China-Russia Oil Deal Masks Frictions

China-Russia oil deal seen unlikely to mend ties.
By Michael Lelyveld
2009.05.18
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BOSTONChina's new energy investment in Russia has renewed interest in closer ties between the two major powers, but distrust continues to block greater cooperation, analysts say.

In February, China agreed to lend $25 billion to Russian oil and pipeline companies in exchange for oil deliveries over a 20-year period, according to news agencies in both countries.

Under the agreement, Russia's state-owned Rosneft will get $15 billion in loans from the China Development Bank to supply 15 million tons of oil per year (300,000 barrels of oil per day). Another $10 billion will go to Russia's Transneft pipeline company, which is building a new oil line to the Chinese border from East Siberia.

On Monday, Chinese Vice Premier Wang Qishan officially launched construction of the 950-kilometer pipeline on the Chinese side of the border in northeastern Heilongjiang province, the official Xinhua news agency reported.

The project is expected to start pumping Russian oil to China's petroleum center at Daqing in 2011, the Interfax news agency said.

China's investments are part of a new "spending spree" aimed at converting a major part of its $2 trillion hard currency reserves into commodities and energy resources, said industry weekly Argus FSU Energy. Chinese oil firms are reportedly negotiating up to $46 billion in foreign investments this year, 80 percent of which are in Russia and Kazakhstan.

China's new financial stake in Russia has raised speculation that the long-awaited strategic alliance between Asia's biggest oil producer and its largest consumer may finally be at hand.

Closer relations unlikely

But analysts told Radio Free Asia that closer relations between the two countries are unlikely.

"That's becoming harder and harder because in many ways they are frontally competitors," said S. Frederick Starr, chairman of the Central Asia-Caucasus Institute at Johns Hopkins University in Washington. Starr cited a host of issues, including conflicting energy interests in Central Asia and competing transport routes to Europe.

Although China's loans-for-oil deal is seen as a breakthrough, it took nearly eight years to negotiate after an agreement on the pipeline was initially signed during former President Jiang Zemin's visit to Moscow in July 2001.

After years of dickering over terms and prices, Russia agreed to the deal under pressure of the worldwide economic crisis. "Russia and Kazakhstan do not so much love China as its cash," Argus said.

Even under pressure, Russia has kept Chinese oil companies at arms' length. China has gained access to foreign oilfields in many countries, but it has largely been barred from establishing a presence in Russia, perhaps due to historic tensions. "These are rather political concerns at the highest levels, especially in Russia," said Starr.

Curbs on trade


Relations have faced strains on several levels, as suggested by a 42-percent plunge in bilateral trade in the first quarter of this year, according to Russian official data.

Russia's trade representative Sergei Tsyplakov blamed factors including the economic downturn and currency shifts, Interfax reported. But security issues have also curbed trade.

Although China was once Russia's biggest arms buyer, it accounted for only 18 percent of Russia's weapons exports last year, the head of Russian arms monopoly Rosoboronexport told the official Rossiiskaya Gazeta last month. That share may soon drop to 10-15 percent, said general director Anatoly Isaikan.

Kremlin news agency RIA Novosti cited "concerns that China may use Russian technology to produce their own copycat versions of military equipment."

In particular, Russia has balked at selling its SU-33 carrier-based fighter jets due to fears that China could produce cheaper knock-offs for export. China has already copied Russia's SU-27K fighter in violation of agreements, the report said.

The Chinese market for Russian arms is likely to entirely disappear in the next five years, said Starr, calling this "a big problem for Russia."

Strategic mistrust

Spying incidents have also added to distrust.

In December 2007, a Moscow court convicted the head of Russian rocket producer Tsniimash-Export and three colleagues for smuggling missile technology to China in a controversial case that dragged on for two years.

Last October, a Russian couple were also found guilty of trying to sell aircraft carrier data to Chinese military intelligence officers, the Moscow Times reported.

In March, Russian prosecutors also charged several high-ranking navy officers with trying to sell anti-submarine missiles and bombs to China through Tajikistan after classifying them as outdated munitions, Interfax reported.

Mikkal Herberg, research director for energy security at the Seattle-based National Bureau of Asian Research, said that Russia came to terms on the oil deal only after the worldwide slump in oil prices.

"It was the perfect time for China to be able to seal that deal for the pipeline because the Russian energy sector was in deep financial trouble," Herberg told RFA, adding that this was not a sign of a strategic alliance.

"You still have a tremendous level of strategic mistrust between Russia and China," he said.

'Optional' alliance?

Dwindling arms sales may also end one of the most important shared interests between China and Russia.

"It's another area where the Chinese are going to want to have their own indigenous manufacturing technology capabilities and not rely on Russia any longer than they would have to," Herberg said.

Yet, despite the obstacles, Russian officials have suggested that Moscow could form an alliance with Beijing if its relations with NATO do not improve soon. Writing in The New York Times on May 6, Russia's NATO envoy Dmitry Rogozin appeared to cite a China alliance as an option, arguing that cooperation with the West is not its only alternative.

"If there is no political progress in relations with the West, Moscow will have to look eastward to define its foreign policy. Then the West will be faced with new economic and security difficulties," Rogozin said.

Analysts see little chance that Russia could forge such a relationship with China, given the range of frictions between the two countries.

"I think that's just silly fulmination," said Starr. "The relationship is not a cordial one."

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