Russo-Chinese Relations

When Russian President Dmitry Medvedev visited China the last week of September, pride of place in the diplomatic agenda was made manifest in a ceremony marking completion of the Skovorodino-Daqing oil pipeline between the two countries built in just 20 months. Comprising a 576-mile spur on the Chinese side of the border to the longtime energy-sector city of Daqing and a 45-mile connector on the Russian side to the East Siberia-Pacific Ocean (ESPO) oil pipeline, it will allow Russia to export 300,000 barrels per day to China over the course of two decades, representing roughly eight percent of current Chinese imports and four percent of current consumption. Pursuant to a February 2009 agreement, Russian para-statal energy companies received $25 billion in loans in order to construct this pipeline and as pre-payment for oil to be received.

The post-Cold War context

The US has over the past decade asserted some strategic interests in South and Southwest Asia (most notably but not only Afghanistan and Iraq), but its military bases and access to facilities in Central Asia have not amounted to a great deal in the broader scheme of things. Flagging interest and uncoordinated policies have undermined earlier strategic gains.

After the Soviet Union disintegrated, the US leapfrogged the Caspian Sea into Central Asian prominence through US energy companies’ relations with Kazakhstan. By the late 1990s, however, despite the success of these energy-industrial ventures, it appeared that a strategic Sino-Russian condominium (‘joint rule’) regime was beginning to close over Central Asia as a whole.

Already throughout the 1990s, Russia had become China’s biggest provider of weapons and military technology, filling the gap left by the western arms embargo imposed after the massacre in Tiananmen Square. These purchases provided important support for the obsolescing Russian arms industry in the years following the Soviet collapse.

A rapprochement between the two powers had thus already been underway for some time before the 9/11 terrorist attacks. Before then, no one anticipated that the US would actually put military ‘boots in the ground’ in the wider region.

Two months earlier, Russia and China had signed their first bilateral treaty in a half-century, the “Treaty on Good-Neighborly Relations, Friendship, and Cooperation.” Besides the treaty’s inclusion of provisions for military cooperation (training of Chinese personnel in Russia, increased Russian arms sales to China including high-technology hardware and know-how) the contemporaneous institutionalization of the Shanghai Cooperation Organization (SCO) created the impression of such parallel strategic interests, mutually endorsed in the treaty, as Chinese political repression in Xinjiang and the Russian fight against the Islamic Movement of Uzbekistan.

On the basis of that treaty, energy cooperation between the two states acquired new momentum, although it took several years for the fruits to become evident. Nevertheless, in fairly quick succession, China National Petroleum Corporation (CNPC) soon signed an agreement on strategic cooperation with Gazprom (October 2004) for developing two natural gas pipelines, a long-term cooperation agreement with Rosneft (July 2005), and another long-term cooperation agreement with Lukoil (September 2006).

A subsequent agreement in October 2008 with Transneft laid the basis for construction and operation of the Russia-China Crude Pipeline, colloquially and almost universally referred to as the Skovorodino-Daqing pipeline, from its terminus points in the two countries.

The natural gas bottleneck

The gas trade between the two countries has not seen the same success as the cooperation in oil: an important gas pipeline project lingers on the sidelines. When Russia created its Eastern Gas Program (EGP) in 2007 to integrate its state activities in gas production and export, one of the two pipelines foreseen in Gazprom’s October 2004 agreement with China was not included.

That was the Altai pipeline, projected to run from West Siberian gas fields into Xinjiang in western China, where it would join China’s West-East Pipeline (now a network of multiple strings) that extends to Shanghai. The Altai pipeline has already been under construction for some time, because there are Russian consumers for the gas in the event that there is no agreement with China over the export price.

The website of Gazprom does not even mention the Altai gas pipeline in the context of the EGP. Price has been the sticking point. Russia wants to set the gas price as a function of the price of oil as it is accustomed to doing with European partners, but China wants to negotiate a lower price. Gas deliveries to China from Turkmenistan are ramping up only slowly, and China still needs other sources, preferentially overland from Asia in order to avoid the Straits of Malacca chokepoint and diversify sourcing.

Putin’s subsequent suggestion that an “Asian oil basket” be used as a basis for pricing Russian gas to China has not eventuated in any agreement despite repeated assurances. Russian leaders have nevertheless lately declared yet again their expectation of an agreement on gas prices with China, now projected for the first half of 2011, with as much as 30 billion cubic meters per year (bcm/y) starting to flow by 2015. According to Gazprom, the cost of building the Altai pipeline has meanwhile increased from $10 billion to $14 billion.

It is notable that China has not offered a concessionary loan for the Altai gas pipeline as it did for the ESPO oil pipeline. Recent press reports suggest that China may now be considering a $25 billion loan to fund pipeline construction and take 30 bcm/y over the period of a 30-year contract. It remains to be seen whether this actually happens.

Meanwhile the Yakutia-Khabarovsk-Vladivostok gas pipeline, which was to have run from Yakutia into northeastern China, is also dormant. It was to have been built in a corridor along with the ESPO oil pipeline, connecting with the Sakhalin-Khabarovsk-Vladivostok gas pipeline, both of them then proceeding to a liquefied natural gas (LNG) plant. The latter pipeline nevertheless commenced construction in June 2009, with the LNG product now planned for export to Japan.

Conclusion

Strategic cooperation between China and Russia transcends the energy sector, but the convergence of energy interests nevertheless remains the driving force behind their improving ties. Besides oil and gas, last month Russia agreed on terms for a Chinese loan of $6 billion in exchange for coal exports over the next quarter-century. Also during Medvedev’s visit Russia agreed to build two more nuclear power stations outside Shanghai, while China is set to build a high-energy steam generator in Yaroslavl.

In addition, although some US-based energy companies continue to be active in the region, it is for example western European companies that have finally taken the initiative to unlock the westward direction for Turkmenistan’s gas. And while Russia is finding itself increasingly locked out of Turkmenistan, China is not. Russian participation in Kazakhstan’s energy sector has not grown so much during the past decade as it did in the 1990s, but China’s has only intensified.

At the same time, Chinese economic excursions into Russian industry on Russian territory are likely to increase. The sovereign wealth fund China Investment Corporation (CIC), with $300 billion in assets, has this month expressed its wish to participate in the privatization program announced last year by Finance Minister Alexei Kudrin, according to whom the government will sell stakes worth approximately $10 billion every year for the next five years.

The Sino-Russian ‘condominium’ that seemed to be closing over Central Asia a decade ago, but which was interrupted by the assertion of US military-strategic interests in neighboring regions, is seeking to reassert itself in a different form. China and Russia can no longer freeze the existing correlation of forces in the region; instead, they wish to provide the mold into which these gel.


Originally published at ISN and reproduced here with permission.