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Are Russia and China ready for a deal on energy?

China is already Russia’s largest single trading partner, with bilateral trade flows of $90 billion and the neighbours aim to double the volume, writes John Kemp

CHINA is our reliable friend, Russian President Vladimir Putin said on Monday in an interview ahead of a conference in Shanghai. “To expand cooperation with China is undoubtedly Russia’s diplomatic priority.”
Most evaluations of the bilateral relationship begin by reciting the historical border disputes, rift between Mao Zedong and Nikita Khrushchev, opening to China by Richard Nixon, and the perennial problem of reaching an agreement on gas pricing.
But these are all essentially backward looking and ignore the growing community of interests between the two countries. The case for a closer bilateral relationship on energy, trade, security and diplomatic issues is compelling. In the energy sphere, the two countries are an almost perfect match: the world’s largest net energy exporter and its second-largest net energy importer (2011) with a long land border.
China is already Russia’s largest single trading partner, with bilateral trade flows of $90 billion in 2013, and the two neighbours aim to double the volume to $200 billion by the end of the decade, according to Xinhua, China’s official news agency.
The Obama administration’s strategic pivot towards Asia and shifts in the energy market are pushing China and Russia closer together as both react to fears of encirclement and energy security.
Russia’s political disagreements with the United States and its allies over Ukraine as well as China’s territorial disputes in the East and South China seas have left them isolated and searching for friends to counterbalance Washington’s network of alliances in Europe and the Pacific. It is classic balance of power politics. My enemy’s enemy is my friend.
Yesterday, the Russian and Chinese navies began seven days of joint exercises in the East China Sea. It is the third time the two navies have held joint drills since 2012, according to Xinhua, and underscores the increasingly close cooperation between them as relations with the western powers deteriorate.
There are no real obstacles to a diplomatic rapprochement between Beijing and Moscow. There are no significant territorial disputes between the two countries over their land border or at sea. China’s disputes are all far to the south.
Russia and China both have territorial disputes that pit them against Japan, over the Kurile and Senkaku/Diaoyu islands respectively, giving them an element of common interest. Both have reason to be wary of the active foreign policy of Japan’s Abe administration.
In other parts of the world including Africa, the Middle East and Latin America, there are no significant issues on which they are on opposite sides. For the most part their interests coincide or are in different areas, which makes it easy to maintain cordial relations. By contrast, there are plenty of issues on which they find themselves on the opposite side from the United States.
On energy, there is a clear convergence of interests. Russia needs to diversify the markets for its oil and gas, while China needs energy supplies that do not have to pass through transit choke-points such as the Strait of Malacca.
Speaking to Chinese journalists on Monday, Putin confirmed negotiations over natural gas exports to China had entered the “final phase”.
“For Russia, implementing these agreements means diversifying gas supply destinations, while for our Chinese partners … it could be a remedy for energy shortage and ecological problems,” the Russian president said.
Even without the crisis over Ukraine, Russia has been depending too heavily on oil and gas exports to Europe, leaving it vulnerable to pricing disputes with customers, pipeline disputes with transit countries, falling European demand and shifts in European energy policy.
Europe accounted for 80 per cent of Russian oil exports in 2012, while just 18 per cent went to Asia, according to the US Energy Information Administration. Most of Russia’s gas exports went to European countries in 2012, with just 19 per cent delivered to Turkey.
Relying so heavily on customers in Europe makes no sense strategically or commercially. Just as consumers need a diverse source of suppliers, producers need the security that comes from having multiple customers.

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