Russia and China: A love affair fuelled by oil and gas

Nov 25, 2010 12:00 AM

Russia and China have enjoyed a close but lopsided economic relationship since the mid-2000s.
Beijing sees its giant neighbour to the west rather as little more than a source of energy and other commodities to feed China's rapidly growing economy. The results of recent meetings between senior Russian officials and China's premier Wen Jiabao suggest that the relationship is unlikely to change anytime soon.

Oil, sweet oil
During his November 24 talks with Russian President Dmitry Medvedev, the Chinese premier announced that earlier in the day a total of 13 contracts were signed, worth $ 8.5 bn in total.
Prime Minister Vladimir Putin, who spoke with his Chinese counterpart ahead of the talks with Medvedev, said that over the year's first eight months, bilateral Russian-Chinese trade had grown by more than 57 % on average, with an 83 % increase in timber sales, 40 % in electricity, and 30 % in coal.

According to official statistics in China, exports of Chinese machinery and electronics to Russia grew over this same period by 96.6 %. Russia also exports high-tech products into China, but most of them are related to the energy sector.
Energy has been, by far, the most prominent issue on the two countries' bilateral economic agenda in recent years. The most high-profile project is the Eastern Siberia-Pacific Ocean (ESPO) oil pipeline and its offshoot linking Russia's coastal town of Skovorodino and the Chinese border town of Mohe. Fuel prices and Russian gas deliveries to China are also high on the agenda.

Beijing is extremely interested in diversifying its energy imports. At the moment, its fuel needs are met mainly by imports from Gulf countries, such as Iran and Oman. This makes Chinese energy policy heavily dependent on US and EU policies, hence China's heightened interest in the energy wealth of Russia and Kazakhstan.
The first bilateral memorandums on joint projects in the energy sector were signed in 2006, to be implemented over a period of 15 years. These projects will result in two gas pipelines, with a maximum annual capacity of 80 bn cm (supply contracts are to be signed before mid-2011), as well as the already mentioned Skovorodino-Mohe offshoot and a joint venture to build an oil refinery and a gas station in China.

East vs. West on the gas market
Russia, long a purveyor of commodities for developed Western economies, is now playing that same role in the developing East. And the reality is that commodities will likely remain the only real driver of Russia's economic growth for some time to come. With this in mind, the diversification of its exports is becoming a matter of extreme importance.
The future of Western economies looks quite bleak now. Alarming signals are coming from China, too, but overall, its economy is posting high growth rates.

Also, Russia could use other potential buyers as an additional bargaining chip in negotiations with its partners. In fact, Russian politicians declare every now and then that the country seeks to totally reorient its natural gas exports away from Europe toward China.
This does not seem realistic at this point, as Gazprom is bound by long-term commitments to Western customers.

No longer the big brother
Back in the Soviet era, the Chinese looked up to Russia as a big brother figure, who would introduce them to modern industrial technology. Now, fifty years on, the roles have been reversed, and Russia is looking to China for help in its bid to overcome its technological backwardness.
Russia hopes this help will come in the form of Chinese investment in Russia's industrial sector. Investors from the "Middle Country," as China calls itself, are willing to invest in Russia, but they insist on terms that are unlikely to promote any meaningful transfer of high technology.

Last fall, Russia and China adopted a strategic program for bilateral cooperation through the year 2018. This program includes 205 large-scale collaborative projects, and most of these will involve the joint development and production of oil, gas and mineral deposits in Russia, with processing to take place on Chinese soil.
Beijing's logic is simple and clear. Such projects will enable it to solve two problems at once -- gaining long-coveted access to the mineral wealth of Russia's Far East and Siberia while also reducing the demographic strain inside China.

Small wonder, then, that Chinese partners always insist on using their own workforce at enterprises and construction sites set up in cooperation with Russia.
Many of these projects are now being carried out in Russia's Far East, and locals watching Chinese migrant workers at work are heard to remark, "They're building great things... for themselves."

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