Mongolia Takes Down Russian Giant: Implications for Regional Economics and Politics

Current Challenges for Russia

The current situation for Russia is undoubtedly challenging.
The focus, of course, turns to the ongoing war in Ukraine and the hostile invasion in the west of Kursk.
However, a significant blow to Moscow has come unexpectedly from Mongolia, a nation traditionally viewed as a friendly state to the Federation.

Sila Sibiri-2: The Gas Pipeline Project

This situation revolves around the Sila Sibiri-2, or “Power of Siberia 2,” a gas pipeline designed to double the capacity of the existing pipeline that transports gas from eastern Russia to China.

This infrastructure is crucial for Russia, particularly for Gazprom, which owns the existing Sila Sibiri pipeline and has conceived the new extension.
In 2023, Gazprom faced its first significant financial loss after years of lucrative profits.

The Sila Sibiri-2 project entails constructing a pipeline that stretches from the Yamal gas fields in northern Siberia, traversing Mongolia to reach China, specifically Shanghai.
This pipeline is expected to be approximately 2,500 kilometers long and capable of transporting 50 billion cubic meters of gas annually, with total estimated costs exceeding $13 billion.
It is vital to Vladimir Putin, yet the subject was notably absent from his recent trip to China.

Mongolia’s Surprise Decision

Recently, the Mongolian government announced it would not include the Sila Sibiri-2 project in its national development plans up to 2028, dealing a severe blow to Russia.
Experts suggest that Mongolia’s refusal to allow this massive international gas pipeline will exacerbate Gazprom’s financial troubles.

Consequently, both foreign and Russian investors are reportedly shying away from buying shares in the giant corporation given the project’s current status, which appears frozen.

Underlying this decision from Mongolia is believed to be the influence of China.
Beijing, sensing Moscow’s vulnerability, appears to have demanded that any Russian gas exported through Sila Sibiri-2 be sold at local Russian market prices, a proposal unacceptable to Putin as it would lead to Gazprom’s significant losses.

The Sila Sibiri-2 project thus appears to be on the brink of failure, marking a substantial setback for Russia, ironically caused by two nations, China and Mongolia, that are considered among its closest allies.