In These New Times

A new paradigm for a post-imperial world

West and Russia spar, China wins

Posted by seumasach on June 8, 2009


Asia Times

6th June

When the Kremlin proposed Khabarovsk as a possible venue for the European Union-Russia summit meeting of May 21-22, Vaclav Klaus, Czech president who holds the revolving EU presidency, reportedly warmed up to the idea.

Khabarovsk has nothing to match the architectural ensemble in Prague. But the frontier town in the Russian Far East, nine time zones from Brussels, can be a delightful watering hole of boulevards named after Vladimir Lenin, Karl Marx and Alexander Pushkin, where a lapdance is hard to steer clear of, especially after a shot of fiery Siebierka vodka. It seems Klaus sold the splendid idea to Jose Manuel Barroso, European Commission president, and Javier Solana, EU foreign policy chief.

But it was a cultural misstep of the first order that could have leaped out of E M Forster’s classic novel Passage to India. The Kremlin was making a strategic point in the harsh world of Eurasian politics. Nothing symbolizes Russia’s complex ties with China better than the old Cossack settlement of Khabarovsk.

Khabarovsk is at the confluence of the Amur and Ussuri rivers, hardly 30 kilometers from the Chinese border. Five-and-a-half days after the Trans-Siberian left Moscow, you could sit in the dining car for a late breakfast and almost peep into snow-clad China as the train hugged the border and stealthily approached Khabarovsk.
Russia plays “China card” By proposing Khabarovsk, as the Moscow publication RBC Daily noted, “Russia was reminding Europe about Asia”. The Kremlin was surely hoping that the EU’s “Troika” could see “China is just across the border … Russia’s patience is not limitless. Europe is by no means the only potential consumer of Russian gas; and if Brussels continues to ignore Russia’s interests, exports may be redirected elsewhere.”

However, the post-summit press conference in Khabarovsk showed that the “Troika” either didn’t see or impetuously decided not to take cognizance of what it actually saw. The press conference turned out to be a spectacle of recriminations. Clearly, EU-Russia strategic partnership is in tatters. Russia sees the EU’s Eastern Partnership, launched in early May, as an affront to its legitimate interests in the post-Soviet space, while Brussels maintains Moscow has nothing to worry as Eastern Partnership is only a benign attempt at sharing influence in Eurasia.

The Khabarovsk summit followed a series of energy conferences that EU convened recently in pursuit of its search of diversifying energy supplies by creating a “Southern Corridor” from the Caspian and Central Asia to Europe that bypasses Russia. Moscow sees the venture as essentially geopolitical and detects Washington’s hand in it.

After surveying the debris of the Khabarovsk summit, Moscow issued its strictest warning so far to the EU last Friday that it was close to playing the “China card”. It came at the level of the powerful Kremlin boss, Deputy Prime Minister Igor Sechin. He said, “Whatever amounts they China ask for, we have the gas.” He revealed that Moscow would put forward its proposals during Chinese President Hu Jintao’s visit to Russia to attend the 2009 summit of the Shanghai Cooperation Organisation in the Urals city of Yekaterinburg next Monday.

Indeed, Russia has already wrapped up a massive US$25 billion loan-for-oil deal with China in April. China has agreed to lend $10 billion to the Russian oil pipeline monopoly, Transneft, and another $15 billion to the state-run oil major, Rosneft, at a discounted rate of 6% in exchange for assured supply of 15 million tonnes of Russian oil annually for the next 20 years also at a discounted price. The Russian supply is equivalent to about 4% of China’s daily fuel consumption.

China commenced the construction of a crude oil pipeline on its side of the border in Mohe in Northwest China’s Heilongjiang province on May 19. Vice-Premier Wang Qishan who was present at the ceremony acknowledged, “Energy cooperation plays a vital role in Sino-Russian strategic cooperative partnership”. He stressed the pipeline will go into full operation by the end of 2010. The construction of the Russian section of the pipeline with a total length of 64 kilometers started on April 27. The Chinese section runs for 965 kilometers.

There is a proposal to boost the pipeline capacity to 20 million tons. Under the agreement, China and Russia will jointly build and operate the pipeline from the Siberian city of Skovorodno to China’s northeastern city of Daqing via the Chinese border town of Mohe.

The vice-president of PetroChina Co, China’s largest oil and gas producer, described the project as a win-win deal for the two countries “as it helped diversify China’s oil import as well as Russia’s oil sales”. The government newspaper China Daily commented, “China’s push to gain resources as the credit freeze, the collapse of the Russian rouble and the depressed global commodity prices prompts countries such as Russia to sell energy assets … cash-rich Chinese oil firms are eager to secure a steady supply of oil to power the country’s growth in anticipation of an economic recovery”.

The newspaper revealed that PetroChina gained approval at its annual shareholders’ meeting to raise as much as 100 billion yuan (US$14.6 billion) this year to finance key projects including exploration, refining, oil and gas pipeline networks and overseas operation.

China accesses Yolotan-Osman
Thus, Beijing watched the Khabarovsk summit with intense curiosity and took note that the differences between Russia and the EU do not lend to easy resolution. Needless to say, that opens a window of opportunity for Chinese energy diplomacy in the Caspian.

For one thing, Russia will now be more inclined than ever before to pay attention to China’s burgeoning market for gas. Russia at present has virtually no gas exports to China, whereas Beijing is hugely expanding the share of gas in the country’s total use of energy. In fact, the intake of gas is being doubled this year. China can, therefore, absorb all the gas that Russia can supply. So far, in its craze for the European gas market, Moscow has shied away from the Chinese market. But that fixation now promises to change.

More important, China visualizes that a stalemate is prevailing in the Caspian sweepstakes. It may not last long, but a power vacuum of sorts has lately developed, as Russia’s hold is under sustained Western assault. The EU and the US one side and Russia on the other are locked in a zero-sum game, while the Central Asian producers are eager for customers. China knows nature abhors vacuums. It has done the sensible thing under the circumstances by putting forth its own bid on terms that neither the EU nor Russia can possibly match at the moment.

Beijing has made a beeline for the main theatre of EU-Russia rivalry – Turkmenistan – and simply waded into one of the greatest gas fields known to exist, South Yolotan-Osman. The Turkmen government on Saturday announced Beijing’s offer to lend $3 billion to develop the vast gas field. President Gurbanguli Berdymukhamedov stated in Ashgabat on Friday: “The deposits at South Yolotan alone, if it produces 50 bcm billion cubic meters of gas annually, could produce enough gas to supply any state for 100 years.”

Last October, the well-known British petroleum consulting firm Gaffney, Cline and Associates (GCA), which was contracted by Ashgabat, reported that its low estimate for Turkmenistan’s Yolotan-Osman gas field could be 140 trillion cubic feet (tcf) while the high estimate was touching 500 tcf. If the gas field has even 210 tcf, that will make South Yolotan-Osman one of the five largest gas fields on earth. (In comparison, Daulatabad, which is currently Turkmenistan’s largest gas field, has an estimated 50 tcf Russia’s giant Shtokman holds 140 tcf.)

The big question for the near term has been: who will get the best access to South Yolotan-Osman gas? Will it be Europe or Russia? We now have the answer – China.

The Chinese diplomacy proceeded hand-in-hand with the work on the 7,000-kilometer pipeline from Turkmenistan to China with a whopping capacity to deliver 52 billion cubic yards of gas annually, which will be completed by the end of the year.

Ironically, Ashgabat announced the Chinese offer when the Turkmen Foreign Minister Rashid Meredov was holding consultations in Brussels. The spin-doctors in Brussels happily interpreted Meredov’s visit as “a sign of Ashgabat’s growing frustration with Russia”. True, strains have appeared lately in the Russian-Turkmen energy equations. Simply put, Moscow is unable to lift the agreed annual volume of 50 bcm Turkmen gas at the contracted price of $340 per bcm. The sharp drop in gas prices on the one hand – global market price is heading toward $200 per bcm – and Europe’s reduced imports due to the economic recession on the other make nonsense of the Russian-Turkmen gas transactions. Ashgabat is peeved.

The West hopes to exacerbate the strains. A sustained Western campaign to woo Berdymukhamedov has been apparent. The US commentators were certain that the “psy-war” was making headway when Ashgabat recently granted German company RWE the prospecting rights off its shores in the Caspian Sea. Ashgabat’s move was promptly interpreted as the manifestation of a “new hue” in the EU-Turkmen ties to the detriment of Russia.

At the root of the “Great Game” is the stark reality that if the “South Corridor” projects are to see the light of the day, Ashgabat must commit to sell its gas directly to the European companies without Russian middlemen. In other words, Washington and Brussels must kick Russia out of the Turkmen energy market. It is a tall order, as Moscow too has immense reserve leverage in Ashgabat. More important, Ashgabat will forever remain wary of the West’s hidden agenda on human-rights issues and “color revolutions”, no matter Washington’s current soft-pedaling on such issues.

Ashgabat is no doubt having a whale of a time playing the EU and the US against Russia, and then playing the whole lot of them “occidentals” against China. The Turkmen grasp of the bazaar is a legion. We do not know the terms and conditions of the Chinese loan for Yolotan-Osman but they are bound to be incredibly soft, which cash-strapped West or Russia cannot match in the present hard times.

China in South Pars
China is proceeding according to a set agenda. Beijing steers clear of the shrill rhetoric of the Caspian Great Game that we constantly hear from the US, EU and Russian capitals. Nor has Beijing any use of the extravaganza of “energy summits” that the EU specializes in. Certainly, Chinese diplomacy in the Caspian never brags about its success stories. It is secretive, result-oriented and purposive. The most fascinating part is that Beijing is not indulging in one-upmanship – at least, openly. It knows Central Asians respect discretion. It doesn’t speak disparagingly of either the Russians or the Europeans and the Americans.

In particular, it takes care not to ruffle Russian sensitivities. Its measure of success lies insofar as it is poised to advance its energy cooperation with both Russia and Central Asian countries. Arguably, it suits Moscow as well that it is China rather than the EU which is succeeding in the Caspian. So long as Europe’s energy dependence on Russia remains at its current level, Moscow remains content.

Equally, China’s latest foray into the Iranian gas scene will be welcomed by Moscow. On Wednesday, China National Petroleum Corporation CNPC and the National Iranian Oil Company signed a $4.7 billion deal to develop upstream phase 11 of the South Pars field with an estimated reserve of 14 trillion cubic meters, which is enough to supply Europe’s gas needs for a quarter century.

France’s Total had originally signed a memorandum of understanding in 2000 to execute the project but retracted under US pressure. As Iran moves slowly into the gas export market, Moscow will be pleased with more Chinese deals (and with the proposed $7.5 billion Iran-Pakistan-India gas pipeline from South Pars). Moscow’s preference is that Iran shapes up as a regional gas exporter in the huge Asian market.

Beijing will step up its energy diplomacy in Iran in the coming period. Its focus will be to pre-empt the Western oil majors. It will try to optimally exploit the window of opportunity that is fast closing. Beijing will anticipate that by the year end there is a strong likelihood of the US-Iran engagement accelerating. US President Barack Obama said in a BBC interview on Tuesday that “Although I don’t want to put artificial timetables in that US-Iran process, we do want to make sure that by the end of this year we’ve actually seen a serious process move forward. And I think that we can measure whether or not the Iranians are serious.”

Unless Washington’s engagement of Tehran breaks down, which seems highly unlikely given the high stakes for both sides, the Iranian energy scene is destined to become a turf of intense international competition within the coming six months to one year. China’s objective, therefore, will be to gain access to as much of the Iranian reserves as possible and work out the evacuation of supplies either via the Turkmen-China gas pipeline (which can have a loop connecting Iran) or through the Iran-Pakistan gas pipeline on which the formal agreement is likely to be signed in Ankara on June 14.

As in the Caspian, the race for Iranian gas pits China against the European countries rather than against Russia. The Kremlin made a big point in organizing its summit meeting with the EU in Khabarovsk.

M K Bhadrakumar served as a career diplomat in the Indian Foreign Service for over 29 years, with postings including India’s ambassador to Uzbekistan (1995-1998) and to Turkey (1998-2001).

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