Russo-Chinese Energy Relations: Politics in Command

Russo-Chinese Energy Relations: Politics in Command

Dr Stephen Blank Series editor: Dr Kevin Rosner

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Publisher’s note Every possible effort has been made to ensure that the information contained in this publication is accurate at the time of going to press and neither the publishers nor any of the authors, editors, contributors or sponsors can accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editors, authors, the publisher or any of the contributors or sponsors. Users and readers of this publication may copy or download portions of the material herein for personal use, and may include portions of this material in internal reports and/or reports to customers, and on an occasional and infrequent basis individual articles from the material, provided that such articles (or portions of articles) are attributed to this publication by name, the individual contributor of the portion used and GMB Publishing Ltd. Users and readers of this publication shall not reproduce, distribute, display, sell, publish, broadcast, repurpose, or circulate the material to any third party, or create new collective works for resale or for redistribution to servers or lists, or reuse any copyrighted component of this work in other works, without the prior written permission of GMB Publishing Ltd. GMB Publishing Ltd. 120 Pentonville Road London N1 9JN United Kingdom www.globalmarketbriefings.com This edition first published 2006 by GMB Publishing Ltd. © Dr Stephen Blank Hardcopy ISBN 1-905050-43-7

E-report ISBN 1-905050-44-5

British Library Cataloguing in Publication Data A CIP record for this book is available from the British Library.

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Contents About the Author Introduction

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1. Politics in command

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2. Chinese perspectives

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„ Competing sources of supply

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„ Domestic imperatives

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„ Energy strategy

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„ The Asian premium

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3. The Russian strategic perspective

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„ The patrimonial model

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„ Competitive inertia

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„ The Russian oil and gas industries

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„ Central Asia

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4. Pipelines as strategic investments

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„ Eastern Siberia

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„ Russia, China and Central Asian energy

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„ East Asia

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„ Kovykta and natural gas to China

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„ Angara-Daqing or Angara-Nakhodka: the unresolved oil pipeline question

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5. Conclusions

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„ An Asian energy association

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„ Multilateralism

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„ Monopoly and empire

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Notes and references

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About the series

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About the author Stephen Blank is Professor of Russian National Security Studies at the Strategic Studies Institute of the US Army War College. Dr Blank has been an Associate Professor of National Security Affairs at the Strategic Studies Institute since 1989. From 1998–2001 he was the Douglas MacArthur Professor of Research at the war college. Prior to this appointment, Dr Blank was Associate Professor for Soviet Studies at the Centre for Aerospace Doctrine, Research, and Education of Air University at Maxwell AFB. Dr Blank’s Master’s degree and PhD are in Russian History from the University of Chicago. He has published over 400 articles and monographs on Soviet/Russian military and foreign policies. His most recent book is Natural Allies?: Regional Security in Asia and Prospects for Indo-American Strategic Cooperation (2005). Dr Blank is also the author of a study of the Soviet Commissariat of Nationalities, The Sorcerer as Apprentice: Stalin’s Commissariat of Nationalities (1994) and the co-editor of The Soviet Military and the Future (1992).

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Introduction As of now Russia provides relatively little energy to China compared with either Russia’s energy exports elsewhere or China’s imports from other producers, particularly in the Middle East and Persian Gulf. However, this energy relationship is poised to take off during the next decade. The reasons for this expected growth combine both economics and geopolitics. Russia’s energy strategy and policy is geared to raising exports and the Asia-Pacific region that prominently includes China is a likely market due to China’s proximity to Russia, Russia’s determination to re-enter Asian politics in a big way through the use of the ‘energy card’, and Asian societies’ spiralling energy demand1. China’s voracious demand will allegedly lead it to establish durable and substantial energy ties to Russia because it needs the energy in all forms: gas, oil and nuclear. China also regards Russia as an ally and partner against the United States, which it regards as its main geopolitical and ideological threat. So a flourishing relationship based on these two states’ economic and strategic-political similarities is a distinct possibility.

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Politics in command As the above suggests, both politics and economics drive this bilateral energy relationship. In an ideal world, Russo-Chinese energy relations would be purely commercial transactions governed as much as possible by market forces. Russia is one of the largest oil producers in the world, the largest gas producer and exporter and overall the largest energy exporter in the world. Its government and overall economy depend on maximizing energy revenues from exports2. Indeed, Russia’s official energy strategy lists maximizing exports as one of its goals3. Russia’s supply and desire for exports harmonizes with China’s voracious and growing demand for energy that will remain at high levels for a long time. For example, one recent estimate states that China’s demand for oil will grow 6.5 per cent in 20064. Since both states share an enormous border, few geographical obstacles to trade exist. In a purely market-driven environment it makes sense to suggest an equally market-driven commercial relationship between China and Russia for trade in general and energy trade in particular. However, the more one looks into this relationship and its many sides, it becomes clear that politics, rather than markets, drive it. As a result it is considerably more stressful and conflicting than the foregoing argument would lead us to believe. Indeed, political and even geo-strategic considerations permeate all aspects of this relationship. Thus one recent analysis of Chinese energy policy observes that China protects its energy firms of SINOPEC (China Petroleum and

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Chemical Corporation), PetroChina, and CNOOC (China National Overseas Oil Company) at home and supports them abroad because its main purpose is that the companies become an arm of national foreign policy, not a profit-maximizing corporation5. Several recent Chinese energy deals, such as that with Saudi Arabia, cannot be justified on strictly economic grounds but rather on strategic reasons. Irwin M Stelzer writes: When SINOPEC agreed to spend US $300 million to develop natural gas reserves in Saudi Arabia, ‘the deal raised eyebrows for its high risks and potentially low returns,’ reported the New York Times. Sure, the Chinese would like to find some natural gas. But most experts say that if SINOPEC had to justify this transaction purely on commercial terms, as would an American company, the deal would never have been consummated. Or, as the Wall Street Journal puts it, ‘stateowned firms will have a higher risk appetite when buying assets than their listed counterparts’. And a market for products that are on America’s list of embargoed items, the Sino-Saudi oil-for-arms trade has included the sale by China of ballistic missiles with a range of 1800 miles and capable of carrying a nuclear warhead6.

Russian conduct is no less politically driven. There are many reasons for this. To begin with, despite the two states’ current strategic partnership, their history is one of long-standing enmity and suspicion. The partnership of the last decade is but an interval in this long chronicle of mistrust and many analysts are sceptical that it

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can last7. Adding to this historically driven suspicion is the persistence in many sectors of both societies of oldfashioned notions that the other side was and/or is or will be a constant threat to their security or to their territorial integrity8. But perhaps the most important reason for the ongoing difficulties that exist in this bilateral relationship is that the two states, which both have mercantile and authoritarian regimes, regard energy not primarily as something bought and sold in free markets, but as a fundamentally strategic good that must be controlled from above, ie by the state. Therefore, all aspects of the development, sale and/or purchase of energy must first serve the state’s political and/or strategic goals rather than its market criteria or objectives. Therefore, Russia and China’s energy policies are a critical aspect of their overall national security policies. Or, as Indian Prime Minister Manmohan Singh told the Financial Times, ‘Energy security is second only in our scheme of things to food security9.’ This perspective is one that is instantly recognizable to Russian and Chinese leaders. Once the state becomes a major actor, politics (occasionally even geopolitics) takes command over markets. Indeed, some analysts believe that a solution to providing Japan, South and North Korea, and China with Russian energy would go far to ease Northeast Asian geo-strategic tensions and serve as a conflict resolution mechanism there10. While this is certainly a worthwhile outcome it has nothing to do with economic rationality and is exclusively a political or strategic conclusion. Nor is it only foreign policy that takes command. Since both Russia and China are heavily bureaucratized states in authoritarian systems, bureaucratic politics is often the primary, if not only, political process. This certainly applies to energy

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given the high stakes for both countries connected with providing or obtaining oil, gas, electricity and atomic energy. Consequently the formulation of their energy policies is often, in the first instance, a struggle between competing domestic bureaucracies or interest groups aligned with one or another bureaucratic faction. In writing about the controversy (see below), as to whether Russian pipelines in East Asia should go to China or Japan, an international group of Russian, Japanese and Chinese writers observe that Russian internal politics is divided over this issue, as is the case in China and Japan; indeed, each of those two governments adopted one of the two contending sides in this Russian policy debate. Shoichi Ito, Vladimir Ivanov and Zha Daojiong write: In reality, it is not China or Japan, but Russia that wants to bring large volumes of its oil and gas to the market of Northeast Asia in the most economical way. Also, it is not Japan and China who are the main contenders for a pipeline route, but rather diverse interests within Russia. Indeed, some interest groups would prefer to explore the oil and natural gas reserves in a way that would not necessarily gain local industries and communities, and without considering the overall groups that prioritize regional developments, social advancement and national energy markets, as well as access to multiple markets in Northeast Asia. The problem is that the Chinese decided to side with the former, while the Japanese aimed towards the latter. Tokyo was only supporting, not proposing the pipeline route that Transneft already advocated and that President Putin strongly favoured11.

Apart from the intrinsic importance that energy issues possess in both countries’ politics and economics, their energy relationship is also a

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major aspect of their individual regional approach to key areas like Northeast Asia and Central Asia. The Russo-Chinese relationship is what scholars call a ‘constitutive relationship’ – one that exercises a formative influence upon the ties of all interested parties to each state and within key regions such as Central and Northeast Asia. Therefore, this relationship has major geo-strategic and geopolitical ramifications for most, if not all, of Asia. For example, China’s difficulties in obtaining reliable and timely energy supplies from Russia or Central Asia because of Russian obstruction, lead it back to the Middle East and to a relationship with that region, particularly Iran and Saudi Arabia. This has serious consequences

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for their foreign policies and for US policy towards the Persian Gulf States in general and China12. Given existing geo-strategic and financial factors, it is problematic for China that it must rely on supplies from the Middle East, if not even more distant places such as West Africa and Latin America. Because of this, China can never forgo paying close attention to Russian and Central Asian energy, where Moscow also plays a big role. Those energy ties and overall SinoRussian relations are inherently related to the regional distribution of power and influence across Asia, including within each state, and therefore cannot be anything other than inherently and fundamentally political in nature.

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Chinese Perspectives Energy security has become an urgent priority for Beijing for several reasons. Issues of energy security and reliability of access are inherently vital economic and strategic issues and also relate powerfully to vital foreign, domestic and economic policies as well as to its armed forces’ ability to conduct military operations. Indeed, the requirements of ensuring energy security, eg keeping the Malacca Straits open and preventing the United States or other states from interdicting Chinese energy flows are factors that are apparently driving China’s longterm military modernization13. Obviously China, a large energy importer, and its armed forces must be able to count on reliable supplies of gas, oil, electricity and so on, at all times14.

Competing sources of supply In 2003, the urgency of finding a satisfactory answer to the problems of ensuring reliable energy supplies became much more acute for the following reasons. First, the US invasion of Iraq forcefully brought home to China the danger of relying on energy supplies from the Persian Gulf, as it currently does. Moreover, it is not merely an issue that any instability there puts reliable energy supplies at risk. For China the most disturbing fact of all was that this invasion forcefully reminded Beijing that it depended enormously on the good graces and capability of the United States Navy to ensure that the sea lanes carrying the energy purchased by China remained open and that energy supplies were obtained in a reliable and timely

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manner. Worse, the United States showed that it was not bound by anything other than considerations of its own national interests, which many in China regard as dangerously expansive. For Beijing, this is intolerable since, ultimately, it puts China’s economic growth (its government’s main task) at the mercy of its main strategic and ideological enemy15. China’s policymakers fear that energy vulnerability gives the United States a potential weapon with which to ‘contain’ China, or that strife in the Gulf and elsewhere in the Indian Ocean, if not Taiwan, could cut off its vital energy sources16. Indeed, the US Deputy Secretary of State Robert Zoellick recently warned China that pursuing energy deals with Iran risks conflict with Washington. Since China cannot ‘lock up’ energy resources by pursuing deals with countries considered troublesome by the United States and its allies, it would be better advised to pursue cooperation with Washington17. The second explanation for the events in 2003, underscoring the intolerable nature of China’s dependence upon foreign energy supplies, applies to Russia. The war in Iraq demonstrated the vulnerability of supplies from the Persian Gulf just as it became clear that Russian President Vladimir Putin would destroy privately owned Russian oil ‘giant’ Yukos for domestic political reasons, and that the pipeline from Angara (southeast Siberia) to Daqing (China) that Yukos wanted to build in order to sell Siberian oil to China would not be built. In the winter of 2002–2003, reports of China’s interest in buying

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equity interest in Slavneft, a Russian oil firm, triggered a nationalist backlash. This was comparable to the US reaction when in mid-2005 China National Overseas Oil Company (CNOOC) announced a bid for the US-owned Union Oil Company of California (UNOCAL). These Russian disappointments and the intervention by Japan into the Russian pipeline issue (with its alternative proposal of subsidizing a pipeline to Nakhodka on the Pacific Coast that would sell to Japan first) caused a major rethinking of Chinese energy strategy. That reappraisal led to both a reorganization of state structures with responsibility for energy and to a more activist diplomacy for energy in Central Asia and the Middle East, not to mention places further afield like Africa, Latin America, and Australia. Chinese analysts have also learned that they would have to take Japan’s interests into account in any Northeast Asian pipeline system18. Thirdly, as energy prices steadily rose Kazakhstan’s economy exploded, outgrowing the shackles that Moscow had tried to fasten on it. But China could not take advantage of this potential outlet. In 2002–2003, Western companies excluded China from the bidding for lucrative holdings in Kazakhstan’s Kashagan fields and the Caspian Sea. These setbacks have led to a new and activist period in China’s search for energy. China and Kazakhstan reforged their energy ties in 200319. By this time, China had also initiated its own strategic petroleum reserve and was negotiating large deals with Australia, Saudi Arabia and Iran (China was already trading more with Iran and was also selling it weapons, missile components and nuclear weapon technologies). It had already concluded negotiations with an international consortium to develop and ship natural gas in the mammoth West-East pipeline, taking gas from

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Xinjiang (East Turkistan) to Shanghai (China). This presented China with opportunities to make further purchases of equity holdings in Central Asian gas finds and existing fields20. Although originally Russian gas extracting company Gazprom was involved with this deal, it dropped out in 2004. Since then, this pipeline has been finished and should now be pumping Central Asian energy into China’s interior and coast. Pipeline construction on the Atasu-Alashankou (Kazakhstan–China) pipeline, which is part of the pipeline from Aktyubinsk to Alashankou, likewise accelerated. But beyond the need for invigorated relations with alternative energy producers, the other lessons of these conjoined trends were not lost on China. First, it needed to ensure the effectiveness of its own domestic efforts to produce and conserve as much energy as possible. This can be done through heightened efficiency in the consumption of energy, despite exploding demand and overall growth. Therefore, while pursuing enhanced dialogues and cooperation with other countries to avert oil and gas price shocks, China is now building up its own strategic reserve and urging international cooperation of buyers and producers against price fluctuations21. Since that could only be a long-term effort, it had to ensure that its firms simultaneously gained greater global access to reliable energy supplies, even to the point of having equity shares in foreign energy sources and companies, and long-term contracts at fixed prices to minimize risks from price shocks and disruptions. Finally, China realized that it could rely on neither Washington nor Moscow, promises to the contrary notwithstanding22. China’s discontent with its dependence on the United States Navy’s ability to keep sea lanes open or, alternatively, Beijing’s inability to prevent the US from closing them or

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destroying a Gulf producer is obvious and the source of increasing Western analysis23. But China’s problems with Russia have not received much Western attention24. While a fuller explanation of Russian motives for obstructing China appears below, the fact of this obstruction must factor in any assessment of China’s energy strategy. Russian energy producers have steadily rebuffed China’s projects for obtaining energy supplies and especially equity stakes in energy firms throughout the former Soviet Union. Russian officials recently reiterated their opposition to being merely China’s source for raw materials and demanded equal status in economictechnological exchanges with China25. Russia is also determined to maintain absolute control over energy firms (its strategic resource) and to retain its ability to manipulate prices in its favour by being a monopolistic producer. Sergei Kuprianov, Gazprom’s Press Secretary, stated in 2004 that: Sharing mineral resources with foreign companies is against our policy…. In fact, sharing oil with the Chinese would be even more inappropriate. After all, their stake in Yuganskneftgaz [the former main asset of the now defunct Yukos energy company] could complicate future price negotiations (for oil purchased by CNPC [China National Petroleum Corporation])26.

Since 2002–2003 Russian officials have also blocked the sale of Russian oil company Slavneft to China, successfully destroyed Yukos (the company that favoured a direct RussoChinese oil sale and pipeline from Angara to Daqing) and, for some time now, has appeared to be winning the policy struggle over oil sales to Asia by proposing a much more expensive (but partly subsidized by Japan) pipeline to Nakhodka (Russian Far East)27.

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Chinese buyers would then have to buy from Japan rather than directly from Russia. Similarly, Russian and US energy companies have obstructed and are still obstructing China’s efforts to buy energy holdings in Central Asia28. As China cannot now obtain equity stakes in those holdings it must depend, against its instincts, on foreign producers and sellers. Despite protestations of mutual identity of interests and eternal friendship in high-level Sino-Russian meetings, the reality in energy and economics has actually been mutual suspicion and tough bargaining. Putin has at least twice publicly voiced suspicion of Chinese economic power in Asia, and Russian officials publicly oppose any Chinese military presence in Central Asia29. While China carefully avoids overt acts that trigger suspicions about its goals in Central Asia and clearly supports Russia’s dominant position there, facts on the ground suggest mutual irritation and suspicion, and not just in energy issues30. For example, Russian military officials moved quickly to gain a base in Uzbekistan in the wake of the United State’s withdrawal from its base there, in order to forestall China from doing so as it had expressed interest in gaining the Karshi Khanabad base31. Consequently, Chinese policymakers face a dilemma. They can rely increasingly upon Russian energy, but would then depend on a state they perceive as increasingly unreliable. Russian leaders want to sell China this energy because they want the market and the leverage on China that it provides. Moscow undoubtedly grasps that otherwise it can only use arms sales as leverage upon China. But selling energy primarily to China then angers Japan and leaves Russia dependent upon a single, monopolistic consumer. Although the most recent evidence suggests that the Siberian

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pipeline will probably go first to China and only then to Japan or, alternatively, that China will be the first customer to gain Russian energy from Siberian sources, Russia’s constant flirtations with both states make this an inherently unstable situation that could deteriorate for both political and economic reasons, eg Russia’s continuing interest in a Japanese market32. Furthermore, it has recently become apparent that apart from Japan, China has another competitor for Russian energy, namely India. India has competed and continues to compete with China for positions in both Central Asian and Russian energy projects. At the 3–4 December 2004 summit with Russia, India announced a US $3 billion Indian investment in the Sakhalin-3 oil field and the joint Russian-Kazakh Kurmangazy oil field in the Caspian. India’s Energy Minister Mani Shankar Aiyar stated, ‘What I am talking about is the strategic alliance with Russia in energy security, which is becoming for India at least as important as our national security33.’ Indeed, India’s quest for energy is such a driving factor in its foreign policy that it agreed to have the Oil and Natural Gas Corporation, India’s national oil and gas company, enter what was a transparent dummy bid for the remnants of Yukos in Russia in order to gain favour in Moscow’s eyes by legitimating this phony auction. Presumably this favour will lead to enhanced access to Russian energy and heightened cooperation with Russian energy firms in advance of China obtaining similar results34. Similarly, India lost out to China in the bidding for Petrokaz, a Kazakh and Canadian firm with holdings in Kazakhstan, and shows rising interest in participating in a gas pipeline from Turkmenistan through Afghanistan and Pakistan, even though it is naturally reluctant to

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allow Pakistan to have a hand in its gas or oil supply35. So while talks with Russian suppliers concerning projects in Russia or cooperative ventures abroad continue, this dependence on foreigners contradicts Chinese policy, which seeks to maximize the reliability of long-term supplies, even to the extent of sending Chinese military forces disguised as oil workers to guard their foreign investments, as in Sudan, or to buy energy in return for arms sales, as in the Saudi and Iranian cases36. As China is being forced into dependence upon outsiders, it has reacted accordingly. China’s foreign energy policies reflect a general reluctance to rely wholly on market mechanisms and instead show a preference to own energy sources outright ‘from well head to terminus37’. Instead of seeking multilateral solutions, China has consistently emphasized bilateral relationships with its suppliers in order to insulate itself against price shocks and gain friends and influence, not least in return for arms sales. But this method has consistently failed to ensure China’s energy security against price shocks38. Since Beijing cleaves to its primarily political and strategic understanding of energy security and sees Washington as a rival and potential threat, the only way for it to avoid excessive dependence upon any one producer or region is to diversify its sources of access to energy. If it cannot physically control the product in one place, it looks for another in order not to be excessively vulnerable to disruptions in the Middle East or elsewhere. Apart from expanding energy relationships with the ‘usual suspects’ in the Gulf (Saudi Arabia, Iraq, Iran and the Emirates), China is also diversifying its holdings by buying equity holdings in Central Asia in Kazakhstan and Uzbekistan, and Africa (Sudan, Libya, Angola and other African states)39. China also seeks sources in Latin America, particularly

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Venezuela, and has also recently signed an agreement with Australia concerning natural gas. China’s abortive effort in 2005 to buy the US firm UNOCAL also reflects this drive, especially as much of that firm’s holding are off Southeast Asia’s coasts and therefore close to China. Even so, China must rely evermore upon Iranian energy. Hence Zoellick’s warning40. China’s quest for energy and its ensuing rivalries with other major consumers like Japan and India have enormous potential international repercussions. In September 2005, five Chinese warships made a show of force near a natural gas field in the East China Sea that extends into water claimed by Japan and then began drilling there, provoking Japan greatly and exacerbating their already strained relations further41. Similarly, while Indo-Chinese relations have improved recently and China may be interested in India’s plans for an Asian structure that brings together consumers and producers of energy to reduce price fluctuations as China has requested, relations are still considerably tense. As Mikal Herberg of the National Bureau of Research, Asia, testified before the US Senate Foreign Relations Committee in July 2005: The growing potential for an increasingly mercantilist competition between China and India over control of energy supplies and transport routes risks fueling tensions between the two. Although Sino-Indian relations have improved recently, each country clearly sees the other as a major long-term regional rival and potential future strategic threat. Moreover, as a region Asia lacks institutions to manage regional conflict and already faces a sensitive transition to accommodate China’s rising power over the next several decades. There are several recent examples where China

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and India came head-to-head over energy supplies. Moreover, each is warily assessing the other’s future intentions regarding building naval power and control of the vital sea lanes in the Indian Ocean and control of the Malacca Straits42.

Given China’s distrust of market forces, its energy acquisitions eschew the logic of Western purchasers and follow a different logic. For example, it is going beyond worldwide diversification of supplies, increasingly tying equity investment to long-term supply contracts to ensure reliable supply and guard against price shocks43. As Phillip Andrews-Speed and Sergei Vinogradov concluded, ‘The key driving force from the [Chinese] government’s point of view is the desire to enhance the security of the country’s petroleum supply through owning both the resource in the ground and, where relevant, the transport network44.’ Normally China seeks a share of the annual oil output by becoming a direct investor or shareholder to shield it against significant price fluctuations for oil imports. These elements of Chinese policy are reflected in its global quest for energy and its investments or deals in North and South America, Africa, and Australia45. Building up a strategic petroleum reserve also aims to ensure reliable supplies at accessible prices. Similarly, China also invests heavily in buying pipeline networks at home and abroad to control the oil and gas shipped from Central Asia, the Gulf (if it goes overland) and Russia46. However, at the same time these considerations drive China to look more at Russian and Central Asian supplies despite its previous frustrations. Although neither Central Asia nor Russia will supplant the Gulf as an energy source anytime soon, both have huge stocks. Russia holds the largest reserves of natural gas in the

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world and both regions are eager to export abroad, including China. Russia and China also share a similar orientation towards international affairs and to US ideological and strategic pressure that should facilitate their coming to terms on the reliable provision of energy to China. Common geo-strategic imperatives override rivalry and disputes on energy, again illustrating the fundamentally political and strategic nature of this bilateral energy relationship. The significance of the emerging strategic alliance should not be discounted in Central or Northeast Asia either. Every analyst who reports or studies the signs of this Sino-Russian collaboration sees it as being directed against the United State’s allegedly ‘overbearing’ policies47. As several US analysts have warned that the greatest possible threat facing Washington could be a Sino-Russian alliance, signs of such an alliance must be disquieting48. That is particularly true as these signs of collusion could also betoken the first tangible and successful signs of regional balancing against US preponderance. The Sino-Russian alliance in Northeast and Central Asia is part of a larger strategy of leveraging regional coalitions against Washington’s heavy-handed or at least allegedly heavy-handed policies. Here it assumes the form of both states’ oft proclaimed identity of interests and proposals49. Indeed, Russian scholars now state that Russia works with China to coordinate their proposals in the Korean nuclear negotiations and numerous communiqués cite an ‘identity’ of views on this topic50. Likewise, in Central Asia these two states have joined forces to pressure the United States into withdrawing from Central Asia and ceasing its democratization campaign. Signs of this alliance abound. Early in 2005, the two governments set up a mechanism for regular consultation on a common

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security agenda. This was the first time China had ever created an interstate mechanism of consultations with a second government for this purpose51. Chinese Foreign Minister Tang Jiaxuan stated that: To China, Russia is the main partner in strategic interaction. This is why while strengthening our strategic interaction, we must focus our attention on efforts to achieve durability, stability and community of these relations, lay emphasis on one’s own resources, orienting ourselves towards the entire world and being in step with the times52.

More recently, China announced its support for Russia’s entry into the East Asian Summit from which Washington was excluded53.

Domestic imperatives China’s drive for reliable and timely energy supplies is not only primarily connected with emancipating itself from potential US threats. Energy security is essential to the realization of China’s most vital interests, namely China’s territorial integrity, including Taiwan (in Beijing’s eyes) and preservation of the Communist party’s rule. In regard to energy, the link is to the troubled province of Xinjiang that not only borders on energy-rich Central Asia, but also has been a hotbed of unrest for over a generation54. Even if most of China’s indigenous energy holdings were not located in Xinjiang, the connection between it and Central Asia’s abundant energy deposits would be clear. Xinjiang’s strategic importance is magnified by its energy holdings and proximity to Central Asian energy deposits, heightening the importance of Central Asia and Beijing’s access to its energy. Indeed, Xinjiang is expected to replace Daqing as China’s main oil production

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site as it sits on 30 per cent of China’s oil reserves and 34 per cent of its natural gas reserves, and is expected to produce 100 million tons of crude oil in 2005 (almost 60 per cent of China’s total domestic production in 2004)55. Once it becomes essential for China to gain reliable access to Central Asian energy (mainly Kazakh oil and Turkmen gas) it will become necessary to tighten security in Xinjiang lest pipelines that must traverse it to reach the interior and coast be sabotaged and energy supplies imperiled. As David Bachman observes: The logical consequence of increased dependence on oil originating in Kazakhstan is tightened security in Xinjiang, as well as the perception that China’s security interests extend well beyond the Chinese border into Kazakhstan. This, in turn, may encourage a buildup of PLA [People’s Liberation Army] forces in Xinjiang, especially along the border, in areas with large ethnic-minority populations56.

At the same time, a pipeline or multiple pipelines to China would give Kazakhstan greater incentives (which China clearly wants) to desist from helping the Islamic radicals along the border in Xinjiang. It also makes Kazakhstan vulnerable to Chinese displeasure if it were to support this continuing unrest in any way57. China must secure reliable energy access to maintain its high level of economic growth, which is the government’s major task and basic rationale for its continuing legitimacy. Energy access is linked to Central Asian policy in many ways. Xinjiang, which adjoins Central Asia ‘is becoming a primary source of energy for the Chinese economy… [and] Xinjiang’s oil resources are vital to China’s future energy security58’. Indeed, 73 per cent of

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Sino-Kazakhstani trade is trade between Xinjiang and Kazakhstan59. In 2004, Xinjiang’s export volume to Kazakhstan comprised over half of its total export volume and this exploding trade clearly includes energy products60. Beijing, not unreasonably, believes Xinjiang faces grave internal and foreign threats61. As former US President Bill Clinton and academic experts have observed, China’s leaders are obsessed with the prospect of its disintegration62. Although most attention focuses on Taiwan, we cannot overlook the challenge and threats that China’s leaders emphasize from a generation of Muslim unrest in Xinjiang. Indeed, China’s leaders and experts actually conflate these issues. For example, Liu Ji a former official writes about Taiwan (but also with Xinjiang and Tibet in mind) that: The unification of China is a matter beyond dispute and bargaining. Anyone with a little knowledge of Chinese culture knows that unification has been an essential tradition and the basis for natural establishment throughout Chinese history. Chinese history is a history of fighting disunity and reinforcing unity. Any person or political group that maintains Chinese unification and territorial integrity wins the people’s support and the appreciation of historians. Any person or political group that tries to divide China, to surrender will be cast aside by the people and condemned from generation to generation63.

Other Chinese commentators echo this theme saying that ‘China’s sovereignty and territorial integrity brook no division64’. Though some Western observers depict this threat as marginal, they admit that China’s leadership is exceptionally proactive toward threats that they link together due to this unrest: secession, terrorism

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and extremism65. And Chinese analysts explicitly tie Xinjiang’s economic future and security to Central Asia. For China, a Central Asia which is capable of overcoming its economic difficulties and getting out of its economic crises has a better chance of achieving economic prosperity and political stability. China can benefit greatly from its stable and prosperous neighboring states. Only when Central Asian states are politically stable and economically prosperous can Sino-Central Asian economic cooperation be conducted effectively and smoothly. Such economic cooperation can and will speed up economic development in the Northwest of China. It can therefore be argued that to a large extent the stability and prosperity of Northwest China is closely bound up with the stability and prosperity of Central Asia. It is, rightly, because of this consideration that China advocates and promotes active trade and economic cooperation between China and Central Asian states for common economic prosperity66.

Furthermore, recent Western research strongly argues that Xinjiang’s problems will, if not confronted by Beijing, worsen over time and go beyond the present low-level violence and unrest67. Chinese policies toward Central Asia, including energy policies, are driven as much by considerations of internal security as they are by geopolitics. And therefore, especially as China remains an undemocratic regime, we should not be surprised that politics still predominates over more market-based approaches and that Russia and Central Asia loom ever larger in China’s energy policy68.

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Energy strategy China’s leaders understand that China must shift from oil and coal to other forms of energy, use them more effectively and ensure the reliability of imports. Accordingly, they drew up a strategy that was codified both in the Tenth Five-Year plan of 2001 and in a speech by Prime Minister Zhu Rongji. He cited China’s shortages of water, oil and other important resources, stressing the need for developing an adequate energy strategy, saying, ‘It is necessary to diligently economize and substitute for oil, to accelerate the search for and extraction of oil and natural gas, to use foreign resources, and more quickly establish a regime of oil and other energy reserves69.’ Practically speaking, this strategy comprises the following elements: „ Diversifying the sources of energy imports, increasing the share of oil and gas imports from Russia and Central Asia. „ Enhancing overseas investments by state oil companies. „ Broadening forms of trade to avoid transactions risk. „ Increasing the investment in oil and gas infrastructure and opening more channels to imports. government„ Establishing controlled strategic petroleum reserves. „ Adjusting energy consumption and production structures and reducing dependence on oil through coal gasification, liquefaction and development of nuclear power. „ Actively participating in the formation of a regional community and establishing a regional energy security system70.

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The strategy mandates China’s increased attention to Central Asian and Russian energy sources, and to a possible Asian energy community in which Russia and possibly Central Asia, as well as China and possibly other Asian states, could play key roles. Obviously such a community would also have significant political importance, as well as being a mechanism for the regulation of multilateral energy deals and investments.

The Asian premium Finally, China also has compelling financial reasons for seeking to ensure reliable supplies from producers nearer to it, such as Russia, Azerbaijan and the Central Asian states. Given the explosion of overall Asian demand by China, India, Japan, South Korea and smaller states, supplies are tight and the slightest threat to reliability of supplies from the Persian Gulf triggers price spikes that add up to US $10–15 per barrel according to some analysts71. But even if there were no shocks to the Gulf, the economics of its energy production work could penalize China into paying what analysts call ‘the Asian premium’72. Because Caspian producers must pay higher costs for production per barrel and lack the infrastructure to rapidly send major supplies to Asia, that infrastructure must be built at very substantial cost to meet Asian, including Chinese, demand. Similarly, one reason for the hold up of Siberian energy flows is the absence and high cost of infrastructure that must be built, including the refining of the oil, which is considerably more expensive than Saudi oil. Thus this region can only solve China’s and Asian needs in the future and after largescale investment by interested parties. Since neither Russia nor China alone has enough capital to do this quickly,

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opportunities for other parties like Japan to interfere in the bidding and make their own proposals for subsidized construction abound, making such decisions inherently international ones involving critical foreign policy issues. But in the meantime, because Caspian producers earn their greatest or highest returns by selling to Western markets, all things being equal, pipelines will be built to the West rather than to Asia. In order for Asian countries to compete to buy vital supplies today, they must pay higher prices than Western consumers do, in order to compensate for the absence of infrastructure and sufficient pipelines and transport73. Beyond that fact, because Saudi Arabia can manipulate prices in the key regional markets of North America, Europe and the Far East, Asian consumers must pay a premium on every barrel they buy, which has grown steadily in the recent past to about US $1.00–1.50 per barrel. This premium represents a net annual transfer of US $5–10 billion to Gulf oil producers even at times of peace74. Actual or potential shocks to the regularity and availability of Persian Gulf supplies would only push this premium higher. Thus every Asian consumer state, especially China, has a large financial incentive to find energy sources closer to home if possible, even if this entails high initial costs of investment in infrastructure and pipelines. Essentially, a package of solutions would need to be found that could include increased Russian production marketed through pipelines from Russia to the Far East. Although that increase in Russian supplies of all kinds of energy, including nuclear, is not enough in and of itself to overcome this premium, it certainly is a key part of the puzzle in any effort to reduce Riyadh’s (capital of Saudi Arabia) leverage and the Asian premium, and to create what many

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analysts hope will be a regional energy system in Northeast Asia75. But until that time, somebody will have to put

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up the investment capital for those projects to reduce Saudi leverage.

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The Russian strategic perspective The patrimonial model Russia also views energy as a fundamentally strategic asset of the state and energy policy outcomes must be maintained by the state for its interests, not those of profit-maximizing companies. Indeed, Putin wrote in his graduate thesis and subsequently published articles stating: ‘Regardless of whose property the natural resources and in particular the mineral resources might be, the state has the right to regulate the process of their development and use76.’ And in view of the chaos of the 1990s the state must reassert control of those resources because it alone has the capacity to ensure a rational use of resources for the national interest77. Thus Putin goes on to underscore the critical importance of control over energy, not just for the revival of the economy but to the survival of the state: The basic strategic tasks for the natural resource bloc involve achieving the transition to a rational combination of administrative and economic methods of government regulation in the sphere of resource exploitation…. In terms of a general conclusion it follows that existing socio-economic conditions, and also the strategy for Russia’s exit from the deep crisis and the restoration of her former power on a qualitatively new basis demonstrate that conditions in the natural resource complex remain the most important factor in the state’s near-term development78.

Indeed, not only is the energy complex the guarantor of economic

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development or a ‘locomotive’ of overall industrial development (an argument Putin and his supporters also have made about the defence sector), its development also ensures the recovery of Russia’s international position as a great power79. And because the entire sector suffers from a shortage of investment and capital to modernize its plant and infrastructure, the state has to step in and create ‘large financial-industrial corporations’, which cut across economic sectors and will be globally competitive. The statedominated and vertically integrated financial-industrial corporations must generate revenue for moving from extraction to processing industry, help develop exports, ensure domestic supplies, further develop the domestic raw material base and help the energy sector invest in foreign firms. These financial industrial groups will operate within the framework provided by the state, and if they serve the state in this way, they can expect to hold onto their assets. From this list of tasks set for the new financial industrial groups, it is evident that Putin views their control of Russia’s assets as a form of guardianship from which the management and the ‘owners’ are free to profit. It is also clear that Putin does not understand this ‘stewardship as ownership’, as it is often construed in the West, where owners have full control of their assets and the authority to determine the direction of their firms’ development. Putin goes on to state this rather clearly: ‘the state has the right to regulate the process of the acquisition and the use of natural resources, particularly mineral resources independent

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of on whose property are located; in this regard the state acts in the interests of society as a whole, as well as in the interests of private owners whose interests conflict and who need the help of the state organs of power to achieve a compromise’80.

State control of the energy sector embraces the entire economy. Some might see here a plan for huge, Chaebol-like vertically integrated monopolies. But in fact, what really is happening is a regression to the Muscovite patrimonial model that has state ownership as one of its fundamental characteristics and the conditionality of control of state assets in return for mandatory service to the state. Indeed, the above justification by Putin of state control is a textbook replica of tsarist and Soviet officials’ justifications for their autocratic and patrimonial systems of rule. This system is also characterized by the absence of any true concept of property rights under a government of laws or even the European notion of a Rechtstaat (a law-governed state). Similarly, from Putin’s own language we see that energy revenues are a rent bestowed upon trusted servitors to control as long as they serve well. The state is a rent-granting institution to elites who are rent seeking and competitive in that endeavour, but who have no concept of private property or of an economy not directed by the tsar and his bureaucracy. Under Putin we have seen a steady attenuation of property rights and regression back to that paternalistic model whereby property rights inhere only to the tsar or, in this case, Putin. Company owners and managers, whatever paper rights they may have, are in effect merely servitors given control over rents for an unspecified duration at the whim of the tsar, but they have no legal rights to the property they purportedly own81. As well as being the

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newest incarnation of the patrimonial Muscovite system, this also entails a retreat from global integration towards an autarchic and zero-sum concept of the energy complex. Nor is this outlook confined only to that sector or to Putin. In his address to the Federal Assembly on 25 April 2005, Putin cited the need for legislation clearly delineating security requirements so that Russia could attract foreign investment, but insisted upon pre-emptive control by ‘national, including state capital’ over defence industry and strategic natural resources82. Similarly, the statecontrolled Gazprom wants to become ‘one of the largest integrated energy companies in the world, spanning oil, gas and electricity83’. This rationale for huge vertical state-run monopolies has now been extended to the railroad system that is now supplying energy to China in advance of pipelines84. Putin’s new Chief of Staff Sergei Sobyanin shares his view that the energy industry is a ‘locomotive’ of the broader industrial sector – an argument that in the defence sector’s case is only partially borne out by the actual record85. Similarly, Defence Minister Sergei Ivanov, who is very close to Putin and a possible successor to him, stated in 2003 that: The state, in my view, should not lose control over all the strategic branches of industry. This does not mean encroaching on their activity, but it must control them, know the situation and understand in what direction these branches are developing…. If we do not begin to invest significant state funds in exploration in the next few years, we risk having to cope with serious consequences in the coming 10–15 years. The state, knowing the situation, can make balanced decisions about investing funds for geological exploration in one or another region of the country, taking into account companies’

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development plans, and then conduct open licensing for the exploitation of these deposits. This is something that the state must do, because in recent years we have become convinced that private companies will not invest in exploration work. Besides this, minerals and resources are state property, not private. Therefore the state has the full right to control this process and manage it in the interest of the entire country’s development86.

Every word here could have come from one of Ivanov’s Soviet forebears and would have been about as economically justified as his arguments. But they make eminent sense if one regards energy primarily as a strategic asset through which the state regenerates itself as a patrimonial model economy. Certainly Ivanov used this argument to justify the destruction of Yukos and of its owner, Mikhail Khodorkovsky, in 2003– 2005. Ivanov’s statements articulate an official consensus about the need for state control over energy87. For Kremlin leaders, energy is the state’s primary strategic asset, both in terms of domestic revenues and in terms of maximizing foreign influence and leverage; it will not let this weapon slip from their control. Therefore, while the government will possibly permit foreign firms to buy minority equity in Russian energy firms, it will not let any foreign firm or government have influence over any of those companies. Kuprianov’s words, cited earlier (see Chapter 2, section entitled: ‘Competing sources of supply’), are again relevant. In this context the reaction to CNPC’s announced interest in buying Slavneft in 2002–2003 reflects the protectionism that characterized Russian policy (and in UNOCAL’s case, US policy too). One analyst charged that China was already ousting Russian companies from Asian

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markets and therefore CNPC’s interest in Slavneft would lead to the deterrence of joint investment projects ‘engaging in diktat, and encroaching on Russia’s interests88.’ Ultimately, if this Belarussian-Russian company became Chinese it would allegedly have no interest in keeping Russian oil refineries operating at full capacity or in developing the Russian oil market. Exports would go only to China, and Russia would gain nothing89. Anatoly Chubais, head of Russia’s state-run Unified Energy Systems of Russia (RAO UES) electric company echoed this opinion, stating that: CNPC is a state-owned company, and its investments would be made on behalf of the Chinese authorities. And that would enable the People’s Republic of China to pressure Russia not only economically but also politically – for instance, in regard to the immigration of Chinese workers to Russia90.

These statements underscore the Russian view that energy is a strategic resource and that in regard to this, Moscow is engaged in a zero-sum game with other potential rivals to the ownership and exploitation of those resources in Russia, whether those rivals be domestic producers or foreign firms and governments. Moreover, the preference for autarchic and geostrategically determined outcomes is also very much in view here. Similarly, one reason for the destruction of Yukos was precisely the fact that parts of it might be sold to a US company that would not be under Russian control but could affect the direction of Russian energy policy. Interestingly, Russian officials now claim that they are ready to consider the participation of Chinese and other foreign firms in prospecting and developing Siberian and Far Eastern (or Maritime Province) oil and gas fields and to discuss the form of these

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companies’ participation in those projects91. Likewise, Putin has signed decrees opening up Gazprom to minority foreign shareholders. While this is intended to realize Putin’s publicly expressed aim of increasing Gazprom’s capitalization, it does not signify movement away from the autarchic and Muscovite model92. This is because the actual conditions of the gas industry, which evidently already are spreading into oil, are fundamentally autarchic and anti-market and tending to grow further in this direction. Thus, allowing Chinese participation in Siberian projects or opening Gazprom to foreign minority shareholders might be efforts to obtain what are in fact foreign subsidies for unreformed monopolistic and oligopolistic structures. Even as Moscow said that foreign firms could participate in tenders for East Siberian fields, Russian Minister of Natural Resources Yuri Trutnev stated that Russia must retain the controlling interest in them, not just as regards extraction, but also in the ‘sense of economic development and supply of other sectors93’. And throughout 2005, foreign energy firms seeking to invest in Russian fields found it harder and harder to make headway. For example, new laws ban any company with foreign participation of over 50 per cent from bidding for a field that has more than one billion barrels of reserves, or that is near a sensitive defence site94. Thus, with all of its dysfunctions and its relapse into autarchy, the archaic Muscovite and patrimonial model reigns supreme.

Competitive inertia While we cannot examine all of the ensuing dysfunctions that result from this system and Russia’s energy strategies and policies, five issues are readily apparent. First, the drive toward

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patrimonialism and absence of property rights, the rule of law and the consequences attendant to these phenomena continue to depress foreign direct investment in Russian energy firms. Therefore they will remain short of capital, non-competitive with regard to investment in Russia’s own infrastructure and ultimately less able to satisfy Russian and global demand. And as long as Russia subsidizes domestic consumption, they will look to foreign markets. But they will do so in their habitually monopolistic way, thus under-fulfilling foreign and probably domestic demand without external prompting, either from the state or from foreign sources. While that is a long-term prediction, there are already signs that oil production, for instance, is reaching a peak even though enormous reserves are in the ground95. Similarly, there are already warnings of a lack of investment that may lead to a ‘gas hunger’ in Russia by 201096. Therefore, it could well become more difficult to satisfy Asian demand in general, not just China’s. Secondly (and the saga of the on again/off again pipelines to China and Japan confirm this), a government that rules arbitrarily or by capricious policy cannot be regarded as predictable. This creates a problem of credible commitments that depresses investment and also leads to the continuing huge flight of capital from Russia97. Therefore, in the Asia-Pacific region we cannot expect productionsharing agreements (PSAs) with foreign firms to take place on any large scale or to bail out Russian producers who need capital investments to export directly to Asian consumers. PSAs, with their requirements for foreign control, legal security and greater transparency, are both ‘allergic’ and directly contrary to the criminal black market and dysfunctional behaviours, which resonate throughout this sector to the benefit of the

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captains of the energy industry. Therefore, they will resolutely block such forms of foreign investment98. Since neither PSAs, private corporate decisions by Russian firms or multinational investment in Russian energy equities will bring Russian energy to China, whatever deals do ensue and whatever pipelines are built will be inherently political affairs involving not just commercial transactions between state firms, but also high politics and sensitive issues of national security on both sides. This inherent political factor, operating under conditions of the arbitrary and unpredictable policies of rival Russian bureaucracies and of the state, almost guarantee continuing tension and probable under-fulfillment in RussoChinese energy issues. It also entails enormous waste. For example in order to meet its present political commitments to China, Russia has to send large amounts of oil over railroad routes, not pipelines, an inherently expensive mode of transport99. As long as the price of oil remains high this is still profitable and establishes Russia’s political credibility to China, but if prices fall then pressure to curtail such shipments will rise correspondingly. Thirdly, as Ukraine’s crisis in gas supplies from Russia at the start of 2006 confirms – and there are repeated previous examples of Moscow shutting off gas to disobedient consumers in the Commonwealth of Independent States (CIS) – Russia will use gas and probably oil supplies as political leverage to impose compliance with its wishes. The threat of cut-offs will also always be in the background in any negotiation with Moscow, making fulfillment of contracts an issue that is inherently open to doubt. While Moscow undoubtedly wants to sell energy to China, the terms that it will impose are at best unpalatable

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to China and contradict its preference for relying on its own direct control of access to energy. Reliance upon an arbitrary and unpredictable Russian energy policy that will inherently fail to realize Russia’s maximum energy potential cannot be a solution to China’s energy problems. Thus structural factors of both states’ economic and political systems militate against the maximization of Russia’s ability to satisfy China’s demand. Russian energy will not be a panacea or completely reliable alternative for China if the Middle East and Gulf supplies are blocked. Moreover, Russia has already proven itself ready and willing to obstruct Chinese activities if it deems it necessary to do so for its own sake. Fourth, the complete politicization of the energy sector and its degeneration into a rivalry among bureaucratic state servitors constitutes a permanent drag upon the maximization of profit and investment and also upon the realization of Russia’s national interest, particularly economic modernization. Symptoms widely associated with the Dutch disease and common to Pedrostates are an example of this failure to maximize growth and modernization. In this environment, rent-seeking and rent-granting amount to nothing more than a licence-to-steal given to high-ranking officials and their cronies. Indeed, this thievery plagues the entire Russian economy. Over half of all legal entities in Russia are created for purposes of tax evasion100. But even if everyone were law-abiding, a system relying upon rent-granting, rent-seeking and monopolies inherently slows growth and modernization and engenders further economic and political dysfunction. These political irrationalities and dysfunctions give rise to economic ones that reverberate throughout the system, strengthening the original pathologies and making it harder to liberalize this system.

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Fifth, the inertia of the Russian system in both politics and economics is towards monopoly and against competition or interdependence. Cooperation with foreigners becomes harder despite their demand for the energy product, and the gravitational pull of interest groups (bureaucratic and/or commercial) for an autarchic posture grows stronger as this system is reinforced daily. In regard to China, we can expect the following trends to assert themselves if they have not already done so. Russian interaction with China will be a bilateral state-to-state affair even if private firms get involved. Decisions will be based on politics as much as economic factors and will more likely be suboptimal and subject to endless revisions and renegotiation than would otherwise be the case. Another reason for this, as we shall see, is that the Russian structure ensures a lack of truly effective state control and coordination as opposed to asset-stripping and rent-seeking. Bureaucratic despotism cannot efficiently substitute for the market. It breeds inherent dysfunctions because of its disregard for the market that consistently pushes towards suboptimal economic outcomes as well as distorted political outcomes, making it harder to enforce credible commitments or secure sufficient profits. China’s system fosters comparable outcomes and also makes cooperation difficult, so both states, due to their politicized energy sectors, find it harder to coordinate policy effectively, make rational decisions based on good information or market signals, or to cooperate effectively for maximum mutual gain.

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The Russian oil and gas industries The evolving structure of the Russian oil and gas industries reflect the political trends now operating in Putin’s Russia, as well as the state’s chequered history over the last 15 years. Since the gas industry is subject to vastly greater state control and even ownership than the oil industry, the Russian Government can exercise a much greater ability to manipulate gas prices at home and abroad, and gain increased control over natural gas markets101. But while the oil industry does not yet reflect this degree of state control, it is falling under greater state control as time passes and is at the mercy of the state agency Transneft, which controls the pipelines. There are 10 private oil firms but only five major ones dominate. Julia Nanay listed these as being: Lukoil, Yukos, TNK, Surgutneftgaz and Sibneft. Since then, Yukos has been destroyed and taken over by the state and Sibneft has also been brought under state control. Juxtaposed against the private oil firms are three key state-owned firms: Rosneft, the oil company; Gazprom, the gas company; and Transneft, the pipeline monopoly. In September 2004, the government announced the takeover of Rosneft by Gazprom (thus demonstrating the latter’s ambition, cited above, to be a major energy firm on a global scale and to be a monopolist in the field). When Yukos was taken over shortly after by Rosneft, which was already earmarked for assimilation in to Gazprom, this displayed the ambition spelled out by Putin earlier, to create companies that would be the Russian equivalent of Saudi Arabia’s 102 Aramco . Since then, Gazprom has also made moves to take control of Russia’s electricity and nuclear energy

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industries103. Although this trend is of global significance, it holds particular significance for Sino-Russian energy relationships. As Keun Wook Paik writes: A Russian political analyst even suggested that the merger between Gazprom and Rosneft would only be the starting point of the establishment of the biggest energy company in the world. The analyst pointed out a kind of holdings company named Gosneftgaz, composed of Gazprom, Rosneft, Surgunteftgaz, Lukoil, Yukos and Sibneft could be established before the end of President Putin’s second term, that is [in] 2008. He added that approbation of creation of a single state oil and gas corporation will be under the control of the St Petersburg Chekists group, which is very conscious of China’s rise. So they are determined to control the oil and gas supply sources to China104.

However, because Gazprom is legally constrained to supply natural gas to producers, especially the existing state-run electricity firm RAO UES, at ridiculously low and subsidized domestic prices, its profits come almost exclusively from its ability to export. If it cannot export, the whole ‘house of cards’ might collapse and force major fuel and electricity price hikes in Russia, which Putin has ruled out even though the EU has demanded them. In other words, any attempt to establish a truly marketbased energy economy inside Russia would, according to many observers, lead to an economic and consequent political crash. If Gazprom and Transneft can establish a degree of control over the entire energy sector, they will export all the deficiencies of their monopolies to that sector and to its foreign policies. Nevertheless, it must be remembered that the creation of a Saudi

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Aramco-like company in Gazprom, and the status of Transneft as ‘king of the castle’ in the Russian oil sector is a logical culmination of the outlook shared by Putin, Ivanov and other officials. Therefore, those hoping to obtain access to major Russian energy supplies are likely to be disappointed. The natural gas industry, led by Gazprom, remains the least ‘marketized’ sector of the Russian economy and has proven highly resistant to efforts to introduce market reforms. Thus it already breeds conditions harmful to the growth of that sector and to Russia’s long-term economic development105. Since Gazprom controls both upstream production facilities and downstream distribution institutions, it constitutes a major obstacle to consumer choice and market economics in its chosen sectors. Moreover, it is the monopoly exporter of gas and the monopolistic buyer of gas produced by oil companies, even as it expands into the electricity and nuclear sectors. Gazprom expects domestic demand to rise steadily, albeit slowly, and demand for its exports to continue rising as well through to 2010. Yet, due to decaying infrastructure that still suffers from lack of investment, output is likely to remain flat in the face of this rising demand106. As Russia’s domestic energy economy (particularly its gas economy) is anything but a market, Russia has to regulate exports in order to sustain it, lest producers export everything they can to get a higher return on their product. Moreover, Gazprom as a monopolist, is not content with regulating exports; it also acts to suppress potential rivals107. Thus as Rudiger Ahrend and William Tompson explain:

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One of [the] things Gazprom wants is to ensure that BP’s entrance into the ranks of the Russian majors does not mean an end to Gazprom’s export monopoly. BP merged its assets with Russian oil firm TNK in 2003 to create TNK-BP. One of the merged firm’s major goals was to export natural gas from the Kovykta superfield near Irkutsk to China and Korea – a US $18 billion project. To protect its interests, Gazprom will continue to sabotage the Kovykta project until TNK-BP relents and allows it in as the operator – an operator that has every intention of letting the other ‘partners’ pay its way108.

Obviously this means higher costs and more delays for China and the Republic of Korea (ROK), which both hope to buy gas from the Kovykta site, assuming that the pipeline ever gets built. Making that assumption is dangerous given the widespread struggle of Gazprom and Transneft (backed as they are by powerful government authorities) to establish monopolies not just over domestic industry but also over neighbouring foreign producers. Gazprom has hinted at an interest in Russia’s foreign oil company Zarubezhneft and we know that the energy sector, acting under state direction, is a powerful (if not the most powerful) leverage Russia has in foreign policy towards the Baltic States, Poland, Belarus, Ukraine, Moldova and Georgia109. During 2005, Gazprom, acting under state direction, concluded accords with Kazakh, Uzbek and Turkmen gas companies that converted Putin’s 2002 call for a gas cartel into a reality, becoming a cartel dominated by Russia whereby Gazprom has a monopoly on Central Asia’s ability to export its gas to consumers. All natural gas produced in the former Soviet Union comes from Gazprom, Kazakhstan,

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Uzbekistan or Turkmenistan with any natural gas originating in a country ending in ‘stan’ having to transit through Kazakhstan and Russia on its way to any market. The KazMunaiGaz deal means that Gazprom – and by extension the Kremlin – now owns all of that gas. Any state wishing to use Central Asian gas in order to get energy independence from Russia is now out of luck. This is particularly worrisome for states such as Ukraine and the Baltic states who now have no reasonable alternative to Russian-owned natural gas. Russia has been bandying the threat of sharply higher energy prices around for years. Now it has finally taken the concrete step necessary to make that an arbitrary reality110.

In the oil industry, Transneft and the government in Moscow have consistently acted to control flow through its pipelines or, failing that, aimed to ‘convince’ Central Asian governments to join it in an exporters’ group (or cartel). However, since the BakuCeyhan (Azerbaijan–Turkey) pipeline has been built, Russia has found it harder to monopolize Caspian oil as opposed to gas111. Nonetheless, the monopolistic drive is present in both cases and will get worse to the extent that Gazprom can exercise leverage in the oil industry along with Transneft.

Central Asia This trend towards monopoly goes beyond the experience of the Kovykta field and the recent formation of the gas cartel. Russia and Central Asia are rivals in the energy market and a large part of Russia’s neo-imperial designs upon the region stem from the fact that it is trying to capture the energy rents (or as many of them as possible) in Central Asia in order to sustain its own autocratic and anti-market

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system. From Russia’s point of view it is essential to establish priority lodgements in Central Asia’s economy because the latter’s oil is cheaper to extract than Russia’s. As Mikhail Khodorkovsky Yukos’s Chairman and CEO told the Carnegie Endowment in 2002, a key reason why Russian oil has a high price is transportation costs and that its most pressing needs are for liberalization and new markets112. But the state will not let go of its control of pipelines, maintaining the excessively high costs of Russian oil and depriving itself of markets even as it has to ‘push aside’ other producers by expanding its pipeline network to take their oil. Khodorkovsky also conceded that Caspian oil is indeed competition for Russian oil; if that energy goes onto markets before Russian energy capabilities are developed, the latter will not have room to compete113. Given the importance of oil and gas companies to Russia’s economics, they are urgently trying to restrict Central Asian production and infrastructure to mainly, or even exclusively, Russian channels, lest their oil and gas become less competitive due to its high cost, wasteful monopolistic structure and dilapidated infrastructure114. Central Asia’s abundant gas deposits, if marketed abroad, could restrict Russia’s ability to compete in world markets, particularly the Asian markets of India, Japan, China and South Korea that are widely expected to surge in the next 20 years with vastly increased rates of demand for fossil fuels. Given the centrality of oil and gas to Russia’s economy that would be a catastrophe. Thus for Moscow to dominate, it is essential not only that the grand Eurasian design sketched out by Putin since 2000 be realized, but also that his proposals for an Organization of the Petroleum Exporting Countries (OPEC)-like cartel over natural gas come to fruition and that Central Asia’s efforts to build

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infrastructure are limited to those compatible only with Russia. Apart from the grand design for Asiatic railways and pipelines to major East Asian states, this also means the successful completion of major transportation and energy projects in Central Asia, including the NorthSouth corridor, which will travel through Central Asia, Iran and India. In that case, Russia could truly become the Eurasian hub of a vast series of trade routes tying Europe, Central, South and East Asia together115. Finally, another reason for Moscow’s and Gazprom’s quest to monopolize Central Asian gas is to use it to overcome the dangers facing Russia from a lack of investment in its dilapidated gas infrastructure and the unwillingness to end the domestic subsidization of natural gas. Although these factors predate Putin, the monopoly status of Gazprom creates an enormous incentive for lack of investment at home and for depletion of resources in a scramble to export, as well as stagnating productivity of labour and of gas fields. This lack of investment may lead to the aforementioned ‘gas hunger’ in Russia116. Forecast extraction increases from 610 billion cubic metres in 2004 to nearly 640 billion in 2010, while domestic consumption is expected to rise from 430 to 470 billion cubic metres. This means that Russia will be unable to meet its domestic and foreign commitments in 2010 by 30 billion cubic metres. Central Asian gas bought at cheap prices may be used to supply Russia’s domestic markets thereby forcing those producers to bear the costs of the domestic subsidy and forego the profits they would accrue by selling on the open market117. Thus Russia’s drive for monopoly reinforces its drive for empire and both can be accomplished only at the cost of perpetuating the socio-economic backwardness of Central Asia, which most

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observers believe will sooner or later trigger a massive explosion there. The geopolitical implications of this policy,

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which rebounds neither to Russian, Central Asian or Chinese long-term interests, are obvious.

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Pipelines as strategic investments Two key points for consideration of Russo-Chinese energy relations emerge from this discussion. Firstly, the importance of pipelines and the control over their construction and direction as strategic investments, and secondly Russia’s determination to prevent China or anyone else from having direct and unmediated access to Central Asia or Russian producers, a determination that directly contradicts the main points of Chinese energy strategy. With regard to pipelines, it is clear that Transneft and Gazprom will not relinquish their monopolies and move to market economic considerations118. Russia views energy as a strategic asset that must be under state control. It also believes its main strategic asset is at risk because Russia must export abroad through pipelines that are not fully under its control. It is dependent upon the owners of that territory, ie neighbouring states, a situation it refuses to accept passively. Jakob Hedenskog writes: As is often admitted, however, Russia cannot make full use of the energy weapon as long as the greater part of its energy exports to the West goes through these countries. That explains why Russia, under Putin, has put major effort into extending the pipeline system to protect Russia with alternatives to transporting its gas through Ukraine119.

The same logic applies to Russia’s pipeline through Belarus of which Michael Fredholm says: When possible, Russia certainly strives, through its energy policy, to avoid

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dependence on other states and at the same time to dominate its domestic market as well as, when possible, the international market. Russia sees a particular strategic need to control the export and transit markets for its exports to the international market. Russia thus works to create export infrastructure on Russian territory that will eliminate the need to transit energy deliveries through other states. Russia, for this reason also sees a need to re-integrate energy infrastructure in the countries of the former Soviet Union by mergers, acquisitions, and investments. Here the interests of the independent energy companies meet those of the Russian Government. A re-integration along these lines makes both commercial and security sense for these actors120.

Russia’s officially published summary of its 2003 energy strategy states that exports are a strategically vital way to finance Russia’s move from being merely a supplier of energy to being a substantive member of the world energy market. Therefore, given Russia’s unique geographical and geopolitical position ‘problems of transit have a special meaning121’. More recently, Putin himself reiterated the need to diversify the routes along which energy travels so that Russia could ‘reduce [its] dependence on potential risks, and of course, [it] would open promising new markets for [itself], in particular in the AsiaPacific region122’. Even so, Transneft (not least due to its monopoly position) has not been able to come up with the means of building pipelines to accommodate the demands of producers for more capacity to export.

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Since prices are high, exports, including those to China, now also go by rail or truck, but that is an inherently wasteful and inefficient mode of transport. Should prices fall, that will no longer be economically justifiable123. And since transport of energy from Siberia to Asia in general (not just to China) will be very expensive, Transneft’s unwillingness to demonopolize and respond to producers’ demands means that pipeline decisions will continue to be based on politics not markets. Similarly, costs will be higher than need be, even if they are extremely high to begin with, as in Siberia for reasons of climate, lack of infrastructure and so on124. The question of future pipeline locations is critical for several reasons. It determines how much oil and gas Russia can bring to the market and how much oil and gas other postSoviet states can export through the network, which remains almost the only network in existence. Pipeline policy will exercise a significant impact upon Russian foreign relations with America, Europe, the CIS, China, Japan and India. Finally, the determination to maintain state control and virtual autarchy will significantly inhibit the growth of the foreign investment that Russia so desperately needs to maximize its energy capabilities. And investment in pipelines is a significant part of that infrastructure125.

Eastern Siberia In the context of Russo-Chinese relations, Putin has emphasized the need for a pipeline from Eastern Siberia to an Asian destination. He has also warned that despite the need for private investment, the state would determine the location, sequence, scope, participants and foreign investors of both pipelines, meaning that Russia will be guided first and foremost by its

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national interests and those clearly mean the state’s interest, not necessarily both nations’ interests126. Yet despite the construction of new pipelines to meet demands, evidently no financing plan is in place for them and state agencies are still divided. Transneft and conservatives are insisting on monopoly and reformers are clamouring for private ownership127. This failure to decide which pipelines will be built in Eastern Siberia has a significant impact on the sale of oil and gas fields. According to Trutnev, even though the government is ready to license fields in Eastern Siberia as of 2005, the absence of a ‘detailed’ state decision prevents the state from earning large sums from the sale of those fields’ energy holdings128. Another issue here is the extent of foreign participation. As we have seen, Transneft and the government have followed a consistent line to build pipelines wherever possible, keeping foreigners out of it, for fear they would retain the power to interfere with Russian exports and render Russia vulnerable to what it considers blackmail129. Inevitably, this policy, along with Russia’s overall tendency towards state ownership and control (monopoly and autarchy) will come into conflict with China’s similar demands: reliable access to energy supplies based on equity ownership, as well as diversification of supplies in order to avoid excessive dependence upon any one route or supplier.

Russia, China and Central Asian energy The inherent tensions of clashing Russo-Chinese perspectives on energy policy are most pronounced in two regions: Central and Northeast Asia. China’s record of achievement in Central Asia is chequered. It has bought

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equity in fields in Azerbaijan and Kazakhstan. In late 2002 CNPC acquired a 50 per cent share in Salyan oil through its various affiliates and in January 2003 CNPC acquired a 31.41 per cent share in the Azeri project, Canub-Qarb Qobustan130. CNPC and SINOPEC are both seeking properties there and in the Caspian Sea. These projects hardly give China a commanding position in Azerbaijan’s energy holdings and do not overcome the difficulty of getting reliable access to pipelines. China’s efforts to gain leverage and access to Kazakhstan’s holdings have been more chequered. In 1997, CNPC purchased a 60 per cent stake in the Aktobemunaigaz firm of Kazakhstan, intending to be the source for an oil and gas pipeline extending from Aktyubinsk in the Aktobe province (Kazakhstan) to Alashankou (China). Yet this project encountered several difficulties to the point where in 1999 there was talk of its cancellation131. Since then the project has been retrieved, not least because of Russia’s failure to deliver on its promised oil pipeline. Now it has greater priority and the pipeline is now being built to Keniak in Xinjiang from where it eventually will connect to Atyrau and with China’s interior132. This is the centrepiece of China’s present holdings in Kazakhstan and it will cost an enormous amount to build this pipeline through rugged and austere terrain and to secure it against natural and human-made disruptions. This project also underscores the vagaries of trying to line up equity in Central Asian energy, since once this contract was signed and the difficulties of terrain and of labour strife emerged, Russian companies such as Yukos offered China oil and gas in order to deprive Kazakhstan of a potentially enormous market and force it into greater dependence upon Moscow, an outcome that suited neither Beijing

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nor Astana133. However in 2004, Peter Mattis reported that Kazakh oil and gas had become more attractive because: More recently, the completion of the NekaTehran pipeline offered the possibility of oil swaps of Caspian and Iranian crude to cut transport expenses from the Caspian Basin to China. Caspian crude would be transported to Iran, while a corresponding amount of Iranian crude would be transported to China by ship. Analysts speculated that these oil swaps would cast doubt upon the construction of a massive China-Kazakhstan pipeline. However, that pipeline (Atasu-Alashankou) seems poised for completion.134

China will probably retain its interests in both programmes to maintain ties to both countries and avoid excessive dependence upon any one supplier or pipeline. However, there is much local resentment of Chinese high-handedness toward the local population, labour policies, economic penetration of what is one of Kazakhstan’s poorest provinces and fears that Chinese workers will privatize the land that is now being sold out of government control. Thus Kazakhstan would like to get a 51 per cent controlling share in any oil pipeline construction to China135. The end result of this troubled project, which China greatly overpaid for, is still not definite.

East Asia In East Asia, Russian energy can flow directly to China if Moscow so chooses. But here, Japan, the third party is a rival claimant on Russia’s resources. Therefore, decisions about pipelines here are closely connected with fundamental questions of Russian foreign

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policy in Asia, such as choosing between Beijing or Tokyo for the status of Russia’s primary energy and probably strategic partner in Asia. Decisions about gas and/or oil pipelines also are of immense significance in defining Russia’s posture on key issues surrounding North Korea’s quest for nuclear energy, if not weapons. As we shall see, these issues also involve Russo-Chinese relations because the decision as to which pipeline to utilize to ensure flows of natural gas to China also involves a choice between North Korea and South Korea. Therefore it is hardly surprising that pipeline decisions concerning the flow of energy out of Eastern and possibly Western Siberia to Asian destinations is a question of high politics at the highest level of Russian foreign policy. Equally important is the fact that Russia, under Putin, has staked its Asian policy primarily on its ability to deliver large volumes of energy or other goods through its pipeline and transport infrastructure. Failure to live up to these claims and promises not only diminishes Russia’s reputation as a reliable provider of energy to Asian countries, it also calls into question the viability of both Putin’s policy and of Russia’s seat at the Asian table. Finally, we can also see that decisions about energy policy and pipelines in East Asia cast a revealing light upon the bureaucratic factional divisions in Russian energy policy and Russia’s overall political economy. Indeed, as noted above, rivalry over building an oil pipeline to Japan or China parallels institutional factional divisions within the Russian energy policy community136. Unfortunately, these ongoing divisions have also made it impossible for Russia to pursue a coherent energy policy in Asia; since 2003 none of Moscow’s decisions regarding gas and oil pipelines to Asian countries have ever been upheld. Instead, all these

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statements are subjected to permanent and unending bureaucratic challenges whose main purpose is the vindication of factional, not national interest. The struggles described below have eroded any pretense that Russia can be a reliable energy supplier to Japan, China or South Korea. Therefore these unceasing bureaucratic and factional struggles by rival bureaucrats to gain or retain their monopoly over gas or oil pipelines and holdings render these calls for multilateral energy associations (which will serve as surrogates or launching pads for multilateral security organizations in Northeast Asia) as quixotic hopes based more on wishful thinking than on the current hard political and economic realities137. Supposedly a natural alliance exists between energy abundant Russia and energy-starved countries like China, Japan and South Korea. However, in fact all potential pipeline projects advocated for providing either oil or for gas from Eastern Siberia to Asian countries are based on political advocacy rather than on hard economic analysis. This is certainly the case regarding Russian proposals. As James Dorrian observed in 2004: I believe that the oil pipeline proposals in Eastern Siberia are a case where the cart was brought before the horse. The pipeline route was identified and even the terms of the contracts with Japan and China were identified and detailed for 20 to 25 years; yet they have not yet assessed the oil resources in Eastern Siberia. So that certainly would have to be done. All indications to this point suggest that the region is a much more gasprone rather than oil-prone area. Production costs for oil fields in Eastern Siberia would be much higher than in Western Siberia. Many people believe that Eastern Siberia will resemble Western Siberia

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in terms of oil production potential, and that is not necessarily the case.138

If one goes through the entire series of negotiations for oil and gas pipelines from Eastern Siberia to Asia since 2002–2003 when this became a critical issue, it becomes clear that it is highly unlikely whether there is even enough oil or gas for Russia to pump to future partners as well as to satisfy its own growing domestic needs. These considerations do not even begin to take into account the question of who is going to build and pay for the pipeline and for whatever is pumped out of Eastern Siberia, given the enormous and potentially uncompetitive costs and prices of merely extracting oil or gas from there, not to mention refining and shipping it along a durable and up-to-date pipeline infrastructure. In the case of the contending oil pipelines from Angara (Siberia), either to Daqing (China) or to Nakhodka or Perevoznaya Bay (on Russia’s Pacific coast), the cost of building a pipeline to the Pacific Coast has jumped from an estimated US $12–13 billion in 2003 to US $16–18 billion in 2006. As Japan has pledged no more than US $7 billion in loans or other subsidies to build this pipeline, the burden of raising the rest of the cash falls upon an under-capitalized Russian oil industry that has done everything possible to scare off foreign investment and PSAs. So it still remains unclear whether or not Russia can even pay for building a pipeline either to China or to Japan. And as the prices of these pipelines goes up, foreign interest will naturally tend to go down139. The following five questions have yet to be answered conclusively: „ What are the comparative advantages and disadvantages of opting for an oil pipeline to

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China or Japan, or for a gas pipeline to South or North Korea first? Who owns the oil and gas? Who will own the pipeline? Who will build and pay for the pipeline? Are any of these projects economically justifiable given costs or sustainable given the competing needs of Russia and all Asian countries for energy?

The struggle since 2002 reveals that state-run companies have decisively failed to maximize Russia’s productivity and competitive standing, and that increasing despotism (manifested through this state control) does not produce a decision-making process to advance the national interest; it actually does quite the opposite. As was true under tsars and commissars, the Russian system of governance produces a system of competing bureaucratic factions and oligarchies that answer to nobody and pursue purely selfish, rent-seeking and factional interests. Privatization of the state, either by businessmen or officials who have seized their properties and hide their own personal or factional interest underneath high-sounding rhetoric of national interest, inhibits the articulation of a genuine national interest and virtually guarantees suboptimal policy decisions. Indeed, by early 2006 Russia had failed to decide conclusively upon either an oil or gas pipeline but had managed to go far in convincing Japan, China and South Korea that it is an unreliable and even duplicitous energy provider. And that was before the crisis triggered by Russian efforts to use energy as a political weapon against Ukraine and Georgia in early 2006. China’s primary or most immediate concern at present is to obtain reliable oil supplies and that concern is

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reflected in the 13-year effort by China to ensure that a pipeline bearing Siberian oil goes to it from Angara. But China is also vitally interested, like other Asian energy consuming states, in transferring as much as possible to the utilization of natural gas. China has expressed a long-standing interest in obtaining natural gas from Russian sources in Siberia at Kovykta. For both oil and natural gas, China has encountered many, if not all, of the difficulties we have listed above. Indeed, as of early 2006 in neither case (oil or gas) can Beijing be certain that it will obtain either the product or the quantities of these energy sources for which it has contracted. Not surprisingly, this uncertainty and the difficulties in navigating Russia’s energy policymaking process have led China to increase its quest for diversification of its sources of energy, thus leading to greater reliance upon Central Asian sources.

Kovykta and natural gas to China Discussions about bringing natural gas from Irkutsk province in Eastern Siberia to China began in 1993. In 1999 an agreement was reached to undertake a preliminary feasibility study into transiting the Irkutsk natural gas to China, via a transnational pipeline. By 2003 South Korea, which is a very large importer of both natural gas and liquefied natural gas (LNG), had entered the project in order to obtain reliable supplies from Russia and to discuss a pipeline route to go from Siberia to the Democratic Peoples Republic of Korea (DPRK – North Korea) and then to Pyongtaek (South Korea). Previously there had been only two routes under consideration. Dmitry Butrin reported in Kommersant:

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The first one, presented by Gazprom would pass through Mongolia to Beijing. It had been planned to link it in Russia to Gazprom’s network of gas pipelines from Yamal and the deposits in Yakutia, and to link it in China to the East-West pipeline of CNPC (China National Petroleum Corporation) that is currently being built. The second route, in which Anglo-American company BP, the joint owner [with TNK] of the Kovykta deposit (known as Rusia Petroleum) has been interested, partly duplicates the route of the Angara -Daqing oil pipeline planned by Yukos and CNPC. In the future it may be extended via an undersea gas pipeline to South Korea140.

Thus the issues regarding the development of gas and oil pipelines to China paralleled each other. For both oil and gas there were alternative routes to the final destination or a choice between customers: China and Japan, or China and one or both Korean states. There was also a choice between relying on a private firm (Yukos or TNK-BP’s gas consortium) and the state oil or gas firms (Transneft and Rosneft with regard to pipelines and oil, and Gazprom with regard to gas). In both cases we find a similar pattern working from 2003– 2006, a fact that suggests the ultimate central direction of the outcome to date. The proposal by Kogas, South Korea’s state gas company, clashed with Gazprom’s and Rosneft’s plans for a LNG distribution centre (mainly using LNG from Sakhalin Island) at Nakhodka. But otherwise it fit perfectly with Gazprom’s and Transneft’s intention to establish a unified and centralized state system for integrating oil and gas extraction and export. Alexei Miller head of Gazprom and Sergei Bogdanchikov head of Rosneft wrote to Putin in 2003 saying, ‘We need a system for coordinating the

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extraction and export of energy sources in the region as a whole141.’ Sergei Vainshtock, the head of Transneft, was more explicit still. He stated that Russia needed to participate with its partners in what he called a ‘Siberian energy corridor’. He claimed that this project was backed by the Ministry of Energy and aimed to integrate all the ‘uncoordinated’ projects for oil and gas in Eastern Siberia and Sakhalin into a single system for exporting Russian energy to the Pacific and even to the United States142. The interest in new pipelines for carrying oil and gas to East Asia coincided with oil and gas firms’ (such as Yukos) calls for reform and even dismemberment of state companies. We will deal with the issue of oil and pipelines in the following section on the Angara-Daqing or Perevoznaya Bay pipeline issue, but it is of note that the same question was raised at this time with regard to Gazprom and gas. However, it went nowhere. On 14 February 2003, Putin delivered a speech that quashed all hopes for breaking up the state gas monopoly stating that: Especially since the early-nineties Gazprom performed the role of a highly important stabilizer, one of the bulwarks of the economy undergoing reform. What is more, Gazprom always had and still does have special social responsibilities to Russia’s citizens. After all, your work brings light and heat to people’s homes. It ensures the normal operation of enterprises. It guarantees the stability of the country’s housing and utilities infrastructure. Mindful of all these factors, the state has taken an extremely cautious approach to any moves to reform the gas extraction sphere. As a strategic company, Gazprom had to be maintained and has been maintained as a single organism. That is how we will

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approach the upgrading of the company’s activity in the future. As Gazprom’s major shareholder, the state will press for a reduction in costs and an enhancement in the effectiveness of the company’s activity, but it will not back any plans for its dismemberment or division143.

Putin’s speech duly made it almost certain that Gazprom, secure in its monopoly, would fight with TNK-BP to prevent a private firm from competing with it to own the China-Korea ‘account’. This would mean that Gazprom would have to make an unrelenting effort to either suppress Kovykta as a source of energy to the East or to take it over and oust its original owners. And since Putin’s speech, this is exactly what has happened. He also announced that there would be no privatization or dismemberment of the RAO UES joint-stock state electricity company, since natural gas has been the main power source of Russian electricity144. Moreover, the consequences of Putin’s speech went further still. As Russian Minister of Economic Development German Gref observed: ‘The Russian economy is already a market economy, but the state remains to a considerable extent Soviet. So, preserving a state-controlled Gazprom in its current form implies preserving its socialist component145.’ Since the Russian Foreign Minister Igor Ivanov was simultaneously stating that energy relations were the most important component of SinoRussian relations, it is clear that the state decided to ensure that control of those relations remained in its hands rather than in those of private companies, whether by TNK-BP in gas or Yukos in oil146. In May 2003, Gazprom and Kogas agreed on developing a 4,000 kilometre pipeline from Kovykta, costing around US $11 billion, to be completed in 2010. Despite this and the

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fact that the two gas companies were subsequently joined by CNPC, the project was already problematic by that time147. Leonid Drachevsky, Putin’s plenipotentiary in Siberia, publicly worried that implementing the project might lead to gas shortages in Irkutsk, Chita and Buryatiya provinces, adversely affecting Siberia’s coal industry while inhibiting other explorations for gas in Siberia148. Soon other problems arose. Gazprom’s negative attitude toward this project, which it would not control since TNK-BP owned Kovykta, now made itself felt. As Vladimir Potapov observed: In the general outline for the exploitation of natural resources that the company [Gazprom] is currently drawing up, priority is given to gas from the Chayanda field (Chayandinskoye) in Yakutia which is currently part of the undistributed stock. The reserves at this field are estimated at around 1.2 trillion cubic meters of gas [as opposed to Kovykta’s 1.9–2 trillion cm of gas] It is envisaged that commercial extraction will begin in 2009 and in 2012 it is planned to reach the design capacity of 23 billion cubic meters. Gazprom’s priorities here are obvious, to say the least. It becomes the operator, attracts additional funds from interested investors, and builds a gas pipeline via Tynda, Blagoveshchensk, Khabarovsk, Vladivostok and onwards to the Korean peninsula. The construction of a gas pipeline geared to the Korean consumer is becoming increasingly pressing in the emerging political situation [North Korean nuclearization and its attendant crisis], and that means that it will probably be necessary to abandon the idea of building a gas pipeline from Kovykta to China and thence to Korea149.

Gazprom’s plans for Eastern Siberia emphasized using Kovykta and other fields primarily for domestic markets

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while exports would not be made until 2014–2020, a programme that contradicted TNK-BP’s emphasis on exports to China. Given the Russian Government’s desire to prevent blackouts in Siberia and to maintain control over the gas industry while promoting Gazprom’s monopoly, the likely decision as to who would control events there was hardly in doubt150. Another related question regarded the route to be traversed by the projected pipeline. China insisted that the pipeline not go through Mongolia so that Mongolia could not turn off China’s gas, ie for strategic and political reasons. But this increased the final costs because the pipeline would have to detour south to reach China and the Yellow Sea before going on to its final destination in South Korea151. However, China’s insistence upon its strategic priority raised the cost of the project while excluding North Korea from consideration. This was not to South Korea’s favour, as it wanted to provide Pyongyang (in North Korea) with alternatives to nuclearization. China’s insistence on avoiding Mongolia was also not necessarily desirable to Russia, which wanted to get in on the ground floor of any Korean settlement by being able to provide natural gas to North Korea as a substitute to its electricity being generated by nuclear power152. In a region with little or no history of multilateral cooperation (something quite absent in Northeast Asian security issues in general) and abundant reserves of mistrust and suspicion validated by history, building any of the routes to Korea would be problematic to say the least and with the involvement of at least three sets of economic and environmental regulations, serious difficulties were to be expected. But South Korea has no choice because any energy project from Russia to South Korea falls into this category. Such projects

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also involve raising capital from both public and private sectors in all three countries, an inherently difficult undertaking. Although we have seen that many commentators believe or hope that multilateral energy cooperation can facilitate peace settlements, this remains an unproven wish. In the meantime the realities are that: A few basic geography lessons are critical to understanding the prospects for the future. Pipelines lock suppliers and buyers into a long-term relationship. Furthermore, to get built, they require stability, trust, and cooperation. In Europe, Russia has proved a reliable supplier and there is no reason to suspect that this won’t be the case in eastern Siberia. The problem is getting the pipelines built…. The lack of any experience of multilateral cooperation continuing tensions in the region pose a major challenge to such cooperation. There are those who sit and ponder maps and dream up numerous pipeline projects, the real issue is how to turn those pipedreams into reality153.

These issues were thoroughly discussed throughout 2003. By November, Russia, China and the ROK were supposed to finalize the results of the feasibility study for Kovykta, while reports suggested that the ultimate route would bypass North Korea due to excessive costs and safety reasons. Instead the pipeline would link up to South Korea through China and the Yellow Sea and annually provide China with 20 billion cubic metres of gas and South Korea with 10 billion cubic metres of gas, after it opened in 2008154. However, even here the signs of domestic Russian discord soon appeared. Gref openly supported opening up Rusia Petroleum and the project to multiple foreign investors. But the United Financial Group bro-

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kerage firm warned that Gazprom could seek to use ‘administrative resources’ to buy Rusia Petroleum at a lower price for itself and quash the project155. Subsequently, by late 2003, Gazprom effectively had two ways to stop the project. Either it could use its ties to the state to buy Rusia Petroleum essentially on its own terms, or it could simply stop TNK-BP from moving forward. Essentially, in 2004, Gazprom would experiment with both options, thereby preventing the project from moving forward. For example in June 2004, Gazprom’s Deputy Managing Director Yuri Komarov stated the company’s interest in joining both the Sakhalin-2 project of Royal Dutch Shell and Kovykta156. The issue of Gazprom’s joining Kovykta was evidently still under consideration in August 2004157. But soon after, it became clear that Gazprom had lost interest in participating in the project and was now focused on destroying it158. President and CEO of TNK-BP Robert Dudley went public in early 2004, complaining about the delays thrown up by Gazprom and the Russian Government. Dudley wrote that the project would benefit Russia, China and South Korea and could then be extended to North Korea. He then added that: This project is not sustainable without the Chinese component. Domestic demand in eastern Siberia is insufficient as a spur to develop the Kovykta field on a large scale. Only by seeing Kovykta as an energy source for China and Korea is the incentive to pump the gas from the ground. And there is a limited window of opportunity. Right now there is a potential alignment of interests between Russia, China, and North Korea to develop the Kovykta field and construct the pipeline. Russia needs to recognize that Kovykta is an asset that needs to be

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monetized. Without guaranteed export markets in China and Korea, the vast majority of the resource will remain in the ground, unused for decades. It is not economical to ship the gas to other markets further afield. Kovykta is also, realistically the ‘anchor’ project for any North-East Asian Regional Energy Corridor (NEAREC). Oil in sufficient quantities has not yet been discovered that would justify an oil pipeline from Eastern Siberia to East Asian markets. The gas is there now and it is ready to move. The Kovykta project could generate a stable energy relationship between Russia, China and South Korea that would lay the basis for other forms of cooperation in the future159.

Other advocates for Kovykta made the point that if this opportunity was lost, China and South Korea would have to source LNG from places like Indonesia, Australia and the Middle East, reducing the US opportunity to buy LNG from these markets160. At this time, China too made the point that it had other alternatives although it was very supportive of the Kovykta project161. And indeed China has signed deals with those providers for LNG. Moreover, the advocates for Kovykta noted that if the project did not go ahead on a timely basis it would wither because China and presumably South Korea would have to rely on LNG162. As it turned out, that is exactly what Gazprom wanted, especially once it bought a large share of Rosneft in 1995, subsequently gaining a large stake in Sakhalin’s large LNG deposits. In this way, Gazprom could preserve its (and the state’s) monopoly and eliminate TNK-BP’s threat to its monopoly even if Kovykta and other deposits were not utilized on a competitive basis. By February 2004, Russia was compelling Rusia Petroleum to pay much higher taxes, Gazprom had refused to buy a minority stake in the

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Kovykta project and the government was already threatening to revoke TNK-BP’s licence to operate the Kovykta field163. By September, the government’s threat to revoke the company’s licence was made public164. The interested parties were well aware of what was transpiring here and it had little to do with alleged irregularities on TNK-BP’s part. As a South Korean newspaper observed: The adequacy of the project had already been evaluated, and even signatures from Russia, China and Korea had been exchanged in Moscow last November…. Russia’s plans to suspend the project cost an estimated total of US $15 billion and relates to Russia’s move to nationalize the nation’s energy sector. On September 14 [the day before the threat to revoke the licence was publicized] the Russian Government approved of the merger between the gas company Gazprom and the oil company Rosneft, which are both operated by the state. The public oil company Yukos, currently experiencing its worst financial setbacks after conflicts with the Kremlin, will most likely be nationalized. Others predict that Russia will establish a corporate energy structure similar to Saudi Arabia’s, which directly controls the energy sector. However, Korea, China and a number of other related nations have already invested capital into the Russian energy market and will resist by all means before this happens165.

By this time, not only was the project on the rocks, Gazprom had also pulled out of PetroChina’s projected EastWest gas pipeline, and other developments suggested that natural gas imports from Russia to China would not match expectations. At precisely this time, a US conference concluded that:

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While Chinese authorities have emphasized developing gas pipeline supplies from Russia – both East and West Siberia – recent plans by CNOOC, SINOPEC, and PetroChina suggest that LNG imports could play a bigger role than planned due to the problems of developing transnational pipelines. Also, LNG costs are considerably lower than pipeline gas from Russia or Western China and therefore are undercutting pipeline gas projects. The Kovykta East Siberian gas pipeline proposal is being held up by several issues. First, Gazprom is designated as the sole coordinator of gas exports to Asia, but BPTNK owns the Kovykta project. Second, Gazprom is seeking much higher gas export prices from China than BP-TNK feels are realistic in light of potential competition from lower LNG prices. Third, Gazprom and BP-TNK disagree on the pipeline route. Another problem is that South Korea’s Kogas has become frustrated by Gazprom’s delays on the pipeline and is moving instead to buy LNG, which undermines the volumes needed to make the Kovykta pipeline economic. Difficulties in finalizing the pipeline route and prices are likely to fuel LNG growth in China and push back by years the completion of the Kovykta gas route166.

By 2005 it was clear to both China and South Korea that Gazprom would not let the project move forward, despite their governments’ continuous diplomatic importuning and pressuring of Russia. In spite of continued Chinese diplomatic efforts to push the project forward, in November 2004 South Korean officials and Kogas executives were publicly speculating that the project was dead and would bypass both China and South Korea. Russia planned to build LNG terminals on its coast at Nakhodka and ship LNG from Sakhalin to its Asian customers, including China who was building LNG terminals on its coast167.

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In April 2005, the Russian Government announced its support for Gazprom’s participation in both Kovykta and Sakhalin gas projects168. By July 2005 South Korea’s Centre for Energy Research, Northeast Asia (CERINA) concluded that the future of this pipeline was ‘uncertain’ because Russia had not yet completed plans to develop natural gas resources in Eastern Siberia, ie its Unified Gas Supply System (UGSS)169. By October, Gazprom had definitively vetoed the Kovykta project as making no economic sense, confirming that it would force TNK-BP to give it up or use it to supply the domestic market at belowmarket share, making operation of that site unprofitable for foreigners. Meanwhile, South Korea and China would have to make do with supplies of LNG from Sakhalin where Gazprom, by virtue of its partial merger with Rosneft, now owned equity in gas projects170. Deputy Chairman of Gazprom Aleksandr Medvedev stated that Moscow opposed letting any customer, for example China, capture strategic Russian assets, echoing Kuprianov’s statements (see Chapter 2, section entitled: ‘Competing sources of supply’). Medvedev said, ‘All history of our exports shows that we never sell gas from any particular field; we are always selling gas from our transportation system171.’ However, the danger for Russia here is that the mistrust and ill will garnered thereby will lead China and South Korea to seek deals with other, cheaper producers of LNG, such as Australia, Indonesia and Qatar, also obtain gas from Kazakhstan, which is looking to build a pipeline east from its Karachaganak gas field172. Indeed, recent gas deals signed by China with the aforementioned states and announcements of Kazakhstan and China’s interest in building a pipeline to parallel the bilateral oil pipeline reveal China’s

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continuing quest for multiple and diverse suppliers. Thus in December 2005 Viktor Vekselberg, Executive Director for gas projects of the Rusia Petroleum syndicate, which operates Kovykta, announced that China was ready to buy 20 billion cubic metres of gas from Kovykta on top of its current imports from Sakhalin. Vekselberg urged that there be speedy completion of the single gas extraction, export and supply system called for by Gazprom, warning that even if it started now (December 2005) China would only be able to buy gas in 2012. He duly warned that China was planning to pursue alternative energy sources and build seven LNG regasification terminals. Vekselberg warned that ‘if those [Chinese] plans are realized, Russian gas reserves may not find a buyer173’. At the same time, President Putin informed South Korean President Roh Moo-Hyun in November 2005 that the Kovykta project would not be providing gas to South Korea despite earlier promises that Russia would build such a pipeline. Roh was reportedly so angry that he did not even mention the project in their joint press conference174. It would be mistaken for anyone to think that Vekselberg’s pleas for speed will generate action, as Gazprom continues to obstruct any hope of TNK-BP operating an export business there175. As of early 2006, the Kovykta project appears to be in limbo and for South Korea and China to obtain gas from Russia they must now go to Sakhalin or other suppliers. While they will undoubtedly have to buy from Sakhalin and Gazprom, it is also clear that they would have bought still more gas from Kovykta if it was available and that they are searching elsewhere (and not without success) for alternatives to Sakhalin and Gazprom, because they now know they cannot rely upon it either for honesty, predictability, or efficiency.

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It is not clear how Russia benefited thereby. However, the above episode, the oil pipeline controversy to be discussed below and Russia’s efforts to muscle into Central Asian energy issues all show that one motive of its monopolies was to squeeze every possible dollar out of potential customers, even if that set back the actual project by years and led them to seek alternatives. In this context it is clear that the priority for these firms was retention and protection of their monopoly against all competition and rentseeking behavior toward that objective. In this case, and as we shall see in the oil pipeline issue, Russia has managed to alienate East Asian customers and drive them to seek alternatives like LNG while foregoing immense revenue. Russia has also failed to develop its own energy industry to satisfy either foreign or domestic customers and obtain foreign investment. But given high global prices, Russia’s monopolies have been able to use state power to drive their competitors underground or out of business as in Yukos’s case. Thus monopoly in economics has accompanied or paralleled the accelerating trend toward monopoly in politics.

Angara-Daqing or AngaraNakhodka: the unresolved oil pipeline question The chronicle of the policy debate over the question of an oil pipeline from Russia either directly to China or to Russia’s Pacific coast and then to Japan parallels the still unresolved issues involved in exporting natural gas to Asia. Here again, China has laboured mightily for over a decade to obtain a secure, large annual oil supply from Russia, only to be disappointed. While China sources oil from

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Russia it only gets it by rail, a most unprofitable means of export. Although this is still profitable at US $70 a barrel, should the price of oil decline, China will be paying an unjustified subsidy for the renovation of Russia’s decrepit railways at an equally unjustified oil price. So this is hardly a solution to its problems or needs. Moreover, the issues involved in determining where an oil pipeline should run from Siberia to Asia have raised the same issues as in relation to gas. Indeed, the question of an oil pipeline again results in the intersection of two questions. Firstly, China and other states’ demand for energy and Russia’s capacity for solving those needs and secondly, the issue of monopolization versus private ownership and control. As in the gas experience, monopoly has won at the expense of a speedy, rational and mutually profitable resolution of Asian energy needs. When the discussion of an oil pipeline to China became serious in 2002–2003, it intersected with Rosneft’s already visible project to swallow up private oil firms and Transneft’s determination to hold onto state control over the Russian pipeline network176. This question was from the outset a prime issue for confrontation with the state energy sector, which even now seeks to extend its ownership and control, (eg to the automobile industry in Russia177). The issue of an oil pipeline from Siberia to China was discussed throughout the 1990s. In 2001, Russia’s Energy Ministry and representatives of oil firms spoke in support of a Russia-China pipeline and the preparation of a feasibility study for a projected pipeline from Angara (situated along the Angarsk River) in Siberia to China’s main terminal in Daqing. In the projected first phase of the pipeline’s operation (2005–2010)

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Russia was supposed to supply China with 20 million tons of oil annually, eventually increasing this to up to 30 millions tons per year. The cost of actual construction at that time was put at US $1.222 billion178. China’s official newspaper People’s Daily later archly stated, ‘Thus there should have been no more suspense regarding who will be the purchaser of oil in the Far East179.’ Yet from the start of the project there were complications. Writing in 2002, US geographer Leslie Dienes observed that: Given joint federal and provincial ownership of subsurface resources, Russia’s regions have legal power to share in decisionmaking on mineral extraction. If pipelines to China in fact are finally built, it will be very difficult politically for the Russian Government to approve large volumes of exports without retaining a substantial portion for the regions themselves. This would make upfront investment on pipelines larger than required by the export volumes alone180.

Perhaps this consideration lies behind subsequent efforts by Moscow to gain exclusive control over mineral and subsoil rights in the new legislation that was supposed to be offered in 2005. The argument about providing for domestic needs, particularly in a region subject to blackouts, was regularly used to challenge the idea of exporting energy to China. Another factor leading to problems in implementing the feasibility study and the subsequent deal in 2002 was the fact that Mikhail Khodorkovsky’s company, Yukos, was the supplier of the energy that would go to China and was pressing the government to allow for private control over the pipelines. Khodorkovsky claimed that the main obstacle to Russian energy

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exports was state control over pipelines and the ensuing monopoly orientation of Transneft and its leader Semen Vainshtok181. Khodorkovsky quite correctly argued that one major motive of Vainshtok and Transneft was personal enrichment and rentseeking, but this stance did not win him more friends in the government, in fact it did quite the opposite. By September 2002, Transneft had begun to oppose Yukos’s plans openly. It argued, as others would continue to do, that it was against Russia’s interest to tie large oil export and transport decisions to a single customer, no matter how solid political relations with China were. It also charged that Yukos would not be able to meet its delivery commitment to China. Transneft’s project, which was for a pipeline from Angara (Siberia) to Nakhodka on the Russian Pacific coast with an oil-loading berth at Perevoznaya Bay would allow Russia to sell to Japan, China and South Korea, and even to the United States. Transneft estimated the cost of the pipeline as being US $4.5 billion and that it would have a design capacity for 50 million tons a year, or 900.00 barrels per day. Yukos, for its part, argued that the cost of its project (Angarsk-Daqing) would be US $1.7 billion (already up from the 2001 figures) and would lift its shipments from 27,000 barrels per day to 540,000 barrels per day (or 30 million tons a year). Yukos also revealed that in August 2002, CNPC had agreed to buy 20 million tons a year by 2005 and 30,000 tons a year by 2010, and that it would lend Yukos half the cost of constructing the pipeline inside Russia182. Thus many of the concerns about Russia bearing the exclusive cost of this pipeline were unfounded. Nevertheless, once again China thwarted its chances by demanding too low a price for the energy it sought to buy. During the second half of

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2002, as it entered into negotiations with Moscow and Yukos, China asked for an oil price of US $12 per barrel, which was about half of the going market rate. Naturally Russia refused and the negotiations stalled in November 2002, just before the Duma moved to bar the sale of Slavneft to China183. Other issues such as financing, concerns over technical questions of drilling in Siberia and the level of reserves available also slowed the negotiations184. However, rather than try and revive the talks, Transneft apparently prevailed upon President Putin to approach Japan, clearly in an effort to undermine Yukos and to force both China and Japan to cough up subsidies for its preferred project185. Indeed, some reports say that the Minister of Energy Igor Yusufov approached Japanese officials in May 2002 suggesting a deliberate effort by the government to set up a rivalry between China and Japan186. As it turned out, this gambit succeeded probably far beyond Transneft’s dreams and set in motion a chain of events that continues to this day, because Japan was only too happy to oblige and make its own counter offer in early 2003. Japan was willing to jump into the fray for the following reason: as war with Iraq became increasingly likely in 2002 and posed a threat of interdicting Middle Eastern supplies, Japan began buying Russian oil. Japan’s Ministry of Economy, Trade and Industry came to regard these purchases as a priority project along with the revival of nuclear power to make up for the loss of the Saudi Arabian-controlled oil field at Khafji in 2002. It estimated that the pipeline project would cut Japan’s dependence upon Middle Eastern oil from 90 per cent of its total to 65 per cent. These sources also charge that Transneft’s early support for Japan

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was really in response to a government order to invite Japan into the project because Gazprom and Rosneft were pushing it187. In that case, the invitation to Japan would have come from the top once talks with China stalled. Other sources charge that Transneft was behind the invitation to Japan and that it made this offer in April 2002, arguing that dependence upon a single customer for a pipeline was unwise188. Therefore it is unclear which party made initial advances towards Japan, but it does seem clear that the Russian Government invited Japan to agree to better terms than China would at this time. However, a pipeline to Nakhodka (on Russia’s Pacific coast) rather than to Daqing (China) would be 60 per cent longer and cost three times as much, indeed almost US $15 billion as was estimated at the time. Nevertheless, Japan took the bait and in early 2003 it evidently offered to buy onefourth of its oil exports from this pipeline and pay US $5 billion towards its construction189. Another factor working in Japan’s favour may have been its belief that it could thereby induce Russia to reach a comprehensive political agreement with it, ie movement toward a formal peace treaty ending World War II and resolving the status of the Kurile Islands that Japan wants back. Obviously a major pipeline deal with Japan would also reduce the threat posed by the Sino-Russian agreement and arms sales that Japan had also come to see by this time. Thus Japanese Prime Minister Junchiro Koizumi and President Putin agreed in January 2003 to undertake a feasibility study and examine the possibility of a pipeline to Nakhodka. On the eve of Koizumi’s visit, Japanese government officials communicated to the Russian Government their readiness to buy up to

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1 million barrels per day to justify building a pipeline to Nakhodka190. Once again, though, this announcement and decision were proclaimed on the basis of insufficient economic analysis. As a Chinese newspaper observed: People on the Russian side who supported the change were of the view that after crude oil is transported to Vladivostok or Nakhodka, Japan and the Republic of Korea (ROK) in addition to China, will be able to purchase crude oil from Vladivostok or Nakhodka. Actually, China, Japan and the ROK so far have not made any purchase commitments. Constructing an oil pipeline before agreeing with the buyers on the volume of oil supplies and the price of crude oil is not in line with the market workings and international practices191.

These developments undoubtedly annoyed China considerably, coming as they did on top of the exclusion from Slavneft. But China said nothing directly in public. Nevertheless, it does seem clear that Transneft was sending a message to Yukos (and other companies) who wanted private pipelines and control over their product. By late February 2003, Transneft officials had changed their tune to say that they thought the pipeline to Nakhodka was unprofitable and hence not economically justifiable (inasmuch as it had not decided to move on the pipeline on the basis of sound economic principles, this is hardly surprising)192. At the same time, Transneft abruptly turned away 400,000 barrels per day of Russian oil exports from Yukos, Lukoil, TNK and Rosneft, the first three companies being among the group that were all trying to break free of Transneft193. Chinese officials may have purposely held their fire, because on 7 February 2003, Russian Energy

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Minister Igor Yusufov proposed a so-called ‘two in one’ plan as a compromise. This plan: Consolidates the original Angarsk-Daqing pipeline (Sino-Russia pipeline) and AngarskNakhodka pipeline (Pacific pipeline) into a single pipeline. A secondary pipeline will branch off from the main AngarskNakhodka pipeline and go through the outskirts of Baikalsk [in Siberia’s Irkutsk region] to reach Daqing, China. It will also be extended from Chita, near the RussiaChina border to Nakhodka on the Pacific Coast. The Chinese portion of the pipeline will be given priority. This plan is viewed as the most attractive plan as far as Russian interest is concerned194.

This proposal would satisfy China’s needs and it would also allow Russia to attempt to also fulfill its agreement with Japan, therefore appearing likely to satisfy officials in at least two, if not three, countries195. It also evidently satisfied the Russian Government because in March 2003 it gave its approval to Yusufov’s compromise, believing that this decision would maximize foreign exchange for its oil exporters and tax revenues from the two pipelines to Transneft and thus the government. Even though the priority would be assigned to the Chinese portion of the pipeline, this compromise could not designate when the second phase to Nakhodka would begin. This was because Russia would still have to supply at least 80 million tons of oil after the trunk and feeder pipelines and it still lacked that capability. Furthermore, Russia would still need US $1.5 billion to build the pipeline to China and then US $5 billion to build the line to Nakhodka196. In other words, the pipeline would be built without any idea of Russia’s actual capability to utilize it profitably.

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Unsurprisingly, Transneft now asked the Japanese to cover any financial deficits incurred in building the pipeline under this compromise197. Russian sources also reported that in order to make Yusufov’s compromise a success Russia was trying to make China finance the project to Daqing in its entirety, eg from its pre-existing debt198. Russia was evidently trying to induce both Japan and China to make large subsidies to complete both halves of the project; in other words, Russia had started a bidding war199. Japan apparently promised to take all the oil that China did not need and to give credits, while China pledged to take the oil, build the pipeline to Daqing including part of the Russian side of that line and pay for the construction of a nuclear power station in China200. During the first part of 2003, China continued to profess confidence that its pipeline would win this competition. As late as September 2003, government officials were proclaiming that this was the official option of the Russian Government, which had not changed its mind201. Chinese experts evidently believed that the Russian compromise proposal to build both pipelines would come to fruition. Russia would build an AngaraNakhodka pipeline and a branch from Baikalsk to Daqing, even though there probably was not enough oil to justify one, let alone two, pipelines, a fact that worried Russian officials and undoubtedly contributed to the delay and desire to force Japan and China to invest in these projects202. Some Chinese media reported that the Chinese pipeline, designed to deliver 20 million tons annually and 30 million tons by 2010, would be built before the pipeline to Nakhodka203. China was also ready to sign a binding contract for 20 consecutive years to overcome Russian fears of

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being vulnerable to a monopolistic consumer204. Yukos actually signed contracts with China in May 2003, at a price that was advantageous to Russia and not China (which had earlier been looking for a lowered price). However, the increasingly tense struggle between Khodorkovsky, Transneft and Putin indicated that Moscow was in no hurry to move on this issue and by midsummer 2003, no progress had been made205. In fact, Russian Governmental spokesmen went back and forth, first supporting pipelines to Nakhodka and then to Daqing, or saying that there would be a subsequent final statement throughout the middle of 2003, indicating confusion, struggle and an unwillingness to decide conclusively206. Indeed, some Japanese officials were beginning to feel that Moscow was deliberately stalling to get a better deal207. By then Transneft, too, had suddenly woken up to the absence of sufficient deposits to justify the Nakhodka line and argued instead on behalf of its geopolitical merits of improving ties to Japan and avoiding dependence on China208. In this respect, it agreed with Prime Minister Mikhail Kasyanov who had worried about the insufficiency of oil in Siberia from the moment the Russian Government approved the Yusufov compromise in March 2003209. But it did succeed at this time in ousting Yukos from the financing of the pipeline to China, suggesting that its main motive was to hold onto its monopoly at whatever cost210. Reportedly, both Japan and China were also now offering very generous financing terms to Moscow, indicating another benefit to Russia of the new rivalry, ie it could press both of its suitors for ever better payment terms, either to pay for the entire pipeline or lend it the money without demanding that Russia actually guarantee the

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loans. By July 2003, Japan was reported to be offering a total of US $10 billion assistance to the project in order to deny it to China. This subsidy included both funds for the pipeline and supposedly US $1 billion for ‘local projects’ and by July for so-called ‘easy-term state credits’ to finance the pipeline211. Similarly, China announced it would pay more for the pipeline to Daqing212. Yet the summer and autumn of 2003 passed without any final decision and the Yukos case became a large, indeed the major, political issue in Russia precluding any decisive moves on the Asian pipeline question until Yukos’s and Khodorkovsky’s fate were resolved. The fact that the economic viability of either pipeline was still not resolved by this point certainly contributed to the delay, but it also reinforces the suspicion that extra economic motives played a large role in preventing the Russian Government from making a decision. Indeed, the preliminary estimates of the Russian Ministry of Energy suggested that the Angarsk-Nakhodka pipeline only made economic sense if South Korea and Taiwan also contracted to buy large volumes of Russian oil on a steady basis213. Similarly, the Russian Government made it clear that it would not bear the burden of guarantees for financing the project, stating that it would fall to the oil and or gas companies to finance these projects – clearly an impossibility and a subtle announcement to Japan and China that they would be expected to subsidize the pipeline if they wanted its oil214. Japan even stated that it would provide such low-cost loans without state guarantees, presumably these being the ‘easy-term credits’ referred to above215. Likewise, the Ministry of Energy vetoed the two different proposals for pipelines, one by Transneft to Nakhodka around Lake Baikal and Yukos’s project to

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Daqing, on environmental grounds, all the while proclaiming piously but falsely to China that since oil companies are private companies, agreements about pipelines were governed by agreements between companies not governments216. Nevertheless, the Russian Government promised in October 2003 that whatever decision was made, Russia would send more oil to China, either through a pipeline to Daqing or through a branch pipeline from Nakhodka or by rail, the latter proving to be the temporary solution as the government could not make up its mind about a pipeline217. Probably this was due to the insistent Chinese and Japanese pressure for a decision and Russia’s growing strategic amity with China on geopolitical issues against Washington. This consideration probably led Putin, who clearly was the target of Chinese complaints about Russian bad faith (not an unjustified complaint either), to ensure that China got its oil so that Russia’s main ally was kept happy, even if it did not get a pipeline. Even so, at this time, ecological and other issues also made themselves felt. The argument was that the proposed pipeline to China would cause serious ecological damage to Lake Baikal (in Siberia’s Irkutsk region), while by building the pipeline to Nakhodka, Russia would also be able to develop three untapped oil fields in Eastern Siberia and produce 7–8 million tons per year there. Supporters of the pipeline to Nakhodka also latched onto this last argument about developing other pipelines and energy projects in Siberia218. But there is also reason to believe that whatever merits these oppositions to the pipelines had, environmental factors may have been used to cloak other agendas. As a result of these environmental issues and the continuing lack of belief that there was enough energy to justify one or

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both pipelines, nothing was done and the project was delayed till at least 2006, rather than the projected starting date of deliveries which had been in 2005. As it is today, nothing will be transported by pipelines until 2008, costing both Japan and China three years of overpriced and insufficient quantities of oil219. By the end of 2003 and throughout 2004, it became clear that Russia could not or would not come to a conclusion about the destination of the pipeline and also that this issue had become (as noted above) a major struggle among partisans of either route within Russian official circles and between China and Japan. In September 2003, it was reported that no decision would be forthcoming for another year, setting back any pipeline construction to at least 2007220. Russian Governmental paralysis continued through 2004. Prime Minister Mikhail Fradkov, Kasyanov’s successor, insisted that economic reforms were being undertaken to foster conditions favourable to foreign investment in Russia, including projects to ship energy to the East. However German Gref publicly warned that the government’s temporary denial of new fields to private oil firms, the lack of development of new prospecting work and overly high mineral production taxes were all depressing growth in oil production and exports. Regardless, Fradkov would not let private investors take either the energy fields or the pipelines under their control221. Also, by midsummer 2004, when China suffered blackouts from a lack of energy, there was considerable disappointment over Russia’s clear inclination to accept Japan’s offer of founding the pipeline to Nakhodka. Russia at this time was pressing Japan to sign an energy cooperation agreement222. Beijing’s disappointment and concern was expressed not only in

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China’s accelerated interest in Azeri and Kazakh energy sources, but also possibly in PetroChina’s backing away from a previous project to internationalize the gas pipeline from Western to Eastern China through partnerships with Gazprom, Exxon-Mobil and Shell. Certainly the Chinese were not shy about publicly venting their scepticism and dismay over Russian energy policy at this time, possibly with the added consideration that such statements would clearly raise the possibility of Beijing’s defection from partnership with Russia, something that Moscow cannot afford in geopolitical terms223. Not surprisingly, by 2004 China’s unhappiness at Russian delays, if not chicanery, was visibly mounting. The British analyst and former Australian diplomat Bobo Lo of the Royal Institute of International Affairs, observed that: Disputes about the pipeline issue threaten to grow into the harshest crisis in relations with China after the breakup of the Soviet Union. Many people will take changing of the route as a fundamental reorientation of the foreign policy of Putin and transition from geographic ‘balancing’ to a more certain strategic adherence to the West224.

China’s new strategy gradually emerged throughout 2003–2004. During this time it became clear that Moscow was going to ‘destroy’ Yukos, China’s main oil supplier. Although China desperately wanted the oil flow from Russia to its energy-starved northern provinces, it decided to hedge its bets and increase its interest in energy pipelines from Kazakhstan and other sources225. At the same time, Beijing placed steady and enormous pressure on Russia to fulfill its promises, no doubt reminding it that the future of the Sino-Russian partnership was at stake. For instance, the Chinese on-line newspaper:

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www.oilnews.cn stated that officials hoped that Sino-Russian oil problems would be resolved but also that ‘continued cooperation with Russia is now “a matter for discussion226”’. The turn to Kazakhstan was also clearly intended to show that China had alternatives besides Russia in Asia. Beijing therefore also announced that it would not invest in the projected pipeline to Nakhodka, undermining its chances of realization, because if a major intended consumer would not invest, then this might deter other foreign investors that Russia needed, as even Japan’s offer of aid could not cover the rising costs of that pipeline227. And while China piled on the pressure it was able to secure Putin’s pledge that no matter what, China would receive oil (in this case by rail) amounting to 15 million tons by 2006 and that China would pay the Russian railway system rather than Yukos, which was clearly ‘dying’. This way China got its oil, albeit at very high prices, and Russian railways got a foreign subsidy for their renovation228. Russia and China also claimed to have agreed on formulating a plan for cooperative development of natural gas to compensate for the end of the East-West pipeline project and of Gazprom’s role in it229. Not to be undone, during 2004, Transneft proposed a compromise entailing a pipeline that would branch off from the newly proposed route to Nakhodka. It would begin at Taishet, some 250 kilometres further west of Angara (making it even longer than the originally proposed pipeline to Japan) and branch off the Nadhoka pipeline to Skovorodino near the Chinese border in the Amur region. It would take three-and-a-half years to build it and it would carry 175 million barrels of oil annually from Western Siberia, part of which could be redirected to China and the rest would be transported from Nakhodka.

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However, once again, there was insufficient economic analysis. To justify this route the proven reserves of Eastern Siberian fields would have to total 590 million barrels and the cost for exploring existing reserves was US $3–4 billion230. Since Russia had already spent US $3 billion in 2003 for geological surveys of the entire country, this cost far exceeded what Russian companies could offer, making this proposal doomed. By October 2004, when Putin traveled to China for a state visit it was clear that he felt the pressure. In his interview with the Chinese media he refused to make a decision but insisted, as had Russian diplomats earlier, that any decision must be carried out on the basis of Russian national interest, which included development of Siberia and the Far East through major infrastructural projects there231. At the same time he stressed that Russia took China’s interests very much into account and that such interests also encompassed development of transport infrastructure and the ensuing stimulation of further exploration to strengthen the development of Asiatic Russia. He also said that Russia would help China and its people plan energy consumption on a more stable basis. However, despite rumours that Moscow had shifted its preference to China it proved impossible to make a decision about a pipeline in 2004 and further complications ensued in 2004–2005232. Even though the Russian Government announced a decision in favour of the Taishet-Perevoznaya Bay at the end of 2004, enormous bureaucratic obstructions remained in the path of any decisive decision. Russian scientists continued to oppose this pipeline on environmental grounds233. Russia may have opted for Japan at this point because Tokyo, unlike Beijing, was prepared to invest large sums of capital in Russia and was apparently not

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pushing the return of all four Kurile islands to Japan at this time, even though some Japanese investors remained concerned about the continuing absence of a peace treaty and a decision on the return of the islands234. But both the Minister of Natural Resources Yuri Trutnev and the Ministry of Economic Development and Trade, led by German Gref, opposed Transneft. They did not want the government to fund the pipeline and instead wanted the oil companies providing the oil to fund it but not to claim ownership. Gref also worried that the pipeline could not be filled to its maximum capacity. At the same time, it also became clear that China or its partisans in the Russian Government had managed to secure for it the proviso that the pipeline branch through Skovorodino would be built, ensuring oil supplies to China by pipeline once it was constructed and by rail in the meantime235. This came about because the pipeline decision now intersected with the question of how to dispose of Yukos as it fell apart under government pressure. Challenged from the outside by lawsuits in US courts and short of capital, Rosneft (probably anticipating a merger with Gazprom) had to approach Chinese banks for a US $6 billion loan to buy out Yuganksneftgaz, the core of Yukos. Apparently the Russian Government and Rosneft even dangled in front of China the idea of owning equity in this company. But while China issued a loan it would not make the same mistake twice of trying to buy equity in Russian companies only to encounter resistance. Instead, China loaned Rosneft the money, which it may have used to cover the buyout of Yuganskneftgaz, but did not buy equity in the company. Instead, China ensured that it would receive 48.4 million tons of oil starting in 2005 and to be

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completed, whatever pipeline was built, by 2010. In other words, the payment was collateral for the rail shipment of oil to China by Rosneft, which took over Yukos’s responsibilities236. In return, Minister of Energy Viktor Khristenko now said that a branch from the proposed pipeline to Nakhodka would go to China through Skovorodino237. China also now promised to build its own pipeline from Skovorodino to Daqing, pay for it and be the only customer238. Fortunately for China, Japan now stepped up its own policy, proclaiming that it would only accept a proposal ensuring the return of all four Kurile Islands to Japan as part of a peace treaty with Russia. Although it had been silent on this point during 2004, domestic pressure evidently forced this new line and it clearly disappointed Moscow239. Indeed, Moscow still believed at this time that Japan and China would invest in Siberian pipelines no matter what happened240. Now Trutnev’s Ministry of Natural Resources missed no time in stating that it viewed the South Kurile Islands as Russian territories that were of strategic importance to Russia and that they would be developed for energy and mineral holdings. It claimed that there could be as much as 360 million tons of oil reserves beneath and around the islands so there was no way they would be returned to Japan241. Not surprisingly, since there were no longer any political gains to be harvested by inclining toward Japan, the tide now turned towards China. Despite everything, China had secured reliable supplies by rail, albeit at very high prices, and Japan had angered Russia by its insistence on returning all four of the Kurile Islands. On 6 April 2005, Russian Presidential Advisor Viktor Ivanov formally announced that the pipeline to China would receive priority and the line to

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Skovorodino would be the first branch of the pipeline to the Pacific242. Putin finally stopped being coy about the destination of the pipeline in July when he used the G8 Summit in Gleneagles to announce that China would indeed be the priority for oil supply243. Putin tied this plan to the development of oil fields in Eastern Siberia, which would lead to China receiving 20 million tons of oil a year. Since then the annual figure for China in 2005 was scaled back to 15 million tons, but subsequent Russian statements have confirmed China as the priority despite Japanese efforts to persuade Putin to reconsider this choice. Indeed, was at this point that Russia let it be known that it would not need Japanese capital to build a pipeline through Siberia to the Pacific244. Meanwhile, official analysis by Trutnev’s Ministry has confirmed that Russia can only produce 50 million tons of oil annually by 2016, while it will need 80 million tons to fill the pipeline to capacity. Some 30 million tons will have to be taken annually from refineries under optimal production conditions that would only be reached in 2016. In other words, Eastern Siberia and Russia will have to sacrifice energy to uphold the contract to China245. Throughout 2005, Japan was nonetheless still trying to pressure Russia for a pipeline246. But it was clear that not only would a pipeline to China enjoy priority, but also that companies like Rosneft and Transneft were discussing new oil and gas supply projects, including pipelines with CNPC and SINOPEC. Indeed, in May 2005, Viktor Khristenko announced that the pipeline to the Pacific Coast would not be up and running until 2012 and that Japan would still have to offer subsidies in order to get that pipeline247. Russia was also transporting large quantities

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of oil, as promised, by rail, but it refused to commit itself, as China wished, to a formal intergovernmental agreement. At the same time that Putin tried to keep the door to Japan open, most likely to induce Japanese investment in Russian energy and the overall Russian economy, Moscow published a plan for the pipeline to Skovorodino and revealed that discussions with Japan and South Korea over oil and gas pipeline routes to those countries from Siberia were not making much progress.248 By the end of 2005, it was clear that Russia had alienated Japan needlessly, despite the unresolved issues in the Russo-Japanese relationship and that China could not rely completely upon its promises. Worse, the capital to build the pipeline to either country was still not available nor was there any reason to believe that there would be enough oil to ensure that doing so would be a rational economic move or one consistent with the true interest of the Russian people or state249. Indeed, under conditions of growing domestic demand, continuing subsidized domestic prices, decrepit infrastructure, falling oil production and the visible inefficiency of the state sector in energy, one cannot blithely accept Putin’s and his officials’ promises that ‘all will be well and that everyone will be happy’. Despite this, Russia has committed itself to both Japan and China. In November 2005, Putin forced Trutnev’s ministry to accept the proposed route to the Pacific Coast at Perevoznaya Bay, despite its openly

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expressed misgivings about the ecological danger inherent in the project. Then, on 6 January 2006, in the midst of the continuing crisis with Ukraine, Putin publicly stated to the Economic Development and Trade Ministry and railway officials that he expects construction of the Taishet-Nakhodka pipeline to begin this year. Also, that the development of Yakutia could provide a foundation for the general development of Eastern Siberia and that domestic and foreign investments should be brought in to accelerate that task and justify the pipeline to Nakhodka. He also said that not only would an oil pipeline be built, but that a gas pipeline would also be constructed. He called for private investment to relieve the burden on the state (essentially a demand for private investors to subsidize the state and assume its risk under highly unpalatable conditions of risk to their investment). Russian officials also called on Japan to join in the pipeline project to the Pacific, possibly because Japan has apparently acted on its threat to pull out of the project if the pipeline goes to China. This would also explain Putin’s calls for private investment to develop Yakutia and Eastern Siberia. As this pipeline is built, the first installment will be to Skovorodino and thence to China through Chinese pipelines that should be finished by 2008250. Finally, Russia and China will collaborate on further energy projects with China getting some 8 million tons of oil by rail in 2006 and twice that amount in 2007251.

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Conclusions Developments in early 2006 should, if anything, reinforce scepticism that Russia will finish either pipeline on schedule or that there will be enough oil to satisfy China or Japan’s rising demand as well as the rising domestic demand of Russian consumers. Neither is it very likely that the foreign investment Russia counts on will be forthcoming. The Russo-Ukrainian crisis of 2006 (when Moscow shut off gas transit to Ukraine to: compel it to accept an outlandishly high price that it could not afford, surrender control of its gas sector to Russia and to undermine the Yushchenko Government) has raised global doubts about the wisdom of relying upon Russia as a reliable provider of gas or oil whether it is to the CIS, China, India, Japan or Europe252. Worse yet, is the fact that Russia thereby unilaterally broke its own 2004 contract with Ukraine, a further sign of its unreliability as well as its willingness to step on contract rights for political gains. Beyond those weighty considerations lie others that are equally important for both China and Russia. First, for China it is clear that it cannot rely on Russia to deliver either of the amounts of oil and gas contracted for at a reasonable price or to do so on schedule. Likewise, any hope of equity ownership in Russia is out of the question. Therefore, China must reconsider its entire energy strategy and there are abundant signs of its having done so, even if the process is incomplete. Since 2003, China has started its own strategic reserve, made major deals for oil and gas with Iran Saudi Arabia, Indonesia, Australia,

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Venezuela, African states and Central Asia. The Central Asian AtasuAlashankou pipeline (from Atasu in Kazakhstan to Alashankou on the Kazakh-Chinese border) is China’s first import pipeline intended to import Kazakh and Russian oil to China by 2007, when China’s domestic pipeline and refinery capabilities catch up to it. Only in 2007 will this 988 kilometre-long pipeline deliver 100–200,000 barrels per day of crude oil to China and it will have to carry Russian oil supplied by Rosneft, as well as Kazakh crude because firstly, there probably is not enough Kazakh oil available and secondly, Russia will otherwise block or impede the project by threatening Kazakh energy interests elsewhere if it is not invited to do so. However, oil and gas deals with Central Asia do not only entail the Atasu-Alashankou oil pipeline. China has also recently leaked hints that it expects the Shanghai Cooperation Organization (SCO) to set up an energy-working group later this year to study proposals for construction of pipelines among the members253. Since China has its own parallel negotiations with Russia for gas and oil pipelines underway, (which have both had a very chequered history) this suggests intensification of China’s search for Central Asian energy, in part because it cannot rely on Russia living up to its past promises. China also is now discussing a gas pipeline with Turkmenistan, which would link up with another possible option, ie a gas pipeline parallel to the AtasuAlashankou oil pipeline from

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Kazakhstan to China. This gas pipeline would bring Kazakh gas to China but evidently a link could be built to allow Turkmen gas to meet up with it254. PetroChina has found 2.4 billion more tons of oil than was predicted in China and internal pipeline constructions to link up China’s northwestern, eastern, and southwestern territories are underway (so as to bring foreign gas and oil to the interior). China has also just signed a gas deal with Nigeria and another with Myanmar, but the Central Asian sources promise greater security because of their proximity to China itself. Despite the deal with Myanmar, which evidently came at India’s expense (as it has long sought a gas deal with Myanmar), China has also now sought to moderate its rivalry with India over bidding for foreign energy sources and in late 2005 filed a joint bid with ONGC for Syrian pipelines255.

An Asian energy association The above joint bid between China and India was a portent of possible Indo-Chinese energy cooperation of a more formalized nature. Indeed, the idea of an Asian energy association has been floated by Chinese and European scholars well before India’s former Minister of Petroleum and Natural Gas Mani Shankar Aiyar formally pursued this as a matter of policy. And when Aiyar came to China in 2005, his Chinese interlocutors even engaged in admittedly speculative, but nonetheless revealing discussions about connecting China in the future to the projected Iran-AfghanistanPakistan-India pipeline, so clearly China has other alternatives in mind regarding Central and South Asian energy256. And if a TurkmenistanAfghanistan-Pakistan-India pipeline project that has been discussed for a

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decade gets off the ground it is likely China will seek inclusion in that project too. Indeed, Pakistan’s President Pervez Musharraf spoke positively about Pakistan becoming an energy provider to China during his February 2006 visit to Beijing257. Were this energy relationship to materialize, it would also heighten the existing nexus between energy, security and maritime power projection inherent in the Gwadar project, but it would also intensify Chinese efforts to help Pakistan remain secure, integral, stable, and non-fundamentalist, given the existence of an uprising in the Balochistan territory which encompasses the Port of Gwadar that China is building on the Pakistani coast of the Indian Ocean258. It is a measure of the urgency of China’s quest for energy and its scepticism, if not outright disappointment, at Russian obstruction and unreliability that these moves suggest reversals in its foreign policy. For example, despite rhetoric about multipolarity, China has usually shunned multilateral discussions about its access to energy. Now it evidently will do so with both India and the SCO. This suggests a search for venues in which to discuss acquiring energy from both Central Asia and Russia, where Russia is not the only player at the opposite end of the table. It also suggests a rising interest in multilateral energy associations that would work against what has hitherto been a wholly unilateral approach to the question of energy security. Such multilateralization will take a long time to accomplish but the signs of Beijing’s interest in this due to policy failures with regard to Russia are unmistakable. At least, in part, these moves are due to the fact that Russia has consistently obstructed China’s quest for independent access to or ownership of Central Asian or Russian energy.

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Multilateralism At the same time, these moves might also reflect a certain scepticism about the virtues of Beijing’s previous unilateralist policy that aimed to establish long-term equity ownership in foreign firms or projects at fixed prices. We see this in China’s call for collaboration with the EU on standards for cleaner energy and hints of a new, more market-friendly approach to energy policy emanating from Beijing259. This earlier unilateralism has proven to be expensive because it has led China to pay for equity ownership in fields at prices higher than the market price and often for energy yields that are not as large as could be hoped for. The new policy, if it is indeed going to be implemented in a multilateral format, could probably prove to be both cheaper and more reliable over time. It could also represent another example of Chinese interest in (and learning from) multilateralism as well as multilateral organizations. If this does indeed become the reality, it will work to erode the Russo-Chinese strategic alliance or partnership against the United States. While Beijing and Moscow see solid political and military grounds for such a partnership, if not alliance, its economic foundation and especially its energy dimension is inherently precarious and will likely remain so for a long time to come. Likewise, the agreement with India to moderate competition for foreign energy fields and share information about potential foreign acquisitions, as well as its recent moves vis-à-vis the EU, have the potential to alter China’s unilateralism and suspicion of the market mechanism as a regulator of its energy policy.260 If those trends do materialize and are allowed to realize their full potential, not only will they affect Sino-Russian relations and China’s relations with Central and

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South Asia, they will undoubtedly also come to exercise a profound influence upon world energy markets. Although Russia’s coercive tactics inevitably forced China back to the Persian Gulf to obtain most of its imports, the China that gradually will appear in the Gulf may be a rather different player than the one we have known before. However, that process will take time and in the meantime there will be no alternative for China but to develop more energy at home, institute energy economies and efficiencies and to return to the Persian Gulf. As it is, OPEC is eager to compete with Russia in China and the recent visit of Saudi Arabia’s king underscores that readiness261. But more importantly, the figures attached to China’s voracious energy demand, Russian dilatoriness and the availability of supplies and readiness of Gulf producers to ship to China are decisive for the short and medium term. That consideration will undoubtedly enhance China’s profile in the Middle East and contribute to its quandary over how to deal with Iran’s nuclear program262. This factor also contributes to the difficulties that already confront Washington in dealing with China in issues of energy and Gulf security.

Monopoly and empire For Russia, the consequences of this energy relationship to date are rather different. First of all, we see that political and economic trends towards state monopoly are pervasive, growing and mutually reinforcing263. Politically, the trend is toward imperialism as is visible in both Ukraine and Central Asian experiences with Russian energy policies. But this only confirms what Russian political scientist Egor Kholmogorov has observed:

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‘Empire’ is the main category of any strategic political analysis in the Russian language. As soon as we start to ponder a full-scale, long-term construction of the Russian state, we begin to think of empire and in terms of empire. Russians are inherently imperialists264.

The economic consequences of this trend toward monopoly are also already making themselves felt in diminished efficiencies of operation, falling rates of growth in energy production and numerous warnings that Russia faces an impending energy crisis, mainly in regard to its gas-fired electric energy sector, which might break down totally by 2008265. Similarly we have already seen talk of Russia’s declining yields and that its oil production might start declining within a decade266. Since Russia is a Petro-state these trends could spell another economicpolitical disaster for it, especially if energy prices fall by any substantial amount. But this is not the only negative possibility that looms for Russia due to its inability to fashion a coherent and effective Asiatic energy policy. Since Russia’s Asian policy is tied to and crucially depends upon its ability to market energy to East Asia, failure to do so reinforces earlier and still visible trends towards marginalization and isolation in East Asia. Certainly, failure to maximize the effectiveness of the energy weapon also terminates any serious hope for restoring Siberia and the Russian Far East to any semblance of economic vitality, a restoration that must underpin any effort to play a powerful role in Asia. Neither will the hoped for multilateral energy association (which includes Russia) materialize anytime soon or prove an effective vehicle for conflict resolution if Russia cannot make good on its promises of energy to Japan, China and the two Koreas267.

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Autarchic practices such as seeking to ban non-Russian-owned companies from prospecting for minerals in general in Russia and ensuring property rights remain insecure in practice, mean that large-scale foreign investment is unlikely to materialize in the energy industry268. BP’s experience at Kovykta and Shell’s at Sakhalin will act as powerful deterrents to any future foreign investment in Russian energy holdings269. The Kovykta and Daqing cases each illustrate that Russian despotism does not provide more coherent or stable state policy, in fact, precisely the opposite. In both cases, bureaucratic factions, each pursuing their own monopolistic interest at the expense of any coherent idea of Russian national interests, have frustrated each other, thereby disillusioning every major player in East Asia concerning the wisdom and likelihood of relying upon Russian energy. Inasmuch as leveraging the promise of that energy is Russia’s ‘main card’ for getting back into the ring in East Asia, none of these factions or the Russian state has achieved what could have been done for Russian interests here. Neither have they secured the foreign investments that Moscow so desperately needs to rebuild its entire infrastructure. Certainly Russia’s decision-making process here has repeatedly ignored economic realities in favour of parochial and short-sighted political or personal gains, led to stagnation in the gas and oil industry and validated every economic treatise ever written on the evils and shortcomings of state control of the energy industry. Suboptimal decision-making is visible everywhere, no coherent concept of state interest has emerged and potential allies or partners have been estranged. These pathologies exist throughout the entire energy sector and are directly visible in falling

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production and the increasing likelihood of Russian energy shortfalls, either in oil, gas or electricity, if not coal, by 2007–2008. Indeed, even though Russia published an energy strategy in 2003 that was supposedly ‘the fruit of mature reflection’ it has already been denounced by high-ranking officials as useless and irrelevant270. Calls for a new energy strategy are already multiplying. While China will probably obtain large amounts of Russian oil and Japan, in time, might do so as well, and although these states and South Korea will also obtain considerable amounts of gas from Russia, it is highly unlikely that they will be able to rely on it to cover their growing needs or that Russia will be able to maximize its capacity to supply them and its own domestic market. Indeed, Japan, like China, will have no choice but to rely increasingly on the Persian Gulf for energy and will have to compete with China for energy coming from Saudi Arabia and Iran271. In other words, those hoping to rely upon Russia as a producer in the East Asian market to reduce the pressure upon consumers there, should expect to be disappointed. Likewise, the Russian people and economy will suffer from a failure to achieve the anticipated revenues of energy sales to the Asian-Pacific market, and Russia’s ability to shape strategic and political outcomes there and elsewhere will also fall short of full realization. These consequences could have a devastating impact upon Siberia, the

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Russian economy and state, not to mention Russian foreign policy in Asia, if not beyond. Certainly this analysis strongly suggests that Russia will fail to overcome the energy and economic weaknesses at the base of Russo-Chinese relations. RussoChinese rivalry over energy issues is likely to continue and if the strategicpolitical issues that have led to their partnership are resolved or other causes for Chinese estrangement from Moscow make their presence felt, Russia’s devious, duplicitous and often anti-Chinese tactics in China’s quest for energy will not be forgotten. Nor will Japan or South Korea forget how difficult and unrewarding their quest for Russian energy supplies has been. Finally, this whole history strongly shows the superiority of market mechanisms over state control. Indeed, even China, as noted above, is cautiously exploring greater movement towards a freer energy market272. Despotism and patrimonialism have once again failed Russia, even as they have again showed the primacy of politics over economic rationality in Russian history and Russia’s present. However, the ‘writing is on the wall’. Without major economic and political reform in this and other sectors the results for Russia will be clear: continuing underdevelopment, stagnation, crisis and, ultimately, possibly even another collapse of an anachronistic system of power.

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Notes and references 1 Ministry of Energy of the Russian Federation. 2003. Energeticheskaya Strategiya Rossii Na Period do 2020 Goda, Moscow. 2 Ministry of Energy of the Russian Federation. 2003. Energeticheskaya Strategiya Rossii Na Period do 2020 Goda, Moscow. 3 Ministry of Energy of the Russian Federation. 2003. Energeticheskaya Strategiya Rossii Na Period do 2020 Goda, Moscow. 4 Alexander’s Gas and Oil Connection 10, 2005. China’s 2006 oil demand to grow 6.5%. No 23 (8 December). www.gasandoil.com/goc/news/ nts54932.htm. 5 Kielmas, Maria. 2005. China’s foreign energy acquisitions: from shopping spree to fire sale? The China Eurasia Forum 3. No 3 (November). 6 Stelzer, Irwin M. 2005. The axis of oil: China and Russia find a new way to advance their strategic ambitions. The Weekly Standard 10. No 20 (7 February). Retrieved from Lexis-Nexis. 7 Lukin, Alexander. 2003. The bear watches the dragon: Russia’s perceptions of China and evolution of Russian Chinese relations since the eighteenth century. Armonk, NY: ME Sharpe & Co; Lo, Bobo. 2004. The long sunset of strategic partnership: Russia’s evolving China policy. International Affairs 80. No 3:295–309. 8 Ibidem. Lukin, Alexander. 2003. The bear watches the dragon: Russia’s perceptions of China and evolution of Russian Chinese relations since the eighteenth century. Armonk, NY: ME Sharpe & Co; Lo, Bobo. 2004. The long sunset of strategic partnership: Russia’s evolving China policy. International Affairs 80. No 3:295–309. 9 Luce, Edward and Quentin Peel. 2004. FT interview Manmihan Singh. Financial Times. 8 November. 10 Ito, Shoichi, V Ivanov, and Z Daojiong. 2005. China, Japan and Russia: the energy security nexus. Conflict prevention and conflict management in Northeast Asia. Ed. Niklas Swanstrom. Uppsala Silk Road Studies Program, Uppsala University. 121–142. 11 Ito, Shoichi, V Ivanov, and Z Daojiong. 2005. China, Japan and Russia: the energy security nexus. Conflict prevention and conflict management in Northeast Asia. Ed. Niklas Swanstrom. Uppsala Silk Road Studies Program, Uppsala University. 139–140. 12 Leverett, Flynt; Jeffrey Bader and the sources cited therein. 2005–2006. Managing ChinaUS energy competition in the Middle East. Washington Quarterly 29. No 1 (Winter); Yoshihara, Toshi and Richard Sokolski. 2002.

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The United States and China in the Persian Gulf: challenges and opportunities. The Fletcher Forum of World Affairs 26. No 1 (Winter–Spring). 187–201. Shambaugh, David. 2005. China’s military modernization: making steady and surprising progress. Strategic Asia 2005–2006: military modernization in an era of uncertainty. Eds Ashley J Tellis and Michael Wills. Seattle: National Bureau of Research, Asia. 77–78. Shambaugh, David. 2003. China’s energy needs and strategies: hearing before the US-China economic and security review commission. (30 October), 77–78. www.uscc.gov; Downs, Erica Strecker. 2004. China’s energy security. PhD disertation presented to the Faculty of Princeton University, Princeton, NJ; Cole, Bernard D. 2003. Oil for the lamps of China. McNair Papers. No 67. Washington: Fort Lesley J McNair, National Defense University; Hale, David. 2004. China’s growing appetites. The National Interest. No 76 (Summer); U.S–China Economic and security review commission 2004 Report to congress and the sources cited therein. 2004. Washington DC: USGPO, (June); Andrews-Speed, Philips, Xuanli Liao, Roland Dannreuther. 2002. The strategic implications of China’s energy needs. Adelphi Papers. No 346.Oxford: Oxford University Press. Dannreuther, Roland. 2003. Asian security and China’s energy needs. International Relations of the Asia-Pacific 3:197–219; Yoshihara, Toshi and Richard Sokolski. 2002. The United States and China in the Persian Gulf: challenges and opportunities. The Fletcher Forum of World Affairs 26. No 1 (Winter–Spring). 63–78; Clad, James. 2004. Convergent Chinese and Indian perceptions on the global order. The India-China relationship: what the United States needs to know. Eds Francine R Frankel and Harry Harding. New York: Columbia University Press. 271–276. Kahn, Joseph. 2005. China’s Leader, ExRival At Side, Solidifies Power. New York Times, (25 September). A1–10. Yoshihara, Toshi and Richard Sokolski. 2002. The United States and China in the Persian Gulf: challenges and opportunities. The Fletcher Forum of World Affairs 26. No 1 (Winter–Spring). Alexander’s Oil & Gas Connections. 2005. US warns China about energy ties to Iran. (28 September). www.gasandoil.com/goc/news/ nts53999.htm. Christoffersen, Gaye. 2005. The dilemmas of China’s energy governance: Recentralization

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and regional cooperation. The China Eurasia Forum 3. No 3. (November). 55–79. Bradsher, Keith. 2003. China buys 2nd stake in huge oil field in caspian sea. New York Times. (11 March). www.nytimes.com. Hsieh, David. 2002. Mega-pipeline paving the way for China’s shift to gas. The Straits Times. (7 July). Retrieved from Lexis-Nexis. Bradsher, Keith. 2002. Energy companies agree on trans-China pipeline. New York Times. (4 July). www.nytimes.com. China’s energy needs and strategies: hearing before the US-China economic and security review commission. 2003. Prepared Statement of Kang Wu. (30 October). www.uscc.gov; Herberg, Mikal E. 2005. Testimony to the Senate Foreign Relations Committee on Asia’s energy insecurity, China, and India, implications for the US. (26 July); Alexander’s Gas and Oil Connection. 2005. China to build strategic oil reserves 10. No 23. (8 December). www.gasandoil.com/goc/news/nts54931.htm Beng, Phar Kim and Vic YW Li. 2005. China’s energy dependence on the Middle East: boon or bane for Asian security. The China Eurasia Forum 3. No 3. (November). 22–23. Leverett, Flynt, Jeffrey Bader and the sources cited therein. 2005–2006. Managing ChinaUS energy competition in the Middle East. Washington Quarterly 29. No 1. (Winter). 187–201; Tang, Shiping and the sources cited therein. 2000. Economic integration in Central Asia: the Russian and Chinese relationship. Asian Survey 40. No 2. 360–376; Yoshihara, Toshi and Richard Sokolski. 2002. The United States and China in the Persian Gulf: challenges and opportunities. The Fletcher Forum of World Affairs 26. No 1. (Winter–Spring). 187–201. Blank, Stephen. 2005. China, Kazakh energy, and Russia: an unlikely ménage a trois. China Eurasia Forum Quarterly 3. No 3. (November 2005). 99–110; Idem. 2005. Petrokaz: China’s difficult search for Central Asian energy. Jamestown China Brief 5. No 23, (8 November). Blagov, Sergei. 2005. Russia wants to be more than China’s source for raw materials. Eurasia Daily Monitor, (30 September). Tuttushkin, Aleksandr, Irna Reznik, Rodion Levinsky. 2004. Without a struggle Gazprom talked China out of bidding on Yuganskneftgaz. Vedomosti. (10 December). US-China Economic and Security Review Commission 2004 Report to Congress. 157. NEED MORE INFO. Tang, Shiping and the sources cited therein. 2000. Economic integration in Central Asia: the Russian and Chinese relationship. Asian Survey 40. No 2. 360–376; China’s energy needs and strategies: hearing before the US-China economic and security review commission. 2003. Statement of Dean P Girdis. (30 October). 45 & 51. www.uscc.gov.

29 ITAR-TASS. 2002. President Putin urges radical changes in policy in Russian Far East. (21 July). Retrieved from Lexis-Nexis; Interfax. 2002. China could compete with Russia in transport project involving Koreas, TransSiberian Railroad. (29 August). Retrieved from Lexis-Nexis; Nezavisimaya Gazeta. 2004. Interview with Deputy Foreign Minister Vyacheslav Trubnikov, Moscow. (12 May). (FBIS SOV – 14 May 2004). 30 Tang, Shiping and the sources cited therein. 2000. Economic integration in Central Asia: the Russian and Chinese relationship. Asian Survey 40. No 2. 360–376. 31 Mukhin, Vladimir. 2005. Poslednaya Nabrosok na Iuge. Nezavisimaya Gazeta. (8 August). 32 Alexander’s Gas & Oil Connections. 2005. Siberian pipeline to go to China first. (28 September). www.gasandoil.com/goc/ new/nts53998.htm. 33 Foreign Broadcast Information Service, Near East and South Asia (Henceforth FBIS NES). 2004. New Delhi: The Hindu, (14 November). 34 Petroleum Economist. 2004. Focus; Geopolitics; India and Russia deepen energy cooperation. (3 December). Vedomosti. 2004. President Putin approved participation of Indian companies in the auction for sale of Yuganskneftgaz. (8 December). Retrieved from Lexis-Nexis. Korchagina, Valeria. 2004. Indian oil company to bid for Yugansk. Moscow Times. (6 December). Mukhul, Jyoti. 2005. ONGC takes dragon’s route to Yukos riches. Business Standard. New Delhi. (3 February). (FBIS SOV – 3 February 2005). 35 Pipelines pondered. www.asiaint.com. (accessed 26 November 2003). Shankar Jha, Prem. The pipeline to peace. www.outlookindia.com (accessed 30 November 2004). 36 Gazprom and CNOOC in discussion to cooperate, Ibid., [accessed 11 October 2005] www.gasandoil.com/goc/company/ cnr54196htm; Gazprom and CNPC mull cross-border gas pipeline, Ibid. available at www.gasandoil.com/ goc/company/cnr54106htm. What are these Ibids for? 37 As one former energy executive told the author, whereas America believes that if you have money you can buy oil or gas on the market, China believes it has to own the oil or gas in order to obtain it. 38 Downs, Erica. 2004. China’s global search for oil security: actions, inactions and implications for the US. Presented at Asian Energy Security and ‘Implications for the US’, National Bureau of Asian Research & Pacific Northwest Center for Global Security, Seattle, 28 September.

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39 Lafrague, Francois. 2005. China’s presence in Africa. China Perspectives. No 61 (September– October) 2–9. Statement of Randall G Schriver before the Senate Foreign Relations Committee. 26 July 2005. 40 US Warns China About Energy Ties to Iran 41 Krouse, Peter. 2005. World’s growing thirst for oil boosts global tensions. Newhouse News Service. (22 November). www.newhouse.com 42 Herberg, Testimony. 43 Herberg, James Clad. 2004. Convergent Chinese and Indian perceptions on the global order. The India-China relationship: what the United States needs to know. Eds Francine R Frankel and Harry Harding. New York: Columbia University Press. 271–276. Tellis. DATE?. China and India in Asia. Eds Frankel and Harding.134–177. Dannreuther, Roland. 2003. Asian security and China’s energy needs. International Relations of the Asia-Pacific 3. 200–202. Andrews-Speed, Philip. Xuanli Liao, Roland Dannreuther. 2002. The strategic implications of China’s energy needs. Adelphi Papers. No 346. Oxford: Oxford University Press. 3, 42–43, 69, 99. 44 Andrews-Speed, Philip and Sergei Vinogradov. 2000. China’s involvement in Central Asian petroleum: convergent or divergent interests? Asian Survey 11. No 2. (March–April). 39. 45 Herberg (43 which is incomplete or 44). Hill, John. 2004. China struggles to fulfill spiraling energy demands. Jane’s Intelligence Review. (1 June). www4.janes.com/subscribe/ jirdoc_view.jsp? 46 Hill, John. 2004. China struggles to fulfill spiraling energy demands. Jane’s Intelligence Review. (1 June). www4.janes.com/subscribe/ jirdoc_view.jsp? Herberg O’Neill, Mark. 2004. Mainland faces tough diplomatic task to secure oil supplies. South China Morning Post. (28 May). Retrieved from Lexis-Nexis. 47 Kerr, David. 2005. The Sino-Russian partnership and US policy toward North Korea: from hegemony to concert in Northeast Asia. International Studies Quarterly 49. No 3. (September). 411–437; Menges, Constantine C. 2005. China: The gathering threat. Foreword by Bill Gertz. Nashville, TN: Nelson Current. 48 Ibid; Jervis, Robert. 1998. US grand strategy: Mission impossible. Naval War College Review. (Summer). 22–36. Betts, Richard K. 1997. Power, prospects, and priorities: choices for strategic change. Naval War College Review. (Winter). 9–22. Gannon, John C. DATE? Intelligence challenges through 2015. http://odci.gov/cia/ publicaffairs/speeches/ gannon_speech_05022000.htmls.

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49 Kerr, David. 2005. The Sino-Russian partnership and US policy toward North Korea: from hegemony to concert in Northeast Asia. International Studies Quarterly 49. No 3. (September). 411–437. 50 Kerr, David. 2005. The Sino-Russian partnership and US policy toward North Korea: from hegemony to concert in Northeast Asia. International Studies Quarterly 49. No 3. (September). 411–437; Zhebin, Alexander. 2005. The Bush doctrine, Russia, and Korea. Eds Mel Gurtov and Peter Van Ness. Confronting the Bush doctrine: critical views from Asia. Abingdon and New York: Routledge. 149. 51 ITAR-TASS (English translation). 3 February 2005. Foreign Broadcast Information Service, Near East and South Asia (henceforth FBIS NES). 2005. New Delhi: The Hindu. (3 February). 52 ITAR-TASS (in English). 3 February 2005. FBIS NES. 2005. New Delhi: The Hindu. (3 February). 53 Rashad, Leslean and Nor Baziura Basri. 2005. China backs Russia’s entry into EAS. Bernama. Kuala Lumpur. (14 December). 54 Starr, S Frederick (ed). 2004. Xinjiang: China’s Muslim borderland. Armonk, NY: PUBLISHER? Blank, Stephen. 2003. Xinjiang and Chinese security. Global Economic Review 32. No 4. 121–148; Fuller, Graham E and S F Starr. 2003.The Xinjiang problem. Washington, DC, Central Asia Caucasus Institute of John Hopkins University Nitze School of Advanced International Studies. 55 Richardson, Michael. 2006. China’s Western Fuel Depot. South China Morning Post. (13 January). Retrieved from Lexis-Nexis. 56 Bachman, David. 2004. Making Xinjiang safe for the Han: contradictions and ironies of China’s governance in the northwest. Rossabi. 2004. Governing China’s Multiethnic Frontiers. 161. 57 Herberg, Testimony. 58 People’s Daily Online. 2005. Northwest China region becomes bridgehead for trade ties with Central Asia. (23 September). http:// english.people.com.cn/200509/23/ eng20050923_210367.html. Hu, Richard W. 2005. China’s Central Asian policy: making sense of the Shanghai cooperation organization. Central Asia at the End of the Transition. Ed Boris Rumer. Armonk, NY: ME Sharpe & Co. 133. 59 People’s Daily Online. 2005. Xinjiang steps up trade with Central Asian countries. 18 October. http://english.people’scom.cn/ 200510/18/eng200051018_215052.html. 60 FBIS SOV. 2004. PRC leaders conduct bilateral multilateral activities 1–28 November 2004. (30 November).

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61 FBIS SOV. 2004. PRC leaders conduct bilateral multilateral activities 1–28 November 2004. (30 November). 62 Scobell, Andrew. 2005. Terrorism and Chinese Foreign Policy. China rising: power and motivation in Chinese foreign policy. Eds Yong Deng and Fei-Ling Wang. Lanham, MD: Rowman and Littlefield. 305–306. 63 Ji, Liu. 2004. Making the right choices in twenty-first century Sino-American relations. Chinese foreign policy: pragmatism and strategic behavior. Ed Suisheng Zhao, foreword Jonathan Pollack. Armonk, NY: ME Sharpe & Co. 249. 64 Qimao, Chen. 2003. China’s new approaches to a peaceful solution of the Taiwan issue. American Foreign Policy Interests 25. December. 513. 65 Shichor, Yitzhak. 2005. Blow up: internal and external challenges of Uyghur separatism and Islamic radicalism to Chinese rule in Xinjiang. Asian Affairs 32. No 2. (Summer). 119-135. 66 Xing, Guancheng. 1998. China and Central Asia: towards a new relationship. Ethnic challenges beyond borders: Chinese and Russian perspectives of the Central Asian conundrum. Eds Yongjin Zhang and Rouben Azizian. New York: St Martin’s Press. 35. 67 Fuller, Graham E and S F Starr. 2003.The Xinjiang problem. Washington, DC, Central Asia Caucasus Institute of John Hopkins University Nitze School of Advanced International Studies; Starr, S Frederick (ed). 2004. Xinjiang: China’s Muslim borderland. Armonk, NY: PUBLISHER?; Blank, Stephen. 2003. Xinjiang and Chinese security. Global Economic Review 32. No 4. 121–148. 68 China’s energy needs and strategies. 2003. Hearing before the US-China Economic and Security Review Commission. (30 October). www.uscc.gov; Downs, Erica Strecker. 2004. China’s energy security. PhD dissertation presented to the Faculty of Princeton University, Princeton, NJ; Cole, Bernard D. 2003. Oil for the lamps of China. McNair Papers. No 67. Washington: Fort Lesley J McNair, National Defense University. 141–146; US-China Economic and Security Review Commission 2004 Report to Congress and the sources cited therein. 151–173; Andrews-Speed, Philips, Xuanli Liao, Roland Dannreuther. 2002. The strategic implications of China’s energy needs. Adelphi Papers. No 346. Oxford: Oxford University Press; Dannreuther, Roland. 2003. Asian security and China’s energy needs. International Relations of the AsiaPacific 3:197–219; Yoshihara, Toshi and Richard Sokolski. 2002. The United States and China in the Persian Gulf: challenges and opportunities. The Fletcher Forum of World Affairs 26. No 1. (Winter– Spring). 63–78; Clad, James. 2004. Convergent Chinese and Indian perceptions on the global order. The IndiaChina relationship: what the United States needs to

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Prime-Tass Business News Agency. (26 April). Retrieved from Lexis-Nexis. Shawn McCormick as cited in F Joseph Dresen (ed). 2005. Russia in Asia – Asia in Russia: energy, economics, and regional relations, conference proceedings. Occasional Papers of the Kennan Institute for Advanced Russian Studies. No 292. 24–25. Alexander’s Gas and Oil Connection 9. 2004. BP runs into trouble in Russia. (25 February). www.gasandoil.com/goc/company? cnr40827.htm. Hurst, Andrew. 2004. Russia warns BP it can revoke oil licenses. Reuters. (15 September). The Dong-A Ilbo International. 2004. Plans to develop Siberian gas fields backfire. (16 September). Executive Summary, Asian Energy Security and Implications for the United States. 2004. Sponsored by the National Bureau of Asian Research and the Pacific Northwest Center for Global Security, Seattle. (28–29 September). 7–8. Prime-Tass Business News Agency. 2004. DJ Exclusive: S Korea, China bypassed by Russia gas pipeline. (25 November). Retrieved from Lexis-Nexis; Xinhua News Agency. 2004. Text of Communiqué from Chinese, Russian premiers meeting. (25 September 2004). (FBIS SOV – 25 September 2004). Prime-Tass (in English). (20 April 2005). (FBIS SOV – 20 April 2005). Prime-Tass Business News. 2005. Interview: Russia S Korea gas pipeline project uncertain. (26 July). Retrieved from Lexis-Nexis. Mortished, Carl. 2005. Gazprom vetoes BP pipeline. The Times of London. (14 October). Retrieved from Lexis-Nexis. Mortished, Carl. 2005. Gazprom vetoes BP pipeline. The Times of London. (14 October). Retrieved from Lexis-Nexis. Mortished, Carl. 2005. Gazprom vetoes BP pipeline. The Times of London. (14 October). Retrieved from Lexis-Nexis. Eurasia Economic Weekly. 2005. China to import 20bcm of gas from Kovykta–Vekselberg. (12 December). Retrieved from Lexis-Nexis. Yasmann, Viktor. 2005. Russia: the upshot of Putin’s Asia visit. Radio Free Europe Radio Liberty Features. (22 November). US Energy Information Administration. Country briefing on Russia. www.eia.doe.gov/ cabs/Russia/NaturalGas.html (accessed on 26 January 2006). Voloshin, Pavel. 2003. ‘Vacuum cleaners’ of the republic type. Novaya Gazeta (in Russian). (21 April). Moscow. (FBIS SOV – 21 April 2003). AFP. 2005. Russian state extends control beyond energy to car sector. (27 November). Pravda. 2001. Russian Energy Ministry supports construction of Russia-China oil pipeline. (15 October).

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179 Lelyveld, Michael. Russia tests China’s patience over pipeline. Asia Times Online. www.atimes.com (accessed on 1 March 2003). 180 Dienes, Leslie. 2002. Reflections on a geographic dichotomy: archipelago Russia. Eurasian Geography and Economics 43. No 6. 453. 181 Kornysheva, Alena. 2003. Pipes become conduit for national interest. Kommersant (in Russian). (17 February). Moscow. (FBIS SOV – 17 February 2003. 182 Helmer, John. Russia’s great pipeline race. Asia Times Online. www.atimes.com (accessed 5 September 2002). 183 Kyodo (in English). (27 January 2003). Tokyo. (FBIS SOV – 27 January 2003); Tian He. What do difficulties in Sino-Russian energy cooperation indicate? Hong Kong Hsian Kang Shang Pao (in Chinese). 2003. (14 January). Hong Kong. (FBIS SOV – 14 January 2003). 184 Ibid for what?.; Yihe, Xu and P Wonacott. 2002. China, Russia Fail to Reach Oil Deal. Wall Street Journal. (4 December). 185 FBIS SOV. (27 January 2003). 186 Kyodo Clue II Internet Version (in Japanese). Kyodo Special Report: The battle for oil in Siberia. 20 February 2003. (FBIS SOV – 20 February 2003). 187 Daly, John CK. 2005. China and Japan race for Russian crude. www.japanfocus.org/ article.asp?id=o81 (accessed on 14 October 2005). 188 Helmer, John. 2003. Tokyo outbids China in Kremlin oil link. Asia Times Online. (4 January). www.atimes.com; PD Online Staff and Zhu Lizhen. Which country, China or Japan does Russian pipeline lead to? Renmin Ribao Internet Version. (24 February 2003). Beijing. (FBIS SOV – 24 February 2003); Paik, Keun-Wook. 2004. Geopolitics of northeast Asian gas development. Report prepared for the International conference on Asian Energy Security and Its Implications for the United States. Organized by the National Bureau of Asian Research and the Pacific Northwest Center for Global Security, Seattle. (28–29 September). 189 Daly, John CK. China and Japan race for Russian crude. www.japanfocus.org/ article.asp?id=o81 (accessed on 14 October 2005). 190 Leguyenko, Maksim. 2003. Asian dragons hungry for Russian oil. Utro.ru (in Russian). (13 January). (FBIS SOV – 13 January 2003). 191 He, Tian. 2003. What do difficulties in SinoRussian energy cooperation indicate?. Hong Kong Hsian Kang Shang Pao (in Chinese). (14 January). Hong Kong. (FBIS SOV – 14 January 2003). 192 ITAR-TASS (in English). 22 February 2003. (FBIS SOV – 22 February 2003); Lelyveld, Michael. Russia tests China’s patience over pipeline. Asia Times Online. www.atimes.com (accessed on 1 March 2003).

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193 Ibid. which one? 194 Qi, Su. 2003. Controversy of the ChinaRussia-Japan oil pipeline. Jingi Guancha Bao (in Chinese). (24 February). Jinan. (FBIS SOV – 24 February 2003). 195 Ling, Wang. 2003. Oil pipeline compromise likely. China Daily Internet Version (in English). (3 March). Beijing. (FBIS SOV – 3 March 2003). 196 Asia Times Online. 2003. Sino-Russian pipeline compromise reached. (29 March). www.atimes.com. 197 Kyodo Special Report. (FBIS SOV – 20 February 2003). CORRECT? 198 China Daily (Hong Kong Edition – in English). 2003. Twist in the pipeline. (12 March). Beijing. (FBIS SOV –12 March 2003). 199 Pletnev, Sergey. 2003. Russian Government forces Japan and China to compete in Eastern Siberia. Strana.ru National Information Service (in Russian). (14 March). Moscow. (FBIS SOV – 14 March 2003). 200 Bovt, Georgiy and Mariya Ignatova. 2003. Split personality. Izvestiya (in Russian). (14 March). Moscow. (FBIS SOV – 14 March 2003). 201 Lizhen, Zhu. 2003. Russian oil pipeline confirmed to lead directly to Chinese Daqing. Renmin Ribao (in Chinese). Beijing. (FBIS SOV – 18 March 2003). 202 ITAR-TASS (in English). (14 March 2003). (FBIS SOV – 14 March 2003). 203 Zhongguo Jingying Bao Internet Version (in Chinese). 2003. Compromised Sino-Russian oil pipeline to be finalized on May 1. (20 April). Beijing. (FBIS SOV – 30 April 2003); Changdong, Sun. 2003. Sino-Russian Angarsk-Daqing oil pipeline reflects neighboring countries’ defensive sentiments. Wen Hui Bao Internet Version (in Chinese). (20 May). Shanghai. (FBIS SOV – 20 May 2003). 204 Ibid. Which one? 205 Hu, Wang. 2003. Nine years concluding a multibillion dollar contract: Russian oil will flow in. 21 Shiki Jingli Baodao Internet Version (in Chinese). (2 June). Guangzhou. (FBIS SOV – 2 June 2003). 206 Bin, Yu. 2003. Party Time! Comparative Connections. (2nd Quarter). (Accessed on 19 August 2003). 207 Asahi Shimbun (in English). 2003. From Russia with oil: Japan steps up battle for pipeline. (21 June). (FBIS SOV – 21 June 2003). 208 Lelyveld, Michael. 2003. Russia; Moscow sees no profit in Japan oil line. Radio Free Europe Radio Liberty Newsline. (15 April). 209 ITAR-TASS (in English). (14 March 2003). Moscow. (FBIS SOV – 14 March 2003); Helmer, John. Russian pipeline agency master of the game. Asia Times Online. www.atimes.com (accessed on 7 May 2003). 210 Ibid. Which one?

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211 Sankei Shimbun Internet Version (in Japanese). (30 July 2003). (FBIS SOV – 29 July 2003); Konstantin Simonov. 2003. Trojan Horse. Kommersant (in Russian). (30 June). Moscow. (FBIS SOV – 30 June 2003); ITAR TASS (in English). (8 July 2003). (FBIS SOV – 8 July 2003). 212 ITAR –TASS (in English). (29 July 2003). Moscow. (FBIS SOV – 29 July 2003). 213 Lukin, Alexander V. 2003. Russia, the United States, China and the war in Iraq. Zhizn. (April). Mezhdunarodnaya, Moscow. (FBIS SOV – 15 April 2003). 214 Aniushkin, Yevgeny. 2003. Interview with Deputy Prime Minister Viktor Khristenko. Rossiyskaya Gazeta (in Russian). (15 July 2003). Moscow. (FBIS SOV – 15 July 2003). 215 Kyodo World Service (in English). (8 July 2003). Tokyo. (FBIS SOV – 8 July 2003). 216 Korop, Yelena. 2003. A lesson in Russian capitalism. Izvestiya. (25 September); CDPP 55. No 38. (22 October 2003). 5. 217 Korop, Yelena. 2003. ‘A lesson in Russian capitalism’. Izvestiya. (25 September); CDPP 55. No 38. 22 October 2003. 5. ITAR-TASS. (19 October 2003). (FBIS SOV – 19 October 2003). 218 Helmer. John. 2003. Beijing strikes back over Russian pipeline delay. Asia Times Online. (5 September). www.atimes.com; TVS (in Russian). (13 March 2003). (FBIS SOV – 13 March 2003). Nikkei Telecom 21 Internet Version (in English). (20 October 2003). Tokyo. (FBIS SOV – 20 October 2003); Kornysheva, Alcona. 2003. Mikhail Kasyanov deprives China of Russian oil. Kommersant. (26 September). (CDPP 55. No 37 – 22 October 2003. 6). 219 Ibid. Which one? 220 Zhdannikov, Dmitry. 2003. Russia decision on China pipeline may take a year. Reuters. (25 September). 221 Smaedova, Yevlaliya. 2004. Fradkov fails to heed Gref. Premier opposes private oil pipelines but favors investment in energy sector. Nezavisimaya Gazeta (in Russian). (22 June). Moscow. (FBIS SOV – 22 June 2004). 222 Interfax (in English) 2004. Moscow. (FBIS SOV – 22 June 2004); Martin, Lionel. 2004. Russian pipeline projects shifting to favor Tokyo over Beijing. Eurasia Daily Monitor. (10 August). 223 Ibid. which one? 224 Ibid WHICH ONE? Russian Oil and Gas Report. 2004. Disputes about the route for construction of the oil pipeline may grow into a severe crisis of Russian-Chinese relations. (14 July). Retrieved from Lexis-Nexis. 225 OPEC.ru (in Russian). (24 December 2003). 226 Veletminsky, Igor and N Dzis-Voinarovsky. 2004. Oil prices are rising and the level of investment is falling because of the Yukos affair. Novye Izvestiya. (12 August). (CDPP 56. No 32 – 8 September 2004. 9).

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227 Moscow Times. 2004. China keeps up pipeline pressure. Moscow Times. (2 August). www.moscowtimes.com. 228 Vedomosti. 2004. President Putin determines parameters of economic cooperation with China. (15 October). Retrieved from LexisNexis; The Russia Journal. 2004. Moscow and Beijing agree on boosting oil exports to China. (27 August). www.russiajournal.com/ news/cnews-article.shmtl?nd=45199; The Russia Journal. 2004. China ready to pay Russian railways instead of YUKOS. (24 September). www.russiajournal.com/ news/cnews-article.shtml?nd=4623. 229 Ibidem which one? 230 President Putin determines parameters of economic cooperation with China; Zhukov, Vasily. 2004. The politics of pipelines: economics takes a back seat in project decisions. Russia Profile. (29 November). www.russiaprofile.org. 231 Interfax (in English). 24 July 2003. Moscow. (FBIS SOV – 24 July 2003); President Putin’s interview with the Chinese newspapers; Renmin Ribao, Chinese Young Correspondent and the Television Channel, Chinese Central Television. (13 October 2004). Moscow. www.president.ru. 232 Yekterina Grigoryeva. 2004. Nakhodka in the morning, Daqing in the evening. Izvestiya. (15 October). (CDPP 56. No 42 – 17 November 2004). 233 ITAR-TASS (in Russian). Moscow. (21 April 2005). (FBIS SOV – 21 April 2005). 234 Kyodo Clue II Internet Version (in Japanese). 31 May 2003. Tokyo. (FBIS SOV – 31 May 2003); Interfax (in English). (25 June 2004). Moscow. (FBIS SOV – 25 June 2004). 235 ITAR-TASS (in Russian). (20 April 2005). Moscow. (FBIS SOV – 20 April 2005); Martin, Lionel. 2005. Russia and China: do oil and weapons make a marriage? Eurasia Daily Monitor. (5 January). 236 Veletminsky, Igor. 2005. Yugansk is to become Chinese in five years. Rossiyskaya Gazeta (in Russian). (19 January). Moscow. (FBIS SOV – 19 January 2005). 237 ITAR-TASS (in Russian). (20 April 2005). Moscow. (FBIS SOV – 20 April 2005); Martin, Lionel. 2005. Russia and China: do oil and weapons make a marriage? Eurasia Daily Monitor. (5 January). 238 FBIS SOV – 19 January 2005. 239 ITAR-TASS (in English). (7 February 2005). Moscow. (FBIS SOV – 7 February 2005); Interfax (in English). (11 January 2005). Moscow. (FBIS SOV – 11 January 2005); Vremya Novostei (in Russian). 2005. Interview with Russian ambassador to Japan, Aleksandr’ Losyukov. (26 January). Moscow. (FBIS SOV – 26 January 2005). 240 Interfax. Russia and CIS Diplomatic Panorama. (13 January 2005). Moscow. (FBIS SOV – 13 January 2005); Jiji Press (in English).

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(14 January 2005). Moscow. (FBIS SOV – 14 January 2005). Blagov, Sergei. Russia’s hydrocarbon geopolitics. Asia times Online. www.atimes.com (accessed 2 February 2005). ITAR-TASS (in English). (5 April 2005). Moscow. (FBIS SOV – 6 April 2005). See also Kyodo World Service (in English). (20 April 2005). Tokyo. (FBIS SOV – 20 April 2005); ITAR-TASS (in Russian). (20 April 2005). Moscow. (FBIS SOV – 20 April 2005). Radio Free Europe Radio Liberty Newsline. (11 July 2005). Xinhua. (in English). (5 July 2005). (FBIS SOV – 5 July 2005). Alexander’s Gas and Oil Connection. 2005. Russia can build Siberian oil pipeline without Japanese investment. (5 October). www.gasandoil.com/goc/news/ntr54378.htm; Milov, Vladimir. 2005. Russian energy sector and its international imbrication. 2005. Discussion Paper presented Tokyo. (30 April). 15. ITAR-TASS (in English). (31 January 2005). Moscow. (FBIS SOV – 31 January 2005); Kaneko, Maya. 2005. Japan pressures Russia to prioritize Pacific-based pipeline. Kyodo. (22 April). Yomiuri Shimbun. 2005. Japan won’t get oil via Siberia pipeline until ’12. (1 May). Milov, Vladimir. 2005. Russian energy sector and its international imbrication. 2005. Discussion Paper presented Tokyo. (30 April). 14; Synovitz, Ron. 2005. Russia: Putin says oil pipeline will reach far East Coast. Radio Free Europe Radio Liberty Features. (21 November); Synovitz, Ron. 2005. Putin calms Japan over pipeline politics. Alexander’s Gas and Oil Connection. (23 November). www.gasandoil.com/ goc/news/ntr5921.htm; Alexander’s Gas and Oil Connection. DATE? Japan and Russia still not agreed upon pipeline route. www.gasandoil. com/goc/company/cnr54994.htm; Yasmann, Viktor. 2005. Russia: the upshot of Putin’s Asia visit. Radio Free Europe Radio Liberty Features/ (22 November); Brooke, James. 2005. Putin promises oil pipeline for Japan. New York Times. (22 November). www.nytimes.com. Janssen, Erik. Can Russian oil growth be sustained?. Clingendael Briefing papers, Clingendael International Energy Programme. No 8. 8. Opening address at the Security Council Session on Russia’s role in guaranteeing international energy security; Siberia-Pacific oil pipeline construction to begin this year; AFP, Putin,6 January 2006; Radio Free Europe Radio Liberty Newsline. 2006. Russia should build gas pipeline to Pacific Coast. (6 January 2006). (Alexander’s Gas and Oil connection. www.gasandoil.com/goc/news/ntr/ 60257.htm/ – 22 December 2005). Alexander’s Gas and Oil Connection. 2006. Russia wants

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Japan to join oil pipeline project. (9 January). www.gasandoil.com/goc/news/ntr60473; Alexander’s Gas and Oil Connection. 2005. Siberian pipeline to go to China first. (6 September). www.gasandoil.com/goc/news/ ntr 53957.htm; Alexander’s Gas and Oil Connection. 2005. Russia gives green light to SiberiaPacific pipeline. (28 November). www.gasandoil.com/goc/news/ntr55154.htm; Nicholson, Alex. 2005. Russian Ministry: Siberian pipeline route running close to Lake Baikal is safe. Associated Press. (11 November). RIA Novosti. 2005. Russia, China to launch new energy projects. (7 November); Alexander’s Gas and Oil Connection. 2005. Transneft and CNPC to study Siberia-China pipeline construction. (1 November). www.gasandoil. com/goc/company/cnr54778.htm; Joseph, Anil K. 2005. China and Russia to build cross-border oil pipeline. Alexander’s Gas and Oil Connection. (4 November). www.gasandoil.com/goc/news/ntr54707.htm. Alexander’s Gas and Oil Connection. 2006. Russia-Ukraine row: China and Japan worry same may happen to them. (26 January). www.gasandoil.com/goc/news/nts60458. Alexander’s Gas and Oil Connection. 2006. Central Asia plans energy cooperation. (9 February). www.gasandoil.com/goc/news/60612. China Daily. 2006. China, Kazakhstan discuss gas pipeline. (11 January). Alexander’s Gas and Oil Connection. 2006. India and China plan Asian energy Agency. (26 January). www.gasandoil.com/goc/new/ nts60441; Alexander’s Gas and Oil Connection. 2006. China and India Sign Energy Agreement. (9 February). www.gasandoil.com/ newsnts606235; Alexander’s Gas and Oil Connection. 2006. India and China sign landmark energy agreement. (26 January). www.gasandoil.com/goc/company/cns60402; Chanda, Mayank. 2006. The geopolitical impact of an India-China embrace. Alexander’s Gas and Oil Connection. (9 February). www.gasandoil.com/goc/news/nts 60624. United Press International. 2006. Pakistan considers energy route for China. (22 February). www.washingtontimes.com; Indo-Asian News Service. 2006. India, China to have more energy cooperation. (13 January). Retrieved from Lexis-Nexis. Reuters. 2006. Pakistan committed to strong China ties-Musharraf. (21 February). www.keralanext.com/news/?id=560916; Pakistan considers energy route for China Asianews.it. 2006. Beijing worried about Balochistan violence. (21 February). www.asianews.it/view.php?1=en&art=5406; Reuters. 2006. Pakistan committed to strong China ties-Musharraf. (21 February). www.keralanext.com/news/?id=560916. EU to sign clear coal deal with China. www.tmcnet.con (accessed 22 February 2006).

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260 EU to sign clear coal deal with China. www.tmcnet.con (accessed 22 February 2006). 261 Alexander’s Gas and Oil Connection. 2005. OPEC competes with Russia to secure oil market share in China. (12 January). www.gasandoil.com/goc/news/nts60215; Alexander’s Gas and Oil Connection. 2006. Saudi King wraps up China visit with significant energy deal. (9 February). www.gasandoil.com/ goc/news/nts60686. 262 Leverett, Flynt, Jeffrey Bader and the sources cited therein. 2005–2006. Managing ChinaUS energy competition in the Middle East. Washington Quarterly 29. No 1. (Winter). 187-201; Wall Street Journal. 2006. China-Iran energy talks complicate nuclear standoff. (17 February). 6. 263 This is exactly what one would expect based on the analyses offered by Poe, Rosefielde, and Hedlund (see note 82). 264 Quoted in Boris Rumer (ed). 2005. Central Asia at the end of transition. Armonk, NY: ME Sharpe & co. 47. 265 TIA Novosti. 2005. Russian energy monopoly chief urges new energy policy. (14 December). www.en.rian.ru/russia20051214/ 42486214.html; RIA Novosti. 2005. Deputy PM for revising energy strategy. (8 December). www.en.rian.ru/20051208/42383600.html. 266 Alexander’s Gas and Oil Connection. 2005. Russia expects oil production growth rate to fall in 2006. (11 October). www.gasandoil.com/ goc/news/ntr54168htm.

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267 Bremmer, Ian; C Sung-hong and Y Kawaguchi. 2005–2006. A new forum for peace. The National Interest. No 82. (Winter). 108–111; Ito, Shoichi, V Ivanov, and Z Daojiong. 2005. China, Japan and Russia: the energy security nexus. Conflict prevention and conflict management in Northeast Asia. Ed. Niklas Swanstrom. Uppsala Silk Road Studies Program, Uppsala University. 121–142. 268 FBIS SOV, 11 February 2005. Ostrovsky, Arkady. 2005. Winners and losers in Kremlin’s grab for oil. Financial Times. (6 November). 269 Special Report Pt II: the Rise of Gazprom Inc. 2004. (21 October). www.stratfor.biz. Royal Dutch Shell’s Sakhalin woes. (14 July). Catan, Thomas. 2006. Shell’s Sakhalin shows an industry its daunting future. Financial Times. 8 January 2006. www.ft.com. 270 TIA Novosti. 2005. Russian energy monopoly chief urges new energy policy. (14 December). www.en.rian.ru/russia20051214/424862 14.html; RIA Novosti. 2005. Deputy PM for revising energy strategy. (8 December). www.en.rian.ru/20051208/42383600.html. 271 Shaoul, Raquel. 2005. An evaluation of Japan’s current energy policy in the context of the Azadegan oil field agreement signed in 2004. Japanese Journal of Political Science 1. No 3. (December). 411–437. 272 ‘ EU to sign clear coal deal with China SOURCE?

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About the series: Russian foreign energy policy reports

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his series of reports establishes for the first time the confluence of Russian foreign policy with the acquisition of foreign energy assets by Russian entities. Ten specific country profiles focus on the oil, gas, electricity and nuclear power industries. Each report, written by an author of international standing, explains how Russian foreign energy downstream mergers and acquisitions are transpiring to consolidate the new Russian empire. These unique studies address many questions of substance for energy industry professionals, investors, policy experts, and decision makers who seek to make sense of the dynamic changes that have overcome the Russian energy complex and altered the balance of global energy geopolitics. Series Editor Kevin Rosner Ph.D., is a specialist in Russian oil and gas, security of critical energy infrastructure, and international energy-security policy. He served as the 2006 CoDirector of the NATO Forum on Energy Security. He is a Senior Fellow both at the UK Defence Academy and at the Institute for the Analysis of Global Security (IAGS) in Washington, DC. Posts held include Senior Security Advisor to the Baku-TbilisiCeyhan pipeline company, Project Director with the Program on Cooperation with the Russian Federation at the OECD, and Project Manager with the UNESCO Science Division in Paris. Dr. Rosner is the founder of The Rosner Group serving leading members of the global oil and gas community with energy and security analytical products.

‘Russian Involvement in Eastern Europe’s oil, Petroleum Industry: The Case of Bulgaria’

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Adnan Vatansever

his report answers questions such as: as one of the largest foreign acquisitions by a Russian company occurred in Bulgaria, what lessons are applicable to charting future Russian downstream takeovers? Why have Eastern Europe and Western FSU countries been the primary focus of Russian acquisitions? What drives LUKoil (and other Russian oil companies) to pursue acquisition of assets in these regions? Finally, what is the stance of the Russian government in terms of promoting such acquisitions abroad? Adnan Vatansever is a freelance energy consultant and the author of a number of reports for Cambridge Energy Research Associates. He is currently in the process of completing his Ph.D. dissertation on Russia’s energy sector at the Paul Nitze School of Advanced International Studies, Johns Hopkins University. He holds a B.A. in International Relations from the Middle East Technical University in

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Ankara, M.A. in Russian and East European Studies from Georgetown University’s School of Foreign Service. Hardcopy ISBN 1-905050-40-2 E-report ISBN 1-90505080-1

‘Kazakhstan: Energy Cooperation with Russia – Oil, Gas and Beyond’ Dr Ariel Cohen

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his important study explains how Russia, with its private sector and policy makers working in tandem, has exerted a significant amount of control over Kazakhstan’s vast natural resources and its economic freedom. It looks at the way Russia and Kazakhstan agreed to divide the Caspian Sea shelf and how Kazakhstan has managed to maintain good relations with Moscow overall, despite its insistence on exporting energy resources to China and Europe directly and its hopes to export through Iran. Ariel Cohen, L.L.B., Ph.D., is an international expert in international security/ terrorism; Russian, Eurasian, European and Middle Eastern foreign, security, economic and business policy. He is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security at the Davis International Studies Institute at the Heritage Foundation. Dr. Cohen has conducted conferences and briefings for the US Government departments and agencies. He appears on major US and foreign TV networks. Dr. Cohen also has extensive experience consulting for the private sector, international organizations, and technical assistance projects in the Central and Eastern Europe and CIS regions. Hardcopy ISBN 1-905050-41-0 E-report ISBN 1-905050-81-X

‘Georgia: Russian Foreign Energy Policy and Implications for Georgia’s Energy Security’ Liana Jervalidze

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his report shows that as Georgia has restructured its energy sector, the new Russian and Georgian political elites exerted their influence, particularly through the participation of Russian gas company Itera in privatizations of Georgian gas enterprises. And how, over the past few years, Russian-Georgian business groups with their offshore capital have been working to monopolise the Georgian economy and Russia’s gas industry has been consolidating its hold over the CIS pipeline infrastructure, particularly through the expansion of Gazprom. However, Gazprom failed to take control of Georgia’s pipeline infrastructure and Georgia is insistent on developing its pipeline potential in order to boost its role as a transit route to Europe, Turkey and Iran. Liana Jervalidze has worked with several government and research institutions working on Caspian region energy policy and development. She has advised private sector companies in on the development of east-west energy corridor and Georgia’s

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potential role in regional integration. Since 2003, Ms.Jervalidze has been working on the development of Georgia’s gas market. She has spoken on regional energy policy at international conferences in the CIS, Europe and the US. Her analyses have been published in both Georgian and English. Hardcopy ISBN 1-905050-35-6 E-report ISBN 1-905050-84-4

‘Russia’s Energy Interests in Azerbaijan’

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Fariz Ismailzade

n 2003-2004, an increased number of senior Russian officials and major energy companies, such as Itera, Gazprom and RAO UES visited Baku in the hopes of participating in energy projects in Azerbaijan. While maintaining diplomatic relations with Moscow, Azerbaijan is more hesitant when it comes to close cooperation with Russian energy companies. Baku fears that if Russia gains more assets in Azerbaijan, control of these assets will be used for political purposes. This unique study looks at the confluence of Russian private and public sector interest Azerbaijan’s energy sector. Fariz Ismailzade works with the Inter-national Republican Institute in Baku and is a part-time lecturer at the department of political science at the Western University in Baku. He holds an MA in Social and Economic Development from Washington University, St. Louis, and a BA in Political Science from Western University, Baku. Hardcopy ISBN 1-905050-42-9 E-report ISBN 1-905050-87-9

‘Ukraine: Post-revolution Energy Policy and Relations with Russia’

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Olena Viter

his report looks at how the new Ukrainian government plans to decrease Russian influence over Ukraine’s energy sector. President Viktor Yushchenko has declared goals which include the diversification of oil and gas supply sources, the reform of the domestic market, and the creation of a strategic oil stock. Ukraine’s search for more partners in the energy sphere has affected the relationship between Ukraine and Russia; from a “brotherly” relationship to one of pragmatic interest. Olena Viter is a Senior Adviser to the Operational Department of the Secretariat of the President of Ukraine. She is Coordinator of Energy Programs at the School of Policy Analysis, National University of Kyiv-Mohyla Academy, and a member of the non-governmental Expert Council on Energy Security. In 2002, she was an intern at the Hudson Institute, and in 2003 she participated in drafting Ukraine’s Energy Strategy. Hardcopy ISBN 1-905050-31-3 E-report ISBN 1-90505077-1

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‘Turkmenistan-Russian Energy Relations’ Gregory Gleason

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urkmenistan has large gas reserves, but as its immediate neighbours have little import demand, Russia holds the key to its gas transport. In April 2003 Turkmenistan and Russia concluded a 25 year transport and marketing agreement for Turkmen natural gas. The new arrangements permit Turkmenistan’s gas production to reach 100,000 million cm per year in 2007. This unique study details the background and looks at the prospects for Turkmenistan’s gas production and export in the context of Russian strategy, and at Turkmenistan’s role in the new energy strategies throughout Eurasia and the Middle East. Gregory Gleason, Ph.D., is an internationally recognized expert in energy policy and international relations. A professor of political science and public administration at the University of New Mexico, Dr. Gleason has extensive field experience in Turkmenistan and the other countries of Eurasia and Central Asia. He has served as a consultant to Lawrence Livermore National Laboratory, Sandia National Laboratories, the Asian Development Bank, and the US Agency for International Development. His research has been sponsored by the National Science Foundation and the National Academy of Sciences as well as other public and private foundations. Hardcopy ISBN 1-905050-33-X E-report ISBN 1-905050-82-8

‘Belarus: Oil, Gas, Transit Pipelines and Russian Foreign Energy Policy’ Dr Margarita M Balmaceda

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elarus relies on Russia for about 85% of its total energy needs, while Russia needs Belarus’ oil and gas pipelines to export its supplies to Western Europe. How will energy exports from Russia and Belarus’ transit capabilities impact Western Europe if this interdependent relationship ends, either through political changes in Belarus or if Russia ends its energy subsidies to Belarus? This report looks at transit, infrastructure and investment issues and analyzes both the state of the current infrastructure, as well as the possibilities this transit opens to Western investors, particularly as the Yamal Pipeline nears completion. In addition, it looks at the current conflict between Belarus and Russian investors for control of the country’s gas transit system and oil refineries. Margarita M. Balmaceda is Associate Professor at the John C. Whitehead School of Diplomacy and International Relations, Seton Hall University, New Jersey, and an Associate of Harvard University’s Davis Center for Russian and Eurasian Studies and the Harvard Ukrainian Research Institute. She received a Ph.D. in Politics from Princeton University (1996), and Post-Doctoral training at Harvard University. She has published widely on Russian, post-Soviet and East European energy and foreign policies. Hardcopy ISBN 1-905050-34-8 E-report ISBN 1-905050-83-6

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‘Gazprom and the Russian State’

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Dr Kevin Rosner

azprom is the world’s single largest producer of natural gas, long acknowledged as a state-within-a-state. In 2005 it reached a turning point in its history when the Russian government reasserted its majority stakeholder position, whilst also continuing its own push to gain control over an increasing share of Russia’s energy complex overall. This timely report provides answers to questions such as: what do these movements mean for the future of the Russian energy sector? What will be the impact of state control over Gazprom on domestic and foreign shareholders? And what do these changes portend for the future of natural gas exploitation, production, distribution and the ultimate export of Russian gas to downstream consumers? And what will these changes mean to world? Hardcopy ISBN 1-905050-30-5 E-report ISBN 1-905050-85-2

‘Baltic Independence and Russian Foreign Energy Policy’

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Dr Harold Elletson

stonia, Lithuania and Latvia are uniquely dependent on the Russian Federation for energy supplies. The security of energy supplies are national security issues in the three ex-Soviet republics, which are now part of the EU. Increasingly dependent on Russian gas imports and with negligible sources of domestic energy supply, the Baltic countries have been the target of aggressive Russian commercial activity and a sustained attempt to lock them into a long-term reliance on Russia. Now, as Baltic political leaders, energy specialists and intelligence analysts consider their options, the implications for the security and independence of the three Baltic States are a matter of concern well beyond the Baltic. This important report will be essential reading for anyone with an interest in the future energy supplies of both the Baltic States and eastern Europe. Dr Harold Elletson leads The New Security Programme, which conducts research into the implications of the new security environment. He was previously Director of the NATO Forum on Business and Security. A former Member of the UK Parliament, he served as Parliamentary Private Secretary to the Secretary of State for Northern Ireland and as a member of the Select Committee on Environment. An international public affairs consultant and a fluent Russian speaker, he has advised many leading companies on aspects of their business in the former Soviet Union, including BP in Azerbaijan and Alstom in Siberia Hardcopy ISBN 1-905050-36-4 E-report ISBN 1-905050-89-5

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