Publication: Eurasia Daily Monitor Volume: 2 Issue: 3

Russo-Chinese relations in 2004 were not all sweetness and light. Moscow’s destruction of Yukos and preference for a Japanese rather than a Chinese pipeline in Siberia put severe pressure on Chinese oil supplies, because Yukos was China’s main Russian oil supplier and Chinese demand for energy is exploding. Thus shortages or supply failures seriously injured China’s economy and led to public muttering about Russia’s unreliability. However, as Russia’s ties to the West worsened in late 2004, it had no choice but to turn back to China and find a solution that entailed guaranteeing Beijing more access to Russian energy supplies.

To overcome their bilateral tensions in energy, the two governments have arrived at a four-part solution.

First, Russian firms will participate in joint construction of nuclear power plants with China, and they will build a thermal power plant at Yimin and Weijiamao (RIA-Novosti December 21).

Second, efforts are underway, apparently with Kazakhstan’s support, to involve Russian companies in the current project of laying a pipeline from Kazakhstan to China. There are also discussions about sharing energy from the Kurmangazy oil field (RIA-Novosti, December 22). This would create another avenue by which Russian energy supplies could go to China.

Third, because no pipeline is currently available, Russian railroads will transport up to 30 million tons of energy to China by 2007, beginning with 10 million tons in 2005. While the railroads could handle freight up to 50 million tons, that is their maximum, and a pipeline would have to be built to carry annual amounts of 50 million tons or more. This railway shipment program thus represents a tripling of current oil shipments to China by 2007, from the existing level of 10 million tons annually (Itar-Tass, December 24).

Finally, Russian President Vladimir Putin has indicated that the China National Petroleum Company (CNPC) might be invited to take part in the production of Yuganskneftgaz, which was the main production unit of Yukos. Deputy Prime Minister Viktor Khristenko has indicated that CNPC might gain as much as a 20% ownership of the new company that is to be owned and managed by Gazprom. Beijing would thus be able to recoup the energy that was going to China before Yukos was destroyed (, December 21; Reuters, December 30).

While the Yukos affair has incurred much criticism abroad and will reduce the efficiency of Russia’s energy companies, soliciting Chinese participation represents an effort to mollify Beijing and give the deal a patina of legitimacy. Ironically, it represents a major policy reversal from 2002, when xenophobic protests derailed earlier Chinese efforts to buy into Slavneft. Thus, this deal also signifies Russian efforts to come to terms with the rise in Chinese economic power that clearly fueled huge anxieties in the Kremlin.

But the rapprochement with Beijing goes beyond energy supplies to encompass defense issues as well. Russia and China will hold bilateral army exercises in China during 2005 that will apparently test the new Russian weapons that are also going to China (Nezavisimoye voyennoye obozreniye, December 17). These exercises will be “quite large” and involve not only large numbers of ground forces but also state-of-the-art weapons, navy, air, long-range aviation, and submarine forces to provide interaction with Chinese forces (Itar-Tass, December 27). These exercises, particularly on the planned scale, are unprecedented and mark an expansion of both Russian and Chinese military diplomacy to encompass greater interaction among their militaries.

Russian arms sales to China faltered in 2004 because China demanded only the most advanced weapons while Russia insisted on the extension of existing contracts for the supply of weapons (RIA-Novosti, December 20). This dispute prompted China to press harder for the termination of the EU embargo , but with only limited success. While the possibility of renewed EU arms sales to China must alarm Russian arms dealers who cannot survive without selling China weapons systems, China still must rely on the Russian market for now because of the strong American opposition and threats to the EU if it lifted sanctions (Russian Business Monitor, December 22; Vedomosti, December 20; RIA-Novosti, December 20; NTV, November 8, 2004). Thus during Russian Defense Minister Sergei Ivanov’s visit to China in December, agreements were hammered out upgrading the scope of Russian arms sales to China. These agreements include delivery of Su-30MK2 fighters and licensing the assembly in China of Sukhoi-27SK aircraft for the Chinese Navy (Itar-Tass, December 13). Thus in 2005 Russia will sell 24 more Su-30 planes to China (Itar-Tass, December 13; Russian Business Monitor, December 22). Other big deals involving Ilyushin-76 Candid transport planes, Ilyushin-78 Midas aerial tankers, and engines for China’s Super 7 and Super 8 planes are also being discussed (Interfax-AVN Military News Agency, December 24).

Paradoxically, these deals reveal the existing tensions in Sino-Russian relations as well as the efforts to overcome them. China wants state-of-the-art weapons that Russia, for obvious reasons, is not prepared to sell, but Beijing still cannot generate sufficient leverage to push Moscow to sell those weapons. However, in the energy sector Beijing can induce Russia to live up to existing contracts, sell energy to China, and even invite it into some form of equity ownership in Russian energy firms. This may not be the ideal solution for China, but it shows that while Chinese economic power is clearly growing, it still cannot compel Russia to comply with Chinese demands in defense economics. Nor is it entirely clear that this energy deal will eventually work out to China’s benefit, given the atavistic fears of Chinese economic power in Moscow. While Russo-Chinese relations may have reached “unprecedented heights,” according to Presidents Putin and Hu Jintao, closer examination suggests that the mountain that both sides are still climbing remains a rocky one.