President
Medvedev will visit China for two days from Sunday. Deputy Prime Minister Igor
Sechin is already in China and has been holding talks on energy cooperation. It
has already been announced that Rosneft and CNPC will jointly build a $5 bln oil
refinery in the country. What else is on the agenda and how may this positively
affect the strategic view of Rosneft?
There are likely to be two separate series of talks; those that will
take place in front of the cameras and the more important talks that will take
place behind closed doors. The former will be about trade and cooperation within
the G20. The latter will be about barter. Specifically the fact that China is no
longer fulfilling its part of the basic barter agreement that underlines most of
Russia's international relationships.
In the more open talks, currencies and the G20 will be amongst the
main topics. Russia has been pushing for the creation of a new global reference
currency that would breaks the dominance of the US Dollar in global trade and
President Medvedev will likely pursue that again at these talks. The next G20
summit is coming up in Korea and both sides are likely to discuss their
priorities and how they may cooperate within the G20 to advance
them.
In geo-politics, Iran and the issue of sanctions is likely to be
mentioned but not in any substantive way.
Both sides will want to gloss over it.
China has a very clear agenda to fill any voids left by Russia and
others in Iran while Russia clearly wants to stay engaged in Iran but doesn't
want to too openly say that. The instability in Kyrgyzstan will also be a
talking point. Elections are due in the country next month and both Russia,
which retains a military base in the country, and China, which shares a border
with Kyrgyzstan, will want to ensure that the process goes smoothly. Neither
Russia nor China will want to see the US increase its military presence in the
region and are expected to jointly offer support – both financial and military –
to the new administration in Bishkek – to ensure that the US does not extend its
foothold.
President Medvedev will also undoubtedly push for Chinese support for
his modernization programme and will try to get a commitment from the government
to encourage its major corporations to increase investment in the Russian
economy and especially outside of extractive industries.
The long outstanding gas talks are also on the agenda albeit the more
substantive part of those talks will probably already have taken place with
Deputy Prime Minister Sechin's team earlier.
The more substantive talks are likely to be about barter.
The basis of many of Russia's economic partnerships is energy and
materials, i.e. where Russia has traditionally swapped energy/materials
cooperation in exchange for other trade and investment deals. That has been the
basis of the energy security for trade access deal with the EU and was also the
basis of the economic partnership with China up until about 2005. Russia offered
China increased access to raw materials and, in exchange, China bought a
substantial amount of military hardware. But since about 2005, the deal has been
almost all one way. Russia has been increasing its energy and materials supply
but china has bought little else. Nor has it made any material investments in
Russia other than paying in advance for energy supplies. That is, however, a
tied deal that mainly benefits China.
President Medvedev will push for some reciprocity in the current
arrangement. Specifically he is may push for a major investment commitment into
economic sectors, such as technology, that the president's plan is targeting for
faster growth, and in the area of infrastructure upgrades. Otherwise the danger
for Russia is that it becomes little more than the energy/materials supplier for
China. In that event, Russia’s political relevance not only to China, but also
to the rest of the world will start to diminish.
President Medvedev’s team are also expected to talk about Chinese
support for the government’s privatization programme, i.e. for Chinese state
backed investment groups to participate. That may also extend to plans for SPOs
of Russian state companies on the Hong Kong bourse. VTB, Sberbank and Rosneft
may list shares on the Hong Kong exchange in 2011 but only if they can be sure
of a successful listing. For that, they will need to be – unofficially at least
- underwritten by Chinese funds. Russian Railways may also consider a dual
listing in Hong Kong in 2011 or 2012.
As for Rosneft; Its Chairman, Igor Sechin, appears to be positioning
the company as the China energy partner. The company already has the oil supply
deal via the ESPO pipeline and now has a deal to jointly build a refinery in
China. It is very possible that Rosneft is also looking to be the Russian
partner for the gas supply contract to China that, according to reports from
this week’s meeting, may be agreed early in 2011. Rosneft has made no secret of
its wish to have a significant involvement in the gas industry so as to create a
more balanced energy structure. China has been equally clear about the fact that
it would prefer its own gas reservoir and a dedicated pipeline, i.e. rather than
to plug into Gazprom’s existing grid. That combination offers the opportunity
for Rosneft to do a deal with BP for control of the Kovykta gas deposit and to
develop it – with BP as the strategic (25%) partner – as the gas source for
China. The recent change of CEO at Rosneft is a catalyst for change in the
company; a major move into the gas sector with a China export contract may very
well be one of those changes.