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Oil Dynamics and China’s Revised Foreign Policy; By Asma Masood

Updated: Feb 1, 2023

Image Courtesy: ETA

C3S Paper No. 0099/ 2015

Courtesy: India – China Chronicle 

Reports in March stated Russia has changed its policy of disbarring sale of majority stakes in its oil and gas fields to foreign investors. This paves the way for allowing Chinese stockholders to hold more than 50 per cent of strategic properties. China has long held keen interest in expanding its energy sources. The breakthrough with Russia will herald a new era for Beijing’s energy policy. One reason for Russia taking a different stance is the drop in crude oil prices, which have dented precious oil income for the Asian Bear. With the Ukraine crisis in tow as well, Russia now needs Chinese investments and markets for ensuring its economic stability. These developments reflect a global shift that is taking place in several oil exporting countries towards greater reliance on China. China is responding by increasingly shaping its foreign policy based on oil dynamics across the atlas.

The fall in oil prices is a decisive stimulus. If oil prices continue to plummet, there is a risk of flux in the economic regimes of the oil dependant states. Economic equilibrium in these countries is in China’s best interest. Thus China’s energy forays are contributing to global stability to a vital degree. Beijing’s relations with Russia, the Middle East, Latin America, South East Asia and Africa deserve special focus.

Beijing and Moscow: Energy Tango

The year 2014 witnessed a historic energy deal between Russia and China. Russia’s Gazprom and China National Petroleum Corp (CNPC) met at Shanghai to sign a 30 – year gas deal estimated to be worth USD 400 billion. The agreement is projected to deliver 38 billion cubic metres of natural gas a year eastward to China, starting around 2018. The timing of the deal’s duration is significant, as it coincides with China’s rise to being the world’s largest economy in 2050.

China’s burgeoning economy is riding on the projected oil import boom from Russia. The scenario is a sea change from earlier circumstances, when Russia was reluctant to allow China to purchase stakes in its oil and gas fields, fearing Beijing’s economic expansion. Despite the huge volume of energy trade, there were no pipelines between the two countries. Russian intellectuals were also perturbed by the influx of Chinese immigrants in the Far East. The new deal will bring a U–turn in Russia’s attitude towards China, and strengthen its partnership on both hard power and soft power platforms. CNPC is heading the hard power front, by providing a prepayment of USD 25 billion to fund Gazprom’s expenditure of USD 55 billion which will support the infrastructure and transportation costs of the deal.

One significant outcome of the deal is that China will provide loans to Russia’s debt– ridden oil and gas companies. These loans will enable the cash strapped corporates such as Rosneft to build pipelines and modernize their production at low risk. China’s prepayment of $60 billion to $70 billion played a decisive role in helping Rosneft manage its large corporate debt. The resultant spike in oil revenues will go a long way in rebuilding the Russian financial system. While not openly acknowledged, the Asia–Pacific is dependent on a stable Russian economy. It is a less known fact that the collapse of the Soviet Union was partially due to the fall in oil prices at the time. China needs a strong modern Russia to carry its success in the Asian Century. It is evident from the recent declaration highlighting Russia as a strategic partner in China’s Maritime Silk Road venture. The process of providing loans and purchasing energy is thus a lifeline not only for Russia but also for rising China.

China’s policy of non–interference complements its energy trade with Russia. While the West condemns Russian actions in Eastern Ukraine and imposes crippling sanctions, China adopts a low–key stance and calls for restraint. Beijing believes that Russia will not initiate a major war as it will only result in negative consequences. Russia owes China for being a diplomatic ally during this time of turmoil. The opportunity of earning higher energy trade may have been a vital factor in shaping China’s response to the Ukraine crisis.

The benefits are not only in trans–border Russia– China energy trade alone. As Russia has drifted away from the West, it will have to forge partnerships with China for oil exploration in the Arctic. China will thus gain a valuable arena to expand its energy resources. The escalation in energy ties will make China face the added expectations from Russia to continue negotiations to normalize the situation in the Korean peninsula. This is indispensable as Russia is set to transit energy to South Korea and Japan via North Korea.

Russia may be fighting a battle on its Western flank, but it is seeing the evolution of stronger ties with its Sinosphere neighbour. China is hence shaping its foreign policy in such a manner to accommodate not only its own interests but also to allay the concerns of its strategic ally in Moscow. It will garner Beijing several advantages beyond the energy realm– Russia is now likely to strongly support China’s claims in the South China Sea.  Russia and China will also work closer together to counter U.S.A’s Asia pivot. In addition, China will devote more attention to the Shanghai Cooperation Organization (SCO) in order to protect its strategic interests in the region. Its energy ties with Russia will form an important crux of SCO dimensions in future. India cannot be ignored in the China– Russia equation. Delhi is likely to forge closer ties in the Russia – China – India triangle, perhaps via the SCO.  Besides, the Russian Deputy Prime Minister had stated in 2014 that an extension of the USD 400 billion pipeline to India could be “one of the largest infrastructure projects that could be conceived”.

The energy deal between China and Russia is sure to pave the way for higher trade ties in other sectors and ensure a gradual erosion of the residual mistrust between Beijing and Moscow. While China increases its energy reliance on the Bear, it is thus seen to grasp a golden handshake on diplomatic, strategic and commercial fronts. The world may soon see an evolved Beijing – Moscow partnership, one that transcends traditional barriers and embraces opportunities to rise together in the Asia– Pacific century.

The Convergence of Sino – Middle Eastern Interests

Saudi Arabia and Iran deserve special scrutiny while studying China’s energy cum foreign policy in the Middle East. The Persian state presents several interesting aspects. As China’s third largest supplier of energy (for 12 per cent of China’s annual needs), Iran plays second fiddle only to Saudi Arabia in Beijing’s Middle East policy.

Beijing imported 630,000 barrels per day (bpd) of Iranian oil in the first half of 2014 alone, up 48 per cent from the previous year. The figures for bilateral trade between Iran and China are noteworthy as well, having reached USD 36 billion in 2012. This makes China Iran’s largest trading partner. The zenith of ties between the states, which once boasted of powerful ancient civilizations, forms a crucial lever for China’s Middle East policy. For starters, the Iran nuclear talks issue has transformed China’s image, displaying the Sinosphere as an important player in the new century’s negotiating table. Thus Iran’s energy exports have not only fed China’s economy, but transformed Beijing into a leading voice in international affairs. These dynamics have made U.S.A appreciate China’s mediatory efforts, and earned China sanction waivers while trading with Iran. Thanks to China’s efforts, frosty relations between Washington and Tehran have recovered. This has formed a circle of positive ties between Beijing and Tehran.

Good relations are indispensable, as Iran will be a vital part of China’s ambitious Land Silk Road plan. The Persian country will serve as a valuable gateway for China’s commercial connections with Europe.  The scope of ties observed between the two countries has made the People’s Liberation Army expand its ambit to the Gulf, with joint defense exercises being undertaken with Iran’s military forces. This ensures security of China’s strategic interests in the volatile Middle East region. These factors are now added to by the recent plunge in oil prices. The phenomenon will make Iran strengthen its dependence on China as a valuable market for its oil and gas exports.

While low prices worry Iran, Saudi Arabia does not seem perturbed. The Kingdom refused to cut energy production, preventing a hike in oil prices. A sag in oil revenue is not an obstacle for the wealthy country, unlike Iran’s case. However lower prices are a boon for China, for whom K.S.A is the largest energy supplier. The bulk of K.S.A’s USD 36 billion exports to China are crude oil. The scope of energy ties have made China the Kingdom’s largest trading partner, surpassing U.S.A. Iran cannot be ignored while studying China– K.S.A relations. K.S.A apparently refuses to cut production in order to maintain low prices and refuse Iran an advantage. China is observed to play a neutral stance, while maintaining good relations with both countries, deriving goodwill and resources in return. China is hence maintaining amiable ties with two of its top Middle East partners, ensuring a platform for linking Asia’s future great powers with the continent’s largest energy suppliers. India can partner with China while fostering relations with K.S.A and Iran. Together the South Asian neighbours can work to successfully build a multipolar environment in the Middle East.

Banking on China for Stability

Lower oil prices have brought China closer to Latin America and Africa. While China has lent a sum of USD 119 billion to Latin America in the last decade, the Asian power has emerged as the region’s largest lender, surpassing even the World Bank. These loans are offered in return for higher oil supplies. The spike in oil exports comes as a relief, especially to Brazil, Venezuela, Ecuador and Argentina, at a time when low oil prices have led to a slowdown in the region’s economic growth. China has thus propelled the region to enhance development in infrastructural and other sectors, while following a policy of non–interference towards the region’s volatile internal affairs. This foreign policy approach has been shaped not only by China’s demand for energy but its goodwill approach towards all partners in the international arena.

Africa is another region where Chinese energy interests are being consolidated.  In fact China has emerged as Africa’s largest trading partner, and is a major oil importer from countries like Angola and Sudan. China is adopting the position of a lender in several African states, offering finance to build their economy in the form of integrated aid packages. These include a wide range of infrastructural ventures ranging from roads/railways to schools, from fiber optic cables to hospitals. China is hence shaping its foreign policy to emerge as a facilitator of development and growth in this struggling region. Energy interests have made China show its diplomatic prowess, while acting as a mediator in the Sudan conflict. While China had provided Khartoum with arms to engage with the rebels, it now mediates with South Sudan to help resolve the conflict. However there remains an issue of the quality of infrastructure funded and built by China. India can play a valuable role at this juncture by working with China to ensure that the Dark Continent and Latin America emerge amidst world– class facilities.  India and China can act as partners and not competitors while reaping mutual benefit.

While China expands its energy interests in far– flung places, it is not ignoring its Southeast Asian neighbours. The slump in oil prices may bring countries like Indonesia and Malaysia closer to China despite their differences in the South China Sea. This may occur through a higher proliferation of trade and finance via the China Southeast Asia Free Trade Area and the new Asian Infrastructure Investment Bank. Ironically lower oil prices indicate China will increase its defense modernization budget to upgrade its naval presence in the disputed South China Sea. Nevertheless China is likely to follow a deterrent approach while maintaining good relations with Southeast Asia. India can partner with ASEAN to maintain balance in the region.

China’s foreign policy with the studied regions is observed to be largely shaped by its energy interests. It is significant that China has established itself a major lender in return for increased energy supply. The newly formed BRICS New Development Bank offers scope for the same. Low oil prices have forged stronger relations between China and the oil–dependent economies. China has also emerged as a mediator as seen with Iran and South Sudan.  Oil has hence has fueled the rising Dragon’s fire, while bringing out its alter ego– the mediating Panda.

If Delhi collaborates with Beijing, the neighbours can expand their strategic interests together. India can share its technological expertise and investments while foraying into the upstream (energy exploration) and downstream (oil and gas trade) avenues. As the century progresses, there may be a shift in oil dynamics, but both China and India will continue to shape their foreign policy based on the resource that is Black Gold.

[Asma Masood is Research Officer at the Chennai Centre for China Studies. Her areas of interest are China, South Asia and Dynamics of Foreign Policy. Email id : Twitter: @asmamasood11]

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