THE JOURNAL OF ENERGY

AND DEVELOPMENT

Shelton Woods,

“Oil for China: The Sino-Russian Waltz,”

Volume 33, Number 2

Copyright 2010
 OIL FOR CHINA: THE SINO-RUSSIAN WALTZ

Shelton Woods*

t has been called the biggest ‘‘soap opera’’ in oil transfer history.1 When the
I 2009 construction finally began on the pipeline that will carry oil from East
Siberia to China, it was after more than a decade of negotiations that included
broken promises, careers that ended in prison, and insults and accusations between
nations. But this is not unexpected given the region’s history and what is at stake.2
When it was first suggested in 1994, the pipeline appeared like a perfect solution to
the needs of Russia and China.3 Russia, rich in oil and gas reserves, is in need of
export revenue to keep its economy stable; China’s economy is expanding rapidly,
and it has the fastest growing need of energy resources. So, if Russia has what China
wants (oil) and China has what Russia wants (money), why did it take 15 years to
come to an agreement on the pipeline? It is a complicated answer with a somewhat
surprising twist in the end. But we are getting ahead of ourselves; the numbers will
only partially tell the story—history and geopolitics are major threads in this tapestry.

Historic Sino-Russian Relations

Sino-Russian relations have never been simple.4 With the sixth longest inter-
national border that stretches thousands of kilometers, China and Russia are

*Shelton Woods, Professor of East Asian History and Associate Dean of the College of Social
Sciences and Public Affairs at Boise State University (Idaho), earned his master’s degree in modern
Chinese history from California State University-Northridge and his Ph.D. in Southeast Asian
history from the University of California, Los Angeles. He has authored four books and numerous
articles in journals such as Contemporary Southeast Asia, Philippine Studies, and Business Horizons.
During 2006-2007, the author served as an American Council on Education Fellow at Indiana
University/Purdue University-Indianapolis. Born and raised in the Philippine’s highlands, much of
Dr. Woods’s current research concerns China’s hegemonic growth in Southeast Asia.

The Journal of Energy and Development, Vol. 33, No. 2

Copyright Ó 2010 by the International Research Center for Energy and Economic Development
(ICEED). All rights reserved.
249
250 THE JOURNAL OF ENERGY AND DEVELOPMENT

geographically joined at the hip.5 At times, this close proximity has resulted in real and
perceived historical slights; for example, some in Russia blame China for the Mongol
invasions of Russia in the thirteenth century because the incoming hordes came from
the east. Several centuries later, as Russia’s population pushed east to the Amur River
and eventually to the Pacific Ocean, China took the unprecedented step of negotiating
a treaty with barbarians to protect its northern borders from ‘‘foreign devils.’’6
Following its 1917 Revolution, Russia—as the then-new Union of Soviet So-
cialist Republics (U.S.S.R.)—appeared to be one country whose anti-imperialist
ideology favored a China that was at the mercy of foreign exploiters. China’s
Nationalist Party, the Guomindang (GMD) led by Dr. Sun Yat-Sen, enjoyed sup-
port from Russia, even at the expense of the Chinese Communist Party (CCP).7
During the mid-1920s, as Sun Yat-Sen organized the GMD Army, Russia/
U.S.S.R. sent advisors to the Nationalist’s Whampoa Academy. Russia also ad-
vised the CCP to abandon its revolution plans in Shanghai and move to Canton and
join the Nationalists. During Japan’s war against China (1937-1945), Russia also
sent aid to the GMD.
After World War II, China became embroiled in a civil war that ended with
a convincing victory by the Communists in October 1949.8 The world took notice
that, just months after proclaiming the formation of the People’s Republic of
China (PRC), a 56-year-old Mao Zedong left his homeland for the first time,
taking a train to Moscow in search of desperately needed aid for the embryonic
PRC government. Cold War anti-Communist nations saw this as a particularly bad
omen: the Soviet Union and the People’s Republic of China represented a volatile
block of two enormous civilizations now bound together by Marxist ideology.
Furthermore, the first economic paradigm that the PRC followed was the
U.S.S.R.’s five-year model. Russian engineers and economic gurus were sent to
the PRC to help the Chinese build a vibrant, industrialized economy.
While the West might have assumed that these issues proved a Sino-Soviet/
Russian chumminess, the reality was quite the opposite. Joseph Stalin and Mao
mistrusted each other; Mao and Nikita Khrushchev despised each other, and the
division between the two leaders eventually caused Soviet engineers in China to
tear up all their blueprint plans for Chinese factories and return home. Even the
threat of a common enemy on the Korean Peninsula did not unite the two coun-
tries. In fact, during the Korean War China accused the Soviet Union of being
a ‘‘merchant of death’’ with regard to encouraging Kim Il-Sung to attack South
Korea. During the 1960s, relations between China and the U.S.S.R. deteriorated to
the point of armed conflict in 1969. In the same decade, the North Vietnamese
leaders understood the Sino-Soviet rivalry and played the two countries against
each other, eventually leading to U.S.S.R. support of a united Vietnam and
China’s support of Cambodia’s anti-Vietnamese Khmer Rouge.9
Given this volatile history, it is a testament to short memories and pragmatism
that Russia and China signed a massive $25-billion Russia-to-China oil pipeline
 SINO-RUSSIAN OIL POLITICS 251

agreement in 2009. This accord is even more startling in light of Russia’s internal
dissent over the project, Japan’s tempting offers for Russia to bypass China in
building the pipeline, and China’s accusation that the United States tried to scuttle
negotiations between China and Russia.

The Numbers

China’s dynamic economic growth that began after its decade-long Cultural
Revolution (1966-1976) has continued largely unabated despite internal crises,
such as the 1989 Tiananmen protests, and global tectonic shifts, for example, the 1991
dissolution of the Soviet Union and the increased threat of terrorism. The momentum
of two decades of economic expansion exploded at the turn of the twenty-first
century. This unprecedented economic dynamism sent pundits and prognosticators
in multiple directions. Martin Jacques’ recently published volume, When China
Rules the World: The End of the Western World and the Birth of a New Global
Order, is part of this growing genre centered on China’s spectacular economic
growth.10 Such growth is fueled by energy, and it is a testament to China’s in-
genuity that, up until the 1990s, coal accounted for up to 90 percent of China’s
energy sources; it is not surprising that China is the world’s largest producer of
coal.11
Environmental concerns, economics, and applications of coal supplies have led
China to diversify its energy sources. Oil and natural gas are two energy forms that
China increasingly pursued during the 1990s. In 1993, the first year as a net im-
porter of oil, China imported 1 million tons of oil; seven years later it imported
50 million tons. In 2007 China imported 160 million tons of oil, with no slowdown
in sight.12 By 2020 Northeast Asia is projected to consume 20 million barrels of oil
a day.13
On the oil supply side, China’s dependence on the Middle East has grown over
the past decade to the extent that nearly 50 percent of its imports come from that
region. Africa supplies another 20 percent of China’s oil imports.14 The volatility
of these regions and the reliance on safe passages through the Malacca and
Hormuz Straits have encouraged the Chinese to explore other sources for oil—
enter Russia.15 With a reported 13 percent of the planet’s petroleum reserves and
an astounding 45 percent of the world’s natural gas reserves, Russia’s economy is
rooted in its oil and gas exports, primarily to European markets. Half of Russia’s
export revenue is derived from its energy sector.16 While only about 5 percent of
Russia’s exported petroleum makes its way to an energy-starved Northeast Asia,
the European markets have matured and demand growth has slowed. Thus, Russia
began exploring the possibility of exporting oil to China. Yet there were too many
economic, geopolitical, historical, and international implications of this resource
transfer to make it a simple story. In the end, it was a surprising twist of fate and
a global economic downturn that sealed the successful Sino-Russian deal.
252 THE JOURNAL OF ENERGY AND DEVELOPMENT

China’s Growing Need: China’s meteoric economic growth since the death of
Mao Zedong in 1976 is somewhat comparable to the history of Meiji Japan (1868-
1912). In 1868 the Japanese were emerging gradually from more than two cen-
turies of economic and political isolation. Fortunately for the Japanese, Tokugawa
(1600-1868) merchants and farmers were progressive and created a proto-
industrialized economy upon which Meiji Japan built. Coming out of isolation, the
Meiji Emperor declared that the Japanese would travel the planet to learn from
more economically advanced states; Japanese citizens were told by the govern-
ment to discard the customs of the past.17 By 1919 Japan was the world’s only non-
Western industrialized country and considered one of the five Great Powers at the
Paris Peace Conference.18
Like Meiji Japan, China in 1976 emerged from a political paradigm that limited
economic entrepreneurship and external financial/business ventures. Mao’s em-
phasis was on ideological purity: ‘‘Better to be red than expert.’’ The bulk of the
Anti-Rightist Movement (1957-1958), the Great Leap Forward (1958-1961), and
the Cultural Revolution (1966-1976) confirmed Mao’s maxim: ‘‘Revolution is not
a dinner party.’’ But once this revolution ended in the months and years following
Mao’s death, Chinese leaders removed restrictive customs from the past and
borrowed examples from free-market systems. Worn out ideological slogans were
replaced with more pragmatic mottos, such as ‘‘Seek truth from facts’’ and
‘‘Practice is the sole criteria for testing truth.’’ After his 1979 visit to the United
States, Deng Xiaoping returned to China with a practical message about adopting
different systems to make China rich: ‘‘It doesn’t matter whether the cat is white or
black as long as it catches a mouse.’’
Some overt economic policies instituted by Chinese officials included
replacing inefficient state-owned enterprises with private companies and creating
special economic zones on China’s eastern seaboard. The call to ‘‘get rich’’ res-
onated with the Chinese, who were kept down for generations by foreign ex-
ploiters and domestic ideologues. China’s economy grew so fast that from 1979 to
2009, it has doubled every eight years; the U.S. economy has doubled once during
that same time period (admittedly from a much larger base). But China’s con-
tinued economic growth and rising standard of living is only possible by increased
use of energy sources, particularly coal, natural gas, and oil. China’s insatiable
thirst for energy has affected its entire global outlook and its domestic and foreign
policy priorities.
Coal dominates China’s energy resource consumption: 70 percent of its elec-
tricity is generated from coal, and it annually accounts for one-third of global coal
use. Coal is an attractive fuel for China because it is the world’s largest producer of
coal. But even that is not sufficient to supply the country’s needs. In 2008 China
became a net importer of coal, with Vietnam as its largest supplier. While China
might enjoy an impressive amount of coal reserves, the environmental and human
toll that it exacts on the country is incalculable. On average, more than 12 Chinese
 SINO-RUSSIAN OIL POLITICS 253

die every day in mining accidents; this compares with an annual coal-extracting
human cost of 30 lives in the United States.19
Natural gas supplies about 2 percent of China’s energy needs, which leaves
petroleum (oil) as an energy source keenly sought by the country. In 1993, 15
years before it began importing coal, China became a net petroleum importer. A
decade later, by 2003, it was the world’s second largest oil consumer, trailing only
the United States (it is projected to surpass U.S. oil consumption in 2031). Even
these statistics need contextualization. With less than 5 percent of the world’s
population, the United States consumes around 25 percent of the world’s oil; by
comparison, China, with 20 percent of the world’s population, uses 7 percent of
the annual global oil supply. But this will change. China’s expanding economy,
building on a modest base, has produced history’s largest rural-to-urban migration.
It has made car ownership a reality to millions of people. All of this is only
sustainable if China continues to import massive amounts of oil. It already imports
almost half of its oil consumption, and this is projected to increase to 60 percent by
2011. China now (2009) consumes an estimated 8 million barrels of oil a day.
China walks a tightrope in its oil consumption as it has only a seven-day reserve
on hand compared with Japan, which has an oil reserve that covers over three
months usage.20 Chinese economists and politicians are keenly aware of these
challenges. It is for this reason they have moved to diversify their oil suppliers
through a variety of strategies. For example, China has developed strong ties with
many African countries and has invested heavily in projects on that continent.
Chinese companies are constructing railroads in Nigeria, and the Chinese are
responsible for building almost all of the main roads in Rwanda. China has ex-
tended educational scholarships for thousands of African students to study in the
rapidly expanding Chinese universities. So it is not surprising that Africa provides
one-third of China’s crude imports and almost 20 percent of its total oil imports.
Sudan alone sent more than two-thirds of its oil production to China, which
represents 5 percent of Chinese oil needs.21 There is a dark side to China’s in-
vestment in foreign countries and its outright purchase of oil fields in foreign
lands, particularly on the African continent. About these relationships, Peter
Navarro notes the underlying philosophy of China’s energy strategy is not im-
moral but rather amoral.22 A concern to the international community is that, in
China’s desire to secure energy resources, it will broker deals with countries
considered as rogue regimes. This has the potential to undermine attempts to
isolate pariah states and enrich totalitarian and human rights-abusing nations, such
as the government of Sudan. The geopolitics of oil remains complicated as control
of energy resources enables certain leaders to gain access to hard currency through
energy exports while continuing unacceptable behavior.
China’s search for oil and allies has even strained relations between the United
States and two of its primary allies in the Middle East: Israel and Saudi Arabia.
Second only to Russia in supplying arms to China, Israel has become an important
254 THE JOURNAL OF ENERGY AND DEVELOPMENT

trading partner with China and something of an irritant to the United States. In
2000 the United States intervened and blocked the sale of four Phalcon early
warning aircraft from Israel to China.23 As for the other U.S. Middle East ally,
Saudi Arabia, the kingdom is able to hold a China-as-a-major-oil-consumer card
should the United States threaten to change its policies toward Saudi Arabia.
Closer to its own shores, China has flexed its muscles in the Parcel and Spratly
Islands—tiny specks of land in the potentially oil-rich waters that are claimed by
Japan and Southeast Asian countries. China uses historical maps to claim that the
islands and waters fall under Chinese jurisdiction.24 Startled Southeast Asians
have woken up to find that, overnight, Chinese soldiers have planted Chinese flags
and built make-shift housing on these small parcels of land.25
Given this context, then, it should not be unexpected that China would look to
its adjacent neighbor—Russia—for oil and natural gas. Soon after 1989, the year
when Mikhail Gorbachev traveled to China, negotiations began between China
and Russia regarding construction of a pipeline from East Siberia to China. It was
an ambitious plan that ran into many detours before its surprising resolution.

Russian Supply: Since the Soviet Union ceased to exist in 1991, Russia’s
economy has undergone tremendous change. Like post-Mao China, post-Soviet
Russia has loosened its stance on a centrally planned economy to one that is more
open to foreign and domestic entrepreneurial endeavors. State-owned enterprises
have been joined by thriving private businesses. And like China, Russia has ex-
perienced severe growing pains in trying to replace an old model with something
more in step with the globalized free-market system. For example, one can never
be certain that the government will not decide to arbitrarily insert itself in so-called
private enterprises. ‘‘Big Brother’’ is always watching.
Beginning in 1998 and for the next decade, Russia’s economy grew at an
annual rate of 7 percent. During that decade, the middle class mushroomed in
Russia’s society. Trade accounted for a large portion of Russia’s economic boom.
But again, there was a dark side to this growth. Russia became economically
dependent on commodity exports, primarily oil, natural gas, and steel. In short,
Russia has played ‘‘roulette’’ with global market prices. Like the capricious winds
that blow in Siberia, Russia’s economy is tossed up and down based on the
fluctuations in global markets. Furthermore, post-Soviet Russia deemphasized
agriculture as a viable economic sector to the extent that the country became a net
grain importer. But since 2007, Russia has tried to balance an economy that
emphasizes both sophisticated technology and agriculture. The results have been
mixed; Russia is now a net exporter of grain yet its technology sector still lags
behind more advanced economies.
A primary mover of Russia’s post-Soviet Union economic boom is its exports
of energy commodities. Russia holds 13 percent of the global petroleum reserves
and an astounding 45 percent of its conventional natural gas reserves, making it
 SINO-RUSSIAN OIL POLITICS 255

what one observer calls ‘‘a natural gas superpower.’’26 Russia is the world’s second
leading oil exporter and the undisputed leader in natural gas exports. As noted
earlier, half of Russia’s export revenues are from the energy sector. Europe, the
primary destination for Russian oil and natural gas, represents a mature market.
There are ambitious goals by European leaders to reduce fossil-fuel consumption
by nearly 30 percent within the next decade (by 2020). One telling statistic is that
during the first five years of the 21st century, Russia increased oil exports by 2.2
million barrels a day, while European imports of oil increased 1.2 million barrels
a day in the same period.27
In short, Russia’s economy is dependent on energy exports, which leaves it
vulnerable to vagaries on the demand side and of global prices. Fortunately for
Russia, its neighbor to the southwest enjoys what is arguably the world’s most
dynamic economy with a desperate need for oil and natural gas. Yet China may be
a bit wary of relying on Russia for the bulk of its energy needs since Russia has
been accused of using energy resources as a diplomatic weapon. Indeed, Russia’s
reputation as a reliable energy supplier to Europe was severely damaged due to its
policies and reactions to actions taken by former Soviet states such as Latvia and
Ukraine.
Once one of the world’s superpowers, many observers still wonder why Rus-
sia’s leadership allowed the disintegration of the Soviet Union. While it was
costing Russia a great deal to prop up the weaker states within the U.S.S.R., many
thought it was worth the cost; in exchange, there was global respect, if not fear, of
the U.S.S.R.’s power. Nonetheless, in 1991 former Soviet states declared their
independence. It is probable that Moscow believed the sentimental, historical, and
ideological ties between the former Soviet entities would serve to keep these new,
independent countries closely allied with the Russian Federation. So it came as an
unhappy surprise to Moscow when the three Baltic states of Estonia, Latvia, and
Lithuania applied (in 2002) and were admitted (in 2004) to the North Atlantic
Treaty Organization (NATO) and then to the European Union.
While Russia did not use tanks and weapons to demonstrate its displeasure with
former Soviet states ‘‘siding’’ with Western Europe, it did use the weapon of
energy resources. One analyst noted, ‘‘The fact that Russia has been using pipe-
lines as a foreign policy weapon is clear from the fact that in February 2003 it
decided to bypass Latvia in exporting oil.’’28 Despite Latvia’s claim that Russia’s
action violated previous agreements, Russia declared that it had the right to close
export markets as it saw fit.
The more public and dramatic energy spat was the January 1, 2006, shut-off of gas
supply from Russia to the Ukraine. While a complicated story with many unanswered
questions and numerous ambiguities, the overarching narrative is as follows.
Ukraine was a cornerstone of the old Soviet Union. During the days of the
Cold War, Russia viewed Kiev as more part of Russia than a piece of the Soviet
Union. Moreover, expensive and extensive infrastructure development, including
256 THE JOURNAL OF ENERGY AND DEVELOPMENT

pipelines, was made by the central U.S.S.R. government in Ukraine, tying ‘‘Great
Russia’’ with ‘‘Little Russia,’’ and vice versa. As Rafael Kandiyoti wrote,

For the Russians, Ukraine is not expendable. In vital issues concerning energy supplies, ar-
maments and other industrial production, the selection of political and military elites, Russia
and Ukraine were, and in some respects still are, parts of a long-united whole. No one really
29
expected Ukraine to exchange all that for a breath of fresh air.

The 1994 Ukrainian elections and the Orange Revolution swept pro-Russian
leaders out of office and ushered in the pro-West Viktor Yushchenko. Obviously
displeased, Russia had to be careful in its response to these developments since
Ukraine serves as a conduit for Russia’s exports of natural gas to Eastern and
Western Europe. Indeed, 90 percent of the natural gas imported to Ukraine (3.8
billion cubic feet in 2004) from Russian and Turkmen sources finds its way to
countries outside of Ukraine.30 The Ukrainian growing courtship with the West
was viewed as a slap in Russia’s face and even a threat to the flow of exports,
which heretofore was selling natural gas to Ukraine far below market prices as,
some suspect, a token of friendship.
In mid-2005, Gazprom, the Russian producer and supplier of gas, warned
Ukraine that it was going to raise the price of natural gas slated for Ukraine from
$50 per thousand cubic meters (cm) to $160 per thousand cm; at the end of 2005,
as gas prices in the world market jumped, Gazprom tried to negotiate a $230 per
thousand cm price with Ukraine. Ukrainian officials balked at the suggested price
increases and claimed they had an agreement with Russia on a fixed price out to
2009. To show its seriousness, Gazprom President Aleksei Miller and Russian
President Vladimir Putin appeared on Russian state television on December 31,
2005, to publically discuss an appropriate response to Ukraine’s intransigence.
The next day, on January 1, 2006, and in the midst of a brutal winter, Gazprom
decided to stop supplying gas for Ukrainian use. To meet its domestic re-
quirements, Ukraine siphoned off gas meant for other markets. Russia lashed out
at Ukraine for ‘‘stealing’’ and for behaving as an ‘‘unreliable transit country.’’31
There was condemnation of Russia for its act of turning off the energy spigot at
such an inopportune time. Four days into 2006, a new agreement was concluded
between Ukraine and Russia, but the implications of the January 1, 2006 actions
were clear. Later in 2006, John Negroponte, the Director of U.S. National In-
telligence, noted that Russia’s behavior was ‘‘an example of how energy can be
used [by Russia] as both a political and economic tool [which could] pose sig-
nificant U.S. national security risks or foreign policy challenges.’’32
These recent acts on the part of Gazprom and Russian political leaders are not
lost on China’s leadership. Thus, while China seeks to receive energy resources
from Russia, it does not intend to become solely dependent on its neighbor’s
supply.
 SINO-RUSSIAN OIL POLITICS 257

The Plan

The first substantive talks on building a pipeline from Russia to China began in
1994 and then heated up in 1997 when Russia and China agreed to develop the
Kovyktinskoye gas field, which is in northern Irkutsk Oblast. These preliminary
discussions opened the door for much more serious considerations of future Sino-
Russian partnerships.33
These discussions occurred at the same time that Russia was being transformed
from a society governed by aged, entrenched bureaucrats to one where oligarchs in
designer suits and expensive cars zoomed around Moscow, making deals and
eliminating those in the way. It was, in a sense, perestroika on steroids. Ineffective
state-owned companies were replaced by hard-nosed Russians, keen to make
money in this new world, and who had benefited from ‘‘fire sale’’ prices in many
instances.
One of the most fascinating characters in this new economic environment was
Mikhail Khodorkovsky, who rose to become the richest man in Russia and the
sixteenth richest man in the world. With parents who were rank-and-file factory
workers, Khodorkovsky had a rather conventional childhood and graduated from
Moscow’s Mendeleev Institute in 1986 with a degree in chemical engineering.
Though his parents were not supporters of the Soviet Union policies, they taught
their son to conform; he presented himself as a loyal citizen while in college, rising
to the position of deputy head of the Communist youth movement Komsomol and
making sure that students religiously attended Party meetings.34
Using his college contacts, Khodorkovsky began creating small businesses.
With the fall of the Soviet Union and new economic opportunities, he launched
a private bank, Menatep. Importing items such as cheap liquor and taking ad-
vantage of black market dollar-to-ruble exchange rates, the new oligarchs in
Russia like Khodorkovsky were on their way to becoming millionaires.
During the mid-1990s, the Russian government was in such financial and
economic difficulty that the once-untouchable oil and metal government com-
panies were opened to private investors. Using the method of loans-for-shares,
Khodorkovsky invested $350 million in Yukos, one of Russia’s largest oil com-
panies. Within two years his investment was worth 20 times his initial investment.
Khodorkovsky’s plans included placing Yukos on the London Stock Exchange
and bringing in Western engineers to help with the upstream activities of oil ex-
ploration and production. He also sought a possible merger with ExxonMobil or
ChevronTexaco. Finally, Khodorkovsky worked on procuring a massive deal with
China. In May 2003, an agreement was reached between Yukos and the China
National Petroleum Corporation (CNPC). Yukos agreed to supply 5.13 billion
barrels of Russian oil to China between 2005 and 2030. The oil would come from
the Angarsk area in East Siberia and flow through pipelines to Daqing, China’s
petroleum-center in Heilongjian Province (see map 1). For its part, China agreed
258 THE JOURNAL OF ENERGY AND DEVELOPMENT

Map 1

to pay $150 billion for the oil. China envisioned that by 2030, 30 percent of its oil
imports would come from its western neighbor, helping to diversify its energy
suppliers. Yukos was poised to begin building the world’s most expensive pipe-
line. However, the Russian Federation still retained its monopoly and control of
the pipelines.
Prior to the breakup of the Soviet Union, there were 84,000 kilometers of
pipeline across the region, making this grid ‘‘the largest single trunk pipeline
network in the world.’’35 Gazprom served as the state-owned gas production
company and Glantransneft had the state’s monopoly on pipeline construction. In
1991 Glantransneft was formed into a joint-stock company called Transneft; it
manages 30,000 miles of pipelines and 390 oil refilling stations. The company,
solidly in the hands of the Russian government, transports 93 percent of oil pro-
duced in Russia. It is a giant and dominating force in the world of pipelines and oil
transit:
With the Soviet Union’s break-up, new independent states have claimed ownership of the
pipelines within their borders. However, given these countries’ frequent inability to pay for oil
and gas, Russia has exchanged oil and gas for control and ownership of the pipelines in these
states. Russia also pressures these new governments to turn over their pipelines to Russia so as
to assure proper maintenance of the lines. This type of request backfired in Ukraine. Mean-
while, the Ukrainian pipeline system appears to be in urgent need of repair. Ukraine has not
been able to carry out proper maintenance and has resisted Russia’s demand for (hazard
 SINO-RUSSIAN OIL POLITICS 259

a guess?) part-ownership of the system, in return for carrying out the required maintenance
work. Russian claims on the network have indeed taken some astonishing forms: in October
2003, President Putin declared it was Russia’s ‘‘prerogative’’ to maintain pipelines con-
structed by the Soviet Union ‘‘in order to protect its national interests and parts of the system
36
that are beyond Russia’s borders.’’

Thus, when Yukos tried to push its way into the Russian pipeline business, it
was up against stiff odds.

The Detour: The Yukos-CNPC deal seemed like a marriage made in heaven.
Russia would profit given the amount of taxes Yukos would have to pay; the
agreement also would address China’s main energy issues—its desire to diversify
its energy sources and its desperate need for oil. But it was not to be. Internal and
external politics derailed the pact. The first signs of disruption occurred shortly
after the very public May 2003 Yukos-CNPC documents signing.
The trouble began with Moscow. Despite his early, relatively low profile,
Khodorkovsky ran afoul of government officials; he was warned to stay clearly
in the business sector but out of political activities; however, his donations
to teachers and media outlets skirted politics too closely. Furthermore, Kho-
dorkovsky’s attempt to partner with Western oil companies alarmed and irritated
many in the government, particularly the Russian president, Vladimir Putin.
During the summer of 2003, the Russian government began arresting Kho-
dorkovsky’s colleagues and publicizing accounts of Yukos’ bullying tactics and
how its main investors acquired their wealth through intimidation and the murder
of rivals in other oil companies. Khodorkovsky did not appear concerned with
these developments; in a July 2003 interview with a news show in Russia, he noted
that there were some concerns the government expressed about Yukos and the
proposed pipeline but that those were ‘‘normal’’ issues to work through with such
a massive project. However, whether or not he had some inkling that the gov-
ernment was poised to arrest him and dismantle the Yukos-CNPC agreement,
these events followed just a few months later on October 25. Charged with fraud
and tax evasion, he was found guilty and sentenced to nine years in prison on May
31, 2005.37
The Yukos company was dismantled and its assets distributed to rival firms.
The state-controlled pipeline agency, Transneft, now sat in the driver’s seat of the
far eastern export project but soon found itself in a political morass.38 Effective
lobbying from Japan, which was helping to finance this massive undertaking,
moved Moscow politicians, particularly those in President Putin’s cabinet, to
scuttle the original agreement. The new plan was for a pipeline to be built from
Taishet, north of Angarsk and further away from Lake Baikal, to Nakhodka,
a Russian port city facing the Gulf of the Sea of Japan (map 1). This new proposed
route was more environmentally sound as it would be further away from Lake
Baikal than Angarsk, the original proposed point of origin. More fortunately for
260 THE JOURNAL OF ENERGY AND DEVELOPMENT

geopolitical reasons, the new route bypassed China and had the oil deposited off
the coast of Japan with a port where it could easily be shipped to Japan, South
Korea, and the United States.39
The Taishet-Nakhodka proposed route was met with outrage in China. Once it
became clear that Russia was wobbling on the original Yukos-CNPC agreement,
some complaints emanated from the Chinese, accusing the United States and Russia
of scheming to limit China’s growth in both its energy and military sectors. Con-
comitantly, the Chinese accused Japan of intruding into the China-Russian oil
agreement and of pressuring the Russians to abandon the proposal. Meanwhile,
within Russia there was a rift developing between Transneft officials, who wanted to
honor the original agreement, and members of Putin’s cabinet, who wanted to go
forward with the Taishet-Nakhodka route. The debate raged from 2004 through 2009.
Media outlets in Japan and China closely followed the political intrigue in
Moscow. At some point during this five-year span, the Japanese press published
articles claiming that Russia had agreed to forgo the original plan and would
bypass China.40 There appeared to be economic and political pressure placed on
Russia by the Japanese. In 2005 Russia’s Industry Minister, Victor Khristenko,
traveled to Tokyo, where he was received and welcomed warmly with the hope
a promise could be secured that the pipeline would be built to the Pacific.
Transneft’s spokesman Sergei Grigoriev insisted that his company would not be
swayed by outside ‘‘bribes’’: ‘‘We are not building a pipeline to China or Japan.
The first part of the project will stretch to Skovorodino [terminal]. Then for the
project to start operations, we will send oil from Skovorodino by railroad.’’ But
Grigoriev also bluntly told the press that Russia’s internal politics would be the
primary factor in deciding where to terminate the pipeline: ‘‘It is political lobbying
that will decide where it [the pipeline] will go—to China or Japan.’’41
By 2006 Transneft, with the blessing of Putin and other cabinet ministers, had
settled on a plan to build the Taishet-Nakhodka route, with a possible spur to
China. But while Transneft built the pipeline, it needed help from a company that
could secure the oil. Rosneft, also a state-owned enterprise, was Transneft’s
partner in supplying the oil that would be transferred via the Eastern Siberia Pa-
cific Ocean Pipeline (ESPOP). The two companies bitterly argued the familiar
debate regarding the destination of the pipeline. Transneft was convinced that the
Taishet-Nakhodka route should be the one followed. Rosneft argued that the
original plan of building a pipeline from Russia to China should rule the day.
Then in 2008, the world-wide economic recession changed everything. Banks
closed, businesses went bankrupt, and the largest U.S. mortgage and insurance
companies stayed afloat with federal government bailouts. Oil prices fell, creating
economic woes in Russia, where 50 percent of its export revenue was generated by
the energy sector. The Russian government and its companies, Transneft and
Rosneft, needed money. In the final analysis, however, it may have been this
economic downturn that helped settle the pipeline route argument. Japan remained
 SINO-RUSSIAN OIL POLITICS 261

interested in financing an $11-billion pipeline to Nakhodka, but when the costs

ballooned to $18 billion at a time when the world was slipping into a deep re-
cession, it had to rethink its position. China, on the other hand, was much more
economically proactive in the face of a global downturn, given its system of
greater state control and the ability of the government to act unilaterally.
Before U.S. politicians were able to pass a stimulus package through Congress
for their country’s stalled economy, China’s government had pumped $586 billion
into its own economy. In addition, during 2008 China cut interest rates and di-
rected special government investment in its economic sector.42 Furthermore, in the
following year, China invested $34.6 billion for clean energy development com-
pared with the $8.6 billion for U.S. clean energy projects.43
China’s proactive economic stimulus measures in 2008-2009 are rooted in
three realities. First, China’s economic growth for the third quarter of 2008 was 9
percent, which was lower than any one quarter since 2003. Second, Chinese
leaders recalled the 1997 Asian financial crisis and immediately set in place
measures, similar to those they used at the time, to invest in domestic projects that
helped China weather that crisis. Finally, China’s unique political system allows
its leaders to implement economic policies much quicker than in other political
structures. China was thus in a position to present attractive options for Russia in
the midst of a global economic downturn.
For its part, China would not sign agreements with any Russian company until
it received assurances that everyone was on the same page. The result of Russia’s
economic difficulties and China’s fiscal largesse meant that China was now in
a stronger position in terms of determining the financing and route of the ESPOP.
The result was that China loaned Transneft $15 billion and Rosneft $10 billion.
The quid pro quo agreement was that Russia agreed to build the pipeline to
China’s doorstep before stretching it to the Pacific. China also agreed to drop the
interest on the loans from 7 percent to 6 percent, while Russia agreed to sell the
crude oil at $11.40 a barrel, which was around one-third of the open market price
at the time. The construction commenced.44 Reviewing these events, John Helmer
put it best in November 2008:

This is what has turned the Skovorodinio-Daqing pipeline into the longest-running soap opera
in the history of oil transportation. Five years and countless episodes later, have Putin and
Wen really tied the knot this time? It seems so, not least of all because of the color of China’s
money has proved more alluring because of the urgent short-term financing problem in which
both Transneft and Rosneft currently find themselves. The Chinese financing turns out to be
45
more than double Japan’s last offer.

Conclusion

Despite the picturesque language of a ‘‘soap opera,’’ a more appropriate de-

scriptor of Russia’s ESPOP is as a puzzle. Some of the pieces are centuries old,
262 THE JOURNAL OF ENERGY AND DEVELOPMENT

while others are new. Long-held suspicions were conveniently swept under the rug
in the name of pragmatism and economic need. Within the context of the ESPOP,
there are what might be considered losers and a winner in this story.
With the outcome of the ESPOP project, Japan might look back on the in-
ordinate political capital expended as excessive in its attempt to influence Russia
and its oil companies to swing the pipeline away from China and toward Japan. In
truth, China and Japan were caught in the middle of the pipeline route debates, and
they were not pleased with the back-and-forth negotiations. A specialist following
the talks stated, ‘‘The China-Japan bidding war over the route of the oil pipeline
helped Russia, but angered China.’’46 Russian officials were frank in stating that
political lobbying would determine the final outcome of the pipeline route. Jap-
anese frustration reached a boiling point in 2005 when a Transneft spokesman,
Sergei Grigoriev, intimated that the first priority would be to get oil flowing near
the Chinese border. Shoichi Nakagawa, Japan’s Minister of Economy, Trade, and
Industry, declared: ‘‘In such a situation, Japan will not provide financial co-
operation.’’ One observer noted,

That [Japan’s] threat played directly into Transneft’s hands, as it had more than once warned
the Kremlin against allowing the Nakhodka oil port plan to be held hostage by Japan’s fi-
nancing formula, tying construction loans for the pipeline to repayment with guaranteed
47
volumes of oil, and favorable pricing.

But some could assert the largest loser in this story is Russia. The world re-
cession exposed Russia’s growing dependence on global commodity prices and left
it with little recourse but to reach out to China and capitulate on its once-intransigent
insistence that ‘‘this is a pipeline on Russian soil and only Russia will decide where
it will terminate.’’ Russia also is dependent on China’s continuing purchases of its
oil. Since the ESPOP terminates on the border of China, there are no close ports or
other countries where the oil might be sent from the terminating point; it is not
a transiting line but with site-specific delivery constraints. This would lessen the
possibility of Russia turning off the spigot whenever it chooses. It is one thing for
Russia to use energy supplies as a weapon against the Ukraine; it is quite another
thing altogether to do the same against China. Finally, the dismantling of Yukos and
the imprisonment of Khodorkovsky is widely viewed as a black eye on Russia’s
announced opening to private-sector investment and to a more open market system.
And if there is a winner, then apart from the generous terms of their loans with
Transneft and Rosneft, China won the battle of having a pipeline built from East
Siberia to its doorstep. Perhaps even more importantly, this was accomplished in the
run-up to and in the midst of a massive global economic downturn. Given the Chinese
government’s ability to move quickly and on a large scale to address economic re-
covery, it initially presented something of a stark contrast to the collapse of U.S.
banks and automobile and insurance companies. So while the ESPOP might just be
a side-story within a global context, one can ponder to what extent this story could be
 SINO-RUSSIAN OIL POLITICS 263

used as a lesson for or premonition of the future. China has many challenges ahead as
it transforms into a global superpower; but, its mix of economic liberalization with
slower political change may offer a trade-off in flexibility and pragmatism.

NOTES
1
John Helmer, ‘‘China Beats Japan in Russian Pipeline Race,’’ Asia Times, April 29, 2005,
available at http://www.atimes.com/atimes/Central_Asia/GD29Ag01.html.
2
The author wishes to thank Michelle Yu for her assistance in translating materials. Support for
writing this article also was provided by Boise State University.
3
‘‘Timeline of China-Russia Oil Pipeline Negotiation,’’ Xinhua, May 19, 2009, available at
http://news.xinhuanet.com/english/2009-05/19/content_11402237.html.
4
R.K.I. Quested, Sino-Russian Relations: A Short History (Sydney: G. Allen & Unwin, 1984).
5
Neville Maxwell, ‘‘How the Sino-Russian Boundary Conflict Was Finally Settled,’’ Critical
Asian Studies, vol. 39, no. 2 (2007), pp. 229-53.
6
Joseph S. Sebes, ‘‘The Treaty of Nerchinsk (Nipchu) 1689: A Case Study of the Initial Period
of Sino-Russian Diplomatic Relations Based on the Unpublished Diary of Father Thomas Pereyra
of the Society of Jesus’’ (Ph.D. dissertation, Harvard University, 1958).
7
Gilbert F. Chan and Thomas H. Etzold, China in the 1920s: Nationalism and Revolution (New
York: New Viewpoints, 1976).
8
Odd Arne Westad, Decisive Encounters: The Chinese Civil War, 1946-1950 (Stanford: Stan-
ford University Press, 2003).
9
Suzanne Veronica Uttaro, ‘‘The Deterioration of an Alliance: The Effects of Various In-
ternational Crises on PRC-U.S.S.R. Relations from 1950-1980’’ (Thesis, Political Science, State
University of New York at Binghamton, 1985).
10
Martin Jacques, When China Rules the World: The End of the Western World and the Birth of
a New Global Order (New York: Penguin Press, 2009).
11
Huaichuan Rui, Globalisation, Transition and Development in China: The Case of the Coal
Industry (London: Routledge, 2004). China holds an estimated 1,144.5 billion short tons of re-
coverable coal reserves, the third largest in the world after the United States and Russia, according
to the Energy Information Administration of the U.S. Department of Energy, available at http://
www/eoa/dpe/gpv/cabs/China/Coal.html.
12
Qipin He, ‘‘An Analysis of Sino-Russian Energy Cooperation,’’ China Thesis Download
Center, March 20, 2009, available at http://www.studa.net/guojimaoyi/090320/15245133.html
(translated by Michelle Yu).
13
Kensuke Kanekiyo, ‘‘Siberian Oil Pipeline and Its Implication for Northeast Asia,’’ paper
presented at the 26th annual international area conference of the International Research Center for
Energy and Economic Development on ‘‘Burgeoning Asian Demand: Could Supply Alliances
Change?’’ Boulder, Colorado, April 19-20, 2005, p. 5.
264 THE JOURNAL OF ENERGY AND DEVELOPMENT
14
Xia Yishan, China-Russia Energy Cooperation: Impetuses, Prospects and Impacts (Houston:
The James A. Baker III Institute for Public Policy of Rice University, May 2000), p. 11.
15
Charles Wolf, Fault Lines in China’s Economic Terrain (Santa Monica, California: RAND,
2003), p. 107.
16
K. Kanekiyo, op. cit., p. 7.
17
Shin’ya Sugiyama, Japan’s Industrialization in the World Economy, 1859-1899: Export Trade
and Overseas Competition (London: Athlone Press, 1988).
18
Margaret MacMillan, Paris 1919: Six Months That Changed the World (New York: Random
House, 2002), p. 306.
19
Emma Chanlett-Avery, Rising Energy Competition and Energy Security in Northeast Asia:
Issues for U.S. Policy, Congressional Research Service Report for the U.S. Congress/Foreign Af-
fairs, Defense, and Trade (Washington D.C.: The Library of Congress, July 14, 2004), p. 11.
20
Ibid., p. 21.
21
Karby Leggett, ‘‘China Flexes Economic Muscle throughout Burgeoning Africa,’’ Wall Street
Journal, March 29, 2005, p. 1.
22
Peter Navarro, The Coming China Wars: Where They Will Be Fought and How They Will Be
Won (Saddle River, New Jersey: Financial Times Press, 2007).
23
Dan Blumenthal, ‘‘Providing Arms: China and the Middle East,’’ Middle East Quarterly,
spring 2005, p. 15.
24
John McBeth, ‘‘Oil-Rich Diet: Beijing is Asked to Explain Its Maritime Appetite,’’ Far
Eastern Economic Review, April 27, 1995, p. 28.
25
Richard L Grant, China and Southeast Asia: Into the Twenty-First Century (Honolulu: Pacific
Forum/Center for Strategic and International Studies, 1993).
26
X. Yishan, op. cit., p. 6.
27
K. Kanekiyo, op. cit., p. 7.
28
R.G. Gidadhubli, ‘‘Russia: Oil and Politics,’’ Economic and Political Weekly (Mumbai, India),
May 24, 2003, p. 2027.
29
Rafael Kandiyoti, Pipelines: Flowing Oil and Crude Politics (London: I. B. Tauris, 2008), p. 114.
30
Jim Nichol and Steven Woehrel, Russia’s Cutoff of Natural Gas to Ukraine: Context and
Implications, Congressional Research Service Report for the U.S. Congress/Foreign Affairs, De-
fense and Trade (Washington D.C.: The Library of Congress, February 15, 2006), p. 2.
31
Ibid., p. 2.
32
Ibid., p. 6.
 SINO-RUSSIAN OIL POLITICS 265
33
Matthew J. Sagers and Jennifer Nicoud, ‘‘Development of East Siberian Gas Field and
Pipeline to China: A Research Communication,’’ Post-Soviet Geography and Economics, May
1997, pp. 288-95.
34
Richard Sakwa, The Quality of Freedom: Khodorkovsky, Putin and the Yukos Affair (New
York: Oxford University Press, 2009).
35
Rafael Kandiyoti, op. cit., p. 116.
36
Ibid., p. 134.
37
Keith Gessen, ‘‘Cell Block Four,’’ London Review of Books, February 25, 2010, pp. 3-7.
38
Adam Landes, Elena Savchik, and Ronald Smith, Transneft: Pipeline Myths (Nicosia, Cyprus:
Renaissance Capital Limited, 2004).
39
Richard Giragosian, ‘‘The Sino-Japanese Pipeline Struggle,’’ Asia Times, October 18, 2005,
available at http://www.atimes.com/atimes/China_Business/GJ18Cb02.html.
40
Metallinou Spyridoula-Amalia, ‘‘Energy Security: The Russian Trans-Siberian Pipeline and
the Sino-Japanese Courtship,’’ paper presented at the International Summer Seminar, Institute of
International Relations, Hydra, Greece, September 2006, p. 3.
41
J. Helmer, ‘‘China Beats Japan.’’
42
Lisa Chiu, ‘‘China’s Response to the Global Financial Crisis,’’ About.Com, available at http://
chineseculture.about.com/od/thechinesegovernment/a/Chinaeconomy.htm.
43
Brandon MacGillis and Nicolle Grayson, ‘‘China Leads G-20 Members in Clean Energy Fi-
nance and Investment,’’ The Pew Charitable Trusts, March 24, 2010, available at http://
www.pewtrusts.org/news_room_detail.aspx?id=57972.
44
‘‘China, Russia: A Pipeline Connection, An Act of Desperation?’’ Statfor Global Intelligence,
February 18, 2009, available at http://www.stratfor.com/memberships/132391/analysis/
20090217_china_russia_pipeline_connection_act_desperation. Editor’s note: The 67-kilometer
pipeline from Skovorodino in east Siberia to China’s northeast frontier, a spur or offshoot from the
line under construction to Nakhodka on the Pacific, actually was opened on August 29, 2010.
‘‘Russia Opens China Oil Pipeline,’’ The Financial Times, August 30, 2010.
45
John Helmer, ‘‘China Ties up Russia’s Crude–Again,’’ Asia Times, November 23, 2008,
available at http://engforum.pravda.ru/archive/index.php?t-231210.html.
46
Stephen Blank, Edward Chow, and Andrew Kuchins, ‘‘Can Anyone Save This Marriage:
Russo-Chinese Energy Relations,’’ Carnegie Endowment, May 25, 2006, available at http://www.
carnegieendowment.org/events/?fa=eventDetail&id=891.
47
J. Helmer, ‘‘China Ties up Russia’s Crude.’’