Sino-Russian Energy Ties

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Introduction

Russian President Vladimir Putin and Chinese President Hu Jintao capped a March meeting in Beijing by signing dozens of significant deals on telecommunications, transportation, security, and, most significantly, energy. The agreements mark a period of closeness between the two giants as they cooperate on a range of topics and seek to counter U.S. influence in Central Asia and around the world.

What is the state of relations between the two countries?

Possibly the best it’s ever been, experts say. In 2005, the two sides settled their lingering border disputes, held joint military exercises, and enjoyed rapidly increasing bilateral trade. In 2005, trade between the two nations was worth $30 billion, up 37 percent from 2004. Moscow and Beijing have signed a "strategic partnership" agreement and are increasingly coordinating their foreign policies. "Relations between China and Russia have never been better since the time of Mao and Stalin, from 1949-1953," says Anders Aslund, senior fellow at the Institute for International Economics. "There’s an enormous complementarity between Russia, which has commodities, and China, which has cheap labor and manufacturing." Experts say the two powers also share a common political objective. "The energy relationship is a manifestation of the larger strategic relationship between the two countries, which has the goal of containing the United States," says Ted Galen Carpenter, vice president for defense and foreign policy studies at the Cato Institute.

The relationship has its tensions, too. China is frustrated at the slow pace of oil and gas deals, especially on a few much-desired pipeline projects. Russia wants Beijing to buy more of its manufactured goods to prevent Moscow from becoming only a source of raw materials for China. And while Russia is China’s main arms supplier—providing everything from destroyers to nuclear submarines—Moscow is more reluctant to sell items, including military aircraft and missile systems, which Beijing could use against it in a land war. "Moscow doesn’t entirely trust the Chinese," Carpenter says. And the feeling is mutual: China doesn’t entirely trust Putin’s promises, Aslund says. "When Putin makes a decision, it’s at best a memorandum of understanding," he says.

How significant are the energy links between Russia and China?

"Especially in the last month, they’ve become a lot more extensive," says Andrew Neff, a senior energy analyst for Global Insight, a London-based intelligence research firm. Russia, a major energy supplier, is finding an ideal market for its products in neighboring China, whose booming economy has an almost insatiable appetite for energy. "It’s an almost perfect marriage of convenience," says Carpenter. Putin’s visit marked the fifth time he and Hu have met in the last year, and showcased the rapidly improving ties between the two countries. While in Beijing, Putin and the roughly 800 Russian officials and industrialists in his entourage signed dozens of agreements on issues primarily involving energy, but also including manufacturing, aviation, telecommunications, and nuclear power.

In which areas are the two countries expanding their cooperation?

They range from energy to national security, and include:

• Oil. Russia is China’s fifth-largest foreign oil supplier. During Putin’s visit, the two countries signed an agreement to expand their cooperation on joint oil and development projects between their state-owned gas conglomerates, Rosneft and China National Petroleum Corporation (CNPC). Russia will provide some 15 million tons of crude oil to China in 2006—about a tenth of China’s imported oil needs. The two countries are also in talks to build a $11.5 billion pipeline from Anagarsk in Russia’s Siberia to the Pacific Ocean, with a connection to the Daqing oil fields in eastern China.
  
• Gas. Gazprom, Russia’s state energy corporation, is considering building two new pipelines that would deliver natural gas to China. Each pipeline would have a capacity of some 40 billion cubic meters per year. In addition, the two countries signed several joint gas exploration and production deals in Beijing in March. Deliveries of Russian gas from Siberia could start in as few as five years, experts say.
  
• Coal. China still gets most of its energy from coal, amounting to 64 percent of domestic consumption. In March, the two countries discussed Russian investment in modernizing large-scale mines and power plants, as well as Chinese investment in Russian plants that would sell energy back to China.
  
• Electricity. Russia delivers between 500 and 900 million kilowatt/hours of electricity to China annually. The two sides want to raise this level to 18 billion kilowatt/hours per year by 2010, which would supply the electricity needs for two of China’s twenty-three provinces. Once feasibility studies are complete, Russian and China are likely to sign long-term contracts to ensure electricity supply and set prices.
  
• Nuclear technology. Putin said in Beijing that his country is ready to help China build nuclear power plants. Both Moscow and Beijing have also supplied North Korea and Iran with nuclear training and equipment.
  
• Military cooperation. The two militaries are increasing their cooperation though the regional Shanghai Cooperation Organization. They staged joint military exercises in 2005 for the first time, and are working together closely on Central Asia security issues.
  
• Transportation. Russia pledged to help China build civilian aircraft, including the medium-range RRJ transport plane made by Sukhoi Aviation.
  
• Economic zones. In Beijing, the two countries discussed creating special economic zones along their shared 2,700-mile border.

What kind of investments is China making in Central Asia?

China has invested heavily in oil and gas resources in Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan. It has signed a raft of bilateral energy cooperation deals, and there are also plans for a $4 billion Chinese-Kazakh coal-fired power plant at Ekibastuz near the Russian-Kazakh border. China’s interest in the region is not surprising: Central Asia has more than 2 billion barrels of proven oil reserves. China bought a major Kazakh oil company last year, and China and Kazakhstan have a multiyear pipeline project underway. The Atasu-Alashankou pipeline cost $700 million to build, and launched in December 2005, only sixteen months after construction began. This pipeline, Kazakhstan’s first path to the outside world without Russian influence, is expected to reach its export capacity of two hundred thousand barrels per day by the end of 2007. It is the second part of a three-phase pipeline that will connect Caspian Sea oil fields to China.

China’s moves to capture the region’s energy resources are taking place right in Russia’s backyard. Russia is looking to capitalize by ratcheting up its own investments in the region. The vast majority of Central Asian oil and gas must travel through Russian pipelines; as a result, Gazprom exerts control over the Central Asian republics’ access to markets. "Russia’s effective control over Central Asia’s oil and gas export infrastructure has translated into substantial leverage over the economic development of the ’stans’ in the post-Soviet era," Neff writes in the March 6, 2006, issue of Oil and Gas Journal.

What are the implications for Central Asia?

Experts say Russian and Chinese interests in Central Asia clash with U.S. and European efforts to encourage democracy and bring economic reform there. "The new energy behind U.S. democracy-promotion efforts and rhetoric combined with the series of ’color revolutions’ in Georgia, Ukraine and Kyrgyzstan are generating an authoritarian backlash championed by Beijing and Moscow," writes Carnegie Russia expert Andrew Kuchins in the Moscow Times. Carpenter agrees. "Both Moscow and Beijing are concerned about U.S. efforts to bring democracy to the region," Carpenter says. "They’re using the Shanghai Cooperation Organization (SCO) to try to edge the United States out of Central Asia, both militarily and politically." In July, the SCO issued a communique that called on the United States to set a timeline for withdrawing from military bases in Central Asia. Soon after, Uzbekistan decided to evict the United States from its military base at Karshi-Khanabad.

Are Russia and China converging on foreign policy issues beyond Central Asia?

To some extent, yes. In what Neff calls "a backlash against U.S. hegemony," Russia and China are coordinating their policies on a range of world issues to counteract U.S. influence. Russia and China, both veto-holding members of the UN Security Council, oppose U.S. efforts to apply sanctions on Tehran for its nuclear program. And both countries, as participants in the six-party talks on North Korea’s nuclear program, favor a negotiated solution to force. Moscow and Beijing are seen as buffering Pyongyang from various forms of U.S. pressure to drop its nuclear program—including the threat of regime change. "Both Moscow and Beijing want the North Korea problem solved through diplomacy. They see the U.S. military option as intensely destabilizing for the region," Carpenter says.

What are the implications for Japan?

The proposed oil pipeline has at least two potential routes: from Anagarsk to the Chinese pipeline network at Daqing, or from both west and east Siberia to the Pacific coast port of Nakhodka. Both China and Japan are pushing for their preferred route. Japan wants the Nakhodka export terminal to be the pipeline’s only outlet, and is worried that if the Chinese link is built Beijing will end up with the lion’s share of Russian oil exports. Experts say the concern is not unreasonable. Carpenter and Neff both believe China will end up the winner of the pipeline competition. Experts say the decades-old dispute over the four southern Kuril Islands, among other issues, has stymied Russo-Japanese cooperation. Overall, "Japan is feeling increasingly uneasy about China’s rise, and its position becomes economically and strategically more precarious if China is backed by Russia," Carpenter says. Experts say Japan has improved its relations with the United States and is reaching out to India to counter the growing Sino-Russian relationship.

What are the implications for the United States?

Many experts say U.S. leaders have not paid enough attention to the growing Russia-China relationship. "To this point, the United States has been relatively complacent about the Russia-China rapprochement," Carpenter says. "At this point there still a question over how to react to [the relationship]," Neff says. Some critics say this indecision shows the United States sleeping on the job while the other two countries pull ahead. But others say the United States is now realizing the implications of closer Sino-Russian relations. Washington has reached out to Tokyo, and its recent nuclear deal with India shows U.S. leaders are aware of the need to balance power in the region, these experts say.