‘Western’ Sanctions will not create a Chinese-Russian Alliance
Vladimir Putin and Xi Jinping at the BRICS summit 2015. Photo: Kremlin.ru
Economic sanctions imposed by the US, EU, Norway, Canada, Switzerland, Japan, and Australia on Russia will boost the already visible energy diversification into Asian markets as well as business cooperation between Russian and Chinese companies. In May 2014 Gazprom and China National Petroleum Corporation (CNPC) reached a deal worth $400 billion for example. As another illustration, CNPC bought a 10% stake in Rosneft’s Vankor oil fields in November 2014.1) However, this does not entail an automatic strategic rapprochement between China and Russia, as hawkish politicians and media outlets often argue.2)
The melting of the Arctic sea ice has spurred the hopes of companies and states for increased resource extraction in the Arctic region. Well-developed onshore oil and gas production capacities in western Siberia are mature and some already in decline.3) The introduction of new oil and gas production technologies and projects might offset declining outputs for some years,4) but in the long run offshore projects seem to offer new chances to uphold or even to increase outputs again.
Russian ambiguity in its Arctic region
Russia is the biggest Arctic littoral state and is expected to hold the biggest share of undiscovered resources in the Arctic.5) National security interests do not dominate today’s Russian Arctic policy as much as during the Cold War – they still matter though. Instead national economic interests and “the interests of companies closely associated with the Russian state”6) play a bigger role than during the Cold War. Yet, it would be too limited to analyze Russia’s Arctic policy with just economic lenses. In fact, Russia’s Arctic policy is pending between the desires to treat the Arctic as an area of domestic politics and the need to open up the Arctic to outsiders.
In 2008 Russian authorities have passed a legal framework regarding the placing of new offshore licenses. Due to, this legal framework, new offshore licenses could only be granted to companies “with a state majority holding and at least five years’ experience of working on the Russian continental shelf”.7) As only Gazprom and Rosneft did fulfill these new criteria Russian authorities had effectively ensured that Arctic offshore exploration activities by smaller private companies, as well as from foreign companies, were not possible without a joint venture with either Gazprom or Rosneft.8) So, there is a conflict of interest between the need to open the Arctic to outsiders within the economic realm that collides with security driven ambitions to close the Arctic – security not only in the military sense, but also in the sense of securing the revenues generated in the Arctic for the maintenance of power of the Russian political elite. While Russian companies need international cooperation, as they lack the expertise, capital, and technology to conduct and maintain offshore and deep-sea drilling activities,9) Russian political leaders would rather keep the Arctic closed.10)
The sanctions hamper Russian ambitions to exploit its Arctic region
The US, EU, Norway, Canada, Switzerland, Japan, and Australia imposed sanctions on Russia as a punishment for Russia’s destabilizing activities in Crimea and Eastern Ukraine. With the downing of the MH17 passenger flight (July 17, 2014), European leaders even tightened their sanctions on Russia. German Chancellor Angela Merkel in particular invested a lot of energy to convince her European counterparts on this move. The resulting third set of sanctions, which was implemented in September 2014, is heavily affecting Russian ambitions for the exploitation of oil resources and reserves in its Arctic region. The sanctions impose bans on the deliveries of technology, financial assistance, and material for projects destined for oil extracting activities in Russia. Nonetheless, US and EU sanctions are not alike. The US for example compelled US based companies to stop all activities affected by the sanctions by September 26, 2014, whereas the EU exempts existing contracts from the new restrictions.(Siân Fellows et al. (2014) EU Clarifies Russian Sanctions. Reed Smith: https://www.reedsmith.com/en/perspectives/2014/12/eu-clarifies-russian-sanctions; Stanley Reed; Clifford Krauss (2014) New Sanctions to Stall Exxon’s Arctic Oil Plans. New York Times: https://www.nytimes.com/2014/09/13/business/energy-environment/new-sanctions-to-stall-exxons-arctic-oil-plans.html last accessed 24 February 2015.))
In reaction to criticism about this discrepancy, the EU harmonized European sanctions with those of the US and amended its sanctions on 4 December 2014.11) For example, Article 3 now covers bans on the delivery of “items suited to oil exploration and production in waters deeper than 150 metres” instead of “technologies suited to the oil industry for use in deep water oil exploration”.12) It is interesting that only the oil sector is targeted by the sanctions while the extraction of gas is excluded. This reflects especially European member states’ intention to leave the Russian gas sector untouched in order to protect themselves from supply shortages. In other words: it was less costly to target the Russian oil sector than its gas sector.
Russian-Chinese relations are mainly business oriented
Many commentators portrayed Chinese-Russian deals on gas deliveries from May and November 2014 as a sign of rapprochement between the two countries. Some even saw the emergence of a new alliance that is gaining strength due to western sanctions.13) For several reasons, this is an overestimation at the very least.
Yes, Russian companies have already announced that they would buy equipment from Chinese or South Korean companies in order to replace those products of European and US companies that are currently unavailable.14) But these statements, which are meant to portray the strength and independence of Russia, are merely empty words. New players in the Arctic offshore market will need some years in order to adapt to the Arctic environment and to update their technology. In addition, Asian (especially Chinese) companies are thus far themselves dependent on western technology for oil and gas development. Therefore, financial contributions from Asia seem like an option for Russia but on the technology/know-how side, there is no way getting around Western companies.15)
Yes, there have been major deals and joint ventures between Russian and Chinese companies in the last years and also after the implementation of the sanctions. However, a closer look reveals that the Russian Energy Ministry has published plans for the eastward diversification of its energy exports before the sanctions were in place.16) Also the spectacular gas deal that has been finalized in May 2014 has been the subject of negotiation since 10 years.17) From a business perspective, Russian energy companies need the connection to Asian and especially to the Chinese market, as the European markets are stagnant and thus rising profits are not easy to obtain on Russia’s traditional markets in Europe. Moreover, the shale gas boom in the US has undermined Russian plans to export natural gas into the USA – yet ever since the crisis in Ukraine began, these plans appear to have been developed in a fantasy world anyway. Furthermore, Russian energy companies are reliant on foreign direct investment not only since the beginning of the sanctions but already since their plans to dig into the highly challenging and cost-intensive Arctic offshore area. In sum, the imposition of sanctions on Russia cannot automatically be seen as a trigger for an intensified Russian-Chinese business cooperation but rather as a catalyzer.
Russia wants to limit the footprint of non-Arctic players in Arctic governance
Nonetheless, Russia is generally not in favor of giving outsiders – i.e. non-Arctic players – a say or crucial role in Arctic issues. Russia was a strong supporter of the Ilulissat declaration in 2008, which affirms the dominant role of the five Arctic littoral states in both territorial issues as well as resource development in the Arctic. Russia is skeptical on letting new players into the Arctic arena. Regarding China, Russia has been especially cautious, due to its proximity and its economic and military power. Additionally, military clashes between the Soviet Union and China during the period of the 1960’s and 1980’s, and border disputes that have been settled only in 2004, have contributed to the aloof Russian posture towards China.18) Thus, it comes as no surprise that Russia has blocked Chinese attempts to become an observer to the Arctic Council (AC).19) Russia was most certainly not cheering when China was finally granted observer status in 2013 still it agreed to this move in the end. The Chinese observer status had become acceptable to Russia after an update of the criteria for admitting new observers to the AC had been adopted in 2011. Ever since this change, new observers are required to recognize Arctic states sovereignty, sovereign rights, and jurisdiction in the Arctic.20)
A window of opportunity for China?
The sanctions have created a window of opportunity for China. Since the initiation of the sanctions the Russian bargaining position vis-à-vis China has altered for the worse, even though Russian energy diversification into Asian markets was initiated years ago. Russia is now acting out of a position of weakness, as the sanctions have exposed its heavy dependency on foreign capital and technology to implement its ambitious plans for resource extraction in the Arctic. Since western capital, technology and expertise are unavailable for Russia for an unknown period of time, Russia has no planning horizon on when to expect regular business cooperation with western companies again. Therefore Russia does not have the leverage in negotiations it used to have. China will surely make use of the current possibility to sign favorable deals, in order to make Arctic resources a piece of the puzzle to safeguard its energy supplies for the next decades.
In sum, the sanctions regime will speed up and intensify Russian orientation to Asian and especially to Chinese markets and companies. But it is questionable to which extent Chinese companies are able to substitute both western capital and technology. An intensification of business cooperation between Russia and China is likely but this will not necessarily go hand in hand with intensified political collaboration as well. As pointed out, Russia is trying to deny non-Arctic players too much influence in the Arctic, thus it will try to limit China’s footprint in Arctic governance.21) In conclusion this means that we most likely do not (yet) see the emergence of a new alliance but rather two actors that share some mutual interests economically trying to reap benefits from Arctic resource development.
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