(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON May 19 "China is our reliable friend,"
Russian President Vladimir Putin said on Monday in an interview
ahead of a conference in Shanghai. "To expand cooperation with
China is undoubtedly Russia's diplomatic priority."
Most evaluations of the bilateral relationship begin by
reciting the historical border disputes, rift between Mao Zedong
and Nikita Khrushchev, opening to China by Richard Nixon, and
the perennial problem of reaching an agreement on gas pricing.
But these are all essentially backward looking and ignore
the growing community of interests between the two countries.
The case for a closer bilateral relationship on energy, trade,
security and diplomatic issues is compelling.
In the energy sphere, the two countries are an almost
perfect match: the world's largest net energy exporter and its
second-largest net energy importer (2011) with a long land
China is already Russia's largest single trading partner,
with bilateral trade flows of $90 billion in 2013, and the two
neighbours aim to double the volume to $200 billion by the end
of the decade, according to Xinhua, China's official news
The Obama administration's strategic pivot towards Asia and
shifts in the energy market are pushing China and Russia closer
together as both react to fears of encirclement and energy
Russia's political disagreements with the United States and
its allies over Ukraine as well as China's territorial disputes
in the East and South China seas have left them isolated and
searching for friends to counterbalance Washington's network of
alliances in Europe and the Pacific. It is classic balance of
power politics. My enemy's enemy is my friend.
On Tuesday, the Russian and Chinese navies will begin seven
days of joint exercises in the East China Sea. It is the third
time the two navies have held joint drills since 2012, according
to Xinhua, and underscores the increasingly close cooperation
between them as relations with the western powers deteriorate.
There are no real obstacles to a diplomatic rapprochement
between Beijing and Moscow. There are no significant territorial
disputes between the two countries over their land border or at
sea. China's disputes are all far to the south.
Russia and China both have territorial disputes that pit
them against Japan, over the Kurile and Senkaku/Diaoyu islands
respectively, giving them an element of common interest. Both
have reason to be wary of the active foreign policy of Japan's
In other parts of the world including Africa, the Middle
East and Latin America, there are no significant issues on which
they are on opposite sides. For the most part their interests
coincide or are in different areas, which makes it easy to
maintain cordial relations. By contrast, there are plenty of
issues on which they find themselves on the opposite side from
the United States.
On energy, there is a clear convergence of interests. Russia
needs to diversify the markets for its oil and gas, while China
needs energy supplies that do not have to pass through transit
choke-points such as the Strait of Malacca.
Speaking to Chinese journalists on Monday, Putin confirmed
negotiations over natural gas exports to China had entered the
"For Russia, implementing these agreements means
diversifying gas supply destinations, while for our Chinese
partners ... it could be a remedy for energy shortage and
ecological problems," the Russian president said.
Even without the crisis over Ukraine, Russia has been
depending too heavily on oil and gas exports to Europe, leaving
it vulnerable to pricing disputes with customers, pipeline
disputes with transit countries, falling European demand and
shifts in European energy policy.
Europe accounted for 80 percent of Russian oil exports in
2012, while just 18 percent went to Asia, according to the U.S.
Energy Information Administration. Most of Russia's gas exports
went to European countries in 2012, with just 19 percent
delivered to Turkey. ("Russia country analysis brief" March
Relying so heavily on customers in Europe makes no sense
strategically or commercially. Just as consumers need a diverse
source of suppliers, producers need the security that comes from
having multiple customers.
Russia continues to export almost all of its oil and gas
from east to west through pipelines built in the 1960s and 1970s
at the height of the Cold War, even though the predominant flow
of energy in the world economy is now from west to east as a
result of the industrialisation of Asia and the shale revolution
in North America.
Given Russia's strategic location between Europe and Asia,
the two major energy-importing regions in the 21st century,
there is a strong strategic case for it to develop a more
balanced approach, increasing the proportion of oil and gas that
it exports to fast-growing markets in Asia.
Building new pipelines or gas liquefaction facilities to
take Russian gas east to China will be enormously expensive. By
contrast, the costs of building pipelines to Europe has already
been sunk and long paid back.
But Russia cannot afford not to develop alternatives.
Continuing to rely exclusively on pipelines to Europe exposes
its gas and oil suppliers to the risk their revenues will be
squeezed over the medium term.
READY TO DEAL?
China too has reasons to increase energy imports from
Russia, especially gas. At the moment, China's economy relies
heavily on domestic coal and imported oil.
But coal-fired power generation is causing severe pollution
and boosting greenhouse emissions, while almost all oil imports
transit through the Malacca Strait and across the South and East
China seas. China's navy cannot guarantee to keep the sea lanes
open in the event of conflict with the United States and its
Bringing oil and gas via pipelines from Russia would
strengthen China's energy security. It would cut the amount of
oil and gas that must arrive along vulnerable transit routes. It
would also give China more leverage to strike advantageous deals
in negotiations with other gas suppliers such as Australia and
oil exporters in the Persian Gulf.
So far, China and Russia have struggled to reach agreement
on the most important aspect of the negotiations: price.
The two countries have been struggling to reach a deal over
gas exports for more than 10 years.
But recent events have probably softened up both sides to
make a deal. Russia badly needs to demonstrate it has other
export options as European ministers contemplate cutting gas
imports. China needs to develop new allies as its relations with
U.S. allies in Asia worsen rapidly.
Closer relations between Chinese President Xi Jinping and
Russia's President Putin, as well as the broader strategic
context, suggest the time is ripe to do a gas deal.
(editing by Jane Baird)