Publication: Eurasia Daily Monitor Volume: 2 Issue: 27

Although Moscow’s East Asian policies have been eclipsed by the oil and gas game, the long saga of Russia’s desire to create a Pacific oil pipeline, coupled with the controversial Yuganskneftegaz sell-off, have added a measure of confusion to Russia’s ties with China.

Last December, despite pledges of a “strategic energy partnership” with China, Moscow approved a Japan-bound East Siberia-Pacific oil pipeline. Subsequently, Russian officials tried to explain the move as following domestic policy needs. The Russian government’s decision to build the Pacific oil pipeline would secure stable crude supplies to oil refineries in the Khabarovsk region, thus benefiting all regions in Russian Far East, according to Rosneft head Sergei Bogdanchikov (RIA-Novosti, February 4).

However, Moscow has dangled possible economic carrots to China, presumably to make up for Beijing’s apparent disappointment over the East Siberia-Pacific oil pipeline. Also in December, Russia’s Industry and Energy Minister Viktor Khristenko publicly offered to allow the China National Petroleum Corporation to take a 20% stake in Yuganskneftegaz. So far, the CNPC has expressed no interest in a Yuganskneftegaz stake.

Furthermore, Moscow has indicated that it did not completely rule out a pipeline branch to China. On January 26 Russia’s Transneft pipeline monopoly said it had started to plan the construction of a pipeline from the Siberian oil fields to the Sea of Japan with another branch leading to China. Transneft head Simon Vainshtock told Russian President Vladimir Putin that the first branch of the pipeline would run from Taishet in Siberia’s Irkutsk region to the town of Skovorodino, only 70 kilometers north of the Chinese border (Itar-Tass, RIA-Novosti, January 26). Transneft has until May to prepare a feasibility study for the pipeline.

Rosneft also said it had begun to make crude deliveries to China by rail. Rosneft head Bogdanchikov pledged “enough resources” to deliver 10 million tons of oil to China by rail in 2005, and 15 million tons in 2006 (Itar-Tass, February 4). Currently, China receives all its Russian oil by rail, although this transport method is more expensive than piping it.

However, there may not be enough crude to fill Russia’s Pacific oil pipeline. Russia’s Natural Resources Ministry has warned that explored oil deposits must grow by more than 70 million a year (as compared to the current growth rate of 30-35 million tons per annum) in order to secure crude supplies for the East Siberia-Pacific pipeline, including its branch to Daqing (Kommersant, January 25).

Russia now has only a vague commitment to build a branch from the Pacific pipeline to China by 2020. Moscow officials have hinted that Beijing would have to come up with the financing if it wanted the oil; therefore the option for a Chinese branch still remains. However, Russia’s plans regarding China’s would-be role in the Pacific pipeline are yet to be fully clarified.

It is hardly a coincidence that Chinese State Councilor Tang Jiaxuan visited Russia February 1-4, officially for consultations on bilateral relations and major issues of common concern. Putin and Tang Jiaxuan announced on February 2 that Russia and China have agreed to hold regular security consultations. Tang told Putin that Beijing does not have such a consultative mechanism with any other country, and called Russia China’s “main partner for strategic cooperation.” In response, Putin hailed the “intensive development” of bilateral political, economic, and security ties. However, Tang told Russian Prime Minister Mikhail Fradkov that China hoped for a “breakthrough” in bilateral cooperation, including in the energy sector (Xinhua, February 3).

Meanwhile, in the wake of the controversial Yuganskneftegaz sell-off in December 2004, Rosneft’s financial dealings to secure future oil supplies to China have come under scrutiny. Notably, the Yuganskneftegaz acquisition remains surrounded by confusion and secrecy, indicating that there was more to the deal than a mere commercial transaction. On February 1, Russia’s Finance Minister Alexei Kudrin indicated that Vneshekonombank had raised $6 billion from Chinese banks so that Rosneft would be able to acquire Yuganskneftegaz. Kudrin told a news conference that state-owned Vneshekonombank was borrowing “$6 billion from Chinese banks to lend to Rosneft.” However, China has denied that it played any role in the purchase of Yuganskneftegaz (Xinhua, February 3).

Russian officials also backed away from the suggestion. Russia’s finance ministry came up with a statement arguing that journalists had misinterpreted Kudrin’s remarks.

The financing of the Yuganskneftegaz acquisition has become a sensitive issue following a Houston, Texas, court ruling in December barring the sale. The order could lead to sanctions against any participants in the Yuganskneftegaz takeover, including its financial backers.

Russia’s state-owned Vneshekonombank dismissed claims that it had used Chinese loans to fund the Yuganskneftegaz acquisition. “Regarding suggestions that Vneshekonombank used Chinese loans for purchasing Yuganskneftegaz: these claims are groundless and not based in reality,” Vneshekonombank said in a statement on February 2. Vneshekonombank secured a loan from a consortium of Chinese banks in order to fund long-term and stable crude oil supplies from Russia to China, the statement said, without naming the banks.

The state-owned oil company Rosneft also issued a statement on February 2, denying that Vneshekonombank had borrowed $6 billion in China to help Rosneft to acquire a controlling stake in Yuganskneftegaz. “Rosneft has received the money for Yuganskneftegaz from a consortium of Russian banks, and we sold some of our assets,” Rosneft head Bogdanchikov told a press conference in Nefteyugansk on February 5 (Finmarket, February 5). However, he declined to name the Russian banks. Therefore, China’s actual role in Russia’s energy maneuverings, notably the Yuganskneftegaz affair, remained shrouded in secrecy.