Business & Economics:
PUTIN HEDGES ON COMMITMENT TO MEET CHINA’S OIL NEEDS
Sergei Blagov: 3/22/06

Russian President Vladimir Putin played up oil-and-gas deals during his just-concluded visit to China, but some Russian experts are taking a cautious approach on the announcements, citing the fact that previous agreements have been slow to develop. Strategic concerns are weighing heavily on Russia as it explores economic cooperation with China.

Energy-related issues dominated Putin’s discussions with Chinese leaders during the March 21-22 trip. On the surface all seemed to go well, as the two countries voiced a desire to expand economic relations. “The sides support the investment role of enterprises in both countries to develop oil and gas resources and expand the energy potential of Russia and China,” said a joint statement issued by Putin and Chinese leader Hu Jintao.

Prior to Putin’s departure for Beijing, official from both countries said they aimed to more than double bilateral trade volume by 2010. Trade between the neighbors, who share a 4,300-kilometer (2,700-mile) border, reached nearly $30 billion in 2005, up about one-third over trade volume the previous year. Much of the increase was attributed to soaring energy prices.

While Putin was in Beijing, Russia and China signed over two dozen deals, including Russian commitment to supply up to 80 billion cubic meters of natural gas per year to China. To facilitate the increase in gas exports, a new $10-billion pipeline would be built. Preliminary estimates call for the pipeline to be completed by 2011. In addition, the Russian oil company Rosneft, along with the state pipeline monopoly Transneft, agreed to explore deals with the China National Petroleum Corp. (CNPC). Russia’s electricity conglomerate, AEO Unified Energy Systems, also signed an agreement to expand electricity supplies to China.

Despite the upbeat rhetoric, the visit did not appear to dispel underlying tension in Russian-Chinese relations. The tension is rooted in China’s rapidly rising demand for energy, especially oil. According to some estimates, Chinese oil imports may rise 6 percent in 2006 as Beijing strives to keep the country’s economic boom going. China’s energy needs represent a strategic dilemma for Putin. On the one hand, China represents a lucrative opportunity for Russian energy companies. On the other, if China succeeds in fostering steep and steady growth, the country could soon surpass Russia as a geopolitical heavyweight. Such a development could have a profound impact on political and economic developments in Central Asia. [For additional information see the Eurasia Insight archive].

The clearest reflection of the Russian dilemma was seen in Putin’s reluctance to offer Chinese leaders an unequivocal pledge to build an oil pipeline linking Russia to China. Putin hedged, suggesting that Russia would “actively pursue” the possibility of building a spur to China from the projected Siberia-Pacific pipeline. The Russian president, however, pointedly declined to disclose a concrete timeline.

Russia has been mulling the construction of a $12-billion pipeline from East Siberia to the Pacific that would pump 80 million tons of oil per year. The project has encountered opposition due to its route proximity to Lake Baikal, the world's largest freshwater lake. But Russian Energy Minister Viktor Khristenko indicated March 22 that a portion of the pipeline could be operational by 2008. Putin has described the Pacific pipeline as a national priority. If the Chinese spur is built, Khristenko indicated that Russia could ship up to 30 million tons of oil per year to China via that route.

In early March, Zhang Guobao, vice-minister of the National Development and Reform Commission, expressed frustration with the pace of the negotiations on both the pipeline and proposed exports of natural gas from Russia. “There has been a lot of communication, but there has been little actual progress,” Zhang said.

Putin’s apparent willingness to move forward with an oil pipeline feasibility study should allay China’s concerns for the moment. But, given Beijing’s energy demands, Chinese leaders will soon start growing impatient again, if the feasibility study drags on.

During his trip, Putin indicated that China might have to alter its trade practices in order to secure Russia’s agreement to build a pipeline spur. In a speech to a business forum in Beijing, Putin noted “unfavorable structural changes in Russian-Chinese trade,” in which China increasingly used Russia merely as a source of raw materials, especially oil and gas. He described this tendency as “a serious problem.” To put trade relations on a more sound footing, Putin said China should start importing more finished products and hi-tech items from Russia. Hu Jintao said at the same forum that Beijing was open to expanding trade in industrial goods, but emphasized that energy would continue to play a central role in the bilateral economic relationship.

Editor’s Note: Sergei Blagov is a Moscow-based specialist in CIS political affairs.