The visit by Russian Prime Minister Dmitri Medvedev to China once again highlighted the strategic importance that Moscow attaches to Asia. Donald N. Jensen, Resident Fellow at the Center for Transatlantic Relations at the Johns Hopkins School of Advanced International Studies, notes that the prospects for cooperation with Beijing may not be as good as the Kremlin hopes.

 

Russian Prime Minister Dmitri Medvedev and Chinese leader Xi Jinping during their meeting in Beijing.

 

An increasingly familiar sight appeared in Beijing on October 22: the latest high-ranking Russian delegation, this time led by Prime Minister Dmitri Medvedev, to seek agreement with Chinese officials on important energy deals that would further align the two countries as economic and geopolitical partners. Rosneft, Russia’s largest oil producer and a company controlled by Putin-ally Igor Sechin, agreed during the visit to provide Sinopec, China’s largest oil producer, with 100 million metric tons of crude oil over the next decade, a deal Medvedev valued at about $85 billion. “That is a large sum of money for any country—even China,” the Russian prime minister said. “It testifies to the fact that we have reached a higher and completely new level of cooperation.”

Other business deals on the agenda will strengthen the countries’ energy relationship as well. Rosneft will also jointly construct an oil refinery near Beijing with the China National Petroleum Corporation (CNPC), China’s largest oil and gas company. (This follows a June agreement between Rosneft and CNPC that will make China Russia’s largest oil customer). In addition, the independent firm Novatek, Russia’s second largest natural gas producer, announced a long-term contract to supply liquefied natural gas (LNG) to CNPC ahead of a widely anticipated lifting of Gazprom’s monopoly on Russian gas exports in the upcoming months. In a separate deal, Russian oligarch Oleg Deripaska, president of EN+ Group, signed a strategic cooperation agreement with Cao Peixi, president of the state-owned power company China Huaneng Group. Only Gazprom, Russia’s state-owned energy behemoth, has been left out, at least for now. Disagreements between Gazprom and Chinese authorities over pricing continue to block a proposal that would let Gazprom sell natural gas to China via a dedicated pipeline. In other economic negotiations, the sides pledged to increase trade, especially Chinese investment in the Russian economy.

The visit had a security dimension as well. Medvedev and his Chinese counterparts continued efforts to reshape the international system to make it less dominated by the United States. They agreed to enhance coordination on key international issues (both oppose multilateral peacekeeping initiatives, for example, and cooperate on Iran). The two sides also declared their intention to bolster the authority of the United Nations Security Council, where they have used their veto authority to protect the Assad regime in Syria and thwart Western diplomacy initiatives with which they do not agree.

The Medvedev visit reflects the growing importance of the Asia-Pacific region—and China in particular—as Moscow seeks to shift the balance of its global commitments away from the West. In its new foreign policy concept, published in 2013, Moscow stated that it seeks to build the importance of relations with Asia within the context of what it sees as the emergence of a multipolar world and a US foreign policy that is “as costly as it is ineffective.” A Kremlin faction led by Sechin is reportedly pressing for an alliance with China against the West. In July, Russia’s Pacific Fleet was involved in major military exercises, including both a readiness inspection and a joint drill with the Chinese Navy in the Russian Far East.

The Medvedev visit reflects the growing importance to Russia of the Asia-Pacific region as Moscow seeks to shift the balance of its global commitments away from the West.

The October oil and gas deals are also part of Russia’s efforts to increase energy exports to the Far East, as its exports to traditional markets, especially in Europe, decline due to that continent’s economic slump, increased global production of LNG and commercial shale, and Gazprom’s increasingly inefficient business model and legal problems. After plunging during the 2008 financial crisis, oil prices have rebounded, but the Russian government will not be able to fulfill its budget obligations at home if prices do not remain high. Moscow is thus increasingly looking to Asia for new customers—especially China, which it prefers to lock into long-term contracts—for new funding to develop Russia’s large energy reserves. It also seeks to build new pipelines to redirect oil produced in western Siberian fields from Europe to Asia.

Despite the positive atmosphere during the Russian delegation’s visit, the Russia-China entente remains fragile and vulnerable to shifts in the underlying conditions on which it is based. Russia’s gloomy demographic prospects, paired with China’s rising military power and its economic penetration of Central Asia, a region which Russia seeks to include in its proposed Eurasian Union, could make the partnership short-lived. China is now the largest trading partner of the Central Asia countries. A recent tour of that region by Chinese Communist Party leader Xi Jinping resulted in economic deals with Turkmenistan, Uzbekistan, and Kyrgyzstan, effectively highlighting Beijing’s expanding regional footprint.

Beijing also has good reason to be careful in strengthening energy links to Russia. China, writes energy expert James Sherr, “perceives that Russia is more interested in enhancing its options than becoming a reliable supplier to the Chinese market.” When negotiations for a gas contract between Russia and China broke down in June 2011, Russia immediately started to play off rival consumers, intensifying talks about implementing a Korean pipeline scheme that would transport natural gas from Russia’s Sakhalin-I field via North Korea. And a decade ago, Russia reneged on a nearly finalized oil pipeline project with China, just prior to the Yukos Affair. Russia’s energy strategy also gives Japan a key lever, which Moscow could use in its dealings with China.

These days China has other options, such as importing more LNG, and the Central Asia–China gas pipeline. Russia, by contrast, faces significant problems in its energy sector. Its infrastructure is decaying, and public services and human capital are absent—especially in East Siberia and the Russian Far East. The federal budget is distorted by corruption and by commitments to defense, security, and the social sector. Ominously, on the day that Rosneft announced its deal with Sinopec, the company also disclosed that it had cut its production forecasts for a key field in Siberia, raising questions about Russia’s ability to meet China’s growing demand for crude. The firm assured the press, however, that it would meet all its oil supply commitments “without doubt.”

The Kremlin is trying to respond to the challenges confronting its energy relations with other countries as well, not only those with China. First, it is locking in Russia’s comparative advantages, by solidifying commitments to the South Stream pipeline, for instance, and campaigning to block shale gas exploitation in Europe. Second, it is trying to exploit the unconventional energy revolution itself. Third, it is restructuring its own energy sector. There are signs that Putin may be willing to replace one national champion, Gazprom, which came back from China empty-handed, with others (such as Rosneft and Novatek). But there is nothing in these plans, Sherr reminds us, designed to address the energy sector’s core problem: value detraction resulting from the extraction of fees at every stage by politicians, bureaucrats, and “shadow structures.” The innovations that Russia needs most—productivity-enhancing technology, intensive development of existing oil fields, and a genuine market—are thus unlikely to emerge under the country’s current leadership. Against this backdrop, the long-term prospects for Russia and China’s energy cooperation, so glowingly depicted during the Russian prime minister’s short visit, seem murky indeed.

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