Putin's Beijing visit dampens Russian hopes of Chinese windfall

By bne IntelliNews September 3, 2015

bne IntelliNews -


Despite Russian hopes of increasing its trade with China to compensate for its frozen links with the West, a two-day visit to Beijing by President Vladimir Putin yielded a sparse crop of agreements as Russia's neighbour struggles with its own economic crunch.

A handful of deals were signed in infrastructure, banking and investment, but energy, the key focus sector of bilateral cooperation, yielded no breakthrough deals or new projects, TASS reported on September 3. 

Rosneft CEO Igor Sechin even said the amount of extra supplies of crude oil to China by his company may be cut to 4.5mn tonnes instead of the originally expected 5mn.

"This is linked to the lack of adequate infrastructures inside China," TASS quoted Sechin as saying. "We have agreed with our partners that we will compensate for these amounts during future periods," he added. "The overall contracted amount will remain unchanged."

Low expectations

Just as Chinese President Xi Jinping came to Moscow in May for celebrations of the defeat of Germany in World War II, Putin visited China to attend festivities marking the end of the war against Japan. But with the ruble's recent volatility bringing extra risks to Russia-China cooperation, expectations for major new deals were low before the event.

Overall trade between Russia and China dropped by 30% in H1 to $31bn, reflecting dashed Kremlin hopes that China could quickly become a prime consumer of Russian goods.

Putin nonethless put a positive spin on the current downturn, pledging to see through joint projects in order to pave the way for future growth.

"We see turbulence going on in the world, in our economies. We are ready for this," the Russian leader said at a meeting with Chinese President Xi Jinping. The sides still had "full confidence that we will move forward consistently, develop our relations, implement our plans, including large projects which will definitely have a positive effect on the development of Russian and Chinese economies, and the global economy as a whole", Putin noted.

Kinks remain in key pipeline projects

After western states imposed broad economic sanctions on Russia in 2014 for its actions in Ukraine, Moscow turned its attention to China as a funding source and partner in a raft of major projects in energy and infrastructure. However, the ruble's subsequent crash and the collapse of oil prices made some key Russian-Chinese projects too expensive. 

It was reported earlier that the Power of Siberia gas pipeline to China is not expected to start operation before the end of 2018, with seven months delay. The pipeline construction began in September, 2014, when oil fetched $103 per barrel, twice the current price.

Now the $55bn of investments needed to further develop the project will pay off only if the gas price, which is tied to the oil price under the bilateral contract, is at $340-360 per 1,000 cubic metres on the Chinese border. This is possible if oil costs no less than $100 per barrel, experts estimate.

In the past year, Russian gas monopolist Gazprom has abandoned hopes of receiving a $25bn pre-payment from China to build Power of Siberia.

Meanwhile, the timeframe of Altai, another gas route to China, has still not been determined. And independent gas producer Novatek's Yamal LNG project, developed with France's Total and China's CNPC, is still waiting for $15bn of investments promised by Chinese partners. 

China's demand for gas, the main contributor to trade growth, has fallen year on year for the first time since 2011, while China's gas consumption increased by just 2.3% y/y in July. This means that the target of $200bn in trade turnover by 2020 cited by Putin in May when he hosted the Chinese president's visit to Moscow is unrealistic.

Apart from energy, hopes for major Chinese investments included a $1bn timber plant in the Siberian city of Tomsk; a large bridge connecting Russia with Crimea; and a high-speed railway link between Moscow and Kazan for the 2018 soccer World Cup. Russian Deputy Prime Minister Dmitry Rogozin recently even floated ideas for a joint space station on the moon.

"Not every project will be built but Russia just has to be patient because this is how China operates," an unnamed Russian government source told the Moscow Times in August.


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