Russia/China: energy cooperation is the biggest challenge

During Prime Minister Vladimir Putin’s visit to China on 11-12 October, a memorandum was signed on cooperation in the field of economic modernisation, as was an agreement to establish a Russian-Chinese investment fund with capital of US$3-4 billion, whose activities will primarily (up to 70%) focus on investments in Russia and the CIS.
The long-term challenge for Russia in its relations with China is the unfavourable structure of trade between the two countries while the principles of their energy cooperation are a central immediate problem. The countries have been unable to conclude several years of negotiations on constructing a pipeline and a long-term contract on gas supplies to China because of a dispute over gas prices. As for petroleum, since January 2011 the Chinese company (CNPC) has been paying a smaller amount than provided for in the 20-year contract. The issue under dispute is the cost of transporting crude through Russian territory via the ESPO pipeline, which according to the Chinese has been overestimated. According to the Russians, consensus was reached during the visit on how to resolve the dispute. The Russian electricity producer Inter RAO has been attempting to conclude an agreement with the Chinese about electricity exports since 2008, but prices are also still a contentious issue.
  • The documents signed show that Russia is trying to change the existing pattern of economic cooperation, which is currently unfavourable to Moscow. Russian exports are dominated by raw materials and unprocessed products (80% of the total), while the share of machine industry only amounts to 5%. The Chinese investments would allow some of the raw material processing to be located on Russian territory. Russia is trying to increase its access to the Chinese market, offering technology in areas such as nuclear energy, the production of helicopters and the aerospace industry. A new element is Moscow’s desire to acquire technology from China in areas such as high-speed rail transport, the shipbuilding industry and alternative energy sources. Simultaneously, the agreements concluded show that the imbalance in bilateral relations is deepening – in China’s favour.
  • The main obstacle in developing energy cooperation between the two countries remains their firm stance on the terms of the contracts, above all on the prices. In the case of the gas contract talks, Russia seems to feel that its negotiating position has been strengthened by Germany's decision to abandon nuclear energy, and the consequent expected increase in Russian supplies to Europe. Russia’s efforts to build a gas pipeline to the two Korean states are also part of the negotiations. China, in turn, is putting pressure on Moscow by making more agreements with Central Asian countries (Turkmenistan and Kazakhstan) to increase the supply through the gas pipeline from Turkmenistan, which has been in operation since the end of 2009.
  • Russia's efforts to involve China in its modernisation process can be interpreted as a signal to the West that Western countries need not be the sole source of technology and capital. Energy cooperation with China, together with the gradual diversification of Russian exports, also serves Moscow as an argument in its negotiations with European customers.