3. Problems of Sino-Russian Energy Cooperation As a result of recent developments Russia became China’s fourth largest energy provider, providing approximately 9 percent of Chinese imports. A doubling of this percentage may occur over the next decade, especially if Russian gas comes online in China. But, firstly, the countries will have to find ways to solve existent problems which constrain current energy cooperation. These problems are conditioned by the following factors. 1) Changes in the structure of international energy market and position of both countries There was a reluctance among the Chinese leadership, notably then-Premier Zhu Rongji, who was in charge of China’s economy, to invest in transnational pipelines—the project economics of which are less attractive the lower the price of oil—and the acquisition of oil exploration and production assets abroad when oil could be purchased so cheaply on the international market. The Chinese also stalled the oil and gas pipeline negotiations in the hope of gaining price concessions from the Russians. The rise in world oil prices over the past decade shifted the power in the China-Russia energy relationship from China to Russia. The increase in the average annual price of oil from $14 per barrel in 1998 to $72 per barrel in 2007 and China’s own oil consumption and import growth over this period—a source of upward pressure on world oil prices—created anxiety in Beijing about the security of China’s oil supply (Downs. 2010). This energy insecurity made Beijing increasingly eager to finalize the oil and gas pipeline negotiations. Unfortunately for China, the feeling in Russia was not mutual. The rise in oil prices fuelled the growth of resource nationalism in Russia, motivating Moscow to expand its control over oil and natural gas resources. For Moscow, greater state control of energy assets is not only a way to revitalize its economy but also a means to achieve international political and economic gains. The emergence of higher oil prices and Russian resource nationalism were an unwelcome surprise to China. The Chinese government had to face the reality that the world’s oil and natural gas markets changed from a buyer’s to a seller’s market. The sharp rise in natural gas prices also contributed to the lack of progress on the Kovykta pipeline by rendering the low prices insisted on by the Chinese even more unattractive to the Russians. Sino-Russian negotiations over the export of Russian natural gas to China have collapsed repeatedly over China’s refusal to pay internationally competitive prices for natural gas. 2) The influence of domestic “interest groups” in Russia The power struggle in Russia’s interest “groups” is close to the energy business and the struggle for redistribution of spheres of influence resulted in the pro-government and pro-European company Gazprom taking the leading place in the exploration and export of Russian energy recourses, and China’s oriented company Yukos and its affiliates losing their control (Klussmann, et,al., 2007). Indeed, both the oil and gas pipeline projects have been hindered by the involvement of private companies, whose control of export pipelines would undermine Moscow’s ability to use energy exports for foreign policy leverage. In the case of the oil pipeline, an important factor behind the abandonment of the Angarsk-Daqing route—and its replacement with the ESPO pipeline and spur to China—was the fact that the principal Russian supporter of the Angarsk-Daqing oil pipeline was Yukos, a private oil company increasingly resented by the Kremlin and Russian state oil companies. Additionally, with the reassertion of state control over the energy sector, the Kremlin and the Russian state energy firms became increasingly irritated with CNPC for continuing to negotiate with Yukos rather than the Russian state. Indeed, one of the lessons China learned from the “Yukos Affair” was to only negotiate with Russian state energy companies. In the case of the natural gas pipeline the position from Gazprom has substantially delayed the plans of the private and half-foreign firm TNK-BP to export gas from the Kovykta field. 3) Orientation of the Russian Foreign policy In terms of the hierarchy of foreign policy priorities in Beijing, the relative weakening of Russia objectively increases the importance of relations with the West and especially with the United States. Indeed, this factor will most likely have a greater impact on Sino-Russian cooperation in the future than it has before. Another important variable likely to impact on Russian-Chinese relations in the upcoming years will be the “2012 factor” – this year will see the election of a new president in Russia, as well as the renovation of the top party and state leadership in China. This consideration should be taken into account with regard to the future prospects of bilateral relations. 4) Absence of concrete strategy and policy towards cooperation with Russia China has no concrete strategy towards energy cooperation with Russia. Several documents were signed, but all of them lack the concrete and long term measures and stages of cooperation. Most of the negotiations on projects were undergone on energy companies’ levels and did not receive the support of the Chinese government. 5) Lack of competitiveness of local companies at the international struggle for energy resources Chinese companies lack competitiveness on the world’s arena. European companies secure most of all the attractive projects, because such companies have strong governmental support, wish to take risks and have more knowledge and resources in energy cooperation. Now the main partners of Russia are Shell, British Petroleum and the Exxon. Even despite the growing tension between Russia and Western Europe in the world arena, energy interests are still behind these political decisions. 6) The Lack of critical infrastructure China and Russia need to construct additional infrastructure to expand energy trade and to make it more cost-effective in the long term. Currently, the majority of Russia’s oil exports to China are delivered by rail, which is about two and a half to three times as expensive for Russian oil producers as shipments by pipeline and may not be economical in the absence of high oil prices. A pipeline or LNG facilities are also required for the delivery of natural gas from Russia to China. 7) The appearance of the conception of “Chinese threat” The appearance of a perceived “Chinese threat” because of the rapid immigration of Chinese to the Russian Far East made a negative contribution to energy cooperation between the two countries. Local governments were lobbying the anti-Chinese projects in order to satisfy the population demand to stop ‘selling to China.’ There is a sense of weakening in the mutual ‘camaraderie and partnership’ between the two nations that reached its high-point during the Cold War but has since declined. There is also a growing recognition that rising Chinese power may result in growing dissatisfaction from Russia who may feel Chinese ascendancy is in part being fuelled by Russian resources (Rosner, 2010). This throws a perceptual wrench into the works of the Russo-Chinese ‘strategic partnership’, particularly where energy is concerned. 8) Impact of the global financial crisis 2008 The level of bilateral trade between the two countries suffered as a result of the financial crisis. Turnover in trade between Russia and China had increased from $8 billion in 2000 to $56.8 billion in 2008 – just slightly below the level of $60 billion, which was declared as a target for 2010 (Portyakov, 2010). However, from September 2008, the volume of trade began to decline. The decrease in Russian–Chinese trade turnover was caused by the deteriorating economic environment and declining investment and consumer demand in Russia, by the depreciation of the rouble, which resulted in the higher cost of imported goods from China and, finally, by lower world prices for oil and petroleum products, which provided over half of Russian exports to China by cost. As a result, in 2009, the volume of Russo-Chinese trade declined, according to Chinese customs statistics, by 31.8 percent – to $38.8 billion. Chinese exports to Russia fell by 47.1 percent – to $17.5 billion, and Chinese imports from Russia declined by 10.7 percent – to $21.3 billion (Portyakov, 2010). The energy politics of other countries also affected Sino-Russian significantly. The following are the most important: 9) Japanese factor Japan pays high interests in importing Russian gas and oil, as the country is 100 percent dependent on energy resources import. Japan played a crucial role in the failure of the project oil pipeline from Angarsk to the Chinese pipeline network at Daqing, proposing and financing the route from both West and East Siberia to the Pacific coast port of Nakhodka. Japan wanted the Nakhodka export terminal to be the pipeline's only outlet, because it was worried that if the Chinese link was built Beijing would end up with the lion's share of Russian oil exports. This proves that Russo-Chinese cooperation is very fragile and based on economic, but not strategic interests. 10) American factor The USA also wished to diversify its own energy supply and to obtain oil and gas from Russia’s Far East, especially after the events of 9/11. Along with intensification of antiterrorist cooperation with Russia, the Bush administration also underwent more active policy towards energy cooperation with Russia. In May 2002, the Declaration on energy dialogue between the two countries was signed and the construction of pipeline from Russian Siberia through Barents Sea to USA was constructed. Up until 2015, this pipeline will supply 50million tons of crude oil per year to the USA. From 2020, the volume will be increased up to 80million tons (Chow, 2003). This played an important role in ensuring Russia that the country is very welcomed in the international energy market and can choose partners on the basis of the more the better. 11) Korean factor South Korea is one of the four biggest energy importers in the world. Similarly to China, the main source of energy supply for Korea is the oil from the Middle East. Korea wished to participate in projects of oil and gas supply from Russia and thus the country supported the project of pipeline construction to Nakhodka using the Korean national groups that are quite influential in Russian Far East.
But, firstly, the countries will have to find ways to solve existent problems which constrain current energy cooperation These problems are conditioned by the following factors. 1) Changes in the structure of international energy market and position of both countries The rise in world oil prices over the past decade shifted the power in the China-Russia energy relationship from China to Russia energy insecurity made Beijing increasingly eager to finalize the oil and gas pipeline negotiations. Unfortunately for China, the feeling in Russia was not mutual. The rise in oil prices fuelled the growth of resource nationalism in Russia, motivating Moscow to expand its control over oil and natural gas resources The emergence of higher oil prices and Russian resource nationalism were an unwelcome surprise to China Sino-Russian negotiations over the export of Russian natural gas to China have collapsed repeatedly over China’s refusal to pay internationally competitive prices for natural gas 2) The influence of domestic “interest groups” in Russia 3) Orientation of the Russian Foreign policy 4) Absence of concrete strategy and policy towards cooperation with Russia China has no concrete strategy towards energy cooperation with Russia 5) Lack of competitiveness of local companies at the international struggle for energy resources European companies secure most of all the attractive projects 6) The Lack of critical infrastructure China and Russia need to construct additional infrastructure to expand energy trade and to make it more cost-effective 7) The appearance of the conception of “Chinese threat” because of the rapid immigration of Chinese to the Russian Far East made a negative contribution to energy cooperation 8) Impact of the global financial crisis 2008 The level of bilateral trade between the two countries suffered The energy politics of other countries also affected Sino-Russian significantly. The following are the most important: 9) Japanese factor Japan pays high interests in importing Russian gas and oil, as the country is 100 percent dependent on energy resources import This proves that Russo-Chinese cooperation is very fragile and based on economic, but not strategic interests 10) Korean factor Korea wished to participate in projects of oil and gas supply from Russia and thus the country supported the project of pipeline construction to Nakhodka using the Korean national groups that are quite influential in Russian Far East