russian projects as the risk of secondary sanctions is becoming very real.

On June 12, the United States again expanded restrictions to isolate the Russian Federation further. They introduced provisions stating that restrictions could affect entities conducting transactions with Russian companies listed on American sanction lists and supporting Russian projects, including gas liquefaction installations. Following Washington, the G7 group launched another strike, and then (June 27), the countries of the European Union adopted the 14th package of economic sanctions against Russia. The new restrictions limit the resale of Russian LNG outside the European Union.

China, which politically and economically supports the Russian Federation, also responded to the new sanctions. Chinese banks have been demanding information from Russian importers about shipping routes for some time. Now, they are refusing payments if the shipment is destined for a port on the Western blacklist.

The chilling effect, especially of American sanctions, also affected the Chinese energy technology company Wison New Energies, which built modules for the key Arctic LNG-2 project belonging to the Russian energy giant Novatek.

According to Bloomberg, Wison announced that it has halted all current projects in Russia and suspended all new Russian businesses indefinitely. The Chinese dragon's reaction was immediate and widespread. The company also decided to sell all shares in the Zhoushan Wison Offshore & Marine shipyard in Zhejiang Province, China, which was working on modules for Novatek.

Wison's decision to suspend cooperation with Russia certainly poses a problem for Putin. Cut off from Western technologies, Russia turned to China. This dependence has deepened significantly, and today, Russia relies on Chinese technologies in many aspects to a much greater extent than anticipated. The withdrawal of Chinese support is a severe blow to Russian projects.

As the British portal Seatrade Maritime explains, the Chinese shipyard was supplying lifting machines and semi-submersible drilling platforms, offshore oil extraction platforms, large offshore floating cranes, liquefaction and regasification units for FLNG, FPSO, and FSO, as well as modular components for heavy marine and land vehicles and industrial units. As recently as March 2024, Wison sent two modules for Arctic LNG-2 to Russia, and two more remained in the shipyard.

The risk of secondary American sanctions is also becoming a real threat to Chinese companies cooperating with Moscow. The tools used by the USA are proving to be much more precise and effective. They create a domino effect. Striking in one place resonates in others, expanding their reach. More decisions to suspend cooperation will follow.

The withdrawal of the Chinese technology supplier is a blow to a key gas liquefaction project. Russia based its plan to compensate for the loss of the European market, to which a pipeline network on LNG exports connected it.

It was supposed to be in the Ura Bay, in northern Russia, in a former nuclear submarine base, where the Russian gas Eldorado was to be created. Novatek is located in two of the most critical LNG liquefaction installations and a logistics centre for its export, Yamal LNG and Arctic LNG-2, on the opposite side of the bay.

The erosion of the grand investment plan in LNG infrastructure, which was to make Russia the largest producer of liquefied gas in the world, began with Putin's aggression in Ukraine. Western companies involved in gas projects and providing technology cut ties with Russia. As a result, Novatek had to scale back its ambitious plans.

Moscow tried to replace Western technology with its own. However, this proved to be a failure. Novatek's "Arkticheskij Kaskad" was so inefficient that even one of the company's leaders openly admitted it at the beginning of 2022. The "Obski LNG" project, entirely based on domestic technology, had to be converted into a gas processing plant.

As a result, the Russians were forced to turn to China. Companies from the People's Republic provided support by supplying their technology, and banks ensured financing. The Arctic LNG-2 project slowly but steadily expanded its capabilities. Although Russia maintains a rhetoric of success, limiting the Arctic LNG-2 infrastructure to two production lines was necessary. This will significantly reduce capacity to 13.2 million tonnes per year, and the reduction in capacity will mean real revenue losses.

The problem is that successive Western sanctions are closing the channels through which Chinese aid was possible without jeopardizing their interests.

"The United States has further restricted the Russian energy sector to deprive the Kremlin of income. The sanctions lists include not only entities managing future gas liquefaction projects (e.g., Murmansk LNG, Obski LNG, companies affiliated with Novatek) but also those involved in the construction of such plants (Rusgazdobycha, Gazprom Invest) and engaged in LNG export logistics (e.g., seven methane tankers built at the Zvezda shipyard for the export of Arctic LNG-2 production, along with companies supplying selected components for such ships)," notes the Centre for Eastern Studies in its latest analysis.