Global Insight Perspective

Significance

The signing of the energy accords marks a high-point in Sino-Russian relations, and brings an end to long-term Russian prevarication on the issue 

Implications

The agreements will ease Chinese frustrations with Russia over energy resource access by providing significant access to Russian gas supplies. China will hope that the far-reaching nature of the agreements will lay the foundation for a positive resolution of the proposed crude oil link between the two countries. 

Outlook

The energy accords indicate that Russia may increasingly favour China's oil proposals to those of Japan , China 's main regional competitor in the energy field, while pointing toward a closer bilateral relationship with Russia. 

Groundbreaking Energy Agreements

Chinese president Hu Jintao today signed high-profile energy accords, among a total of 15 mainly economic agreements, with Russian President Vladimir Putin, during the latter's two-day visit to Beijing. The accords mark a high-point in Sino-Russian relations, and will assuage growing Chinese frustrations with Russia's previous prevarication on a number of important energy deals. However, the leaders failed to reach a solution on the construction of a vital oil pipeline to run from Siberia to either the Pacific or Daqing in China

The terms of a memorandum of understanding (MoU) signed by the countries' top energy officials provide for the large-scale shipment of Russian gas to China. They propose the construction of two gas pipelines: one in the west, connecting Russia's Altai region to China's Xinxiang region, and the other in the east, linking Russia's Far East to north-eastern China. Gazprom and China's National Petroleum Corporation (CNPC) signed a further MoU on the gas pipelines, which would skirt Mongolia and carry up to 80 billion cubic meters (cu. m) of Russian gas to China each year. The western pipeline, which would probably carry 30-40 billion cu. m, could be operational by 2011, according to Gazprom. The western pipeline is estimated to cost US$3-5 billion, with its eastern counterpart costing up to US$10 billion. However, Chinese hopes that the Russian political leadership had come to a decision on the construction of an oil pipeline from Siberia to the Chinese oil capital Daqing, rather than to the western Pacific, as requested by China's main regional competitor Japan, were not met. The Beijing government has been lobbying for this in recent years, but the Russian leadership emphasised that the final decision on this issue would have to follow the completion of an ongoing feasibility study.

Indication of Closer Sino-Russian Relations

The energy accords, as well as other economic agreements, serve to bind China and Russia together more closely by strengthening the economic links between the former rivals, while making steps towards bolstering both countries' energy security. Recent progress in bilateral relations has been made manifest in the resolution of a 40-year border dispute, last year's first-ever joint military exercises and thriving bilateral trade, peaking at nearly 30 billion dollars in 2005 - a 37% year-on-year (y/y) increase. As such, the accords mark a high-point in Sino-Russian relations, with China and Russia enjoying their greatest convergence of interest since the Sino-Soviet Alliance was at its peak in the early-1950s. Thus, both countries have an acute interest in nurturing their growing economies, with China seeking access to global energy markets to fuel its rapidly growing economy, and Russia being able to provide for such needs. Moreover, both countries are seeking to counteract U.S. hegemony in the Asian region - an aspiration made apparent in the two countries' leadership of the Shanghai Cooperation Organisation, which excludes the United States. This is further put into relief by the recent U.S. National Security Strategy (NSS), which lashed out at both countries, provoking anger in Beijing and Moscow. Moreover, Russia and China have recently sought to co-ordinate their response to the Iranian nuclear crisis, as permanent members of the UN Security Council, while taking on a constructive role in international affairs by hosting negotiations aimed at ending the nuclear programmes of Iran and North Korea respectively.

However, the question remains as to whether this will make for a deeper long-term alliance, based on a convergence of interests; the Chinese side has described the relationship as ‘hot on the top but cold on the bottom' according to Xinhua. Any assessment of a growing friendship between the two countries, as marked by the signing of this week's energy accords, must therefore be tempered by considerations that they are grounded on a temporary coincidence of material interests, which has yet to yield long-term benefits for the two countries

China's Thirst for Raw Materials and Sino-Japanese Competition

China, as the world's second-largest energy consumer after the United States, has used the energy accords to secure oil and gas from Russia, which is the world's second-biggest supplier of oil. Moreover, the Beijing government is seeking to make Russia come down on China's side in the ongoing rivalry with Japan over securing the Siberian oil line. Agence France-Presse (AFP) cites Dave Ernsberger, Asian director for energy consultancy firm Platts, as stating that the agreement is an important step for China in its long-term energy strategy, as it seeks to secure access to energy sources and increase gas consumption, to reduce its over-reliance on oil. China is one of the few major countries in the world not to have gas as a significant factor in its energy mix. The accords therefore seek to remedy the fact that China is expected to consume 120 billion cu. m of natural gas annually by 2010, while only being capable of producing 80 billion cu. m domestically.

Importantly, the energy accords also suggest that Putin is increasingly favouring Chinese needs in the context of the proposed Siberian oil pipeline route - a shift in policy from his declaration last year in the Japanese capital Tokyo that the pipeline would reach the Pacific coast rather than the Chinese city of Daqing. They therefore represent a success for China's lobbying efforts in its continued energy competition with its main regional rival Japan. The BBC reports that the Japanese side has offered to pay most of the construction costs, and the contract had previously been seen to be going their way. Russia's signing of the energy accords has served to assuage China's criticism that it has been dragging its feet in this area, although the Moscow government can also be seen as pursuing immediate strategic interests by providing a reminder to Europe that it holds great sway over the European gas market, and could diversify as it has other export options available. However, the accords have also been accompanied by Russian calls for the restructuring and diversification of bilateral trade with China, as Russia is no longer content with merely being a supplier of raw materials to China.

Outlook and Implications

The energy accords constitute concrete action on the Russian side to accommodate China's long-term demands on the issue, and testify to the increasingly constructive relationship between the two countries, which could be strengthened further in the energy field if an oil pipeline is built. However, efforts will have to provide lasting benefits for the two historical rivals, with observers pointing to many major obstacles that still need to be overcome before the export of Russian gas to China can ensue, with the five-year timeframe appearing somewhat ambitious. It therefore remains to be seen whether the massive scale of Russia's promises to China will indeed hold, but if and when it happens it will mark a significant shift, as Russia currently supplies none of China's gas needs.

Contact: Raul Dary

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