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Fri Feb 24 11:55:10 PST 2006

Energy-rich Russia has proposed piping gas and oil to resource-hungry China.
But Russia¹s record of using energy exports to promote its foreign policy
interests suggests that, if the new pipelines are actually built, supplies
could be a source of friction rather than friendship

RUSSIA and China have much in common. The huge countries share a border of
2,700 miles (4,300km) and a history of autocratic rule. And both are
enjoying economic booms. But while Russia prospers by exporting oil and gas
from its vast reserves, China is a voracious importer. On March 21st
Russia¹s president, Vladimir Putin went a little way towards keeping both
economies bubbling in the long term, while making the most of the mismatch.

Mr Putin, in Beijing for talks with China¹s leader, Hu Jintao, agreed a
number of deals that could partly slake China¹s huge thirst for energy.
Gazprom, Russia¹s state-controlled gas monopoly, will construct pipelines
from Siberia that should start pumping gas to China in five years. State oil
firms from the two countries will run joint-ventures. And, perhaps more
importantly, China National Petroleum Corporation agreed to stump up $400m
towards an oil pipeline between eastern Siberia and China.

China should not celebrate too soon on the last deal, at least. Mr Putin
failed to give any details of the construction or time-scale of the oil
pipe, though his energy minister said work would begin this year. Russia has
long deliberated about the route the pipe should take, with both China and
Japan desperately keen for it to come to them. As usual, final plans will
depend upon the conclusions of a ³feasibility study². The environmental
impact of such a big project could be enormous. The pipe¹s proximity to Lake
Baikal, the world¹s largest single store of fresh water, and its effect on
the haunts of a rare species of leopard apparently trouble Russia¹s
planners. More pressing, however, are the interests of the Russian state.

Lobbying from Japan and China on the route of the pipeline has gone on for
some years. Japan wants it to reach the shore of the Sea of Japan, where
tankers could distribute the black stuff to Japan and China, and elsewhere
in Asia and America. Japan is ready to put a hefty sum towards construction
costs to secure a deal. This route would be far longer than one to the
proposed terminus in China.

Mr Putin has suggested that the pipe will run to the coast and a spur will
supply China with his country¹s oil. But his silence on details may be
intended to suggest that all options are still open while Russia waits for
more concessions. That, at least, is typical of Russia¹s use of its oil and
gas as instruments of foreign policy. Even the promise of a pipeline is a
useful means of wielding influence over neighbours, both to the east and to
the west. Russia may hope for a favourable outcome in a territorial dispute
with Japan over the Kuriles, a chain of islands linking Japan to Russia. Or,
with China, it might expect better co-operation in Central Asia.

China¹s quest for ³energy security² has sent it far and wide. Last year,
CNOOC, a state oil firm, even tried to buy America¹s Unocal, though Congress
stymied the move. Russia previously blocked Chinese firms from buying stakes
in its oil firms, so the proposed joint-ventures count as something of a
concession. Chinese state-controlled oil firms are also busy picking up
assets in various corners of Africa, Venezulea, and most galling to Russia,
in the former Soviet republics of Uzbekistan and Kazakhstan.

Keeping a grip

Russia¹s grip on the oil and gas of Central Asia and the Caucasus loosened
after the break up of the Soviet Union. But through Transneft, the state-run
Russian monopoly that owns many pipelines in the region, it retains serious
clout. Until recently much of the energy exports from these areas went
through Russia. Last year, however, a consortium led by BP opened a huge
pipeline between Baku, on the Caspian Sea, and the Turkish port of Ceyhan.
When operational it will give the West access to the region¹s oil and gas
through a pipeline that avoids Russia. Last year a pipeline opened between
Kazakhstan and China which may yet extend to the Caspian oil fields. Until
then most Kazakh oil was piped through Russia.

Mr Putin has responded by consolidating the state¹s hold over domestic oil
and gas reserves. Last year, Gazprom, the giant state gas company, bought
Sibneft, a private Russian oil producer. Earlier, Rosneft, another
state-controlled oil firm, acquired the main production operation of Yukos,
a private energy company that had been dismembered by Russia¹s state.
Yukos¹s boss, Mikhail Khodorkovsky, was also thrown into jail, perhaps
partly because he planned to build a private oil pipeline to China (he also
meddled in internal Russian politics). Foreign oil companies have also been
blocked from making any new investments in Russia.

Such tight control of energy exports lets Russia manipulate relations with
its near neighbours. It cut supplies to Ukraine at the start of the year as
the two countries rowed about the cost of gas. Many suspect, too, Mr Putin
was punishing Ukraine¹s pro-western government. Russia subsidises gas
exports to Belarus, buying the staunch loyalty of its leader. When Belarus¹s
leader, Alyaksandr Lukashenka, irked the Kremlin in 2004 Russia turned off
the taps, if only briefly. A new pipeline across the Black Sea, carrying gas
to Turkey, raises questions over Russia¹s influence on that country. And
western Europe in general is increasingly reliant on Russian energy exports.
Though the dispute in Ukraine was settled quickly, it highlighted doubts
over Russia¹s reliability as a supplier. At the very least it made clear
that‹as China and Japan know only too well‹the provision of energy supplies
has political, as well as economic, ramifications.