Publication: Eurasia Daily Monitor Volume: 5 Issue: 208

Leaders of Russia and China hailed what they described as a bilateral strategic partnership, while the countries’ state-run energy giants are struggling to work out a compromise on energy prices.

Russian Prime Minister Vladimir Putin, following a meeting in Moscow with his Chinese counterpart Wen Jiabao, announced that relations between Russia and China had reached “a new level of mutual trust and strategic partnership.” Putin urged that bilateral trade be increased to $80 billion a year.

During the talks, Putin reportedly suggested using Russian and Chinese currencies in bilateral trade in order gradually to replace transactions in U.S. dollars. In response, Chinese Premier Wen Jiabao hailed bilateral trade ties and urged that China and Russia work together to help stabilize the world economy, but he refrained from making any concrete commitments (Interfax, RIA-Novosti, October 28).

Russian officials have repeatedly voiced reservations about the use of the American currency in trade with China. Russia suggested limiting transactions in U.S. dollars in bilateral trade, Russian Deputy Prime Minister Alexander Zhukov said after a meeting with visiting Chinese Minister of Commerce Chen Deming. Zhukov also urged working out new economic models, capable of countering the global financial crisis and protecting the domestic economies of Russia and China (Rossiiskaya Gazeta, October 16).

During Wen’s visit to Moscow from October 27 to 29, Russian and Chinese state-run companies signed a series of agreements. On October 28 the Russian oil pipeline monopoly Transneft and the China National Petroleum Corporation (CNPC) signed an agreement on the spur line to connect the East Siberia Pacific oil pipeline (ESPO) with China.

Russia’s nuclear corporation Rosatom and the Chinese nuclear agency signed a memorandum of understanding on expanding China’s Tianwan nuclear power plant, while Russia’s state-controlled VEN and Gazprombank signed agreements with Chinese banks on funding joint projects (Interfax, RIA-Novosti, October 28).

Russian and Chinese state-run oil firms Rosneft and CNPC were also expected to sign a 15-year oil supply agreement. On October 28, however, Deputy Prime Minister Igor Sechin announced that the deal would be finalized by November 25 (Interfax, October 28). Rosneft and CNPC appeared to remain divided over prices for crude oil to be supplied to China via the ESPO spur line.

Russian officials have repeatedly voiced the hope that the bilateral oil deal could be clinched sooner rather than later. On October 23 Russia’s Energy Minister Sergei Shmatko said that Rosneft and CNPC could sign a new oil supply deal based on a price formula in one or two months, but he conceded that the ESPO spur line to China would not be built in 2009 (Interfax, October 23).

Meanwhile, Chinese sources made little secret of their uneasiness over protracted negotiations. On October 16 Russian news agencies quoted sources from CNPC as saying that the Chinese oil company was continuing discussions with Rosneft on crude oil prices to be supplied via the ESPO and voiced hope that an agreement on the ESPO spur line to China could be signed in October. The source also pointed out that the Altai gas pipeline project had been suspended due to disagreements between CNPC and Gazprom over gas prices (Interfax, October 16).

Earlier this month, Russia’s gas giant Gazprom held talks with Chinese representatives, but the negotiators apparently made little progress. On October 22 Gazprom and CNPC held the sixth meeting of their joint coordination committee in Kazan, Russia. Both sides agreed to continue negotiations on the terms of Russian gas supplies to China, Gazprom announced (Interfax, October 22).

In the meantime, trade between Russia and China continued to increase. From January through September bilateral trade reached $42.97 billion or a 23 percent increase over the same period last year, according to Chinese government statistics. Russian exports amounted to $19.53 billion, 34.6 percent up, while imports from China reached $23.44 billion, an increase of 14.7 percent.

Although China’s trade surplus in its trade with Russia amounted to $3.91 billion from January through September, it was 43 percent down from the same period last year, Sergei Tsyplakov, Russia’s trade representative to China, said. In the first nine months, Russia oil export volumes were down 21 percent, timber exports were down 24.5 percent, and fertilizers supplies were down 46 percent; but Russia’s export values were still up due to high prices in the first half of the year, Tsyplakov said (Interfax, October 22).

Russian officials have repeatedly complained that Russian exports to China were dominated by commodities. Earlier this month, Russia suggested setting up a fund to finance trade in machinery and industrial goods to boost ties amid the worsening global financial crisis, according to a statement issued after talks between Russian Economic Development Minister Elvira Nabiullina and visiting Chinese Minister of Commerce Chen Deming. Vnesheconombank, also known as the Development Bank, may set up the fund with China’s Eximbank, Nabiullina announced in Moscow (Interfax, RIA Novosti, Xinhua, October 15).

Apart from economic issues, earlier this month Russia moved to finalize its border arrangements with China in an apparent bid to prop up the bilateral “strategic partnership.” China and Russia held a ceremony at Heixiazi (Bolshoi Ussuriisky) Island to unveil the boundary markers delineating the eastern section of their border, and Russia transferred one island and part of another to China as part of a border agreement with its neighbor.

On July 21 Russian Foreign Minister Sergei Lavrov and his Chinese counterpart Yang Jiechi signed the border agreement, which settled the demarcation of their 4,300-kilometer (2,672-mile) border, the longest land frontier in the world. Under the agreement, the border divided the disputed areas some 145 square miles (375 square kilometers) between Russia and China almost equally. Part of Bolshoi Ussuriisky Island and the whole of the Tarabarov Island were handed over to China.

The settlement of the border issue between Russia and China comes as an example of diplomacy being used to solve a decades-long dispute between the two nations, RIA Novosti news agency said (RIA Novosti, October 14). The transfer of the islands served to settle all border disputes and closed the border issue between Russia and China, said Andrei Ostrovsky, deputy head of the Far East Institute, a Moscow-based think-tank. He also suggested using the islands for free trade zones (RIA Novosti, October 14).

The Chinese media made little secret that the agreement was seen as a territorial hand-over by Moscow. Russia’s return of Heixiazi Island marked the end of the border dispute, China Daily wrote (China Daily, October 14). The border agreement between China and Russia set an example for the international community, China’s Foreign Ministry said (Xinhua, October 14). Yet despite optimistic official “strategic partnership” pronouncements, both sides are understood to remain divided by a series of commercial disputes on energy prices.