Presidents Putin and Jinping look on as the heads of Gazprom and the China National Petroleum Corporation sign on the dotted line (Source: the Presidential Press and Information Office)

Russia-China partnership threatens to shut out Western firms

28 May 2014 | By Rod Sweet 0 Comments

Russia and China’s agreement to build a gas pipeline between Siberia and Manchuria, agreed last Wednesday after 10 years of negotiation, may signal a fundamental shift in Russia’s diplomatic and economic orientation, with the effect of making it harder for European and American construction companies to win work in the country.

The $400bn, 30-year deal marks a new closeness between the two giants, who have had a strained relationship since they fought an undeclared border war in 1969. Commentators suggested that one reason the deal has now gone ahead was Russia’s confrontation with the West over Ukraine.

Keun-Wook Paik, associate fellow in energy, environment and resources at Chatham House in London, told the New York Times that Putin needed to find “an umbrella to show that he’s not completely isolated”, and lessen the impact of any future economic sanctions. Putin commented before the deal that “Russia–China co-operation has reached its highest point in all its centuries-long history”.

According to Alexei Miller, the chief executive of Gazprom, the state-owned enterprise that will begin supplying the gas in 2018, Russia will invest $55bn on building the infrastructure required to transport the gas to China.

In construction terms, the deal will trigger a huge inflow of investment. As well as the line itself, the project includes the large-scale construction of factories for the production of helium and other gasses, along with infrastructure facilities. A separate route to deliver gas to China’s western provinces is also in the works.

Maxim Poletaev, First Deputy Chairman of Russia’s Sberbank, told Russian news agency RIA Novosty: “Putin has announced this as a major top-priority project. Where else in the world would you find one?

“Everyone wants to make money. This construction project requires huge resources, huge contracts. Look at Turkish companies: without any ideological prejudice, they came in and built half of Sochi facilities ahead on the Olympics and earned money there.”

The gas deal was accompanied by talks to increase trade between Russia and China. China is already Russia’s largest trading partner, with bilateral flows of $90bn in 2013. The two neighbours aim to increase that to $200bn in 10 years.

The deal also opens the way for China to penetrate Russia’s transport infrastructure and power generation market, at the expense of Western firms, which are reluctant to enter into agreements that may be subject to future economic sanctions.

An additional factor that is increasing China’s leverage is the increasing difficulty that Russia is experiencing in raising capital on the world’s financial markets. Russia’s central bank says $64bn left Russia in capital outflows in the first quarter of this year, and the IMF is forecasting $100bn of outflows for the full year. 

This has made Chinese investment additionally welcome, and a series of joint ventures have just been announced by the two countries’ sovereign wealth funds, the Russian Direct Investment Fund and China Investment Corporation, worth some $1bn. These include  the first ever railway bridge over the Amur River on the Russia-China border.

Poletaev believes the Western businesses are dismayed by the worsening relations between Russia and the West. He said: “Western business is both eager and reluctant to speak. I feel a sense of regret on the part of Western investors about the tensions brought on by the countries’ administration, interested in achieving their narrow political objectives.”

Poletaev added that Sberbank, Russia’s largest bank, has expanded its international business, buying subsidiaries in Europe and Turkey, and is faced with heightened worries on the part of its foreign partners.