Russia and China: An Old Alliance Hinges on Energy

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Adrian Bradshaw / Epa / Corbis

Russian Prime Minister Vladimir Putin, right, walks with Chinese Premier Wen Jiabao at the Great Hall of the People beside Tiananmen Square in Beijing on Oct. 13, 2009

The images of Russian Prime Minister Vladimir Putin toasting Chinese Premier Wen Jiabao during his visit to China this week conjured up memories of the Sino-Soviet alliance during the early years of the Cold War. But despite the bonhomie and talk of common interests, the neighbors are now most aligned by the bottom line. After signing $3.5 billion in deals and approving a framework for the export of a huge quantity of Russian natural gas to China during an Oct. 12-14 summit, the two countries have shown that what links them closest is the almighty deal.

"The most important thing is that Russia and China have the need and capacity to enhance cooperation and the two economies are complementary to each other," Putin told China's state-run Xinhua news service. For each side, there are clear benefits: Russia's energy companies secure a stake in China, which is set to become the world's biggest energy consumer within five years, according to the International Energy Agency in Paris. And for China, Russia provides a safer, more direct source for gas and oil than either the Persian Gulf or the Horn of Africa. Energy-rich Russia has suffered from tanking oil and natural gas prices, while China has managed thus far to weather the global economic downturn thanks to $586 billion in government stimulus spending. China has taken advantage of more than $2 trillion in foreign-exchange reserves to shop for energy and mineral reserves abroad.

"The timing is good," says David Zweig, director of the Center on China's Transnational Relations at the Hong Kong University of Science and Technology. "China has been very active to get as many commitments on energy around the world before the dollar devalues too much." In August, China signed a $41 billion contract to buy liquefied natural gas over the next 20 years from Australia. Last month, China's state-owned China National Offshore Oil Corp (CNOOC) entered talks with Nigeria to buy as much as one-sixth of the West African nation's proven petroleum reserves, the Financial Times reported. This week, Guinea's junta announced a $7 billion mining deal with an unnamed Chinese company, which human-rights activists say could prop up a government implicated in a mass killing of demonstrators in September.

China and Russia have yet to come to terms on an agreement for Gazprom to sell natural gas from fields in western and eastern Siberia to the China National Petroleum Corp. (CNPC). In 2006 the two companies signed a memorandum of understanding to develop two pipelines, one that would link Sakhalin Island with northeast China and a second that would join the Siberian Kovykta gas field with China's northwestern Xinjiang region. Completion of that deal stalled on disagreements over several issues, including price.

China and Russia also still disagree on how to finance those unbuilt pipelines, which are likely to cost billions of dollars. (As a measure of how expensive these projects are, the BTC oil pipeline linking Azerbaijan's capital, Baku, through Tbilisi, Georgia, to Turkey's Caspian port of Ceyhan cost $4 billion to build in the early 2000s.) "Gazprom has been looking to get into the Chinese market for a considerable time, but the problem has always been over agreeing on the price," says Julian Lee, a senior energy analyst for the Center for Global Energy Studies in London. "There is no indication that they have done this this time." While the high-profile announcement this week of a new framework indicates support for a deal from both governments, the price question has yet to be resolved. If settled, Russia could begin supplying China by as early as 2014 and eventually provide China with as much as 70 billion cubic meters a year — nearly 90% of the 80 billion cubic meters China consumed in 2008.

China's energy demands are expected to climb steeply over the next two decades. The country now gets 70% of its power from coal-fired generation and just 3% from cleaner-burning natural gas. China has rich coal resources, but the material is generally of low quality and contributes heavily to the country's severe air pollution. China will continue to rely on coal to fuel its energy needs, but the proportion of cleaner natural gas is expected to rise. The U.S. Department of Energy's Energy Information Administration estimates that China's natural gas demand will triple by 2030.

And while China needs Russia's vast energy reserves, it can afford to wait a little while. Beijing has already tapped into Central Asia's vast gas reserves. A new pipeline from Turkmenistan is scheduled to begin gas shipments to China in December via Uzbekistan and Kazakhstan, both gas-rich countries. China also has access to the world's largest natural gas field, the South Pars, which is shared by Iran and Qatar. In June, CNPC purchased a block of the Iran-owned South Pars field after the French energy giant Total walked away from the bid for fear of antagonizing the French government, which was attempting to impose tighter sanctions on Iran.

That steady stream of suppliers has seemingly made Russia eager to make deals with its neighbor rather than to lose out to its competitors in the Persian Gulf and the Caspian. Says the Eurasia Group, a risk consultancy in Washington, in its research note on Thursday: "Gazprom increasingly has an incentive to lock in a share of the Chinese market, as it sees growing competition from Central Asian suppliers as well as LNG suppliers such as Australia, Qatar and even Papua New Guinea."

China is considering all options as it scours the globe for gas and oil deals. Having watched commodity prices rise wildly before last year's downturn, Beijing is scurrying to lock in supplies now, while prices are stable. That search has a significant effect on how China interacts with the world. "Energy is a big issue for Chinese diplomacy," says Han Hua, an associate professor at Peking University's School of International Studies. "We have to diversify and get energy not just from the Middle East but from Russia. After decades of discussion, this agreement is really important for China's growth."

And while the old Cold War allies may still want to counterbalance American influence, Moscow and Beijing are linked by 21st century economic concerns. "We cannot be as close as we were in the 1950s," says Han. The communist neighbors grew apart starting in 1956, and even after the fall of the Soviet Union, trade between Russia and China remained slow. In recent years it has expanded rapidly, from $10.7 billion in 2001 to $56.9 billion in 2008. "Half of that is energy," says Zweig. "Energy is a very important component of the bilateral trade relationship. In many ways, it is a pillar." These days, it's a much more sturdy pillar than ideology.

With reporting by Vivienne Walt / Paris