China buys up Russia's backyard

By bne IntelliNews February 3, 2014

Ben Aris in Moscow -

Russia spent the end of last year battling the EU for control over Ukraine. But should the Kremlin have been paying more attention to what was going on its southern border instead? In the last three months, the Chinese have swept through Central and Eastern Europe (CEE) and Central Asia, buying up Russia's backyard in a string of billion-dollar deals.

Chinese President Xi Jinping was set for a summit in Moscow in September last year, where Russian President Vladimir Putin was hoping to conclude a crucial natural gas deal that would see a gas pipeline built to connect Russia's Siberian fields with China's underdeveloped northwest territories. The pipeline project was agreed on years ago, but the deal has been held up, as the two sides can't agree on the price of the gas that will flow through it.

However, instead of flying directly to Russia's northern capital, President Xi went on a whirlwind tour of Central Asia. It was like a visit from Santa Claus as Xi distributed billions of dollars of deals along the way.

In what must have come as a shock to the Kremlin, during his last stop in Turkmenistan Xi signed off on a $60bn energy investment deal that includes $10bn to develop the massive Galkynysh gasfield which has gas reserves of some 1.3 trillion cubic metres - enough to meet China's needs for several years. The Turkmen deal makes Gazprom's deal largely superfluous.

Chinese Premier Li Keqiang followed up a few weeks later with the second "16+1" China/Central and Eastern Europe summit held in Bucharest on November 26. Prime ministers from 16 Emerging European countries respectfully lined up with their caps in hand and the gold rained down.

China is clearly on an aggressive westward expansion and trying to spend their accumulated treasure of dollars before anything untoward happens to the currency. Chinese overseas investment rose to $80.2bn in the first 11 months of 2013, the latest data available - more than the $77.2bn that was invested in all of 2012. And outbound investment calculated on the basis of deals closed was up 28.3% in January-November.

The reason why Russia didn't complain about the Turkmen gas deal or any of the other deals in Central Asia is because Russia is one of the biggest recipients of this bonanza: Chinese investment into Russia surged 685% over the same period. The issue of the day is not whether Ukraine will become a vassal of Russia's new Soviet Union Inc, but if Russia will become just one of China's many raw materials appendages.

Materials and infrastructure

As we move into the new year, the promises that Xi and Li made are now starting to bear fruit and there is a steady stream of announcements as each of the deals come to a conclusion.

The deals come in two flavours: raw materials (and especially hydrocarbons) and infrastructure. In general, most of the deals cut in Central and Southeast Europe are infrastructure deals, whereas those in Eastern Europe and Central Asia are energy and mineral deals.

The Emerging Europe effort is going to be coordinated by China Civil Engineering Construction Corporation (CCECC), which is opening offices in Romania, Hungary and Bulgaria. In addition, Beijing has launched a $10bn fund to finance the projects. "We are interested in revamping railroads, bridges, tunnels, highways. Our company is willing to collaborate with local firms to benefit from European funding for such projects," said Zhang Zhenhai, general manager of the company's Eastern Europe department, during a China-Central and Eastern Europe forum in November. There are also plans for a Shanghai Cooperation Organization-backed (SCO) development bank in the works.

Further east the deals are being struck on a case-by-case basis and are mostly done at a governmental level. The overall goal is to double the trade between China and CEE, says Li. In Russia's case, trade has already soared to $89bn by the end of 2013, making China Russia's biggest trading partner. "China-CEE trade accounts for one tenth of China-EU trade," Li said during a visit to Romania. "We need to strive to double our trade volumes... in next five years... We need to work together to build large-scale infrastructure projects."

• Turkmenistan

China's deal over the Galkynysh gasfield may have been a shock to the Kremlin, but it was only one of many struck. The China South Locomotive and Rolling Stock Corporation (CSR), the largest locomotive construction company in the country, plans to build two passenger locomotives for Turkmenistan. CSR has already fulfilled four orders and exported more than 200 locomotives to Turkmenistan.

• Mongolia

The story in Mongolia is almost exactly the same: China has recently brokered a mix of energy and infrastructure projects designed to feed its economy with the inputs it needs.

China has been developing the Tamsag basin oil deposit with Mongolia for a decade, but in January Ulaanbaatar agreed to build its first oil export line at a cost of $1.5bn to China. Gas pipelines are the geopolitical equivalent of marriage, as they cost a lot to build and can't be moved once completed.

Infrastructure projects are rapidly tying the Mongolian economy to China: late last year it signed off on a plan to build a very short rail link across its southern border to China - a link Ulaanbaatar has been trying to avoid because it ties the two economies "too closely" together.

The Mongolian government is trying to balance the influence of all its large neighbours. That is going to be hard, as Mongolia already leads the world in the share of its exports that go to China, sending 87.6% of its goods over its southern border. And with the new pipeline and rail link, that share will only go up.


• Kazakhstan

Central Asia's hydrocarbon king has tied its economy closely to its neighbour China, but President Nursultan Nazarbayev has shown himself a master of international diplomacy, as he has managed this without annoying his other big neighbour Russia.

China already accounts for a big chunk of Kazakh exports. Kazakhstan produced some 82m tonnes of oil in 2013. A third was exported via the Caspian Pipeline Consortium (CPC) pipeline that runs over Russian territory to the west. Small amounts were sold via Azerbaijan and Iranian swaps, but most of the rest went to China via a pipeline that was built several years ago.

At the same time, China has quietly been buying into the Kazakh oil sector and already accounts for a quarter of the country's production, according to the press service of the Kazakh Oil and Gas Ministry. And in December, China upped its share again when the China National Petroleum Corporation (CNPC) took a 8.33% stake in the North Caspian Operating Company (NCOC), the multinational consortium developing the massive Kashagan oilfield in the Kazakh sector of the Caspian Sea, which is encountering technical problems but is due to come on stream this year

Most recently, the Chinese mining company Shenhua said in December it is considering investing up to $8bn in coal production in Kazakhstan, one of the biggest ever deals. "The Chinese company has had a series of talks with the local governors of Karaganda Oblast to develop a coal deposit. The production unit plans to produce 6m tonnes of coal a year," said the agency's deputy chairman, Kairat Karmanov, at the end of last year.

• Kyrgyzstan

Tiny Kyrgyzstan doesn't have much in the way of resources, but took in $400m of Chinese money to build a road running from the north to the south of the country, Transport and Communications Minister of Kyrgyzstan Kalykbek Sultanov said following his meeting with Li in November.

• Uzbekistan

China is one of the largest investors in the Uzbek economy with 488 enterprises operating in the country that have invested a total of $6.5bn.

The two signed 20 bilateral agreements at a business forum in Tashkent in November including a $350m investment deal to build a railway tunnel linking the Uzbek Fergana Valley to the country's main rail network in December.

In a second major deal textile company Chinese Henan Sine said it will invest $80m over the next two years into the bankrupt Bobur textile company in the Andijan region. Bobur was commissioned in 1982 and is one of the largest textile companies in the Fergana region.

• Romania

Outside Central Asia, China is looking at Romania as a second manufacturing bridgehead in Europe in addition to Belarus.

In November, Li and his Romanian counterpart Victor Ponta agreed to cooperate in building high-speed railways in Romania. The two leaders also reached comprehensive consensus on deepening cooperation in such fields as trade, energy and infrastructure.

During the same trip Chinese telecommunications equipment producer Huawei said it will invest in research and education programmes in Romania and will open a regional centre in Bucharest, according to Ponta.

And Romania and China signed two nuclear cooperation agreements to clear the way for the Chinese company to take a role in building new reactors on the Cernavoda site, in a project being led by Canada's Candu Energy, owned by Montreal-based SNC-Lavalin. CGN, a Chinese energy company, has promised to supply part of the financing for the $5.4bn project.

• Belarus

Belarus is also set to be a major manufacturing bridgehead for China in Europe. A new Chinese-Belarusian industrial park is going up outside of Minsk and Huawei also said in December it was interested in opening an R&D center in Belarus as one of several projects.

In January, Belarus and China agreed on a programme to promote an all-round strategic partnership in 2014-2018 and Minsk is hoping China will become a major investor into its economy.

• Serbia- Hungary rail link

China will participate in building a railway link between Serbia and Hungary, Li said after meeting the Hungarian and Serbian prime ministers in the Romanian capital in Bucharest in November.

Flanked by Hungarian Prime Minister Viktor Orban and his Serbian counterpart Ivica Dacic, Li said: "We reached important agreement... we agreed to begin cooperation on the construction of railway linking Hungary and Serbia... The three parties agreed to immediately set up a joint working group to launch the project as soon as possible."

• Bulgaria

Two state-owned Chinese construction companies have offered to build Bulgaria's Cherno More (Black Sea) motorway, a major new road to connect the north and south of the country. If it goes ahead, the project will be funded by China's $10bn CEE fund. The deal was discussed during a visit to Beijing by Bulgarian President Rosen Plevneliev in January, when he met with President Xi. The two heads of state also agreed to double their mutual trade volumes over the next five years.

"Many Chinese companies invest in Bulgaria, in the industry, in agriculture, in renewable energy. We also welcome the ambitious programme of Chinese construction companies to participate in infrastructure projects in Bulgaria," said Plevneliev after the meeting.

• Ukraine

And finally, several big deals worth billions of dollars were announced between China and Ukraine in 2013 when Kyiv was particularly strapped for cash. However, while the Ukrainian side reported these deals as closed, it later transpired that most were only "agreements" - in other words, no money was committed.

Still, Ukraine and China say they are planning to actively develop cooperation in the energy sector, in particular Ukrainian coal gasification, Ambassador Extraordinary and Plenipotentiary of Ukraine to China, Oleh Demin, said in December.

"We're talking about coal gasification, serious cooperation, which our countries began last year to alleviate our energy situation, to maximally use our own energy opportunities for the development of the national economy," the diplomat said at a briefing in Xian (China), speaking about the issues that will be raised during the state visit of Ukraine President Viktor Yanukovych to China.

Related Articles

Drum rolls in the great disappearing act of Russia's banks

Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more

Kremlin: No evidence in Olympic doping allegations against Russia

bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more

PROFILE: Day of reckoning comes for eccentric owner of Russian bank Uralsib

Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more

Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.