Putin's visit to China focuses on raw material co-operation

On 12-15 October, the Russian prime minister Vladimir Putin paid an official visit to China. The visit was mainly devoted to issues of economic co-operation. A number of economic agreements were signed, including a preliminary agreement on terms and conditions for gas supplies from Russia to China. However, the parties still have not reached agreement on the price of the gas, which remains a major point of contention. On the eve of the visit, the Russian media informed that in September, Russia and China had already agreed on an extensive programme for Russian-Chinese regional co-operation in East Siberia and the Far East, running until 2018.
Even if many of the documents signed are just declarations and plans, the visit has revealed that Russia and China have different visions of how their bilateral relations will develop in the future. Russia's strategy is to drag China into a system of economic interdependencies: in return for assistance in developing East Siberia and the Far East on Russia's terms, China is supposed to receive supplies of raw materials and participate in their distribution onto the Chinese market. Russia thus also intends to neutralise those of China's potential policies which could be detrimental to Russian interests, including uncontrolled economic and demographic expansion. At the same time, Moscow is aiming to present its relations with Beijing to the West as a strategic alliance, for purposes of propaganda. Beijing, however, views Russia only as the supplier of raw materials for its rapidly growing economy, and not as a true political ally.
The current preliminary gas deal and the regional co-operation programme as well as the previous agreement on oil supplies and the US$25 billion loan from China to Russian energy companies which was signed this February all indicate that the model of Russian-Chinese relations is evolving rapidly, and that China is gaining the upper hand. A Chinese presence seems necessary for Moscow to help it develop the eastern regions; however, China's economy does also have alternatives to supplies of East Siberian natural resources in the foreseeable future. It therefore seems that the model of co-operation will be defined mainly by the Chinese side; this may mean that Russia will be reduced to the role of a supplier of mineral resources.

Towards a gas contract

The most important outcome of the visit consists in the signature of a preliminary agreement between Gazprom and China's energy company CNPC laying down terms for gas supplies from Russia. The document is a more detailed variant of the agreement concluded in February 2006, and provides for the gas to be supplied via two routes, from fields in West Siberia (around 30 billion m3 a year) and from fields in East Siberia and the Far East (around 38 billion m3). According to Gazprom, supplies could begin as early as 2014-2015, but this seems unlikely as the parties have yet to agree on the main issue which has impeded the signature of the final contract for years, namely the price of the gas. Moscow wants to have the contract signed because this would further the development of the East Siberian fields (see Appendix 1), which are of key importance for the development of the Russian energy sector; however, it wants to sell gas at European prices. The Chinese expect a much lower price, and while Beijing is interested in importing gas from Russia, such imports will not be essential for the next several years because China has ensured gas supplies from Central Asia and other sources. This strengthens China's bargaining position, and so the signature of a contract with a price formula to June 2010 (which is what Gazprom claims will happen) is in fact unlikely unless Russia makes concessions.
It also appears that the Chinese are mainly interested in gas supplies from Sakhalin and East Siberia to the eastern part of China, and in gas supplies from West Siberia to western China (which is the destination for gas from Central Asia) to a lesser degree. Gazprom, on the other hand, is prepared to launch supplies from West Siberia first. Moreover, arrangements are in place under which gas from Sakhalin-2 will be purchased for over twenty years by Japanese and Korean companies (meaning any potential deliveries to China require the development of the new fields). Developing the fields in East Siberia will require enormous investments to be made and costly gas pipelines to be built. The Chinese could possibly finance the infrastructure development to a large extent, although they would probably expect co-ownership of the fields in return, which Russia has objected to until now.
The fact that the preliminary gas deal has been signed even though no price formula has been stipulated indicates that Russia is trying to use its future gas co-operation with China for propaganda purposes as part of its European policy. On the one hand, Moscow is trying to obtain more support from the EU member states for the gas pipeline projects (Nord Stream and South Stream), keep in place its long-term contracts for gas supplies to the EU countries, and attract more investment in the development of the large energy reserves in the Arctic region (such as the Yamal). On the other hand, Russia intends in the medium term to diversify its energy resource exports for which Europe is currently the main market.

Other arrangements

During the economic forum organised on the occasion of the visit, the parties signed deals worth over US$3.5 billion, as well as a US$1 billion contract for the construction of a 'super dockyard' in Vladivostok to build drilling rigs, an agreement on the participation of Russia's Atomstroiexport in the extension of the Tian-Wan nuclear power plant, and a memorandum between the Russian and Chinese railway companies concerning the construction of a high-speed railway in Russia. Rosneft and CNPC signed the long-negotiated agreement on joint construction and operation of an oil refinery in Tianjin (worth US$3 billion, with a capacity of 10 million tons a year) and 300 filling stations. In this way, the Russian energy company (which will control 49% of shares in the enterprise) has managed to enter China's internal market for the first time. The example of Rosneft is a good illustration of the efforts big Russian companies have made to establish a presence in China.

Regional co-operation

On the first day of Putin's visit, the Russian daily Vedomosti published the text of the Programme for co-operation between the Russian regions of the Far East and East Siberia and the North-Eastern region of China in 2009-2018, approved on 23 September by Presidents Dmitry Medvedev and Hu Jintao during their meeting at the UN session in New York. This extensive document lists 205 planned joint projects, most of which concern the extraction of resources in Russia (including coal, iron ore and noble metals) and the processing of timber (see Appendix 2 for details). The projects are supposed to be implemented using Chinese technology, investments and labour, and the processing of raw materials is to take place in China. If the document is implemented, it will mark a turning point for the Chinese economic presence in the Russian East Siberia and the Far East. The document also demonstrates that Russia views China as a key partner for the economic development of the region.

Wojciech Konończuk

Appendix 1

Gas fields in East Siberia and the Far East
The gas reserves of East Siberia and the Far East are not currently being exploited, except for Sakhalin-2 where extraction started only this year, and Yakutia (Sakha) where small quantities of gas are being extracted for local consumption. In order to develop the region's gas fields, in 2007 Gazprom launched the so-called 'eastern programme' which provides for the creation of extraction centres in the Krasnoyarsk krai, the Irkutsk oblast, Yakutia and Kamchatka, and the construction of the necessary transmission infrastructure. Implementing the programme requires massive investments (also because installations must be built to purify the natural gas of helium, as the two are mixed in the East Siberian deposits). However, Gazprom is not in a position to make the necessary investments on its own.
Gas for the projected gas pipeline from East Siberia to China (to be built along the East Siberia-Pacific Ocean VSTO oil pipeline) is to come from the largest two fields of the region: Chayandinskoye (with reserves of 1.2 billion m3) owned by Gazprom, and Kovykta (with reserves of 2 billion m3) controlled by TNK-BP (which nevertheless may shortly lose its licence in favour of Gazprom). According to the plans, the operation of Chayandinskoye could start in around 2016.
Until now, Chinese companies had no shares in gas fields in Russia. However, shortly before Vladimir Putin's visit to China, the Russian media announced that a previously unknown Russian-Chinese Investment Energy Company (controlled by the Hong Kong-based RusEnergy Investment Group) had acquired 51% of shares in Suntarneftegaz, the holder of a licence for the East Siberian fields of Yuzhno-Berezovskoye and Cherendeiskoye with reserves of up to 60 billion m3. The Suntarneftegaz board of directors is headed by Viktor Khmarin, Vladimir Putin's colleague from their past as students.

Appendix 2
Programme for co-operation between the Russian regions of the Far East and East Siberia and the North-Eastern region of China in 2009-2018

This twenty-page document lists 205 Chinese-Russian projects to be implemented to 2018 in Russia and in China. Sample projects to be carried out on Russian territory include the development of coal, molybdenum, gold and copper fields in the Zabaykalsky krai, the construction of a timber processing plant in Chita, the development of the magnesium, silver and apatite deposits in the Irkutsk oblast, the development of coal fields in Magadan and Kamchatka, the construction of the Verkhneye-Telekayskoye-Anadyr oil pipeline (138 km), and the construction of a heat & power plant and a sugar plant in the Amur oblast. The document also mentions the modernisation of existing border crossings and the creation of new ones, co-operation in the field of transport, the creation of a number of joint technology parks in Russia and in China, as well as tourism and environmental co-operation.

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