Opinion

The Sino-Russian relationship is strengthening in a globalized world

By Anna Novikova

Ph.D in economic theory, specialized in geopolitical studies and energy sector

The recent financial and economic crisis resulted in a profound shift of the world order. The world economic centers are multiple now. The recent economic growth and the gain of political power of the two of the most important emerging economies (China and Russia) is discussed in this essay on the example of their energy sectors. The energetic collaboration and the strengthening bilateral relationship are analyzed. 

            It often happens that when a geopolitical or economic center goes through rough times or a crisis, the periphery tends to maintain the fast pace of its development. This was the reason why we have witnessed the most impressive growth of the last decade in four of the biggest emerging economies: Brazil, Russia, India and China (acronymed into the BRICs by Goldman Sachs in 2001). These economies have grown in different ways, and for different reasons, but their economic might, has influenced the overall geopolitical picture, destabilizing the American hegemony in economic terms.

             

            China and Russia had not always had a linear relationship, until it was significantly improved in late 1980s by Mikhail Gorbachev. In 1996, the two sides signed agreements to establish stronger economic ties and to develop common political grounds. The two countries have been developing their relationship ever since, and are eager to benefit from each other’s economic might and political power to hold influence on the world stage. A welcome reduction in world tensions, and a new partnership that may even stick.

            Bilateral economic connections based on the geo-economic platform reveal themselves to be more profound, more effective than a simple exchange of goods. This is why certain Russian regions, like Siberia, the Urals and the Far-Eastern regions initiate the geo-economic way of developing their extra-economic connections by initiating co-operation and establishing joint ventures with the Asian countries. Thus, the economic boundaries now shift the existing geographic frontiers and infiltrate them.

                                                               

            Until recently, the main focus of Russian hydrocarbon exports was Europe. The Russian oil supply to Western countries has been decreasing throughout the past year and in July of 2013 Russian oil exports fell to their lowest level in the past ten years - 2,1 million barrels/day. According to some experts, the growing volumes of the Russian oil refining industry might also cause decreasing oil exports. Some of the EU member states have been very aggressive in lobbying of the so-called “third energy package” (an attempt to dictate prices on imported gas). The European Union is gradually losing its status of the monopolistic consumer of the Russian energy resources, remaining however its most important economic partner. The Russian export policy and its reorientation towards the Asian-Pacific market were caused by the change of EU energetic policy and its recent focus on the liberalization of the market.

            According to China National Petroleum Corporation (CNPC), in 2014 Chinese oil demand is going to grow by 4,8% and thus reach 514 million tones. China’s own oil production will be 210 million tones. Russian imports, in the overall oil consumption, will reach 59%. Among other large exporters to the Chinese market, there are Iran, Central Asian countries (Kazakhstan, Turkmenistan, Uzbekistan) and Venezuela. 

            “Rosneft”, a Russian state-owned oil company, is planning to double its exports to China from 15 million tons to 30 million by 2015. According to the Financial Times, Russian oil exports to China now total about 500,000 barrels a day. The Russian state-controlled “Transneft” has recently put into operation the second line of the oil pipeline “Eastern Siberia – Pacific Ocean” (ESPO). The second line, 2000 km long, connects Skovorodino in the Amur region and a special sea oil port Kozmino in the Primorye region.  Previously the oil exports were transported by railway. The power capacity of the “ESPO-2” is 30 million tons, with a planned increase to 80 million by 2020. The construction of the second ESPO line started immediately after the inauguration of the first in December2009/January 2010. The export of Russian oil to China is fixed by a 20 year contract with annual capacity of 15 million.  Russian "Rosneft" has invited CNPC to discuss a potential increase in oil supplies via the Atasu-Alashankou section of the Kazakhstan-China pipeline, linking Atasu in Central Kazakhstan to Alashankou (Alataw Shankou) in China. 

          

Data source: BP (2011)

            According to the Russian “Rosneft”, the biggest ESPO importers in the East are Japan and China, between them accounting for 65% of the overall ESPO export, in the first half of 2013. The Russian vice-premier Arkady Dvorkovich stated, that “Rosneft” is planning to increase its export to China by 9 million tons a year, to realize a new project of a refinery in Tianjin. An agreement was signed in 2010 as part of the Vostok Petrochemicals joint venture (49% Rosneft, 51% CNPC) on preparation of a feasibility study for the construction of an oil refinery at Tianjin, in China. The new refinery will be able to process 13 mln tones (95 mln barrels) of oil, of which 9 mln tones will be from Russia. Under the agreements achieved between the two companies, the refinery should be commissioned no later than in the final months of 2020. Target markets are Northern China and regions of the country’s Central Plateau, including Beijing, Tianjin, Hebei province, Changzhi, Jinan and Shandong province, as well as the Eastern Chinese seaboard. The major source of oil exported to China remains Vankor field in the Krasnoyarsky Region, Eastern Siberia. The Vankor oil and gas field (operated by "Rosneft", through its subsidiary "Vankorneft") is the biggest field to have been discovered and brought into production in Russia in the last 25 years. The proven hydrocarbon reserves of the Vankor are 1.603 mln boe.

            The Russian gas sector has been going through rough times, which is mostly due to the fast growth of shale gas production. Both North and South America are having a shale boom; and some European countries, such as Poland and Germany, are starting their own shale drilling, which enlarges the market, making gas more plentiful. This fact dramatically impacts on the demand for Russian gas and its state-owned giant, “Gazprom” (which, according to The Economist, produces 75% of Russia’s gas). Experts are hopeful that the shale boom will limit “Gazprom” and its still limitless power on the European gas market, thus cutting its prices. Europe is still one of the biggest importers of “Gazprom’s” gas and is the source of 40% of its revenues. The European Commission criticized the company’s dominant position on the European market and launched an antitrust probe, to diminish its power in the region by introducing a new liberalization policy. Therefore, the market  should be open to more players and further growth; and financing of renewable resources is encouraged.

            In light of all these facts and considering the overall situation and new tendencies on the European market, the best strategy for “Gazprom” would be to move its exports to Asia and to China in particular. The possible revenues would be much more significant, compared to those in Europe.

         

            In Turkmenistan, already China’s largest foreign supplier of natural gas, China’s president, Xi Jinping, inaugurated production at the world’s second-biggest gasfield, Galkynysh. This gasfield’s production will help triple Chinese imports from Turkmenistan. In Kazakhstan China is investing $30 billion in oil production in Kashagan, the world’s largest oil discovery in recent decades. In Uzbekistan, Chinese president, Mr. Xi, concluded $15 billion deals in oil, gas and uranium fields. Although China is the biggest trading partner of four of Central Asia’s five countries and is becoming more  present in the region, the Russian presence is still overwhelming. China’s focus lies in obtaining admittance to hydrocarbon and mineral fields worldwide to satisfy its growing energetic consumption, so China needs to wield some political influence to ensure that goal. 

           

  

Data Source: China Customs, 2011.

            In spite of the growing role of alternative and renewable energy sources in the world energy balance, hydrocarbons are going to remain principle energy sources in the foreseeable future. Among other regions of common interest between Russia and China, the Central Asian countries and the Arctic region have become the two priorities, which now share first place in the geo-economic priorities of both countries.

            The Arctic strategy is being developed by 30-40 experts of some of the most important institutes and scientific centers in China (such as Polar Law & Politics Research Institute, Center for Maritime & Polar Region Studies and Polar Strategic Studies Division). Presently, China is forcing the possibility of becoming a part of the Arctic Union, which in the long run will enable it to have more control over the Russian hydrocarbons export market. Agreements on cooperation in the Arctic zone were already achieved with Denmark and Iceland. The Sino-Norwegian partnership will improve in the foreseeable future. The focus of China’s interests in the Arctic zone is thought to be purely economic, which explains the great interest shown by many arctic nations towards the possible collaboration. The Arctic countries do not seem to be intimidated by the Chinese political power  that the country might gain in the region. 

            China’s political intentions coincide with recent tendencies in world economic affairs. The 21st century is going to become a century of multiple political and economic centers and further economic globalization. There has been a significant shift in economic relations, which are no longer linear but complete, assuming new shapes and new understandings based on competitiveness. The world economy is becoming a multi-step, multilayered structure, where both Russia and China are considered among the most important economic forces, which are advancing progress.