Uncovering the Domestic Factor in the Sino-Russian Energy Partnership

ABSTRACT

What explains the differences in the Sino-Russian oil and gas cooperation? Overall, I suggest, the several trajectories are explained by the dissimilarities of oil and gas as commodities and potential foreign policy tools. These differences, along with other factors, such as corporate culture and individual personalities, shed light on the strategies of Russia’s gas conglomerates, Gazprom and Rosneft. Yet, if a more nuanced understanding of variation within these energy markets illuminates the reasons behind the sequencing of oil and gas cross-border pipeline projects, what explains the particular timing of the landmark 2014 gas deal? Why after 15 years of stalemate in the Sino-Russian gas cooperation did breakthroughs occur in 2014? And what explains the modesty of the record in gas cooperation to date? Many factors are undoubtedly involved, both economic and political; however, I contend that the conclusive factor can be found in underlying domestic politics.

The article outlines the role of national narratives in driving both Russia and China’s energy foreign policy and goes on to argue that the Sino-Russian gas breakthrough in 2014 was due to the peculiar way in which domestic factors paired with international circumstances to produce the outcome at that particular moment.

Notes

1. Against the backdrop of the U.S. shale revolution (i.e. the spreading of fracking technology), perhaps the most significant of the described shocks, the supply-demand balance of global oil and gas markets has significantly loosened. For a detailed analysis see Yergin (2014).

2. For detailed accounts on the influence of firms on states and, especially, the firms’ subtle reshaping of domestic coalitions and national policy preferences, see Hirschman (1945[1980]); Lindblom (1977) and Culpepper (2011).

3. Even though the share of state ownership in Gazprom is lesser than one of Rosneft. Moreover, political interlinks between the Kremlin and Rosneft are even more significant than in Gazprom’s case.

4. As observed by Marcel Salikhov, a Russian energy analyst, Gazprom has always branded itself as a ‘socially responsible organization’ accountable for Russian gas supplies. However, as Salikhov notes, it is questionable whether this extra ‘responsibility’ justifies state’s subsidies in favor of Gazprom. Interview with the author, September 2015, Moscow.

5. Rosneft has often accused Gazprom of blocking access to networks. In 2013, following a request from Rosneft, the Russian ministry proposed a revision of Gazprom’s export monopoly on LNG. Although this might appear as a significant step in the gradual liberalization of the Russian gas industry, the authorization is given directly to only two companies (Novatek, for the Yamal LNG project; and Rosneft). In the words of Marcel Salikhov, Russian energy analyst, discussing Russia’s domestic gas market and Gazprom’s pipeline export monopoly: “Russia’s Domestic market is evolving but the competitive structure of the market is still distorted and is dominated by a few players.” Interview with the author, September 2015.

6. The key difference between sensitivity and vulnerability interdependence hinges on the costs that countries would bear should relations between them be disrupted. States trading heavily that can easily locate close substitutes for the goods being exchanged clearly are interdependent but not vulnerable. At the same time, states conducting little trade that would have great difficulty locating substitutes for the goods being exchanged may be highly vulnerable. For a detailed analysis see Keohane and Nye’s seminal study Power and Interdependence, 1977, [2011] pp. 10-16, (IV edition).

7. See George and Bennett (2005).

8. In process-tracing these events, I apply Bennett and Checkel’s principles. See  Bennett and Checkel (2014).

9. These are problems that often seem to confine qualitative researchers when they try to show the value of their craft relative to quantitative methods.

10. For more on constructivist approaches in IPE that emphasize that policy practices may result from political institutions, international norms and national identities, see Finnemore (1996); Wendt (1996) and Thomas Risse (2002).

11. Moravcsik (2008). See also Ikenberry (2011).

12. Especially in the late 1990s, when oil prices fell below $11. See Erica, S. Downs ‘Sino-Russian Energy Relations: An Uncertain Courtship,’ Brookings Report, 23 August 2010.

13. The Sino-Soviet split, which came to an end in 1991 with the self-liquidation of the USSR, prevented the two Communist giants from cooperating for almost thirty years (Hopf 2009). Historical memory – fraught with bitterness and mutual suspicion – remained engraved in their psyche and played a crucial role in the two countries’ foreign-policy thinking. It also mitigated against fast recovery in economic relations. For a detailed account on how for decades the Sino-Russian strategic relationship was ridden with angst, see also Kuchins (2002) and Garnett (2000).

14. In the words of Tian Chunsheng, scholar at the Chinese Academy of Social Sciences, “The Middle East is not a stable place. Therefore, this unstable area can’t provide the large requirement of oil and gas for resource stability in China.” Interview with the author, 29 July 2013.

15. Concerns about transportation security arose from the geography of the Strait of Malacca, a six-hundred-mile-long waterway among Singapore, Malaysia, and Indonesia that is only one and a half miles wide at its narrowest point. Some 80 per cent of Chinese oil imports transit those Straits. Interview with Liu Xiaoli, Energy Research Institute (ERI) within the National Development and Reform Commission, China 19 July 2013.

16. In 2002, Mikhail Khodorkovsky’s Yukos held talks about engaging the Chinese in the development of Eastern Siberian upstream, and building an oil pipeline that would service the Chinese market from those fields. Such a proposition, however, ran against Putin’s plans to build a pipeline all the way to the Pacific port of Nakhodka, thereby adding an extra 3000 km to the original Khodorkovsky plan. In 2004, Khodorkovsky was arrested and accused by the Russian government of, among other things, large tax evasion. The Yukos Affair marked the beginning of a large renationalization of Russia’s oil and gas industry. For a detailed discussion, see Gustafson (2012).

17. According to Leonid Grigoriev, a Russian energy analyst, “Moscow’s dependence on revenue from energy exports, its determination to compensate for the plunge in global demand that began in 2008, and need for capital to tap new oil fields, ensured a more accommodating stance toward China.” In conversation with the author, May 2014, Moscow.

18. The population of the Russian Far East faces a China that is becoming more powerful and beset by a growing population and potential pressure on arable land (Menon 1997).

19. Some notable developments: In June 2015 Russia surpassed Saudi Arabia to become China’s top crude supplier (Bloomberg 2015). In March 2016, moreover, China overtook Germany as Russia’s top crude consumer. (RT 2016).

20. Interview with Konstantin Simonov, President of Russia’s National Energy Security Foundation. On the contours of the Sino-Russian May deal: “Maybe part of the Chinese philosophy was to wait. There were talks about taking shares in the Russian upstream business—Putin usually refused to do it—Sechin lobbied heavily to involve the Chinese in joint ventures. Gazprom may do the same in the Kovykta field. In the future CNPC may also acquire shares of Rosneft. For Sechin is comfortable to work with the Chinese. So CNPC could buy shares of Rosneft—maybe even better than granting equity shares in Chayanda and Kovykta.” 30 May 2014, Moscow.

21. Six months later, Russian oil output - then the largest in the world - reached its post-Soviet record of more than 520 million tons of crude.

22. According to a Chinese industry insider, this is the second prepayment (agreed in March 2013, upon Xi’s visit to Moscow), after the $25billion-worth loan of 2009. See also: “Russia and China agree $270bn oil deal” Financial Times, 21 June 2013.

23. In the words of Dr. Feng Yujun, Head of Russian studies at the China Institute of Contemporary International Relations: “The Western sanctions put a question mark over a smooth implementation of the existing agreements. We are not only talking about the gas deal, but the promised increases in oil, Yamal LNG, and the Tianjin refinery. The deterioration of the overall investment environment in Russia means that there is a lot of uncertainty surrounding these deals.” Interview with the author, 11 September 2014.

24. Author’s interview with Guan Guihai, Chinese Scholar, February 2015, Cambridge, MA.

25. Foy, H. “Chinese gas company buys 20% of Russian field from Rosneft for $1.1bn,” Financial Times, 29 June 2017.

26. With slowing economic growth hitting its stock market, China had to deal with its own credit crunch. See for instance, “Putin’s China Energy Deals May Hide Paper Tigers as Growth Slows”, Bloomberg Business, 4 September 2015.

27. Despite Moscow’s outreach, Chinese entrepreneurs have been wary about investing in Russia because closer ties with Russian companies might harm their economic links with the Unites States, a “global” partner where Russian ties are viewed as regional. Bloomberg Business “China Wary of Closer Russia Energy Ties, Ex-Cnooc Economist Says, 2 July 2015.

28. See for instance, “Rosneft deal boosts Russia-China relationship,” Financial Times, 20 November 2017.

29. “Russia and China quietly build business bonds”, Financial Times, 24 September 2017. See also “China Deepens Oil Ties with Russia in $9 Billion Rosneft Deal,” Bloomberg, 8 September 2017.

30. Phone Interview with a Chinese oil executive, 17 October 2017.

31. Sergey Karaganov, interview with the author, Moscow, August 2013; Andrey Kokoshin, interview with the author, Moscow, May 2014.

32. Interview with Tatiana Mitrova, Head of the Energy Institute of the Russian Academy of Sciences, 27 May 2014;The International Energy Agency estimates that Asia’s natural gas use will increase by a factor of more than 2.6 by 2035 (and that China’s will quadruple), while demand in Russia’s traditional European markets will grow only slightly. The EU’s natural gas demand is expected to peak at 473 billion cubic meters (bcm) in 2025–30 and thereafter decrease to 452 bcm in 2040.

33. Due to the Chinese still strongly regulated (and subsidized) domestic gas market, China was not prepared to pay the gas price that some European countries are paying to Gazprom. Liu Xiaoli, Chinese official, in conversation with the author, Beijing, July 2013. Zha Daojiong, a Chinese energy expert, in conversation with the author, Beijing, August 2013.

34. Sergey Karaganov, Interview with the author, Moscow, August 2013.

35. Sergey Komlev from Gazprom Export, in conversation with the author, August 2013, Moscow.

36. “Frankly speaking, Gazprom is a liability for Putin’s pivot-to-Asia policy,” said Keun Wook Paik, an expert on Sino-Russian energy cooperation at the Oxford Institute for Energy Studies. Quoted in Johnson, K. Russia’s Stumbling Pivot to Asia, 8 May 2015, Foreign Policy.

37. Xiandeng Yi, Chinese diplomat, in conversation with the author, Beijing, August 2013.

38. By middle 2013 following the disappointments of the EU’s Third Energy Package, with its rules on the “unbundling” of gas supply and distribution, and measures that promoted competition, Gazprom finally began to “pivot” East. Elena Burmistrova, Head of Gazprom export, in conversation with the author, June 2016, Moscow.

39. Despite these changes, Europe remains an essential market where Gazprom has maintained its market share, and, in 2016, Gazprom’s gas supplies to Europe and Turkey reached an all-time record. At the same time, the European market has become increasingly “liquid” and interconnected. As a result, the prices at which Gazprom maintains its market share have gone down or, in other words, the Russian company gained market share by playing by the EU’s gas market rules. About Gazprom – Marketing in Europe: http://www.gazprom.com/about/marketing/europe/; See also: http://www.gazpromexport.ru/en/statistics/ and FT, Gazprom targets increased gas sales in Europe, 27 April 2017.

40. For a more detailed discussion, see for instance Gil Rozman (2014, December), The Russian Pivot to Asia”, The Asan Forum.

41. In the words of Jia Qingguo, Chinese scholar, “In the old days, pollution has always been secondary to economic growth, now the environmental factor is becoming a larger social concern, especially in the last few years.” In conversation with the author, August 2013, Beijing.

42. Xi Jinping, for instance, is a strong supporter of the Paris Climate Agreement. See The Guardian ‘China’s Xi Jinping says Paris climate deal must not be allowed to fail’, 19 January 2017. See also The Economist ‘The rise and rise of Xi Jinping―Xi who must be obeyed’, 20 September 2014; BBC News, Follow the Leader: Xi Jinping vs Deng Xiaoping, 25 October 2017.

43. National “12th Five-Year Plan” for Environmental Protection. Available at: http://english.mep.gov.cn/Resources/Plans/National_Fiveyear_Plan/201606/P020160601356854927248.pdf., Accessed on 26 November 2017.

44. Zha Daojiong, Chinese scholar, Interview with the author, August 2013.

45. The delays over the gas deal were instrumental in pushing Beijing to turn to Central Asia, where, in 2007 it quickly negotiated and implemented long-term agreements with Turkmenistan, Kazakhstan, and Uzbekistan. This, in turn, led to China becoming the principal economic player in Central Asia and an emerging strategic actor there. The 4,000km pipeline became operational in 2009 and is to western China and transporting 30bcm a year over 30 years.

46. In the words of Valery Nesterov, Russian oil and gas analyst at Sberbank CIB, “Cost is difficult to control in frontier areas, like East Siberia. I predict cost overruns as compared to the initial estimates, so the rate of return of this pipeline will be low or even negative.” Interview with the author, 30 May 2014. See, also Natural Gas Europe, “Mikhail Krutikhin: “It’s all about Russia’s Incompetence,” 4 December 2014; or Noel, P. “The Power of Siberia natural-gas project: commercial or political?” IISS Comment, January 2017.

47. As O’Sullivan, Overland and Sandalow (2017) hypothesize in their new working paper, “The Geopolitics of Renewable Energy” for oil and gas producers, the decline in petroleum revenue could in principle, provide an impetus for political reform and economic diversification. However, it could also generate new sources of instability, such as income inequality and corruption that can fuel societal unrest, and as a result jeopardize growth and regime legitimacy.

48. In pipeline gas trade, the price of the natural gas is usually indexed to fuel oil. Yet as Maugeri argued, the supply of oil is bound to remain significantly greater than global demand due to the rationalization in the use of hydrocarbons and the discovery of new sources of fossil fuels around the world. Maugeri (2017).

49. According to IHS Jane’s Defense Budgets Annual Report, in 2015 the Kremlin boosted its military spending by 21 percent to $54.1 billion. IHS Jane Press Release,” Growing Security Fears Boost Defense Budgets, IHS Says”, 16 December 2015, http://press.ihs.com/press-release/aerospace-defense-security/growing-security-fears-boost-defence-budgets-ihs-says, Accessed in February 2016.

50. China has recently increased its influence over Russia by virtue of its strength and of Russia’s economic woes. It has, for instance, taken a cautious approach in its opening to Russia in response to its own volatile stock market and Russia’s increased “riskiness” due to its open conflict with the West.

Additional information

Funding

This work was supported by the Harvard Kennedy School’s Geopolitics of Energy Project’s Postdoctoral Fellowship; Belfer Center for Science and International Affairs, Harvard University [Postdoctoral Fellowship].