The China Analyst

2011 was a year of flourishing trade relations between Russia and China, with trade flows reaching a new record of nearly USD 80 billion. The 2009-18 Cooperation Programme also gained traction in 2011, with 27 joint investment projects put into operation. The only major sticking point is the lack of agreement on natural gas prices.

China-Russia Briefing: Trade highs; Joint investment projects; Oil and gas deals

• Bilateral trade between China and Russia set a new record in 2011, reaching USD 80 bn. At the current pace, bilateral trade will exceed outgoing Russian President Dmitry Medvedev’s prediction in June 2011 that this figure would reach USD 100 bn by 2015. Near-border territories play a special role, with China becoming a major trade partner for the Russian Far East in the last decade. However, resources still dominate Russian exports to China while finished goods’ share in China’s total exports to Russia exceed 75%
• On 31 January 2012, the Chamber of Commerce and Industry of the Russian Federation (RF CCI) held a session of the Russian-Chinese Business Council (RCBC) to announce the 2011 outcomes of the 2009-18 Cooperation Programme. Overall, 27 major joint projects worth a total of USD 10 bn were implemented in the 19 federal regions of Russia. The original framework between the Russian Far East, Eastern Siberia and Northeast China called for the establishment of 200 projects throughout the three regions. The commencement of this framework has seen increased participation by Chinese companies in Russia in 2010 (see chart below)
• Despite certain price disputes between the China National Petroleum Corporation (CNPC) and Russia’s Rosneft and Transneft during the autumn of 2011 regarding the transport of oil via the East Siberia-Pacific Ocean (ESPO) pipeline, in 2011, oil supply via ESPO was flowing in accordance with the contract terms. The ‘ever-pending’ gas deal, however, which involves supplying natural gas to China via the ‘Altai’ pipeline from Western Siberia, remains a thorny issue

China-Russia Trade

Total Trade

• Bilateral trade between China and Russia maintained a confident trajectory in 2011, reaching USD 79.25 bn, an increase of 43% y-o-y (see chart below)

China Imports from Russia

• China’s imports from Russia in December 2011 amounted to USD 3.65 bn, up 47.7% y-o-y
• China’s imports from Russia in 2011 amounted to USD 40.34 bn, a staggering increase of 56.15% y-o-y

China Exports to Russia

• China’s exports to Russia in December 2011 amounted to USD 3.53 bn, up 19.1% y-o-y
• China’s exports to Russia in 2011 amounted to USD 38.9 bn, an increase of 31.37% y-o-y

China-Russia Trade Nexus: Heilongjiang

• Heilongjiang province in Northeast China plays a crucial role in China-Russia trade relations, with trade volume totalling USD 18.99 bn in 2011 or 23.96% of the total trade volume between the two countries
• Among Heilongjiang’s exports to Russia, the highest growth rates can be seen in machinery and electronic appliances (38.2%) and hi-tech products (10.3%). However, exports are still dominated by clothing, footwear and textiles, which collectively account for a share of around 50%
• Heilongjiang’s major imports from Russia include crude oil, iron ore, timber and wood pulp. From January to November 2011, growth rates for iron ore, timber and wood pulp were 84.75%, 52.7% and 32.3%, respectively. However, with the official launch of ESPO on January 1, 2011, provincial trade relations with Russia are now dominated by crude oil, a pattern which will likely last for years to come. Heilongjiang’s oil imports stood at 15.01 mn tons in 2011, accounting for around 60% of China’s total oil imports from Russia in 2011

China-Russia Investment

Major Recent Deals

• At the end of September 2011, Omsk Manufacturing Association and China’s ZTE signed a cooperation agreement to collaborate in the production and deployment of complex solutions on the basis of GoTa technology (Global open Trunking architecture). The firms agreed to implement joint projects to develop new techniques and technologies, in addition to conducting joint R&D and marketing research
• Also in September, Sakhcement-Longxing, a China-Russia joint venture, commissioned a cement plant in Sakhalin, an island on the east coast of Russia. The costs of construction-installation works and equipment totalled USD 2.74 mn, with the Chinese party assuming USD 1.4 mn of these costs. During its first three months of operation, the plant produced 7,000 tons and expects to reach an annual capacity of 150,000 tons
• In February 2012, another China-Russia joint venture, New Century, announced that it would complete the construction of a brick factory in Sakhalin in Q2 2012. The project is expected to help meet Sakhalin’s strong need for high-quality construction materials. With approximately USD 10 mn in investment from strategic Chinese investors, annual plant capacity is expected to reach 20 mn bricks
• Also in February, Rosvertol, the attack and transport helicopter arm of the state-owned Russian Helicopters holding company, announced an agreement with Xi’Ao Aeroplane Manufacturing, one of China’s leading aircraft manufacturers, to construct a production base in China’s Hebei province for the Mi-2M and Mi-2A multi-purpose helicopters. Construction is expected to be completed by July 2012, and the required investment is expected to reach USD 224 mn. Production capacity will be 100 helicopters per year. When operational, this base will also become the only overhaul centre for Mi-type helicopters in Asia

China-Russia Resources Watch

Electricity exports from Russia to China; Deadlock on natural gas pipeline project; New national oil and gas field service company

• In 2011, oil supply through the ESPO pipeline from Russia to China’s Heilongjiang province was carried out in full accordance with the contract terms. As mentioned in previous editions, according to the 2009 agreement between Russia’s Rosneft and Transneft and China’s CNPC, Russia will supply 15 mn tons of crude oil to China annually over a period of 20 years. In 2011, the first successful year of the project, the amount supplied reached 15.01 mn tons. According to China, the transported oil meets the specified standards, with reliable pipeline operations and no breakdowns
• As for natural gas, China’s CNPC and Russia’s Gazprom have not yet been able to reach an agreement. The export agreement has been under discussion since 2006, yet for the past five years the parties have not been able to agree on a price. Various Russian experts seriously doubt that the parties will be able to come to any agreement on pricing in 2012, or even over the long term. Chances of a successful contract with mutually acceptable terms between Gazprom and CNPC became even smaller after the announcement of a new deal between China and Turkmenistan. During the summer of 2011, Gazprom even offered Beijing a discounted gas price, on the condition that CNPC will give Gazprom an advance payment of USD 40 bn, despite the fact that the offered discount would not guarantee 12-15% profit margins, a precondition for Gazprom in its previous investment projects in China. Nevertheless, in September, China officially declined to sponsor the deal with Russia. As many Russian experts believe, Gazprom will never agree on supplying natural gas on China’s current terms. If the parties eventually reach an agreement, it would involve a significant decrease in the supply volume

• In January this year, System Operator of the United Power System (SO-UPS), the sole provider of operational dispatch management for the Russian power grid, and the Northeast China Centre for Dispatching and Communication successfully completed testing of direct current links at the new 500 kW ‘Amurskaya-Heihe’ transnational overhead transmission line, which was built to increase electricity exports from Russia to China. The ‘Amurskaya-Heihe’ transmission line was jointly constructed by the Russian Federal Grid Company of Unified Energy System, Inter RAO UES, and China’s State Grid in 2011. This new line will significantly increase Russia’s power supply capacity to China by 750 MW without the need to synchronise the two countries’ systems
• In February, following a successful testing of the ‘Amurskaya-Heihe’ line, Inter RAO signed a deal with China’s State Grid on power supply for a period of 25 years. Supplies are expected to commence in March 2012. According to Inter RAO estimates, 2012 will see a doubling of Russian electricity exports to China, amounting to 2.6 bn kilowatt-hours. These exports will increase in subsequent years to eventually amount to around 100 bn kilowatt-hours over the 25 years
• In February, Igor Sechin, the vice-premier of Russia, assigned the Ministry of Energy and three leading state-owned energy companies (Rosneft, Gazprom and Zarubezhneft) the task of preparing the necessary documentation to realise the idea of creating a national oil/gas field service company, most probably on the basis of Rosneft. The idea was also presented to Russian President Elect Vladimir Putin. With this initiative, Igor Sechin effectively supports the plan initially offered by Natalia Komarova, governor of the Khanty–Mansi Autonomous Region (which accounts for over 50% of Russia’s crude oil production). Various experts in Russia are already discussing the potential participation of leading Chinese companies (namely CNPC and Sinopec) in this project, including the establishment of a joint venture. Experts emphasise the fact that both Chinese companies have solid experience in working with Rosneft. In 2005, Rosneft and Sinopec established a geological exploration joint venture (part of the Sakhalin-3 project), and in 2006 Sinopec bought a 49% stake in Udmurtneft, a subsidiary of Rosneft, to jointly produce oil in the Udmurt Republic (Urals region). In 2010, Rosneft and CNPC created the largest ever China-Russia joint venture (USD 5 bn) for the  construction of an oil refinery in Tianjin