Russia and China

Arctic development is important for China. Firstly, before the population of China reaches 1.3 billion by 2040⁴⁹, the government must find new sources of oil and natural gas.

Secondly, 90% of world trade occurs between Asia, Europe and North America⁵⁰. The Arctic Ocean connects these continents, and if transportation routes for goods went through the Arctic, shipping costs and time could be reduced for China, which controls a large volume of world trade.

For China, one of the largest shipping powers in the world, the search for alternative ways of moving goods is crucial. The South China Sea is the subject of a dispute between China and its neighbors regarding the ownership of several islands. Pirates threaten the passage of ships into the Suez Canal from the Indian Ocean. The use of the Northern Sea Route, which runs along the northern Arctic coast of Russia and is free of ice in summer, would reduce the time of cargo transportation by 40%.⁵¹ It can reduce China's dependence on the South China Sea, where tensions currently persist.

In order to maintain a leading position in the global economy, the Chinese leadership seeks to participate in large-scale projects related to new markets, transport routes, and hydrocarbon production in the Arctic. Of course, Russia today is one of the most promising partners of the PRC in terms of geography, politics and economy, and Moscow, in turn, seeks to attract Chinese investment. In the long run, China's participation in the development of the Russian Arctic is expected to increase, depending on continued changes in ice conditions, oil prices, infrastructure development and the development of relations between Beijing and Moscow⁵².

Beijing assures Moscow that its intentions are not contrary to Russia's interests in the Arctic. Russia and China still cooperate well in the Arctic Council, and Russia seeks constructive relations while China limits itself to the role of observer and does not dispute Russian interests. It is worth noting here that the conflict between Russia and the West over the events in Ukraine has negative consequences for intergovernmental cooperation, although most states try to do business “as usual.” China is in a situation where some states are members of the Arctic Council harshly criticize Russia about Ukraine’s policies, limit cooperation and avoid resolving contentious issues in the Council.

49 Population Pyramids of the World from 1950 to 2100 https://www.populationpyramid.net/china/2040

50 World Trade Statistical Review, 2017 https://www.wto.org/english/res_e/statis_e/wts2017_e/wts2017_e.pdf

51 ørensen C.T.N., Klimenko E. Emerging Chinese-Russian Cooperation in The Arctic. Possibilities and constraints.

(SIPRI Policy Paper, no. 46, 2017). https://www.sipri.org/sites/default/files/2017-06/emeging-chinese-russian- cooperation-arctic.pdf

52 S. Blank, Exploring the Significane of China’s Membership on the Arctic Council. (China Brief, vol. 13, iss. 14, 2013). https://jamestown.org/program/exploring-the-significance-of-chinas-membership-on-the-arctic-council

China is currently the largest emitter of greenhouse gases in the world (about 6 billion metric tons per year), while large Chinese cities are choking on smog caused by coal-fired power plants⁵³. Clean burning of natural gas is the best alternative, especially considering Beijing’s goal of purifying the air in Chinese cities by 2030. Thus, about a third of the world's gas reserves located in the Arctic are at the center of China’s cooperation with the Arctic states and, above all, with Russia. China is located in the northern hemisphere and has an important strategic interest in the Arctic, associated with the sustainable development of the national economy and national security.

It is obvious that in the future the Arctic will become an important source of energy supply for China. There was a time when Russia primarily worked with European countries on the development of energy production, including in the Arctic, - now a number of factors have forced the Russian government to reconsider its views on Asian countries as potential investors and technological partners, and also consider them as key consumers. It should be noted that China more and more stands out as an important partner of Russia in the development of the Russian Arctic. Cooperation with Russia on Arctic resources and shipping routes also contributes to enhancing the role and influence of China in the Arctic region.⁵⁴

Cooperation with Russia is one of China's top priorities. This is confirmed by the active development of a joint gas production project in Yamal, a very promising cooperation in the construction of the Belkomur railway, which will run from Arkhangelsk to the Komi Republic under the White Sea and further to the Urals, in which large Chinese corporations plan to invest.

It is obvious that Arkhangelsk and Murmansk will become the main transport hubs of Europe, connecting the Arctic sea route with Northern Europe and the regions within Russia.⁵⁵ Large shifts in world energy markets significantly influenced the development of Russia's Arctic shelf resources and the expansion of current land resources the peninsula of Yamal. At least three key factors led to a significant overproduction of natural gas in Russia and, consequently, delayed the development of gas resources on the Arctic shelf: 1) EU plans to diversify gas suppliers in the European market; 2) complex relations with Ukraine, which is the third largest consumer of Russian gas in Europe; and 3) the “revolution” of shale gas, which led to the loss of other

53 China now no. 1 in CO emissions; USA in second position ( Netherlands Environmental Assessment Agency, 2007) http://www.pbl.nl/en/dossiers/Climatechange/Chinanowno1inCO2emissionsUSAinsecondposition

54 Stephen Blank, Exploring the Significane of China’s Membership on the Arctic Council (China Brief, vol. 13, iss. 14, 2013) https://jamestown.org/program/exploring-the-significance-of-chinas-membership-on-the-arctic- council

55 Tarakanov M.A. Transport projects in the Arctic: synchronization, complexity (Vestnik Kolskogo nauchnogo tsentra Rossiiskoi akademii nauk, no. 1, 2014), 80–85

potential markets.⁵⁶ According to experts, the attitude to oil and falling prices for it made the development of Arctic shelf deposits economically unprofitable. This will continue until the oil price remains below $ 100 per barrel. However, the decisive factor in the need to diversify partnerships between Russian companies was the geopolitical tensions between Russia and the West in connection with the crisis in Ukraine⁵⁷.

China sees the Russian Far East, Siberia, and the Russian Arctic as increasingly important regions due to their potential for energy, export markets, and new shipping and trade routes.

These regions are recipients and partners of Chinese infrastructure and other development projects. This activity is synergistically linked to China's One Belt One Road (OBOR) Initiative.

China also seeks to take advantage of Russia's current geostrategic and geo-economic vulnerability, and Russia needs China as a partner to gradually strengthen its presence in the Arctic. In 2013, Rosneft and China National Petroleum and Gas Corporation (CNPC) discussed opportunities for cooperation on offshore projects in the Arctic Barents and Pechora Seas with special emphasis on the West-Novo-Novaya Zemlya, Yuzhno-Russian, Medynsky and Varandeysky marine deposits. Among them, the most promising are Medynskoye and Varandeyskoye, which, according to estimates, can produce 3.9 million and 5.5 million tons of oil per year, respectively⁵⁸. In February 2013, the head of the NOVATEK company visited China as part of the official Russian delegation to discuss the possibilities of cooperation on the main Arctic project “Yamal liquefied natural gas” (Yamal LNG). As a result of this visit, held on September 5, 2013, NOVATEK and CNPC signed a contract to sell a 20% stake in Yamal LNG.

The agreement provides for a long-term contract for the supply to China of at least 3 million tons of LNG per year, which is 18% of the total capacity. The transaction was approved by the Government of the Russian Federation in November 2013 and signed in January 2014. After the crisis in Ukraine, NOVATEK became the target of sanctions, and the Yamal LNG project again faced financial difficulties. NOVATEK was forced to seek further cooperation with foreign partners, and China was one of the few remaining alternatives. In September 2015, NOVATEK sold another 9.9% of Yamal LNG to the Silk Road Fund, the Chinese sovereign wealth fund, for about 1.09 billion euros. In December 2015, within the framework of the transaction, NO- VATEK received a loan from the Silk Road Fund in the amount of 730 million euros for a period of 15 years to finance the project. Based on the results of these achievements, on April 29, 2016,

56 Sørensen C.T.N., Klimenko E. Emerging Chinese-Russian Cooperation in The Arctic. Possibilities and

constraints. ( SIPRI Policy Paper, no. 46, 2017) https://www.sipri.org/sites/default/files/2017-06/emeging-chinese- russian-cooperation-arctic.pdf

57 Menkiszak M. Russia and the West: What Went Wrong and Can We Do Better?

https://dgap.org/sites/default/files/aticle_downloads/ostpolitikworkingpapermenkiszak.pdf

58 Jiping Zh. China National Petroleum Corporation : Annual report, 2013

http://www.cnpc.com.cn/en/2013ru/201407/9162442c8cf34006ad9b48f0c964dca5/files/8ab7e2986ae4ed096a33c12 8dc8578b.pdf

Yamal LNG announced the signing of an agreement with the Export-Import Bank of China and the Development Bank of China for two 15-year loans totaling 9.3 billion euros to finance the project, therefore China will provide up to 60% of the necessary capital for the implementation of the project. China also received huge benefits from the deal, since up to 80% of the equipment for Yamal LNG will be produced in Chinese shipyards.⁵⁹ Russia and China have increased their technological cooperation in the non-gas industry after the introduction of Western sanctions.

For example, in September 2015, China Oilfield Services Limited (COSL) entered into transactions with Rosneft and the Norwegian company Statoil for drilling two exploration wells in the Sea of Okhotsk, the conditions of which are similar to those in the Arctic . The agreement strengthened the potential for cooperation in the exploration of non-gas resources of industry leaders in Russia, Norway and China⁶⁰.

The subsoil is divided into blocks, the right to which is bought by energy companies wishing to explore and exploit them. The Chinese ship Hysy 720 is not only the first large deep- sea seismic vessel in China, but also belongs to COSL. Rosneft decided to conclude an agreement with this company in April 2016 in order to carry out the operation of connecting the two units during the summer of 2016, before the polar night⁶¹. In order to get ready for work, the Chinese ship docked in Kirkenes, the northernmost Norwegian port city, and signed agreements with the local transport company Henriksen⁶². The Russian-Chinese Arctic partnership since the summer of 2016 is only one of many, as the example of the Yamal LNG project shows, where the Chinese have invested $ 12 billion in Russian banks. China National Petroleum Corporation (CNPC) has a 20% stake in the Yamal project, which is located in the Arctic. As soon as the Yamal project starts, during the summer months, gas will begin to be transported east along the Northern Sea Route (in ice-class tankers “7 LNG”, which will be built by the South Korean company “Daewoo”). In winter, LNG will travel west to Europe. CNPC is also collaborating with Rosneft to explore three oil fields in the Barents and Pechora Seas.⁶³

The Eximbank of China and the China Development Bank are the main contributors to Chino-Russian energy projects. These banks and funds are institutions whose money comes from the state budget. Their participation in Arctic projects implies strong support and attention from the Chinese government. The oil and gas fields of the Arctic are registered under Russian law as

59 Henderson J. Russian LNG: Progress and Delay in 2017. https://www.oxfordenergy.org/wpcms/wp- content/uploads/2017/03/Russian-LNG-%E2%80%93-Progress-and-delay-in-2017-OIES-Energy-Insight.pdf

60 Klimenko E. Patterns of and Incentives for Entry into the Arctic and South-East Asia.

https://www.sipri.org/sites/default/files/atterns-of-and-Incentives-for-Entry-into-the-Arctic-and-South-East-Asia.pdf

61 Staalesen A. Russians Choose Chinese Explorers for Arctic Oil. (The Independent Barents Observer, 2016) https://thebarentsobserver.com/en/industry/2016/04/russians-choose-chinese-explorers-arctic-oil

62 Valantin J.M. The Russian Arctic Meets the Chinese New Silk Road, 2017.

https://www.redanalysis.org/2016/10/31/the-russian-arctic-meets-the-chinese-new-silk-road

63 Valantin J.M. Russian Arctic Oil: A New Economic & Strategic Paradigm?, 2017.

https://www.redanalysis.org/2016/10/10/russian-arctic-oil-new-economic-strategic-paradigm

strategic, foreign investments in which are strictly controlled. The continuous drop in oil prices and US and EU sanctions have had a serious impact on the Russian economy and, therefore, have caused a serious financial imbalance. Ironically, the difficulties faced by Russia are beneficial to China, since the Russian leadership gave a political guarantee to Chinese investment. ⁶⁴China has sufficient technology, power, and money of interest to the Arctic Council. In turn, China wants to benefit from any cooperation. Beijing also cautiously "goes north" so as not to seem aggressive. The Arctic is not necessarily the main task of China today, perhaps it is only part of long-term planning. The Arctic will not change in the next five years, but within 30 years the situation will probably change, and then China will be ready for this.

64 Savinsky S.P., Smakhtin D.A. Development banks of China. (Money and credit, 2007) https://www.cbr.ru/publ/Money-AndCredit/china.pdf