Trading With the Enemy: The Bear and the Dragon

In the last installment of the two part “Trading with the Enemy” Series, this blog looked a serious issues of contention affecting Sino-American trade-relations, cyber-espionage and hacking.  Now we will examine a  little discussed area of discomfort,  trade between China and it’s very large northern neighbor, Russia.  Over the last two decades, the Sino-Russo “Cold War” has thawed, as both nations have sought closer political and military ties in order to buttress U.S. influence in their perspective “backyards”.  Still, there is lingering suspicion in many quarters of  the Russian government over a newly resurgent China’s strategic ambitions in Siberia and the Russian Far East.  Chinese illegal immigration has been a real topic of concern over the last decade in the sparsely inhabited and resource rich regions East of the Ural Mountains.  As with the U.S. case, increasing trade with China has only seemed to increase suspicion.

In regard to how this affects trade, many analyst have paid careful attention to what should be the most obvious sector of trade between the two nations, an area that has long showed lackluster growth,  fossil fuels.  China is the fastest growing importer of fossil fuels in the world, and Russia is in the top 5 of all fossil fuel exporting nations; however, Russia only provided 6% of China’s total oil imports over the last year.

This situation may change:

On Jan. 1, China received its first commercial delivery of oil through the 990-kilometer (615-mile) [Skovorodino-Daqing oil pipe] line [from Siberia] to its northeast oil capital of Daqing, news services said.

Crude oil from Siberia is now flowing at the rate of 42,000 tons (307,000 barrels) per day, according to the official Xinhua news agency.

The pipeline will allow Russia to effectively double its oil exports to China, Reuters reported.

The doubling of oil flow  maybe be physically possible, but it is not clear if it will occur.  Russian Prime Minister Vladamir Putin has stated that he expected 30 million tons of crude per year and possibly 50 million at some indefinite point in the future by all routes currently available.  As large as it seems, that only  accounts for 10% of Russia’s total oil output from ports and pipelines that have  traditionally served Europe.  Still, Russia has long debated if it should build the pipe line to China at all, thinking it might be better to build it out to the Pacific, for the Korean and Japanese markets.

The reason being, the Russians were afraid of China becoming their largest single buyer on the route, because it would give Beijing the ability to influence price.   A variation on an old saying, if you owe the bank US$100,000 the bank owns you.  If you owe the bank US$1 billion, you own the bank.  Russia has to balance its apprehension with the reality that Europe’s five biggest oil importers will see decreases in their imports by 1.1% in 2011, while China will grow by at least 6.5%.

In the end, the Russians decided to hedge their bets by building one branch of the pipeline going into Northeast China, and another, scheduled to open in 2013, to the Pacific.  While Russia’s Gazprom expects to reach a deal with China over natural gas soon, it is clear that China wishes to diversify it’s gas imports, as it has it’s oil imports, by investing heavily in a  gas pipeline  from Turkmenistan through Uzbekistan and Kazakhstan, an area Russia considers it’s “Near Abroad”.  Needless to say, Russia is cautiously observing Chinese movements.

Russia also wants to see itself as an energy technology producer, not just a commodities seller, this would include nuclear power and renewable energy projects.  Russia wants to fully exploit its resources in Siberia and the Russian Far East, while at the same time raising living standards and increase the population of its  indigent citizens in the regions.