The Chinese -Russian Gas Powered Merry-go-round

by Roman Kupchinsky

The signing of a general trade agreement on October 14 between two state owned energy companies - Russia’s Gazprom and China’s National Petroleum Corporation (CNPC)- to supply China with 68 billion cubic meters of gas yearly, not only caught many energy analysts off-guard but also made them highly skeptical.

The agreement was signed during Vladimir Putin’s first visit to China in his new role as Prime Minister.

Russian Deputy Prime Minister Igor Sechin, who is also the chairman of the board of Rosneft, Russia’s largest producer of crude oil, said Gazprom and CNPC might set a price (for the gas) in the course of further talks and sign a contract in early 2010. In that event, supplies would likely start in 2014 or 2015.

Shipments could reach China by new pipelines or as liquefied natural gas aboard tankers, he said.

The Moscow Times, however, reported that Alexei Miller, the CEO of Gazprom, told a Russian-Chinese business forum that the price for Russian gas to China would be based on the price of oil products, the same formula used by Gazprom in its European export contracts.

Russian-Chinese gas purchase talks began in 2004 and thus far have not yielded any results. Pricing has been an ongoing issue between the two sides, but the main concern analysts have is Russia’s ability to supply 68 bcm of gas per year to China while meeting long-term commitments to European customers as well as rapidly increasing Russian domestic demand for gas.

Earlier this year, Gazprom announced that gas from the Sakhalin-1 project will not be sold to China, but diverted instead to the gas hungry Russian Far East region of Vladivostok. Gazprom is holding talks with Exxon about buying all of its gas output from Sakhalin and industry sources say the company is offering prices equal to Russia's domestic gas prices – which are far below world prices. Exxon said it is studying all options to sell gas from Sakhalin-1.

In addition to making promises to supply China, Gazprom has also stated that it wants to capture 10 percent of the U.S. gas market within the next 5 years by selling some 66 bcm of gas in the form of LNG. The plan envisions that Sakhalin-2 will supply the bulk of this LNG.

The bottom line is whether Russia is capable of building such costly pipelines as Nord Stream, South Stream and a second string of Blue Stream; while at the same developing the Yamal peninsula into a major gas producing center and finishing the Shtokman project? These projects, and others too numerous to mention, are projected to cost hundreds of billions of dollars which Russia does not have and which Western companies might not want to spend given the shaky business reputation of Gazprom and its management.

Russia’s Triads - Chinese Organized Crime in Russia

by Roman Kupchinsky

The jewel in the crown of the Russian Far East is Vladivostok, a hilly maritime city often compared to San Francisco. And while San Francisco prides itself on having a thriving Chinatown, Vladivostok is home to a thriving Chinese criminal community.

The damage these criminal gangs do to the region’s economy is enormous, yet, according to a 2007 study conducted by the Vladivostok Center on Organized Crime: “Political and academic circles in Moscow believe that the “problem” is exaggerated and warn those who write about the Chinese Mafia in Russia that this topic might harm relations with China.”

In March 2007, the mayor of Vladivostok, Vladimir Nikolayev, a supporter of the pro-Kremlin United Russia party, was removed from office after the city’s Leninsky District court approved a motion from the prosecutor’s office to strip him of his post. Nikolayev, also known by his criminal underground name of “Winnie the Pooh,” was charged with illegal land deals and embezzlement.

Five other criminal investigations of high level municipal officials, including the deputy mayor, were opened at this time but apparently were dropped. The funds allegedly embezzled by Nikolayev and his accomplices topped $3 million. Prosecutors have linked Nikolayev to Chinese organized crime gangs operating in the city which are suspected of bribing the former mayor. (International Herald Tribune, 1 March 2007)

Such Chinese crime groups as The Wolves, The Snakes and The Mad Dog have made heavy investments not only in the above listed activities, but also in local tourism and fishing as well as extorting protection money from both Chinese and Russian businesses in the city.

In 2006 a number of highly placed customs officials, Federal Security Service (FSB) and Ministry of Internal Affairs (MVD) officers, along with local prosecutors were fired during a crackdown on illegal food smuggling from China. One such smuggling operation involved a shipment of food products filling 150 railway carriages. The leaders of the gang were Chinese triad members and Russian businessmen according to Vladimir Ovchinsky, a retired MVD Major General and former head of the Russian Interpol office.

A great deal of Chinese organized crime activities involves natural resources. According to the Far Eastern Economic Review of May, 30, 2002, “Chinese and Russian groups illegally fell 1.5 million cubic meters of timber a year worth some $300 million, the WWF says. Much of it ends up in China and South Korea.”

China’s rich panda challenges the poor Russian bear’s Turf

by Roman Kupchinsky

The Chinese financial and trade behemoth has begun to slowly make its might felt in the states of the former Soviet Union, a territory proclaimed by the Kremlin to be its scared sphere of influence.

These inroads are not only being made in countries close to China such as Turkmenistan where Beijing has signed important gas pipeline and purchase deals, but are now proceeding further Westward.

Belarus recently announced that it would pay China in Yuan for goods purchased from the People’s Republic. On July 29 the Chinese Central Bank transferred $3 billion worth of Yuan to the Belarus Central Bank in a currency swap.

In terms of local currencies, the Chinese swapped 20 billion Yuan for 8 trillion non-convertible Belarus Rubles. The Yuan will be used to pay China for imports such as potash fertilizers, spare parts, microchips and chip assemblies, chemical products and machine tools.

In 2008 Belarus-Chinese trade reached $2 billion.

One week before the parliamentary elections in Moldova, China, according to the Financial Times on July 28, signed an agreement to loan the “cash strapped, resource strapped country” $1 billion dollars.

The Financial Times noted “The money will be funneled through Covec, China’s largest construction company. It will ostensibly be put towards infrastructure and projects such as energy modernization, water systems, treatment plants, the industrialization of agriculture and the creation of high-tech industries, which Moldova sorely needs.”

Ukraine, meanwhile has avoided approaching China for a loan, but is looking to Asia for investments and on July 16 Prime Minister Yulia Tymoshenko arrived in Seoul, Korea, seeking to encourage Korean investments in Ukraine’s energy sector.

Tymoshenko promised that the Ukrainian government would form a special group of assistance to South Korean investors, which will be headed by Vice Premier Hryhoriy Nemyria.

"We will create special mechanisms of cooperation. A special group will be operating under Ukraine's government, which will be promoting your investments into the fields of cooperation with Ukraine," she said.

Nonetheless, Tymoshenko has also stated that Ukraine hopes to step up its trade and economic cooperation with China.

"We hope that our mutual relations will continue developing actively as well, but apart from that, we hope to step up cooperation concerning potential investment in Ukraine's economy by Chinese businessmen," she said at a meeting with Chinese delegates in Kyiv on June 26.

Chairman of the China Council for the Promotion of International Trade Wan Jifei, in turn stated that 2008 had been one of the best periods in the development of trade and economic relations between Ukraine and China.

Jifei said that representatives of 50 Chinese companies, representing such areas as engineering, the energy sector, electronics, and light industry, had arrived in Ukraine to attend various business forums and exhibitions.

"We consider today's meeting as one of the most large-scale events in recent years, and we hope to deepen our cooperation," he said.

How the Kremlin will react to Chinese trade and financial initiatives in the former USSR is unpredictable, but the possibility exists that it will be viewed with suspicion by a highly aggressive Kremlin looking to consolidate its regional power.

China and Russia Compete for African Riches

by Roman Kupchinsky

On June 30, 2009 China agreed to extend Zimbabwe a loan of $950 million to help the country weather the global economic crisis, Zimbabwean Prime Minister Morgan Tsvangirai told the press.

The recently formed Tsvangirai government is a makeshift coalition between two bitter enemies, President Robert Mugabe and Tsvangirai, which is seeking $8.3 billion (5.9 billion euros) to revive the country’s once thriving economy, battered by years of political turmoil and deepening economic crisis under the leadership of Mugabe.

Explaining the nature of the loan, Chinese official Zhou Yongkang told state news agency Xinhua. "We will encourage and facilitate more Chinese companies to seek development in Zimbabwe.”

The Chinese loan to Zimbabwe comes on the heels of Russian President Dmitry Medvedev’s tour of African countries, a visit geared to promote Russian energy companies projects in Africa deemed vital to Russian energy strategy.

In Nigeria, where Russia's powerful gas giant Gazprom, wants to secure contracts to build new gas pipelines, Medvedev threw his support behind the Trans-Saharan pipeline project which can potentially deliver some 30 billion cubic meters of Nigerian gas to Europe.

While Russia concentrates on the African energy business, China aims to lay claim to vast reserves of minerals found on the continent.

Zimbabwe has huge reserves of chrome and according to a study by the Strategic Studies Institute of the U.S. Army War College by Kent Hughes Butts:

“The strategic mineral reserves and production capabilities of the world are concentrated in the former Soviet Union and Southern Africa. Of the foremost important strategic minerals, chromium, cobalt, manganese and platinum, these two regions account for 88 percent, 63 percent, 91 percent, and 99 percent of the known world reserves, respectively. With the exception of small quantities of platinum produced domestically and scrap, the United States is 100 percent dependent upon foreign imports for its supplies of these four strategic minerals.”

Eurasian Energy Briefs

by Roman Kupchinsky

China continued to forge closer energy ties with Turkmenistan. On June 25, 2009 the China Development Bank signed an agreement with Turkmengaz, the state-owned gas company, promising $4 billion in preferential loans for energy projects. Turkmengaz agreed to boost future gas deliveries to China by 33 percent, from 30 billion cubic meters (bcm) to 40 bcm annually. China National Petroleum is building the 7,000 kilometer (4,300 mile) Central Asia Gas gas pipeline from the Bagtyarlyk region of Turkmenistan that is scheduled to open this year.


Russian energy giant Gazprom began its annual stockholders meeting today in Moscow. On the agenda was the election of a new board of directors. The board is headed by first Deputy Prime Minister Viktor Zubkov and contains four Gazprom managers, including CEO Alexei Miller. Valery Musin , the former teacher of Prime Minister Vladimir Putin and President Dmitry Medvedev at St. Petersburg State University was elected to the board. Professor Musin is one of Russia's leading international business law experts. He served as chief legal expert to the St. Petersburg Mayor's Office Foreign Affairs Department headed at the time by Putin. His election strengthens Putin's grip on Gazprom.

Ukraine’s Naftohaz refuted charges made by Gazprom’s Deputy CEO Alexander Medvedev on June 24, 2009 that storing Russian gas in Ukrainian underground facilities is risky and that Ukraine “stole” 8 billion cubic meters of Russian gas. After the press conference, Gazprom’s press center explained that Medvedev was referring to a dispute which took place in 2004-2005. In response to these charges, the Naftohaz press center stated that it is impossible for Ukraine to steal any Russian gas from its storage facilities because for the past 4 years no Russian gas has ever been stored in them. Furthermore, Naftohaz explained that according to the current contract there is no linkage between storage and the transit of Russian gas to Europe. Naftohaz did indeed offer to store Russian gas this year, but Gazprom refused the offer.

Iran Signals Possible Shift of Procurement of Advanced Air Defense Systems from Russia to China and Belarus

According to a report in the Iranian news agency Press TV, Tehran is now contemplating to buy the HongQi-9 (HQ-9) long-range surface-to-air missile systems recently offered by China for export under the name of FD-2000. As the Press TV report suggests, Tehran's shift of procurement efforts from Russia to China can be explained by Iran's frustration over Moscow's continued refusal to honor the $800 million deal signed in 2007 to deliver the S-300 strategic air defense systems, which was discussed on this blog in April. Designed by the China Academy of Defense Technology and manufactured by the China Precision Machinery Import-Export Corporation (CPMIEC), the HQ-9/FD-2000 is a reverse engineered hybrid of U.S. Patriot and Russian S-300 air defense systems. Although, judging by some of its technical characteristics, HQ-9/FD-2000 is inferior to the advanced versions of the S-300 family of air defense systems, including the S-300 PMU1 and S-300 PMU2, it can nonetheless considerably improve Iranian air defense capabilities around the nuclear facilities and critical infrastructure assets. Equipped with the phased array guidance radar capable of tracking 100 targets, the HQ-9/FD-2000 air defense system can engage up to 48 airborne assets (including aircraft, cruise missiles, air-to-surface missiles and even tactical ballistic missiles) simultaneously at the range of 7-125 km and firing altitude of 0.025-27 km.

In a parallel development, in January the British defense publication Jane's reported that, based on the information provided by the undisclosed "defense industrial sources in Belarus," Iran was finalizing the $140 million deal with Belarus for the delivery of two surplus S-300 PT air defense systems. It should be noted that the S-300 PT is an older version of the S-300 air defense system, which was first deployed by the Soviet Union in 1978. Nonetheless, according to the Jane's report, the S-300 PT air defense systems allegedly proposed for sale to Tehran by Minsk are equipped with the 5V55K and 5V55R missiles with the range of 47 km and 75 km respectively. Considering that in accordance with the provisions of the agreement on the joint air defense and creation of an integrated air defense network signed by Russia and Belarus in February, Moscow is obligated to supply the advanced S-400 air defense systems as part of the planned upgrade of air defense system in Belarus, it is no wonder that Minsk is now in the possession of the surplus outdated S-300 PT platforms. The First Deputy Air Force Commander Lieutenant General Vadim Volkovitsky recently confirmed to the RIA Novosti that Russia and Belarus were negotiating the details of the S-400 transfer without specifying the delivery schedule.

The Jane's report provides astonishing details regarding the manner in which the S-300 PT air defense systems may be delivered to Iran from Belarus. According to Jane's, the partially disassembled air defense systems and spare parts will be transferred to Iran aboard cargo civilian and military aircraft as part of the regular flights between Minsk and Tehran. Moreover, the investigative reporter Edwin Black wrote in July of last year quoting "informed sources" that some of the components of the S-300 air defense system had already arrived in Iran but remained disassembled in boxes. Black described Belarus as "a common portal for controversial Russian arms shipments" and claimed that the Israeli Ministry of Defense believed that the S-300s would be delivered to Iran via Belarus. Meanwhile, on May 8, the Belarusian President Alexander Lukashenko summarily dismissed foreign media reports concerning illicit transfers to Iran. President Lukashenko stated, "As far as S-300 and Iskander [missiles] are concerned, these complexes cannot be exported without my approval. There is not a single contract or project related to these systems that I have been asked to approve. This is utter nonsense."

Regardless of the speculations in media and official denials, the "background noise" created by the aforementioned news reports prompts one to surmise that the United States and its allies will not be able to prevent the illicit transfers of S-300 air defense systems to Iran if they were to occur within the hypothetical logistical Russia-Belarus-Syria-Iran (with a plausible modification of Russia-Belarus-Armenia-Iran) network. The high level of secrecy and impeccably falsified consignment documentation will most likely ensure that the shipments will be carried out undetected. Thus, in the absence of specific intelligence, the U.S. and its allies will have to continue to rely on satellite imagery in the hope of identifying preparations indicative of the possible deployment of S-300 air defense systems in Iran.