Thorns in the rosy China-Russia relationship
By Sergei Blagov
Having moved beyond their antagonistic Cold War relationship, Russia and China
are now seeking to develop a strategic partnership. In addition to Russia's
substantial arms sales to China and joint military exercises conducted under
the umbrella of the six-nation Shanghai Cooperation Organization (SCO), the two
countries have also sought to cement their bilateral relationship through
energy ties.
Indeed, China's rapidly growing economy and its increasing demands for energy
have proved to be a complementary match with Russia's massive energy resources.
Yet despite optimistic
official pronouncements by the leaders of both countries, thorny issues remain,
particularly in the area of bilateral commerce.
Arms sales and military exercises
In recent weeks, a significant number of Chinese soldiers were transported
through Russia for the SCO's military exercises, code-named "Peace Mission
2007". The drill, which started last Thursday and ends this Friday, involves
some 4,000 troops, mainly Russian and Chinese, in Chebarkul, Chelyabinsk
region. The Kremlin has made little secret that it views the war games as a
demonstration of multilateral solidarity, with anti-Western overtones.
In June, the SCO defense ministers met in Bishkek to discuss the drill. At the
meeting, Russian Defense Minister Anatoly Serdyukov criticized the US
missile-defense plans for eastern Europe. In an apparent reference to the
perceived unilateralism of the United States, he reportedly claimed that some
nations used the "war on terror" and non-proliferation efforts in their own
interests, thus undermining the interests of other countries.
The SCO war games are part of a second series of major joint exercises, the
first being the eight-day maneuvers in August 2005, code-named "Peace Mission
2005", which involved some 10,000 troops in eastern China's Shandong Peninsula.
Repeated displays of Russian and Chinese military power were understood to
indicate the determination by both Moscow and Beijing to project their clout
jointly in Central Asia.
Incidentally, the SCO could have marked Peace Mission 2007 with even more
anti-Western overtones. Last year, Iran was understood to be interested in
participating in the war games under its observer status in the SCO. The June
2006 SCO summit in Shanghai, however, made it clear that membership status was
not going to be extended to Iran any time soon. Subsequently, only the
militaries from the SCO member states were invited to Chebarkul this month.
The foundation of the Sino-Russian security relationship, however, rests not as
much on the joint military drills as on the extensive arms deals between the
two countries. Over the past decade, China has been a top importer of
Russian-made military hardware, though beginning this year, Russian media have
been speculating that Russian arms exports to China, estimated at some US$1.5
billion in 2006, were slowing down. Chinese officials were quick to counter
these claims.
On July 27, Chinese Ambassador to Moscow Liu Guchang announced in Chelyabinsk
that bilateral military cooperation remained "very successful". In the
meantime, Moscow and Beijing have repeatedly pledged to cement their
partnership. During his March 26-28 state visit to Russia, Chinese President Hu
Jintao hailed what he described as the bilateral "strategic cooperation" and
presided over a ceremony in the Kremlin to open the "Year of China in Russia".
Energy partners?
China's import of Russian energy has likewise been a key element in the
bilateral relationship, as reflected by the numerous deals that have been
struck in recent years. In March, China and Russia signed a joint statement
pledging to cooperate on a variety of issues. In their declaration, Russia and
China vowed to boost cooperation in the oil, gas and power sectors to
consolidate "comprehensive and long-term strategic collaborative relations in
energy and resources". Russian state-run oil giant Rosneft and China's Sinopec,
however, reportedly postponed signing a $1 billion contract to increase
crude-oil supplies to China.
Last November, Rosneft and Sinopec, a subsidiary of the China National
Petroleum Corp (CNPC), signed an agreement on strategic cooperation. According
to Rosneft, joint projects with Sinopec in Russia and some third countries
could eventually total $3.5 billion.
In July 2005, Rosneft and Sinopec agreed to launch a joint venture to explore
the Veninsky deposit, part of the Sakhalin-3 project. This February, Rosneft
and Sinopec reiterated their pledges to develop the Veninsky bloc jointly at
Sakhalin-3, as well as the OAO Udmurtneft and Adaisky bloc in Kazakhstan.
Sinopec reportedly offered to set up a joint refinery venture in northern
China.
In addition, Rosneft, CNPC and the State Development Bank of China have also
signed a $6 billion contract involving the transfer of 50 million tonnes of
crude oil to China. Last October, Rosneft and CNPC agreed to set up Vostok
Energy, a joint-venture company, which planned to produce 10 million tonnes of
crude oil a year by 2009-10 in Eastern Siberia and Russia's Far East. Rosneft
has a 51% stake in the joint venture, while CNPC holds the remaining 49%
interest in Vostok Energy.
The Kremlin awarded the joint venture with lucrative concessions. On July 31,
Vostok Energy placed winning bids to develop two oil-and-gas deposits in the
Irkutsk region. Vostok Energy paid 400 million rubles ($15.65 million) for a
license to develop the Western-Chonsk deposit and 780 million rubles for the
Verkhneichersky deposit. On August 1, Rosneft stated that Vostok Energy was
interested in a similar auction for licenses to develop the Vakunai and
Ignyalin deposits in the Irkutsk region, due next month.
Within Moscow's energy policy, China is clearly a priority, as evidenced by the
building of a $12 billion pipeline from Eastern Siberia to the Pacific to pump
up to 80 million tonnes to China and Japan. Furthermore, Russia rushed to build
the Eastern Siberia-Pacific Ocean (ESPO) pipeline, despite the uncertainty
regarding whether the region could pump enough crude oil to fill it. Russia's
pipeline monopoly Transneft pledged to build the 2,694-kilometer pipeline by
the end of 2008. Russian government officials conceded, however, that
investments in the ESPO would take 18-20 years to be recuperated.
Russian energy officials sought to reassure their Chinese counterparts that
Russia was a reliable energy supplier. Indeed, Russia fulfilled its commitments
and supplied 10 million tonnes of oil to China by rail, Industry and Energy
Minister Viktor Khristenko announced in Beijing on July 10. Yet he seemed
reluctant to mention that Russia had previously planned - but failed - to
increase its rail-based oil shipments to China up to 15 millions tonnes last
year.
Russian officials were also keen to counter questions about the economic
viability of the ESPO. The first stage of the ESPO would "undoubtedly" be
filled with 30 million tonnes a year, because Russian oil companies had already
pledged so supply more crude oil for the pipeline, Khristenko said in Beijing.
If an offshoot to China is built from the ESPO, Russia would supply 15 millions
tonnes per year at the first stage and up to 30 million tonnes per year
eventually, Khristenko said in Beijing on July 10.
Meanwhile, despite optimistic official pronouncements, indications of
disagreements have begun to appear. Khristenko said Russian gas supplies to
China may be postponed unless bilateral negotiations on the western route are
completed this year and talks on the eastern route are finished in 2008. He
added that gas supplies along the western route are expected to start in 2011
and the eastern route is due to be on stream in 2016. China, nevertheless, was
understood to be reluctant to accept Russian offers of gas at high prices.
In March 2006, Russian President Vladimir Putin traveled to China and pledged
to raise oil and gas exports to that country. That same month, Gazprom and CNPC
signed an agreement on gas supplies from Russia to China, via the "Altai
pipeline" of the western route. Gas supplies via both routes were expected to
total 68 billion cubic meters (bcm) eventually, with the first shipments due in
2011. The western route to China and the eastern route are expected to funnel
30bcm/year and 38bcm/year, respectively.
Although Russia has repeatedly said that its plans to supply China do not mean
that oil and gas exports will be rerouted from Europe, Moscow's China-bound
pipeline plans are understood to imply a warning to European consumers: Russia
would prefer to have the option to redirect oil and gas to China. Yet the
Kremlin's pipeline game may still be undermined by China's reluctance to buy
Russian energy resources at any price.
Moscow and Beijing also appeared to have struggled to agree on the terms of the
ongoing bilateral energy trade. The two countries have long discussed an
electricity trade. In the mid-1990s, Russia and China mulled over a project to
build a 2,600km power-transmission line from Irkutsk region in Siberia to China
at a cost of $1.5 billion. Eventually, however, China abandoned the project in
1999 when the two sides could not agree on pricing.
Nonetheless, Russia has remained interested in exporting electricity to China.
Russia's electricity grid RAO UES supplied about 800 million kilowatt-hours of
electricity to China last year and plans to supply 1.4 billion kilowatt-hours
in 2007. Last November, the UES and the Chinese State Grid Corp agreed to raise
annual exports of electricity from Russia to China up to about 4 billion
kilowatt-hours per year in 2008-10, 18 billion kilowatt-hours in 2010-15 and 60
billion kilowatt-hours eventually after 2025.
Early this year, however, Russia's plan to boost electricity exports was dealt
a major blow. Beginning in February, China refused to import Russian
electricity, thus leaving the Bureiskaya and Zeiskaya plants without a market
in which to sell electricity. Chinese negotiators reportedly argued that the
Russian price of 8 cents per kilowatt-hour was unreasonable and nearly twice as
high as China's domestic prices. On August 3, the UES formally requested the
Russian government to approve lower electricity prices to resume exports to
China.
In spite of these setbacks, Russia reiterated its pledges to develop the energy
partnership with China. On July 13, the Russian and Chinese foreign ministers
discussed bilateral ties, including energy issues, during talks in Moscow.
After the meeting, Russia's top diplomat Sergei Lavrov noted their mutual
interest in investment and energy cooperation, including the coordination of
plans to develop Russia's Far East and Siberia, as well as northeastern China.
Commercial challenges
Russia has also pledged to increase trade with China, presumably aiming to prop
up the bilateral strategic partnership. High growth rates of Sino-Russian
commerce have been seen by Moscow as an important indicator of the health of
the bilateral partnership. Last year, Putin announced plans to raise bilateral
trade levels to $60 billion to $80 billion a year by 2010. In 2006, Russia's
trade with China reached some $30 billion, up 15% year on year. Russia still
sells more goods to China than it buys, but in 2006 Russia's trade surplus was
down by 35.4% year on year at $1.73 billion.
In 2007, Russia's trade with China is expected to reach $40 billion, according
to both Russia's Trade and Industry Chamber and the Chinese government. Russia
is no longer expected to have a trade surplus in its commerce with China,
however, and growth rates of bilateral trade have begun to slow down.
Furthermore, Russian exporters voiced their concerns over the growing Chinese
industrial exports to Russia. Last month, Russia's Natural Monopolies Institute
(IPEM) released a study warning of substantial economic and social risks of
increased trade with China. The Chinese government subsidizes a number of the
country's export-oriented sectors, and subsidized exports could destroy
Russia's heavy industry, thus undermining steel production, the petrochemical
sector and other industries, the study said. The study suggested that to limit
Chinese exports to Russia, Moscow ought to rely increasingly on anti-dumping
and anti-subsidy investigations as well as technical regulations.
Apart from military and security cooperation, the dynamic development of energy
and commercial ties is meant to demonstrate a significant potential for
Sino-Russian relations. If the strategic partnership is to become potent,
however, many of the disagreements in the commercial relationship, notably ones
involving Russian energy exports to China, will have to be resolved.
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