Partnership of Convenience: Understanding Russo-Chinese Relations

The views expressed here do not represent those of the U.S. Army, Defense Department, or U.S. government.

Introduction

A Russo-Chinese alliance may pose the greatest potential threat to the United States due to the combination of Russia’s energy and military technologies and China’s rapidly improving economy and defense capabilities.[1] Recent geopolitical events like the war in Georgia have brought the two states closer, despite China’s refusal to support Moscow’s declaration of Abkhazian and South Ossetian independence.[2] Both China and Russia oppose U.S. unilateralism as well as American policies regarding Iran, missile defenses, Central Asia, and democracy promotion; the states’ recent closeness stems from rising Russian hostility towards America, which pushes Russia toward China. China’s value to Russia lies not within itself, but within its ability to counter the United States. Russia sees China very much as an instrument of a primarily anti-American Weltpolitik, not as a full actor in its own right.[3]

Russian analysts build upon Moscow’s swaggering international posture, arguing that Russia “is successfully crowding out the United States from its position as China’s No. 1 partner, and over time could become that country’s quasi-ally.”[4] They also say that mutual security dialogue has become more active.[5] Indeed, Russia’s foreign minister, Sergei Lavrov, said in July 2008 that strengthening ties with China ranks at the top of Russia’s policy agenda.[6] Russia and China and their respective leaders endlessly reiterate their mutual satisfaction with their relations, proclaiming that they have never been better and that they have identical views on key issues in world politics.[7] Both sides repeatedly claim these relations will improve still more under Russian president Dmitry Medvedev.[8] 

Is this relationship as intimate as Russia and China want us to believe? Close examination of the countries’ actual beliefs on issues like Central Asia, arms trade, energy, ties with Japan, and the future outlines of the Korean peninsula suggest a different relationship: an axis of convenience rather than an alliance of conviction.[9] As time passes, and especially as the consequences of the current global economic crisis register differentially upon Moscow and Beijing, Russia will probably experience increasing pressure to follow China’s line on many issues in world politics. Russia already reels from the economic crisis, which, despite its serious impact, will likely improve China’s relative position in world politics.[10]

Meanwhile, the world can already witness pressure on Russia to follow China. Russia’s failure to develop its Far East and become a major Asian economic power enhances the likelihood that Moscow will continue to move towards Beijing. Then–Russian president Vladimir Putin’s haste in March 2008 to reassure China publicly of Medvedev’s support for their partnership before he similarly reassured Washington signifies that dependence.[11] Russia sees China’s rise as generally beneficial because their strategic partnership raises Russia’s influence in Central and East Asia.[12]

Yet China’s rise over time almost certainly entails a diminution of Russia’s relative standing. Russia already needs Chinese support more than China needs Russia’s support; this trend will continue into the future, barring major upheavals.[13]

Russia clearly perceives great political harmony with China in checking U.S. power and its impulses toward foreign intervention and democracy promotion. Thus, both countries support Iran and the SCO to block such intervention and reduce the scope of U.S. power. Both also oppose U.S. missile defenses – Russia emphasizes defenses against intercontinental ballistic missiles ICBMs and China emphasizes theater missile defense – and a revived U.S. alliance system that encompasses Japan, India, and Australia – because of their exclusion from such a grouping.[14] Moscow and Beijing agree that North Korea should not become a nuclear power. Russia has also pursued the dream of building a strategic triangle with China and India, thus moderating or even eliminating the danger that could arise from a Sino-Indian rivalry, a situation that would force Russia to choose between partners.[15] Yet, while both sides talk of a strategic partnership and some analysts worry about the threat of an alliance, recent analyses suggest that Russia and China have a primarily tactical and strategic relationship based only on interests, not affection.[16]

Russian leaders, despite their swagger, fully grasp that failure regarding Russian Asia could lead to China’s domination of the region. In 2000, Putin warned local audiences in Eastern Russia that unless Russia intensified regional development, they would end up speaking Korean, Japanese, or Chinese.[17] Some Russian analysts have offered similar predictions.[18] By September 2008, Medvedev warned that if Russia fails to develop its Far East, it could turn into a raw material base for more-developed Asian countries—a trend that already seems to be well under way and—“unless we speed up our efforts, we can lose everything.”[19] It is clear to whom Russia could lose or with whom it could establish a neocolonial trading relationship. Despite previous resistance, Russia now must welcome Chinese foreign investment in its Asian provinces.[20]

Central Asia

China’s thrust into Central Asia generates concern in Russia even if Beijing now supports Russia’s proposal for Iranian membership in the SCO.[21] In 2005, China sought to replace Washington’s military bases in Uzbekistan, and incautious Chinese statements suggested Beijing’s interest in acquiring a foothold in Kyrgyzstan after that country’s “Tulip Revolution” in 2005.[22]

 Russia’s reaction has been subtle and nuanced. First, it has strongly opposed all foreign bases in Central Asia.[23] Second, it has consistently strengthened its own alliance system in Central Asia, the Collective Security Treaty Organization (CSTO) and its military capabilities while seeking diplomatic support against China in Central Asia. It has pursued a triangular relationship with China and India in Central Asia to ensure that it is not alone with China in Central Asia or Asia generally.

It has also conducted defense discussions with India to win that country as a more permanent ally and to hedge against China’s rising influence in Central Asia and increasing interest in a permanent military presence there.[24] Russian and Indian diplomats began discussions in February 2006 on enlarging the CSTO and allowing Indian participation in its forums.[25] These consultations displayed Russian and Indian appreciation of potential challenges in Central Asia and India’s potential contribution to overcoming them. Limiting China’s military thrust into Central Asia might be an unstated reason for this collaboration: in 1997, Russia’s press reported that, in private Indo-Russian diplomatic conversations, “Russian and Indian diplomats willingly open the cards: both Moscow and New Delhi see a threat in the excessive strengthening of China and the Islamic extremists.”[26] 

Finally, to retain ties and mollify Chinese worries about Russian reliability while continuing to pursue large-scale Russian military sales to China, Moscow joined with Beijing to conduct large-scale combined arms exercises in Shandong Peninsula in August 2005 and within the SCO in 2007. More exercises will occur in 2009, and the two states’ General Staffs have also opened direct phone links.[27] Allegedly, the 2005 maneuvers occurred under the SCO’s auspices as antiterrorist exercises. However, their scale and scope—featuring airborne forces landings, amphibious landings, air assaults, and conventional operations—suggest a different target, either Taiwan or possibly U.S. forces in Korea, a fact that several analysts who commented on these exercises noticed.[28] However, even earlier, Sino-Russian differences emerged. Ingmar Oldberg, a Swedish scholar, reports that:

 As Moscow conspicuously fails to develop its East Asian provinces or supply China with the energy that it has sought for more than a decade, China must compete with Russia for access to energy in Central Asia, thereby exacerbating tensions between the two states. But beyond competition in energy, China is developing its market power in Central Asia in ways that alarm Russians who fear they cannot compete with it.

The SCO’s future profile and direction remain enduring major dilemmas for SCO members divided on those issues. The SCO’s exercises since 2002 have raised the possibility of the SCO becoming a genuine military alliance. Russian efforts to move in this direction have repeatedly foundered on Chinese and Central Asian opposition.[30]

China has always opposed the idea of the SCO becoming a military bloc, because that contradicts one of the fundamental principles of its foreign policy: opposition to military alliances in Asia.  Skepticism about China’s formal position may be warranted given China’s quest for a base in Central Asia . Yet numerous Chinese official statements support this principle, including those by President Hu Jintao at the SCO summits in 2006–07 and those by the SCO’s secretary general Zhang Deguang, declaring that the SCO should stress regional economic cooperation in trade and development as its main priorities.[31] Chinese Foreign Ministry spokesmen recently reaffirmed that the SCO’s main task is not military operations but rather: “strengthening internal construction and deepening the practical cooperation among its member nations.”[32] Indeed, China seeks to become the leader of economic cooperation in the SCO. As a 2007 report from the Russian-Chinese Business Council observed:

Arms Trade and Defense Cooperation

This aspect of the Russo-Chinese partnership is the most revealing of the recent bilateral intimacy. For a decade, Russia sold China $2 billion worth of weapons annually. Numerous production problems, albeit largely unreported ones, occurred.[34] Such sales fell precipitously in 2007 to $700 million, causing considerable worry, sharpened by the current economic crisis, in Russia’s defense industrial complex. China, having already bought many weapons platforms, now needs the technologies associated with those platforms and state-of-the-art Russian weapons.[35] But, it does not currently have any large-scale defense contracts with Russia. Moreover, China predictably now wants licenses to manufacture these weapons at its own plants, creating a major problem for Russian intellectual property, which Moscow is jealous to preserve. Worse yet, Russian officials could not decide what systems should be sold to China. The revelations of defective weapons sales to India and Algeria, coupled with Russia’s habit of abruptly raising prices for its products and then demanding payment in case the production line shuts down, call into question Russia’s overall reliability as an arms dealer. Beyond this, “there is currently no effective communication channel or mechanism to deal with the problems, not even at the top leadership levels.”[36]

Therefore, this issue became a serious concern for Moscow, especially as it refrained from selling Beijing its most sophisticated and latest technology, which it already sold to India. Meanwhile, there appear to be signs of a subterranean disquiet about the rapid growth of Chinese power.[37] Although some analysts argue that Russia does not fear Chinese military power, that is not the case with regard to Chinese nuclear and missile policies. That expanding arsenal clearly has triggered Russian anxiety that Moscow dare not publicize.[38] But since defense exports depend on sales to China, it is likely that some compromise weighted toward Beijing will ensue. During Chinese prime minister Wen Jiabao’s recent visit to Russia, Russia announced that arms sales will continue through 2015 without problems, a trend that both sides welcome.[39]

These difficulties seem to have been overcome to some degreee. In December 2008, Russian defense minister Anatoly Serdyukov led a delegation  to Beijing for the first meetings of the bilateral Military Commission since 2005. Those meetings reviewed the entire inventory of arms sales and led both sides to agree to increase cooperation  in high technology, (no specifics were given though) to a higher level (i.e., develop newer Russian models and weapons), and jointly develop high-tech products. Although negotiators signed no new contracts, discussions currently are under way on many new contracts.[40] Reportedly, Russia is willing to expand bilateral military cooperation as well as defense and security cooperation within the SCO framework so that both sides can play a bigger role in Eurasia’s security agenda.[41]

China’s greater role will involve continued production of Su-27 and Su-30 fighter jets under license, as well as cooperation with Russia across the spectrum of Sukhoi aircraft, including the new model Su-33 and multirole Su-35 fighter, project 677E submarines, and elements of carrier-based aircraft based on the Su-33. China also could be interested in obtaining the Tu-22M3 missile-armed naval aircraft with heavy new antiship intermediate range missiles, project 971 and 949, a multirole nuclear-powered submarines, and the MiG-31 Interceptor. In 2010, China will receive the Il-76 military transports and Il-78 tanker, for which China signed a contract but did not receive due to production difficulties.[42] However, China’s continuing violation of Russian intellectual property and efforts to make copies of the Su-33 and the Su-27K has more recently led to an apparent cancellation of the deal to sell the Su-33 fighter to China. Moscow evidently fears that China will make a cheaper export version and sees these continuing efforts to copy the plane as a violation of the agreement made in 2008 to stop infringing on Russia’s intellectual property.[43]

Nevertheless, if the rest of the 2008 agreement goes through, China will receive much of what it wants. Thus, it appears that Russian anger with the United States, need for support against America, and desire to show Washington that it has other options—coupled with arms manufacturers’ distress at decreased sales and the looming economic crisis—have led Moscow to sell China most, if not all, of what it wanted in the way of access to high-technology weapons systems  and new weapons from Russia, which will now help it to challenge the U.S. Navy, Taiwan, and other Asian players and to develop enhanced capabilities for power projection.  Russia may even review the Su-33 sale later due to China’s compelling need for carrier air to match its carrier project. [44]

Thus, Russia has evidently failed to resolve fully the intellectual property issue of Chinese copying of Russian systems.[45]  But, given Russia’s crisis, it may have to live with this ambivalence. In order to realize the arms sellers’ and producers’ revenues, Russia must first overcome its own production bottlenecks, which obstructed the full realization of previous programs.[46] While Russia has had to deny that it will supply China with nuclear submarines because of the inevitable foreign concern that these agreements generated abroad, it will now actively support China’s military development, even though it acknowledges that this power represents a threat to its own interests.[47]

Missile Defense and Military Issues

Chinese military growth concerns all the leading Asian-Pacific powers even though Russian leaders have said they see no Chinese military threats.[48] Russian military analysts fully grasp potential Chinese military threats despite avoiding discussion of them. Although critics of the partnership with China  discuss these threats, the Russian authorities profess to believe that they have at least ten years before China can threaten Russia.[49] At least some writers have charged that the rise in China’s capabilities could go beyond a conventional threat to Russian assets in Siberia and Russian Asia. For example, there are multiplying signs that China’s no-first-nuclear-use prohibition is not as absolute a ban on first-use as China previously proclaimed and that the policy is under pressure from younger officers.[50]  As a result, China is now debating retention of that posture, and nuclear weapons will play a more prominent role in Chinese strategy than previously believed. China is also building a previously undisclosed nuclear submarine base in the Pacific and a major nuclear base in its interior, two events that suggest not only the country’s consideration of a second strike capability, but also its desire to put pressure on Russia’s Pacific Fleet and Russian Asia.[51] By 2004, China’s nuclear forces could seriously degrade and destroy Russia’s Far Eastern provinces and the conventional forces stationed there. Thus, further development of China’s nuclear and missile defense forces could easily threaten Russia’s Asian position.[52] China’s rising interest in and capabilities for a second strike can put more pressure on Russia’s Pacific Fleet and Russian Asia. We may see a rethinking of Russia’s nuclear strategy in Asia.[53]

Moscow is already increasingly ambivalent about the Intermediate-Range Nuclear Forces (INF) Treaty of 1987–88. While this ambivalence relates to NATO’s enlargement, it also reflects Russian concerns about China’s (and Iran’s) missile buildup. As Russian officials, including Vladimir Putin, have argued, other countries to Russia’s south and east are building such missiles, but America and Russia cannot do so. In October 2007,

These remarks reveal that Moscow cannot publicly reveal or confront its true threat perceptions, forcing it to blame Washington for its failure to take Russian interests into account.

Even so, new trends have emerged within Moscow’s defense reforms. To some degree, these trends aim to compensate for the all-too-visible obstacles to the state’s ambitious military goals. First, General Nikolai Makarov, Russia’s chief of the General Staff, recently publicly stated that Russia will retain its tactical nuclear weapons (TNWs), as long as Europe is “packed with armaments,” as a guarantee that Russian security will be maintained and that priority funding will be directed to Russia’s nuclear arsenal.[55]  Similarly Vice-Admiral Oleg Burtsev, the Navy’s Deputy Chief of Staff, told RIA Novosti that, "Probably, tactical nuclear weapons will play a key role in the future," because of their enhanced range and precision and the possibility that the navy may fit new, less powerful nuclear warheads to the existing types of cruise missiles. "There is no longer any need to equip missiles with powerful nuclear warheads," Burtsev said. "We can install low-yield warheads on existing cruise missiles."[56]

These policies follow Russian doctrine in calling for a nuclear first-strike against purely conventional platforms in the event that they threaten vital Russian interests. This means a possible preemptive nuclear strike,  if not a first-use of nuclear weapons used in a retaliatory fashion. These policies also underscore the fundamentally one-sided and unserious nature of Russian critiques of the US for conducting research into such low-yield weapons.[57] Since nuclear weapons are launched from naval vessels, Russia could use them against a Chinese attacks as easily as against a US or NATO attack. Beyond that, Russia is buying new nuclear missiles that can evade U.S. missile defenses. As part of its prioritization of its nuclear forces, Russia will buy and deliver to the forces more than seventy strategic missiles, more than thirty short-range Iskander missiles, and a large number of booster rockets and aircraft.[58] Moscow will also spend $35.3 billion (1 trillion rubles) on serial production of all weapons between now and 2011 and virtually double the number of strategic missile launches to 13 for 2009.[59] It can easily deploy these capabilities as well against China.

Second, increased defense spending has led to an increased tempo and more exercises, including those completed by forces in Siberia and the Far East. Third, Russia is building mobile and integrated all arms force packages and rapid deployment forces that can quickly execute missions on the ground, in the air, and in maritime sectors (if not theaters). Russia has also rehearsed projecting nuclear missile strikes from its Northern Fleet to the country’s Pacific coast.[60] As General Viktor Zavarzin (ret.) observed while serving as chairman of the Duma’s Defense Committee in 2004, “Our main military priorities are to preserve the potential of the strategic nuclear forces with the simultaneous fulfillment of all international agreements, the build-up of permanent readiness units, and the formation of groupings of troops on their basis.”[61]

Fourth, the Pacific Fleet will be the main fleet of two nuclear fleets, suggesting that its main mission will be to provide a reliable second-strike deterrent and that the non-nuclear vessels will protect nuclear armed submarines and prevent hostile forces from coming within their range. Russia’s long-term rearmament program envisions the renewal of the submarine fleet with nuclear-propelled multirole submarines in an effort to save money. These vessels will engage in three missions: antisubmarine warfare, anti–aircraft carrier missions – mainly against U.S. carrier battle groups, and attacks on surface ships and transports; the submarines will be armed with precision conventional weapons in order to be a strategic non-nuclear deterrence force.[62] Russia’s drive to the Arctic also presupposes using both the Pacific and Northern Fleets, in particular the latter nuclear-armed fleet, as swing fleets that can challenge enemies from the North Pacific. Just as the Northern fleet has bastions on the Kola Peninsula, the Pacific Fleet has its bastions, which the Northern Fleet or elements thereof may help defend. Alternatively, the Northern Fleet and Russian air forces based in the north could sweep the North Pacific of enemy air and naval assets. Even though the Far East is primarily a naval theater, Moscow will invest more in nuclear weapons, to redress Russia’s conventional inferiority vis-à-vis the U.S. and Chinese threats, and airplanes and air defense, to forestall a Kosovo-like aerial campaign, than in its navy.[63]

If the scale of the threat overwhelms or is too large for the conventional forces, Russian doctrine continues to point to the use of nuclear weapons – probably TNWs – in a first-strike or possibly even preventive mode as stated by Russian chief of staff General Yuri N. Baluyevsky.[64] On January 20, 2008, he stated,

Russian commentators noted that he was speaking entirely within the parameters of established Russian doctrine and that he essentially conceded the failure of conventional forces to provide adequate defense and deterrence at the high end of the spectrum of conflict.[66]

The pressures of North Korean proliferation and China’s rise have changed the nuclear landscape in Northeast Asia. This trend presents Russia with difficult choices, especially given its nuclear naval deficiencies. Russia must reckon with the growing pressure on China to abandon its no first use policy and China’s increased nuclear and second-strike capability, even as Russia must reduce its nuclear forces.[67] This downward pressure on the Far East’s regional arsenal was already apparent in 2004–05, and if Baluyevsky’s remarks should be taken seriously, it is likely that the Northern Fleet’s nuclear forces and Russia’s TNWs will become more important for consideration of deterrence or first strike in the Asian and European theaters. As of 2004, about 20% of the deployed Russian strategic nuclear forces remain in the eastern part of Russia. As strategic forces shrink, the pace of reductions in the region is the fastest. In particular, three of the four divisions of the Russian Strategic Forces that have been disbanded since 2000 were located here. And the reductions will continue. Most likely, the SS-18 base at Uzhur will be closed down after 2010. The future of the SS-25 mobile intercontinental ballistic missiles (ICBMs) is also uncertain, as they are getting older. The submarine base on the Kamchatka Peninsula will likely no longer host strategic submarines once the last Delta III nuclear submarines will be retired. Thus, perhaps the only place where strategic forces will remain in this part of Russia is Ukrainka, the home of strategic bombers. As deployment of strategic nuclear forces in the eastern part of Russia is curtailed, nonstrategic nuclear weapons in the region may be assigned a stronger role. According to the author’s assessment, nearly one-third of the 3,300 Russian nonstrategic weapons are assigned for deployment with general-purpose forces in the Siberian and Far Eastern military districts. All these weapons are currently kept at central storage facilities of the 12th Directorate of the Russian armed forces. In case of hostilities, they can be deployed with surface-to-surface, surface-to-air, air-to-surface, antiship, antisubmarine missiles, and other dual-use means of the ground, air, and naval forces.[68]

However, if the importance of nuclear missions grows, North Korea will be less willing to give up its existing nuclear weapons or to stop producing new weapons. Japan and South Korea will also face more temptations to develop their own nuclear programs or cleave ever more to Washington, which would likely increase its  own regional military presence under such conditions.[69]

A purely military nuclear strategy therefore leads Russia into a strategic dead-end. Russia needs a political strategy to defuse potential security challenges here. That strategy includes the search for partnership with China even though it also covertly depends upon America’s alliance system to maintain a regional balance, forestall a renationalization of Japanese defense policy, and give Moscow an opportunity to remind Beijing of its independent capacity for effecting a rapprochement with Japan. Such divide-and-rule tactics are basic to Russian foreign policy.[70]

Energy Issues

The recent fiasco of Russian energy firms’ endeavors to obtain a Chinese loan for their operations reveals the true situation in this field. In October 2008, both sides announced a new deal to ensure the supply of Russian oil to China through the East Siberian–Pacific Ocean Pipeline (ESPO), currently under construction, which branches off to China at Skovorodino and then goes to China’s terminal in Daqing. This deal represents not just China’s earlier irritation at Russia’s stalling and failure to deliver on energy projects, but also its readiness to use its economic power to compel favorable outcomes.

As Russia and China finalized the ESPO agreement, Rosneft and Russian energy firms appealed to China for loans to bail them out from financial distress.[71] China agreed to lend Rosneft $15 billion and Transneft $10 billion on the condition that they could guarantee completion of the pipeline and annual shipment of 15 million tons of oil (300,000 barrels/day) to China through ESPO to Skovorodino and Daqing.

Even Prime Minister Putin had to welcome Chinese investments.[72] Deputy Prime Minister Aleksandr Zhukov told the Russo-Chinese bilateral commission that Russia favored reciprocal investments in each other’s economies. Oleg Safonov, the presidential plenipotentiary in the Far East, also promoted mutual reciprocal investments, specifying Chinese investment in basic products like timber processing and the high-tech sectors of aircraft construction, nanotechnology, and energy.[73]  And still more recently, President Medvedev practically asked China to invest in the Russian Far East while Foreign Minister Lavrov called for implementation of joint large-scale bilateral projects there to overcome the current economic crisis.[74]

Yet such rosy scenarios are unlikely to materialize. As of early 2008, direct Russian investments in China totaled $14.2 million and direct Chinese investments in Russia stood at $415 million.[75] This disparity will probably grow as the global economic crisis and falling energy prices force Russia to retract its economic ambitions. Chinese investment, however, will probably grow because Russia cannot sustain its position in the Far East without large-scale foreign investment. Thus, a consortium of Chinese engineering firms led by Harbin Turbine will be building coal-fired turbines in the Russian Far East to generate 41,000 megawatts of new generating capacity by 2011. Stanislav Nevynitsyn, executive director of the Russian power producer OGK, admitted, “It is simply a necessity for us to work with the Chinese. We will not get the capacity built otherwise.”[76] In other words, Russia is increasingly dependent upon Chinese capital investments in regional infrastructure, as this case and the loan to Russian energy companies have shown.

Yet the scheme for Chinese loans failed almost at once. China first agreed on 7 percent interest and then changed its mind to request that the interest be pegged on the higher LIBOR rate. Russian sources denounced China’s interest demands as absurd lending conditions, however, and the talks fell apart on November 12, 2008..  

Only in April 2009 did the deal for a Trasneft pipeline designed to ship Rosneft’s oil to China reach completion. The pipeline will cost China 10 Billiion Yuan ($11.34 Billion Hong Kong dollars) and represents China’s contribution to the Russo-Chinese oil project. China loaned Rosneft and Transneft, two highly-leveraged firms, $25 billion to commit them to build the pipeline from Taishet to Skovorodiono in Eastern Siberia, from where the oil will then go to Daqing. From 2011-2034 China will receive 15 milliion tons annually from Russia that will be tied, against Russia’s past preference, to a single consumer at the pipeline’s end, a situation that Moscow has successfully blocked everywhere else.

Both sides claim that this agremeent represents a win-win deal. Moscow now argues that the deal’s conclusion will create a reliable, stable sales market for oil from eastern Siberia to the Asia-Pacific region and that the rest of Russia’s pipeline to the Pacific Ocean, the East Siberian Pacific Ocean (ESPO) pipeline, will soon open and start selling oil from the terminal at Kozmino Bay.[77] While this pipeline will start carrying 30 million tons of oil annually it ultimately will carry 80 million tons of oil annually.[78]

However, China now possesses ample opportunity to gain equity assets in both Kazakh and Russian firms and influence state policy directly in these petro-states. Worse yet, according to Western analysts, Moscow is actually selling the oil to China at a price estimated between $11.40 to $22 a barrel, a figure that includes loan and interest calculations.[79]

The two governments announced formally that the price of this oil would be based on a formula constructed on the floating price of Brent crude oil when it arrives at the projected Kozmino Bay terminal.[80] But no pipeline to Kozmino Bay - or an idea of who would pay for such a project – exists. Despite Russian optimism, it is quite unclear whether or not Japan will make the huge investment necessary for this pipeline to materialize. As such, the Russian railway system, a grossly overpriced and inefficient way of transporting oil, will carry all energy flows to Kozmino Bay for now. However, given the absence of pipeline financing and the greed, mismanagement, high labor costs, and endemic corruption of the Russian energy industry, combined with the failure to announce a price for the oil shipped to China let alone that which will be shipped to Kozmino Bay, skepticism about such pricing announcements is warranted.[81]

While Chinese anlaysts may not be happy about this pricing arrangement, we can be relatively sure one or another side will seek to renegotiate it once prices move dramatically up or down. Russia may think that it won a stable market and the first major step in its efforts to diversify its energy supplies eastwards. But in fact Russia made this deal out of weakness: not only will China gain access to upstream Russian energy assets, it also evidently was able to induce Moscow to reorganize its process for negotiating energy deals with China, a sign of its superior leverage.[82] Moreover, China certainly intends that this deal will remain stable and lead Moscow to provide it with even more oil, gas, and electricity.[83]

In other words, despite Russian satisfaction that it has a stable market and that it can now ship oil to China, it appears that China received and will recieve more and more out of this deal than Russia. China has essentially effectuated a major victory over Russia and will gain access to equity in hitherto protected Russian firms.[84] Russia may proclaim that it could become China’s largest oil supplier in 15 years (a prospect this author finds to be unlikely), but in fact Moscow and Astana must accept not only Chinese equity positions in their energy firms, Russia also must accept outcomes that it has successfully rejected everywhere else and get less for its products than the market now charges.[85]  Russia also must find financing to build oil and gas pipelines from Siberia to the Pacific Coast, and given its own shoddy construction record and the games it has played with Japan, this is not a certain proposition.

Since many of Russia’s decisions on the China oil supply issue represent a reversal of past Russian priorities, i.e. building a pipeline to one Asian party alone and not to the Pacific where it could supply all of Northeast Asia and the US, the Sino-Russian deal lends impressive testimony to both China’s heightened power and to Russia’s decline. Apart from ensuring large oil shipments through the pipeline to itself, China is abetting Russia’s reorientation of its energy strategy away from Europe and has induced Moscow to approach Beijing again concerning the project of a gas pipeline from the Altai to China for 40BCM a year of gas. Gazprom has now repented its past decision to abandon this pipeline and has approached CNPC to participate in retail gas sales in China as a quid pro quo for favorable pricing.[86]

Yet Russian officials are not sure the pipeline will be completed on time. Transneft’s vice president, Mikhail Barkov, said it would be commissioned at the end of 2009 and reach full capacity in 2011.[87] But Energy Minister Sergei Shmatko recently told the subcommission on energy cooperation of the Russo-Chinese bilateral commission that there is no way ESPO could be launched in 2009.[88] Also, to the degree that the current global crisis continues, Russia will find it harder to raise the cash it needs to develop Siberian energy sites, invest in infrastructure, and hold up its end of the ESPO bargain.[89] Again, given the pervasive rent-seeking, graft, and suboptimal economics of Russia’s energy sector, one should exercise caution when projecting a completion date for ESPO, especially absent agreement on energy prices.

This fiasco typifies the bilateral energy situation. Russian oil deliveries to China, which now go by rail, failed to meet their targets in 2007, falling 10 percent between January and November.[90] Revelations of delays in ESPO and further declines in Russian oil shipments to China in January 2008 further compounded these problems.[91] Through August 2008, Gazprom could not provide China National Petroleum Corporation with oil, due to a dispute with Kazakhstan. When Gazprom resumed shipments in September, China had already begun looking into alternative arrangements with other suppliers to buy oil fields elsewhere.[92]

On the other side, Gazprom wanted to renege on its plan to sell gas to China.[93] Russia had earlier struck costs associated with designing a gas pipeline from the Sakhalin-1 Project’s 2008 gas budget because Russia cannot produce enough gas to satisfy its Asian, domestic, and European markets. Under such pressure, Gazprom put domestic needs before China’s energy needs, confirming rising suspicions that Russia, under current and foreseeable production levels, cannot satisfy the rising demand of its Asian, European, and domestic energy customers.[94] This suggests that China’s efforts to avoid dealing with Gazprom at Sakhalin-1 by signing a memorandum of understanding with Exxon Mobil in 2006 have failed, and that Gazprom will probably drive Exxon Mobil into a minority status, as it has done to Sakhalin-2 with Mitsubishi, Mitsui, and Shell.[95] From China’s perspective, worse than the fact that Sakhalin-2 will start selling gas to Japan in 2009 may be that Gazprom unveiled plans to build a pipeline to the Sea of Japan, bypassing China and rewarding Japan.[96] Such Gazprom actions might explain why Beijing now demands more Russian nuclear energy through participation in tenders for potential reactor construction in China.[97]  

Russia has had to delay construction of its projected gas pipeline to China due to competition from other entities for other gas sources in China. These competitors arose in great part from Russia’s own dilatoriness in negotiating and then building the pipeline.[98] The Altai pipeline, designed to ship 30 bulk cubic meters of natural gas to China annually from Western Siberia, was excluded from Russia’s new blueprint for the gas industry through 2030 because neither Russia nor China could agree on pricing and other issues. In addition, gas from the Altai pipeline would be less competitive than gas China receives from Turkmenistan.[99] These do not exhaust the list of Russia’s failed promises for China and East Asia; indeed, they have led China to upgrade its energy quest in Central Asia and elsewhere, making it a direct competitor of Russia.

Japan  and Korea

In a recent speech in Tokyo, Foreign Minister Lavrov stated, “Russia in its policy attaches primary significance to the development of a balanced system of bilateral ties with all states of the region”—not exactly China’s objective.[100] Regarding Japan, he cited the two economies’ complementariness, reciprocal commitment to universal democratic values, absence of confrontation, and objective interests in cooperation.[101] Thus, Russia uses its ties to China to leverage greater investment and ties with Japan. It has eagerly sought Japanese and South Korean energy and other investments in the Far East to balance China, and it has been more welcoming toward Japanese and South Korean investments than it has hitherto been to Chinese investment.[102] Despite its overtures to Japan, Russia will not pay the real price of genuine normalization or undertake the reforms necessary to unlock Japanese interest in investing in Siberia. It still primarily sees Japan as a tool to balance China and maintain the possibility of Russia’s ideal vision of Northeast Asian security:  a kind of concert of Asia where Moscow would have an upgraded role disproportionate to its actual capability. Neither China nor the United States will be bound by such an arrangement. 

As a result, Russian policy in Northeast Asia ultimately materializes in invariably insufficient efforts to play Japan and/or South Korea against China while, ultimately, finding refuge with China and disappointing the other two states, who actually do wish to do some business with Russia.[103]

Russia cannot supplant China, let alone the United States, in South Korea’s calculus, and its efforts to play a role as energy supplier for North Korea ultimately depend on someone else paying the bill for North Korea’s energy in the case of a Korean settlement. Most likely, that power—not Russia—will then acquire primary influence in North Korea’s foreign relations:

The historic Russo-Chinese rivalry for influence in the DPRK, if not the entire peninsula, will probably not be resolved in Russia’s favor:

 Providing those substantive resources is where Russia falls short, mainly because of Russia’s governmental structure, domestic economy, and national strategy.[106]  North Korea’s nuclear weapon test on May 25, 2009 further complicated calculations on this issue. Even so, since China knows of Russia’s economic weakness, it does not worry too much about Russian efforts to slip Beijing’s leash. Ultimately, China’s rising power and ability to pressure Russia, as seen from Beijing, will be decisive and ultimately further marginalize Russia as a serious Asian player.[107] Since Russia cannot openly admit its converging interests with the United States in an Asian balance of power, without which it would face more marginalization, it will increasingly have to “lean to one side.”

But that inclination presages an even more severe and distasteful marginalization: a strategy driven by rampant bad governance and anti-Americanism leads back into the dead end of past Russian strategies in Asia. A Russo-Chinese partnership potentially threatens not only American interests, but also Russia’s interests. While Russo-Chinese relations hold important consequences for Asia and the world, the repercussions for Russia may yet become the most serious of all.