China on April 21, 2009, formally concluded an agreement to lend US$25 billion
to Russian state-owned oil company Rosneft and pipeline monopoly Transneft in
exchange for the completion of an oil pipeline from Skovorodino in Russia to
Daqing in China. Russian commentators claim that the deal was not commercially
favorable to China [1]. That contention, however, is arguably misplaced.
Admittedly, the price of the oil was set at the floating price of Brent crude
oil when it arrives at the projected Kozmino Bay terminal and Russia has
finally gained an Asian entree for its energy exports. Yet, while Chinese
leaders may cringe at the deal's price tag, Beijing has gained serious
geopolitical advantages over Moscow in the Russian Far East (RFE) because
of the effect that the global economic crisis is having on the latter's economy
and on Moscow's ability to control the RFE.
Moscow also now looks favorably on China's investments in Central Asia. By
opening up the RFE to Chinese investment and blessing similar investments in
Central Asia, Moscow is reversing its policies toward both the Far East and
Central Asia. In effect, this and other similar deals opens the door to a huge
expansion - with Moscow's assent - of China's strategic profile in both
regions. The creation of a new regional order in the RFE and Central Asia is
beginning to take shape and China is set to become the region's security
manager, ensuring foremost that its portfolio investments are safe and secure.
The deal provided the impetus for significant increases in Chinese access to
the development of Russian energy assets in the RFE that has hitherto been
blocked (China
loan turns Russian oil east, Asia Times Online, February 24, 2009).
Since Moscow failed to develop the RFE under present economic conditions, it
had to invite Chinese participation starting in late 2008 when it began to
negotiate this loan.
Although the direct cause of this move is the global economic crisis, the root
cause is the mismanagement of the Russian energy industry, which is Moscow's
main - if not only - trump card in the Far East. Yet, in doing so Moscow is
undermining what experts say has been the strategic rationale behind its East
Asian policy. That policy operated on the premise that Moscow would use its
energy revenues to develop the RFE and Eastern Siberia further and promote
Russia's full integration into Northeast Asia as a major great power [2]. The
failure of this policy does not bode well for Russia's quest to be recognized
as an independent and key player in Asia.
On May 21, Russian President Dmitry Medvedev admitted in a rare public
acknowledgement that unless China invested in large-scale projects in the RFE,
Moscow's plans to develop the region could not materialize. The acute decline
of the Russian economy is clearly illustrated by the contraction of foreign
trade, which has declined by one-third since the start of the year to May 2009.
As of June 2009, forecasts predict an 8% decrease in GDP, and the government is
now cutting the budget and being forced into ever more crisis-driven polices
[3].
Medvedev candidly stated that the economic development of the RFE cannot depend
on Russia's ties with Europe but rather its ties with Russia's main
Asia-Pacific partners. He also stressed that the RFE's regional development
strategy must be coordinated in tandem with China's regional strategy of
rejuvenating its old industrial base in Northeast China (for example
Heilongjiang province). Other officials quickly followed suit.
Army General Nikolai Patrushev, secretary of the Russian Security Council,
subsequently conceded the weaknesses of the RFE's infrastructure and outlined
the RFE's most important priorities: "The development of cross border
cooperation with neighboring countries, enhancement of transit possiblities,
development of infrstructure and capacities for wood processing, seafood
processing and output of products competititve on the world market."
While liberal and other critics of the regime continued to warn about Chinese
encroachment in the Far East, the government's leading spokesmen praised
Russo-Chinese relations as being at their highest point ever. Russian Deputy
Foreign Minister Sergei Rybakov actually lauded Chinese investment in Central
Asia for its "transparency" [4]. Furthermore, Rybakov declared that, "We
believe that our friends and partners in Central Asia are appropriately meeting
the situation and solving the task facing them in the sphere of economic and
social development using the opportunities that present themselves as a result
of cooperation with China. Hence this can only be welcomed." [5]
The Russian leaders' statements constitute a reversal of Moscow's past policy
of trying to prevent Chinese economic penetration of Central Asia, which was
meant to avoid economic competition, and probably confrontation, with China in
the region. Moscow's elite has hitherto regarded any gain by Beijing in Central
Asia with unease, and the Russian media has repeatedly speculated about China's
economic "conquest" of Central Asia. [6] As a 2007 report of the
Russian-Chinese Business Council observed, "Being a member of the SCO [Shanghai
Cooperation Organization], China views other members of the organization as
promising markets. It is China that wishes to be the engine behind the trade
and economic cooperation within the framework of the SCO ... China's intentions
to form [a] so-called economic space within the SCO are well known. Owing to
that fact, experts have been speaking about greater Chinese economic expansion
in various parts of the world, including Central Asia … Beijing has activated
ties with all Central Asian countries and strives to comprehensively strengthen
economic relations and the dependency of these countries on its market."
Rybakov's remarks reveal a significant change in Russian policy and a major
concession to China. Yet the real payoff to both sides - although primarily to
China apart from this unprecedented concession - can be found in the new and
recent energy deals.
Beijing naturally welcomed this initiative. At the June 16-17 summit with
China, Medvedev admitted that, "We riveted much attention to investment
breakthrough". Medvedev stressed both sides' acceptance of the need for a
qualitiative breakthrough and the readiness of Chinese firms to make sizable
investments in energy facilities, timber processing and transport
infrastructure in the RFE.
Russia's Bank for Development and Foreign Economic Affairs, Vnesheconombank
(VEB), had to borrow money from China. As a major stockholder in Russia's
largest oil company, Lukoil, China also indirectly has leverage over that firm.
After having excluded foreign firms from bidding on the huge Udokan copper mine
in Southeast Siberia, Moscow had to reopen the bidding to Chinese, South
Korean, and Kazakh mining and refining enterprises.
All these moves constitute a major reversal of past Russian policy in energy
and mineral investment dating back to 2003. Similarly, under the terms of the
new agreement, Russian companies may invest in oil exploration and natural gas
distribution in China (for which they lack the captial at present) but that
Chinese firms (who have huge amounts of capital for investment) may also invest
in developing oil and gas fields in Russia along with liquefaction plants. It
appears that the following deals were consummated at the June 16-17
Sino-Russian summit in Moscow, some of which were listed above.
More specificially, "On June 17, Medvedev and Hu signed a joint statement. Both
sides also signed memoranda of understanding (MOU) on gas and coal cooperation,
trade promotion, an investment cooperation blueprint, a framework agreement on
[a] $700 million loan from China's Export-Import Bank to Russia's VEB
(Vnesheconomobank), and an additional MOU between Renova and China's state gold
mining corporation. ... [Also on] June 17, Lukoil and Sinopec signed a contract
to supply 3 million tons of crude oil from the South Hylchuyu deposit in Nemets
Autonomous Region in Russia between July 1, 2009 and June 30, 2010." (see
Russia, China numbers missing, Asia Times Online, July 22, 2009).
Since then the Liaoning Xiyang group announced that it will invest in the
development of a 1 billion-tonne iron ore deposit at the Berezov deposit, 20
kilometers north of the Inner Mongolian border town of Shiwei.
Aside from these events, China has become Russia's largest trading partner as a
result of the current crisis. Russia and China are discussing co-production
arrangements in oil, gas, and electric power settlements and deals totaling
$100 billion, the use of their national currencies in mutual settlements, and
Russian officials are even promoting both the rouble and the yuan as new
international reserve currencies.
On June 17, Medvedev claimed that he had clinched deals with China on energy
totaling $100 billion by a "special mechanism", a reference to the April 21
deal.
China's strategy triumphs
China has naturally welcomed these opportunities for expanding its influence
over Russian and Central Asian energy and other assets and is moving to take
advantage of them through these deals and energy purchases in Russia,
Turkmenistan, and Kazakhstan, and by expanding its loans and investments in the
Central Asian states. Given the subtlety that characterizes Chinese policy
toward the region, Beijing will not loudly proclaim a new order in Asia, but it
is finally in a position to realize the goals it set out to achieve in 2002-03
when it first began to invest in Russian and Central Asian energy in
anticipation of beocming an energy importer.
China first sought to buy into the Slavneft oil firm in 2002 and to deal with
Yukos under Mikhail Khodorkovsky's leadership in 2002-03. After those deals
were rebuffed by direct state interference, Moscow played a game with China and
Japan, first promising one and then the other that it would build a pipeline to
their Asian destination of choice, but failing to deliver on any of these
proposals.
Russia failed to live up to many of its previously-announced commitments to
China in energy through 2008. [7] Now we can expect considerably more Chinese
investment in both the Russian Far East and Central Asia as Moscow is in no
position to object and desperately needs the capital that China can provide.
Conclusion
These deals demonstrate not just the failure of Russian policy in the RFE, but
also China's growing dominance, through its economic power, of Russia's policy
toward Asia - a situation facilitated by the global economic crisis.
Russia has seemingly renounced its autocratic dreams in the Far East and
solicited Chinese investment. Courting Chinese power has forced Russia to
reverse long-standing Russian policies in the RFE. For all those who are
watching for the emergence of China as a dominant economic and political player
in Asia, these new deals with Russia have a profound significance that we
overlook at our peril.
Notes
1. Alexander Lukin, "Russia to Reinforce Asian Vector", Russia in Global
Affairs, Vol VII, No 2, April-June, 2009, p90.
2. Sergei Lavrov, "The Rise of Asia and the Eastern Vector of Russia's Foreign
Policy", Russia in Global Affairs, Vol 4, No 3, July-September, 2006, pp70-77.
3. "Russia Faces GDP Decline of 7.9 Percent This Year, World Bank Says", from
Bureau News, June 24, 2009,
blog.taragana.com/n/russia-faces-gdp-decline-of-79-percent-this-year-world-bank-says-90732/.
4. Open Source Center, OSC Feature, Russia, OSC Analysis, "Russian Officials
Laud Ties with China; Observers Express Concerns", Foreign Broadcast
Information Service Central Eurasia, (FBIS SOV), July 20, 2009.
5. Ibid.
6. Bulat Abdulin, "For Kazakhstan's Army - a NATO Heading", Marketing I
Konsalting Internet Version, in Russian, January 9, 2008, FBIS SOV, January 15,
2008.
7. Stephen Blank, "At a Dead End: Russian Policy and the Russian Far East",
Demokratizatsiya, Vol XVII, No 2, Spring, 2009, pp122-144.
Dr Stephen Blank is a professor at the Strategic Studies Institute of the
US Army War College at Carlisle Barracks, PA. The views expressed here do not
represent those of the US Army, Defense Department, or the US Government.
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