Business leaders hail Russia’s booming energy ties with China

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As Russia’s relationships with the West become increasingly fragile amid ongoing economic sanctions, Moscow continues to look towards China for economic opportunities — and energy is one space where that relationship is flourishing.

“The relations between the Russian Federation and People’s Republic of China are on the rise,” President Vladimir Putin said in a welcome message at a Russian-Chinese Energy Forum in Beijing on Thursday. “An important part of these relations is energy cooperation which has lately received significant development.”

Putin and Chinese President Xi Jinping organized the first Russian-Chinese energy forum during their meeting in June 2018, a meeting where the leaders vowed to pursue economic initiatives and to oppose the trade protectionism promoted by Donald Trump.

This perspective was articulated by the head of Russia’s major oil company Rosneft, Igor Sechin, who spoke at the Russian-Chinese Energy Forum on Thursday. Sechin said that “certain aspects of the current political conditions in the world, increasing protectionism and threat of trade wars in the world economy serve as additional incentives to cooperate more closely and make decisions faster,” according to Russian news agency TASS.

“In many ways, Russia ties prospects for increasing economic growth to advancing development of Eastern territories and development of natural resources there. China, in turn, is interested in ensuring its energy security and reliable supply channels,” Sechin said.

Such a pivot towards China and its neighbors has been no less apparent that at this year’s Russia Calling investment forum taking place in Moscow this week, with business leaders in the energy sphere. Held by Russian bank VTB, the forum has seen the trend continue with Russia eyeing more opportunities in China, especially in the energy sphere.

VTB Bank President and Chairman Andrey Kostin told CNBC on Wednesday that Russia has an “extremely close relationship with China” that it wants to develop further. His comments came after it was announced in September that a group of Russian and Chinese businesses are considering 73 joint investments worth more than $100 billion.

“We have quite a big economic interest, our trade is now $100 billion and China is Russia’s largest trading partner. China will not substitute Western investors or the West for us, but China is now quite important for Russia and we are very eager to develop further our relationship with China, in all areas,” he told CNBC’s Julianna Tatelbaum at the investment forum.

One of the largest energy projects linking Russia and China is an ambitious 3,000-kilometer pipeline — known as the ‘Power of Siberia’ — being built by Russian gas giant Gazprom that will run from gas fields in Eastern Siberian to the Chinese border.

Gazprom says the “Eastern Gas Program” project includes five fields that are under commercial development and the route helps “establish a new major route to export Russian gas to the Asia-Pacific region.

Gazprom is not the only Russian energy company building infrastructure in the country’s Far East. Sibur, Russia’s largest gas processing and petrochemical company, is also looking to benefit from a push eastwards, having partnered with Gazprom to build a gas chemical complex near the Chinese border along the ‘Power of Siberia’ pipeline.

Dmitry Konov, the chief executive of Sibur, told CNBC on Wednesday that the firm sees opportunities from China, particularly in light of Gazprom’s pipeline to the Chinese border.

“(In the case of) Gazprom, which signed a long-term gas supply contract with China, they are developing two new fields, building the pipeline and building the gas processing plant, at the Russian side of the Russia-Chinese border which allows some supply of our feedstock, our petro-chemical feedstock.” Feedstock is raw material used in an industrial process.

“So the location of the plant is mostly driven by the Gazprom plants rather than China’s proximity. But, for us, it’s a good combination of these two factors — availability of the feedstock and a big, growing market close by.”

Sibur is no stranger to China, however, having established a joint venture with Chinese oil and gas firm Sinopec to produce synthetic rubbers in 2014. Sinopec then bought a 10 percent stake in Sibur in 2015. Now, Sibur is planning a large gas chemical complex in Russia’s Far East (a region targeted by the Russian government’s development strategy) with investments of around $7 billion to $8 billion.

At the fore of considerations when it comes to China’s demand for energy are environmental factors. China vowed earlier this year to step up its crackdown on its worst industrial polluters and Reuters reported that eight regions had promised in May to beef up anti-pollution curbs, “vowing fresh cuts in smog, cleaner water and soil.”

China’s coal industry is the most obvious offender when it comes to pollution.

“I would say that the environmental crackdown in China is probably the single most important industry trend,” Vitaly Nesis, the chief executive of Russian precious metals miner Polymetal, told CNBC on Thursday at the Russia Calling investment forum. “Our response to this is definitely to continue investing in greener processing technologies,” he added.

The relationship between China and Russia is “very unlikely to deteriorate in the foreseeable future,” according to Alexander Gabuev, senior fellow and chair of the Russia in the Asia-Pacific Program at the Carnegie Moscow Center. He said in a note Tuesday that three fundamental factors are driving the countries closer, from the Kremlin’s perspective.

First, Gabuev noted that there is a financial imperative to avoid tensions along the 4,200-kilometer border between China and Russia. Secondly, he noted, China is a natural market for Russian exports. “Catering to the resource-hungry Chinese economy could help Russia compensate for its losses in the West.”

Lastly, he said that the “two authoritarian regimes understand each other well.” “The Kremlin doesn’t fully trust China, but it knows that the national interests of both countries coincide in many areas and that China will be a predictable and pragmatic partner for years to come. By contrast, Moscow sees U.S. leaders as unpredictable and untrustworthy.”

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