Natural resources make allies of China and Russia

For Chinese people born in the 1940s and 1950s, many of whom still remain in very powerful positions in China, heart-felt Russian folk songs and old photos of beautiful Russian girls (who were pen pals) stir fond memories. Mao Zedong’s campaign to ally with the former Soviet Union as a fellow communist country helped instil Russian culture into China.

Much of it was romanticised. Even today, most Chinese still have a mythical notion of what Russia is really like, which is why participants in a natural resources panel at the third annual Russia & CIS Investment Summit, hosted by FinanceAsia and AsianInvestor, said they take the time to escort serious investors to Russia to show them the real deal. (And they take investors to the CIS region, or the Commonwealth of Independent States, which comprises the countries of the former Soviet Union.)

Russia has changed and so has its relationship with China. Today, the two countries are no longer allying themselves as communist superpowers — the common denominator is now resources. Russia has them, China wants them.

China is aggressively looking for sources to meet its energy needs and, at the same time, striving to meet its goal to cut emissions by 40% by 2020. So that means Russia is going to have to help China on myriad levels.

“China is looking actively at alternative [energy] sources,” said Dominic Li, managing director of UC Rusal. “The ongoing hydropower projects are a reflection of its hunger for clean energy.”

“Only 4% to 5% of China’s energy demand is met by gas,” said David Robson, chairman and CEO of Tethys Petroleum. “Gas may not be the cleanest fuel but it is a lot cleaner than coal, so China may want to move to a more ‘gassy’ environment, and very clearly the obvious place China can get that gas from is Russia and the CIS region. The competition among different suppliers in the CIS region will benefit the prices for buyers. So we are likely to see more trade between the two nations in gas as well as crude oil.”

But there are some hurdles. Robson noted that there are vast deposits of gas in eastern Siberia, which could certainly have a significant effect on the Chinese market. The infrastructure to develop and export the gas could be put in place relatively easily, but price still appears to be a big stumbling block.

The Russian position seems to be that pricing should be tied to long-term contracts for crude oil and heavy fuel oil, just like in Europe. But China’s competing supplies of domestic gas, Central Asian imported gas and LNG are significantly cheaper on a blended basis. So there is a big difference between what Russia is asking and what China is willing to pay.

Bridging this gap will be difficult unless the two countries can take a different view on pricing.

Another issue that remains is logistics. Put simply, both rail and sea connections need to improve. But the panellists cast that as an opportunity. “We have seen big oil companies investing in transportation projects,” said Alex Metherell, head of natural resources for VTB Capital, who went on to say that he expects there will be an increasing number of investment opportunities in infrastructure.

Finally, panellists pointed out that the natural resources-based relationship between China and Russia will also have spillover effects to other industries. Scientists and engineers are sure to cooperate more, for example, and this, say the panellists, is likely to be encouraged on a business level (rather than a government-sanctioned diktat).

Rusal, for example, is carrying out a $1.5 million five-year joint project with the Hong Kong University of Science and Technology (HKUST), aimed at strengthening scientific and educational ties between Russia and Hong Kong. The project will include a series of lectures given by international politicians, businessmen, scholars and scientists, an exchange award and scholarship programme, and finally a research programme to develop a large-scale pre-insulated fibre-reinforced aluminium envelope and roof system, using aluminium composite as an energy-saving and environmentally friendly material.

When scientific, thought-leadership starts to emerge from both China and Russia, the rest of the world — and not just 1940s and 1950s-era Chinese — may have to rethink their views on both nations.