China, Russia and Oil Politics

China, Russia and Oil Politics

 

The most interesting diplomatic visits are those which are never made public. This is certainly the case with the trip which Russia’s Energy Minister Viktor Khristenko undertook in January to China. Nothing was said about the event by either side, although the sensitivity attached to Khristenko’s visit is understandable. For it concerned one of the most critical developments in Asia: the competition for Russia’s energy resources between China and Japan. But all the indications are that, far from clarifying matters, Khristenko’s mission merely muddied the waters even further. Russia looks set to enjoy being courted by both Japan and China for quite some time, but all the indications are that China will be the loser in this relationship.

 

Last year alone, China’s energy consumption has jumped by an estimated 12 per cent, as a result of the country’s phenomenal economic growth. From fairly modest beginnings, the Chinese are now the biggest oil consumers after the US, and may yet overtake America. Much of China’s supplies currently come from unpredictable sources and are also expensive to transport.

 

Total crude oil consumption and imports (millions barrels a day)

 

 

Diversifying energy sources has now become one of China’s most important preoccupations. The Chinese are wooing Middle Eastern governments and – to the increasing irritation of the US – they are investing heavily in Iran and Sudan. Chinese oil companies have even offered extraction-sharing deals to Canada, right on the US doorstep. The rapid expansion of the Chinese navy is also justified by the need to protect the country’s sea transportation routes. One way or another, the growing dependency on oil is rapidly transforming the country’s foreign and military policies: China is becoming a true global power not so much as a result of a conscious policy – at least not for the moment – but more out of necessity.

 

 

And nowhere is this clearer than in China’s relations with Russia. The traditional Chinese view of Russia was essentially dismissive. True, the Russians have remained China’s main foreign supplier of weapons and military technology. But by almost every other yardstick, the Chinese have long ago decided that they do not need the Russians. The country is hardly a potential exporter of cutting-edge technology, apart from some military items. It is not an exporter of capital either. And it remains an impoverished market, not an essential trading partner for booming China. Add to this the disdain which most communist Chinese have for Russia – viewed as an example of a country which tried to reform communism only to end up by dismantling it – and the picture is complete.

 

And yet, having dismissed the Russians as a spent force, an old superpower in decline, the Chinese have suddenly shifted to a policy of assiduously courting Moscow. Early last year, China National Petroleum Corporation (CNPC), a wholly-owned government outfit which accounts for 79 per cent of domestic oil supplies, offered to take a major stake in Russia’s energy industry. The strategy made perfect sense: with vast oil and natural gas resources, Russia – already the world’s single largest oil supplier – is a perfect fit for its southern neighbour, soon to become the world’s biggest consumer.

 

The Chinese understood only too well that Russia could not divert its supplies overnight, even if it wanted to. Since the 1960s, the bulk of Russian oil and gas went to Europe, still Moscow’s main energy export market. Even if the vast proven reserves in eastern Siberia – much closer to the Chinese border – are ultimately exploited, they will require a gigantic investment, particularly in new pipelines. This is a question of years, and plenty of cash. But Beijing was prepared to offer precisely such a commitment: during talks in Moscow last September, Chinese Prime Minister Wen Jiabao touted no less than $12 billion in financial loans and grants, and explicitly stated that he is prepared to see a return during the next, rather than this decade.

 

However, while these sweeteners kept pouring in, the Russians smiled politely, but offered no response. Meanwhile, every Chinese effort to buy a stake in a Russian oil company was rebuffed or obstructed through bureaucratic measures. And, to make matters worse, the Russians let it be known that, while considering the construction of a pipeline to China, they were also toying with a Japanese offer to construct an alternative pipeline to the Sea of Japan.

 

And yet, during the last few weeks, everything appeared to be changing. Having re-nationalized Yukos, Russia’s second largest oil company, President Vladimir Putin suddenly announced that he was considering inviting the Chinese to take a stake in its assets. And Moscow subsequently went further, by specifying that CNPC may be allowed to gain a 20 per cent stake in the old assets of Yukos. No wonder, therefore, that the Chinese received the secret visit from Russian Energy Minister Viktor Khristenko with open arms. So, a major breakthrough? Hardly: just the continuation of the old Russian teasing game, with a few new twists.

 

The Russians clearly have an immediate political interest in suggesting that China could take a stake in their oil industry. Western shareholders who lost money after Moscow seized Yukos are now pursuing their claims through American courts; by using the ‘China card’, the Russians are trying to warn the US not to push the current legal claims too far. Secondly, Russian President Putin, who recently opted for building a pipeline to Japan rather than to China, now wants to avoid annoying the Chinese any further; touting the possibility of future Chinese investments in Russia’s oil industry without making any specific commitment therefore represents a clever exercise in political damage-limitation.

 

But, when the immediate political needs dissipate, the chances still are that Moscow will remain opposed to forging deeper energy partnerships with China. The reasons for this reluctance, which continues to baffle Beijing, go deep in Russia’s history and politics. Siberia, the vast energy-rich region adjacent to the Chinese border, is sparsely populated. For years, the Russians have fretted about what they claim is an increasing illegal Chinese migration into their province. Blissfully oblivious to the derogatory racist connotations, Russian politicians openly talk about a ‘yellow peril’, which will supposedly deprive them of their territory. Just about the last thing any Russian leader would consider is granting China either exploration rights or a financial stake in Siberian oil fields. Just about the only thing which remained constant in the policies of presidents Boris Yeltsin and Vladimir Putin over the last decade has been an adamant refusal to allow foreign stakes in Russia’s oil and natural gas fields. And, if the Europeans or the Americans were refused such stakes, it is difficult to see how the Chinese may fare any better.

 

President Putin has also been adamant about retaining absolute government control over his county’s pipelines. The policy has throttled growth in Russia’s energy industry but, seen from Moscow, it has a clear reason. The monopoly over the pipeline network allows the Russian government to keep control over the various oil companies in the country. It is also the ultimate guarantee that taxes will be paid, and oil is still by far the largest single source of revenue for the country. Given these considerations, there are few people in Moscow prepared to make concessions on this score if only because this is considered a matter of national security. The Chinese offers to build new pipelines will therefore continue to fall on deaf ears.

 

And then, there are grander political calculations. Germany – Europe’s pivotal state – is increasingly dependent on Russian energy supplies. This dependency has given Moscow a unique influence over European affairs, something which no energy link with China can offer. The Russians are only too aware of China’s growing importance. But they reckon that oil deliveries to Japan, as well as the possibility of future direct sales to the US, are even more enticing. In short, the strategic benefits of China are still considered too slender, if compared to the political advantages which Russia derives from its other existing customers.

 

To be sure, China will get a slice of Russia’s natural gas industry, the energy resource of the future. Secret Russian calculations predict that eastern Siberia, with known reserves of 6.6 trillion cubic meters of gas, could produce 110 billion cubic meters per year by the end of the next decade. But even then, the Chinese will receive less than a fifth of that amount under current deals.

 

The courtship between China and Russia will continue. But, more often than not, it will be the Chinese who will remain frustrated.

 

Jonathan Eyal

The author is Director of Studies at RUSI