Wednesday, 18 September 2013

The partnership of the Bear and the Dragon

China and the United States have had a rocky road this year. Cyber tensions and territorial disputes have helped to cool the US “pivot” efforts in Asia. Relations between Russia and the US are equally stressed, described at the recent G-20 conference as the worst since the end of the Cold War.

But regular visits to Moscow by the Chinese President Xi Jinping and a new energy deal – which will potentially deliver 38 billion cubic metres of Russian natural gas directly to the thirsty Chinese industries – both herald smooth driving ahead for Russia and China as they draw each other into a closer embrace.

The warm relationship has been nurtured over this year. Mr Xi has taken three trips overseas since he took office in March. In two of those outings he made sure to visit Moscow where an enormous weapons procurement and a NZ$330 billion oil deal were organised. Russia now delivers more than 17% of its total energy exports to East Asia – up from a tiny 4% in 2005.

Russian President Vladimir Putin has called the relationship between the two Asian heavyweights as “the best in their history”. Their opinions are also synchronising on the world stage with the two countries agreeing on almost every foreign policy issue.

While the headlines focused on what the world’s most powerful leaders said about Syria, on the sidelines of last week’s G-20 conference, Russia and China were particularly busy discussing new energy deals.

Russian energy firms are looking to diversify their exports into East Asia due to the growing energy independence in their usual European markets. And China would rather have more options for importing natural gas than just those transported across the sea, especially as the Pacific becomes crowded with competing national interests. Ultimately, China may not be able to guarantee constant flows of its critical energy imports.

China presently uses more energy than any other country in the world. Their natural gas consumption has been steadily rising over the past decade, with Beijing estimating its economy will guzzle between 200 and 250 billion cubic metres per year by 2020. The stars are aligning in many ways because China is looking for more natural gas and Russia has vast stocks.

Alongside its gas deals with Russia, China wants to develop their domestic energy production quickly. Yet even with an announced NZ$16 billion investment plan for domestic energy exploration, China is unlikely to meet its energy production goals soon and will still need to rely on imports to make up the shortfall.

China’s thirst for energy is a unique opportunity for Russia. An opportunity made all the more smooth with their shared ideological history. With each step Russia takes away from the United States with clashing diplomatic spats, it moves closer to China which it sees as a trustworthy and important ally.

So while the Bank of America recently confirmed a US$1.5 billion exit from the China Construction Bank, and with Goldman Sachs making a similar move four months ago from the world’s most profitable bank - the Industrial and Commerce Bank of China - it’s no wonder Beijing and Moscow are walking increasingly in lock-step.

China doesn’t have to put all their eggs in the Russian basket, there are other energy options for in Central Asia. For instance, the Galkynysh natural gas field in Turkmenistan began construction in July and could boast between 13 trillion and 21 trillion cubic metres of natural gas reserves. Those pipelines would flow more naturally into China than almost anywhere else with Beijing promising more funding than the already delivered NZ$9 billion.

But there is political strategy in the close dance of the two massive economies on the Asian landmass.

Both countries are finding their geographic neighbourhoods increasingly crowded and neither have much affection for the American plan for the future. Economic ties, as implicit expressions of soft-power, can sometimes speak louder as geopolitical actions than their more visually impressive hard-power brethren.

Although Russia has not been exactly forthcoming in supporting China’s territorial claims in the South China Sea, Beijing has nevertheless thrown its support behind Russian positions regarding Syria.

And even though high-profile American banking investors may be getting the jitters in China – a flight of whom should sound alarm bells in Beijing and global investors alike - Russia is right now happy to put more effort into their neighbour.

Beijing’s reaction to Russian overtures this year show they plan to take the partnership with their northern neighbour as more of a friendship, with benefits. However, the relationship may have its limits as the economic connection is so far all that is on the cards.

Right now, the two nations have more to gain by working together than by ignoring the opportunities lying in front of them. After all, the path to reconciliation with the United States is a long one for Russia. Earning some cash from a still enormous Asian market is far simpler; it could even turn into a long term plan for Moscow.

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