In mid-February, Russia and China signed an agreement providing for Chinese agencies to lend US$25 billion to the Russian energy trusts Transneft and Rosneft in return for the construction of a branch from the East Siberia-Pacific Ocean (ESPO) oil pipeline from Skorovodino to the Chinese border and the guaranteed supply of significant amounts of oil over the long term.  In the wake of the breakdown of American efforts to build its tactical cooperation with the Central Asian states over Afghanistan and the “global war on terror” into a broader strategic vision, the ESPO accord agreement signifies a reestablishment of the ability of China and Russia to cooperate together on geo-economic questions even within the context of their competition for influence in Central Asia.

BACKGROUND: Russian plans for an East Siberian oil pipeline were long on hold due to indecision between building it to China and building it to a Far East port that could supply other consumers as well such as Japan. Although the idea for such a pipeline first popped up in the mid-1990s as the Yeltsin administration sought ways to enhance Russian-Soviet economic cooperation, it was only in April 2003 that Presidents Vladimir Putin and Hu Jintao signed an agreement for a pipeline to the Inner Manchurian petrochemical center Daqing. Mikhail Khodorkovsky, then the chief of Yukos, at the same time signed an agreement with Chinese energy trusts for a China-only route.

However, a half-year later, Khodorkovsky was in jail awaiting trial and Yukos was being dismantled. The Pacific route was no longer off the table, and Moscow wanted to use it for diplomatic leverage over Japan. The Russian political executive approved a Transneft-blocked route to the Pacific Coast port of Nakhodka at the end of 2004, but the Kurile Island dispute backed substantive progress. Finally in April 2005, the Russian government decided to integrate the two variants. The pipeline would run from Taishet in eastern Siberia both to Daqing and to Nakhodka. The cash infusion also allows Rosneft to meet its debt obligations of over $9 billion this year.

The new ESPO agreement implies a price for oil from Russia to China of US$22 per barrel and an embedded interest rate charged by China to Russia of 6%. Both figures are exceptionally advantageous. The agreement just signed calls for Russia to build a 1.6 million barrel per day (bpd) pipeline to Skorovodino. In return for a $15 billion loan to Rosneft and $10 billion to Transneft, Russia will develop further fields, build the ESPO leg for Daqing from Skorovodino to the Chinese border, and supply to China at least 300,000 barrels per day. Beyond the border in the Chinese interior, Beijing will construct a domestic pipeline approximately 600 miles long to Daqing. From Skorovodino to Kozmino Bay, Russia will build a further 1 million bpd pipeline.

IMPLICATIONS: As late as last October, Russia hoped that Kazakhstan would also use the ESPO pipeline, even publicly suggesting that the country’s national energy transit trust KazTransOil might use ESPO. The head of the energy production trust KazMunaiGaz, however, demurred. It appears that any discussions that occurred were only of the most general nature without seriously adumbrating specific quantities or timetables. Kazakhstan’s experience with Russia’s delaying tactics in negotiations over the long-agreed-in-principle doubling of the capacity of the Tengiz-Novorossiisk pipeline (the Caspian Pipeline Consortium) certainly bred skepticism among the Kazakh energy decision making elite.

Nevertheless, the ESPO agreement with China is part and parcel of Russia’s re-orientation, under way for some years now, of energy exports towards Asia and away from Europe. In the connection, it is worth noting that also in February, Russia inaugurated in Sakhalin its first liquefied natural gas (LNG) plant for East Asia. At projected full capacity, this plant, which is Russia’s first venture into the global LNG market, would supply 5% of world demand. The first stage of development is expected to be at about one-third of that capacity, of which two-thirds of exports will go to Japan with the remainder divided between North America and South Korea. This calculation reflects the expectation that the annual increase in Asia’s gas demand will average 3% through at least 2030, with India and China together accounting for a significant fraction of the total.

Sino-Russian competition for influence in Central Asia has become manifest over the course of the present decade as Beijing has extended its reach into the region. Its influence in neighboring Kyrgyzstan was already established in the 1990s and has not diminished since then. It is perhaps in the energy field that China’s sway has recently become most evident. An oil pipeline from eastern Kazakhstan into western China agreed in the late 1990s was after years of delays finally built and opened, and plans are on course for its extension westward to Aqtobe and beyond. A gas pipeline from Turkmenistan was agreed last year and is now under construction, with ground having been broken in the transit countries Kazakhstan and Uzbekistan. Also the Shanghai Cooperation Organization has provided China with a regular forum for exploring and deepening contacts and cooperation with the Central Asian states that it is subsequently able to follow up on a bilateral basis. Thus for example on the basis of a 2005 Treaty on Friendly and Cooperative Partnership, China’s relations with Uzbekistan have been deepening, particularly over the last two years, across a multitude of issues.

CONCLUSIONS: At the beginning of the current decade, Russia and China appeared to be in the process of establishing an entente over the evolving shape of Central Asia, even dividing it informally into competing spheres of influence. The June 2001 agreement that institutionalized the “Shanghai-5” grouping as the Shanghai Cooperation Organization (SCO) also provided for a joint anti-terrorism center in Bishkek, which was however later established in Tashkent. The Sino-Russian aspect of the cooperation was signaled separately in July 2001, when the two countries signed their first Treaty on Good-Neighborly Relations, Friendship, and Cooperation in fifty years. After 9/11, sudden new American attention to the region led to military basing agreements with Tashkent and Bishkek in October 2001. With boots on the ground in Afghanistan, Washington appeared by the end of 2002 to have blocked the impending closure of Sino-Russian hegemony over Central Asia.

By early 2009, however, the American profile is fading. Uzbekistan expelled American forces in 2005, and the U.S. is losing the Manas base in Kyrgyzstan, although Washington is considering reinvigorating military cooperation with Tashkent as a backstop to the latter eventuality. There may be still a place for Western powers in Central Asia, and the Central Asian states recognize that this may be in their interest. For example, Kazakhstan is now as concerned about forced dependence upon China as it was earlier about forced dependence upon Russia. Both Kazakhstan and Turkmenistan have been moving towards a long-term expansion of energy exports in the western direction. However, neither the U.S. nor Europe seems to have a strategic view of the region, or at least the means to implement one, notwithstanding the EU’s adoption of a Partnership Strategy with Central Asia nearly two years ago.

After the China National Petroleum Corporation’s headline acquisition in 2005 of the Canadian company Petrokazakhstan in a bidding competition against the Russian trust Lukoil, there were noises made on both sides in favor of greater cooperation in energy affairs. The ESPO deal falls into this perspective, and its significance is essentially bilateral except for third countries such as Japan, which wanted to import the energy from Russia but could not match the Chinese offer. The Sino-Russian ESPO accord signals that even if the incipient Sino-Russian entente over Central Asia of a decade ago has been overtaken by events and fallen by the wayside, nevertheless the capacity for substantive and significant cooperation between Beijing and Moscow in the broader region has been reestablished. This notwithstanding, the Central Asian states on their own will continue to pick and choose between them insofar as they are able, seeking also to balance their international policies with other actors such as the EU and its members, the U.S., and Japan.

AUTHOR´S BIO: Robert M. Cutler is senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada.