Why Russia and China Can’t Reach a Simple Agreement to Make Them Both Rich

Indiziert: 2026-05-22

[00:00:00]What if I told you that there was a  deal that would make both Russia and China rich. They both know it, and  they both have known it for years, but neither of them is willing to make the  necessary concessions to get the deal done.

[00:00:14]Well, that is not a hypothetical. It is a reality.  And it is the perfect case study to illustrate why you need to understand bargaining theory to make  any sense of the bizarre world that we live in.

[00:00:27]Perhaps you have already heard  the high-level version of the story. Fresh off Trump’s visit  to China, Xi welcomed Putin to Beijing for the latest renewal of their  unlimited partnership. It was all smiles.

[00:00:41]The main speculation heading into the summit was  whether the parties would finally make progress on a proposed gas pipeline to supply  Siberian energy to Chinese industry.

[00:00:52]So the thinking went, China had held up  the deal in previous years by demanding that Russia offer incredibly low  per unit prices on gas. However, Donald Trump’s foray in Iran has changed  the calculus there. Prior to the war, China sourced about 30% of its gas imports  from behind the Strait of Hormuz. Although it will take many years to complete the pipeline,  the higher baseline level of instability with Hormuz would compel China to raise its offer  to Russia. Or at least that was the hypothesis.

[00:01:25]But nope. No deal. So what gives?

[00:01:30]Well, today, we will begin with a brief  history of the Power of Siberia pipelines.

[00:01:35]Then I will give an overview of the economic  situation between the two countries in the context of the Ukraine War and explain  why it is natural to think that a deal should be happening. But then we will finish  with a pair of bargaining frictions—hold up problems and private information—that  appear to be tanking the negotiations.

[00:01:55]But let’s start with the PoS pipelines. Oh, and just so we are clear, PoS stands for  Power of Siberia, a perfectly good name and abbreviation that causes no problems  when discussing the pipelines casually.

[00:02:12]As you likely already know, a bunch of tiny  creatures all decided to die in the region we now call Siberia. After applying  pressure to their fossils for eons, they turned to natural gas, and now the  Russian Federation tries to keep itself economically afloat by exploiting sales  of the corresponding energy reserves.

[00:02:34]Unfortunately, natural gas is very hard  to transport. Even more unfortunately, very few people live in Siberia  who could use the gas. The best solution is to put the gas in pipes  and send it to wherever the people are.

[00:02:49]Well, it turns out that China has a lot of  people. So it makes sense to send the gas there.

[00:02:55]And that is exactly what China and  Russia have done previously. The Power of Siberia 1 pipes gas from a couple  of eastern fields right into China.

[00:03:05]Construction on it began in 2014, and  they marked the occasion with the pomp and circumstance that you would expect. Here,  you can see the first section getting welded, as well as this person on the right  who is definitely a serious inspector and definitely not a model that  Gazprom hired for the occasion.

[00:03:25]Five years later, the first deliveries  made it to China. And everyone was happy.

[00:03:31]However, Russia has a second major  gas deposit further west. Meanwhile, China still has an endless stream of  people. So the next natural question was whether Russia should construct  a second pipeline for that purpose.

[00:03:45]And that takes us to the current economic  situation, which will actually turn into an essay on yet another way that the Ukraine  War has perversely distorted incentives.

[00:03:56]In the Before Times, Russia did not feel a  pressing need to establish a pipeline from West Siberia to China. After all, there were rich  and willing buyers all over Europe who were also closer to those gas fields. They even built a  pipeline or two to facilitate the purchases.

[00:04:14]But then the Special Military  Operation lasted more than three days, European buyers began to reconsider their  entire relationship with Russian energy, and *someone* may have decided to  sabotage pipeline operations to Europe.

[00:04:30]European purchases persisted a bit longer than  the more Euro-focused leaders would have liked, but the Kremlin now needed  a new buyer all the same.

[00:04:40]As time progressed, the Kremlin also began feeling  a pressing fiscal need to get a deal done. The Russian masses were not gung-ho about the SMO,  forcing Putin to pursue an expensive voluntary contract campaign to keep the ranks staffed. Never  mind all of the metal that the war has consumed.

[00:04:59]And as time has further progressed, the  pink birds kept having the darnedest bad luck in crashing into highly  valuable, highly explosive locations.

[00:05:09]Meanwhile, throughout almost all of this period,  China has been the same that it always has. It has a growing industrial base, and they love operating  with cheap fuel. We have seen this through China increasing imports of Russian LNG, but that  is a suboptimal transportation method. Thus, the pair were a pipeline match made in heaven. And  yet, through 2025, they failed to get a deal done.

[00:05:37]China set contract demands at $120  to $130 per thousand cubic meters, roughly equivalent to the subsidized  prices that Russian domestic consumers pay.

[00:05:49]Side note: these energy subsidies  are common among autocratic regimes, and they are ridiculous. All they do is  incentivize citizens to over consume the fuel and find perverse applications  for it—like Venezuelans converting electricity into bitcoins. It would be  economically more efficient to sell the energy on the open international market, and  then pay the profits back to the citizens.

[00:06:15]Anyway, again, China sought $120  to $130 per thousand cubic meters.

[00:06:22]Russia was looking for twice the  price, between $240 and $260, which is still a discount from post-invasion  prices that Europeans tend to pay. I guess that is what happens when you remove a set of  wealthy buyers from the equation. Regardless, there was no bridge to close the Russia-China  gap, and so you had consecutive meetings where they discussed the pipeline and “made progress,”  yet nothing substantive would happen in between.

[00:06:52]Policymakers in Kyiv just sat back and  watched the whole affair in amusement.

[00:06:57]Then we had the Iran War and the meltdown of  energy markets worldwide. Another pipeline not only provides an alternative for China—it  is also less vulnerable to blockade efforts both at Hormuz and the Strait of Malacca in the  event that Beijing makes a play against Taiwan.

[00:07:15]Hence the speculation that China  might raise its offer price, and the parties might actually  break ground on the second PoS.

[00:07:22]So what happened? According to reports,  Russia kept its asking price at $240 to $260 per thousand cubic meters. And China …  also kept its offer price at $120 to $130.

[00:07:40]Huh. So much for progress.

[00:07:43]Well, if we want to get an  answer to what happened here, we need to start talking  about bargaining problems.

[00:07:48]Actually, we discussed these before in  the context of the pipeline two years ago, when there was another failed negotiation.

[00:07:56]And just so we are clear, I am not arriving here  after the fact to tell you that there are more fundamental underlying problems. I took my stand  on the situation a long time ago, and my only regret is not having the foresight to have the  thumbnail caption read “Heated Rivalry” instead.

[00:08:14]It was clear back in 2024 that the  economically efficient thing to do was to set up the pipeline. Russia was not  going to find a buyer who could offer more, and China was not going to find a  seller who would pass the gas for less.

[00:08:29]So, in principle, a deal should have made  them both better off. Sounds familiar, right?

[00:08:36]Consequently, if they did not get a deal done, then some bargaining friction must have stood  in their way. That is the only way to explain an impasse given a mutual acknowledgment that  a deal would have been better for both parties.

[00:08:50]In that light, whatever is happening over  in Hormuz does not change the feasibility of the agreement. An agreement was always  feasible. What would cause a change in the expected outcome is if something happened  with those bargaining frictions, perhaps in how they interpret them in light of Hormuz or  because something entirely unrelated happened.

[00:09:12]Okay, then let’s discuss the two major  bargaining frictions. The first is called a “hold up problem.” For gas to exchange  hands, someone has to build the pipeline.

[00:09:22]That is a capital-intensive project that will  not offer any returns for an extended period.

[00:09:29]Russia paid the entire capital cost for its  section the Power of Siberia 1. But you do not need me to tell you that Russia does not have  the liquidity for that right now. Therefore, it would be up to China to foot the bill.  The standard economic trade would then be for Russia to offer discounted rates on gas  until it pays back China for the de facto loan.

[00:09:52]If only it were that simple. Beijing must  worry about what happens once the pipeline is up and running. Whatever China poured into  the construction is now a sunk cost. In turn, China must be concerned that whatever discount  was agreed to years previously will vanish, and Russia will begin holding it  to the market price. After all, if Moscow can find someone willing to pay more, it  will find an excuse to sell the gas to that party.

[00:10:22]A cautious Beijing consequently forces Russia  to front its share of the pipeline investment, which is exactly what the current proposal is.

[00:10:31]How has this bargaining friction  evolved over time? Well, the hold up problem will never go away. The  only thing that can mitigate it is Russia’s ability to make the capital outlay. And  I would say that has only gotten worse, as the continued war has only made  budget constraints in Moscow tighter.

[00:10:50]The second of the two bargaining frictions  is private information. China is under the impression that Russia is desperate to get  a deal done and thus will be willing to take a significant haircut to get there. Russia’s  position is that, no, it is not in trouble to the degree that China believes it to be,  and so there will be no haircut at all.

[00:11:12]This sounds like a classic case of Russia having  private information about its own vulnerability, and it is impossible for us as outsiders to know  who is right. After all, if we could clearly see Russia’s true position, then so could China, and  either Russia would have no ability to bluff, or China would recognize that it is wrong  and change its position accordingly.

[00:11:35]This asymmetry would also explain why  recent negotiations between Ukraine and Russia have gone nowhere,  so it does seem plausible.

[00:11:45]On one hand, it is surprising that this  uncertainty has persisted for as long as it has. On the other, the Ukrainian refinery  campaign has caused enough observable damage that it ought to exacerbate the differences in  the remaining unobservable factors. And that might also be causing whatever has happened along  Hormuz to cancel out in negotiations with China.

[00:12:07]And zooming out, I would not expect this  impasse to last forever. At some point, China will concede that Russia is  capable of holding out for the long run, or Russia will have to give up its bluff. And  eventually Russia’s economy will return to a state where making years-long infrastructure  investments will be a wise financial move.

[00:12:28]Okay, that one will be a while, but they  will get there at some point. So I think it is inevitable that the Power of Siberia 2 gets  built. But until the fiscal and informational problems get resolved, it will be difficult  to finalize an agreement on the pipeline.

[00:12:45]So, what are our takeaway lines for today? The  Power of Siberia 2 should improve both China and Russia’s welfare. Bargaining frictions  are getting in the way of reaching a deal.

[00:12:57]The Strait of Hormuz crisis does not  affect bargaining incentives in the way that would be necessary to change  things. And because Hormuz challenges do not override the frictions, we  go another summit without a deal.

[00:13:10]Meanwhile, you do not have to wait to  learn more about the politics of China.

[00:13:14]I have a playlist defe... Dedicated.  I have a playlist dedicated to the subject. Autocorrect got me again. But  boy is that fitting for this PoS video.

[00:13:25]Anyway, if you enjoyed today’s  video, then please like, share, and subscribe, and I will  see you next time. Take care.