Editor's Note: Russian President Vladimir Putin will meet with Chinese Premier Li Keqiang on Oct. 14, during three days of significant business negotiations and deal signing between the countries. Russia has been looking for an investment boost as a remedy for its economy, which is in sharp decline because of slowing internal growth, sanctions from the West and a sour investment climate overall. Already, Moscow's focus on expanded economic ties has shifted east, prompted by Russia's tense relations with the West in recent years. Moscow has traditionally been reserved in its relations with Asia — and China in particular — but this trend appears to be changing.
Russia reached out with the expansion of the East Siberia Oil Pipeline, completed in 2012, a move that increased eastbound oil exports from 4 percent to approximately 20 percent. Russia hopes to duplicate this success with natural gas exports through the Power of Siberia pipeline, which began construction this summer. The oil and natural gas deals with China are worth some $270 billion and $400 billion, respectively, over the next three decades.
Beyond energy, Moscow now views China as a much larger investor in Russia as well as an alternative market for credit. Both areas are reflected in the type and quantity of deals struck between the two countries over the past three days, 38 agreements in all, worth approximately $25 billion. Among the first notable deals is an agreement with China's Exim Bank that could provide $2 billion of long-term loans to Russia's Vnesheconombank, or VEB, which is currently suffering under sanctions imposed by the West. Additionally, Beijing said it would invest $10 billion in a high-speed rail project connecting Moscow and Kazan, Tatarstan, a $25 billion project that was put on hold when Western investors shied away because of sanctions.
Moscow also offered Beijing the chance to purchase a stake in Russia's oil giant, Rosneft. This is alongside a proposed stake in planned liquefied natural gas facilities on Russia's eastern coast and a possible expansion of the Power of Siberia pipeline — one that would add a large spur supplying China's western regions. Though indicators appear to show a revival of the Sino-Soviet alliance, both countries are carefully calculating their commitments: Beijing and Moscow are naturally wary of being beholden to one another. For the time being, however, there is a shared willingness to come to terms, which offers a distinct advantage for a Russia badly in need of new markets and investors, and a China that fits both those bills.
June 18, 2011: Russia is one of the world's largest energy producers and China is one of the biggest consumers, but these bordering countries have done very little energy trade. Instead, Russia relies mostly on the West as a consumer — it supplies one quarter of Europe's energy — while China largely relies on energy supplies from the Middle East and Africa imported via sea routes. The reason for this disconnect is that Russia's current oil and natural gas production occurs mostly in the west of the country, while most of China's population is in its east, leaving thousands of kilometers between the source and the consumers. The distance — and therefore investment — involved in connecting Russia's energy to China's population is massive.
Considering the difficulties involved in any oil and natural gas projects linking Russia and China, the endeavors appear to make no economic sense. However, this is not only about economics. Beijing and Moscow have many political, security and other issues in their overlapping and respective regions. It could be that energy cooperation, even at a high price, is considered mutually strategically necessary, or it could be a tradeoff for concessions in other areas. It is not clear what the tradeoff could be, but it is clear that a serious discussion is going on between the two Asian giants on finding common ground and shaping a stronger relationship in the future.
March 9, 2012: Russia is diversifying its customer base so that if demand in Europe declines — or if Russia and its European customers find themselves in a politically untenable situation — Russia will still have a large market to its east. In the past decade, Russia has increased its oil exports to Asia from 3 percent to 15 percent of total exports, with more increases expected. When the Eastern Siberia-Pacific Ocean oil pipeline (ESPO) is expanded, Russia theoretically could supply one-fifth of China's imports, or one-third of Japan's imports. However, Russia is not singling out one customer in East Asia yet; it is supplying many customers. Conversely, no East Asian country wants to become too reliant on Russia after seeing Moscow cut off supplies to its customers in the West.
Jan. 23, 2013: With its oil and natural gas exports to Europe declining, Russia is expanding its energy export networks to Asia. Russia has long relied on Europe as its primary customer, but over the past two years Moscow has worked to build out its energy infrastructure to the east as a way of diversifying its customer base. Today, it has enough capacity to divert about half of its oil exports to eastern markets. Because oil and natural gas are the chief sources of revenue for the Russian government, the Kremlin wants to ensure it has the flexibility to shift routes and destinations as demand in different regions rises or falls, somewhat insulating the country from volatility in energy markets.
Sept. 11, 2013: The past two weeks have been particularly busy for Russia and China as they discuss energy deals. Last week, Russian Deputy Prime Minister Igor Sechin traveled to China and struck a series of deals on behalf of Russian oil giant Rosneft, of which he is a board member. In June, the two sides agreed to a $270 billion oil deal under which Russia, starting in 2015, will export 300,000 barrels per day to China for 25 years, on top of the 400,000 barrels per day it already delivers noncontractually. In addition to this deal, Sechin and Rosneft agreed with China National Petroleum Corp. to construct a new oil refinery in the Chinese city of Tianjin and launch a joint venture to open gas stations across China that would be fed by Russian oil — Moscow's first venture into China's gasoline market.
Sept. 12, 2013: As China diversifies its options for natural gas suppliers, it is leveraging its position to get the best deals it can out of new contracts with Russia. Because Russia is counting on the Chinese natural gas market to help it move away from exporting energy to Europe, Moscow is offering concessions to Beijing, particularly in light of the growing competition it faces. Beijing's wariness of a natural gas contract with Russia and its concern about the end price of Russian natural gas has put Gazprom in a difficult position. The company was supposed to begin constructing the Power of Siberia pipeline in September, but without a final deal with China in place, it is postponing construction of the $32 billion pipeline until early 2014 to ensure that there will be a market for the natural gas the line will carry. Gazprom is courting other customers, such as South Korea and Japan, to sign contracts for natural gas exports via the pipeline, but the volume these countries would import is not nearly as great as the amount China has proposed.
May 21, 2014: Russia and China struck a long-awaited deal on natural gas May 21, according to Alexei Miller, the CEO of Russian natural gas giant Gazprom. According to the provisions of the deal, which is worth $400 billion, Russia will supply 38 billion cubic meters of natural gas per year to China for the next 30 years, with the option to raise supplies to 60 billion cubic meters per year in the future. The agreement will enable Russia to launch plans for building the $42 billion Power of Siberia pipeline, a 4,000 kilometer-long (approximately 2,500 miles) pipeline that will tap two new source fields and run from Siberia to China. The energy deal does not mean that Beijing and Moscow are aligned politically, as they were periodically during the Cold War. But each country now has a use for the other, and their partnership could help ensure domestic stability and enhance their respective positions in the world.