Category Archives: China-Russia

North Korea: Trade, Opportunity And Russia

Rajin Port, North Korea, 2011. Photo credit: Laika ac. Licenced under Creative Commons.

EVEN WITH UN trade sanctions against North Korea in place, China’s trade with North Korea rose 15% in the first five months of this year to just over $2 billion, according to customs data.

China is certainly buying less from North Korea, principally because it suspended coal purchases in February in response to North Korea’s fifth nuclear test in defiance of UN demands. However, it is still importing iron ore.

In the other direction, more Chinese oil (up 18% year-on-year) and goods, notably telephone equipment, textiles, soybean oil and vehicles, are flowing into North Korea.

The first-quarter data, which show a 37.4% rise in total trade, has drawn the predictable irascible tweet from US President Donald Trump, whose administration is showing signs of increasing frustration with Beijing’s attempts to be cooperative in reining in Pyongyang’s nuclear weapons ambitions.

The debate is intensifying in Washington over how honest an ‘honest broker’ Beijing is over North Korea. Is it, too, as frustrated with Pyongyang as its public statements suggest? Or is it less than neutral, still supporting Kim Jong-un’s regime to greater or lesser extent.

The darker conspiracists in Washington believe Beijing is ‘running’ North Korea with the end of keeping the peninsula on the brink of instability to keep US regional allies diverted from China issues while making China, as North Korea’s only ally and main aid donor, the essential partner in any brokered solution that never comes.

This Bystander thinks that a conspiracy theory too far, not least because subcontracting the maintenance of managed instability to the agency of the Kim dynasty seems such a high risk.

More likely, to our mind, China is protecting its red-line position. Beijing does not want the Pyongyang regime to collapse for fear of the outcome being a US-aligned unified Korea on its border, over which an influx of North Korean refugees, possibly starving, will already have poured.

Thus it will lean on Kim, but not heavily enough to topple him. This leaves the United States squeezed between taking direct action — which is everyone’s last resort, though one that Trump may resort to more readily than others — and imposing further sanctions, most likely next targeted at more banks and companies, including Chinese companies, thought to be financing North Korean trade, especially illicit trade.

Remittances by North Koreans working abroad are another potential target. A UN report in 2015 estimated that there were more than 50,000 North Koreans working abroad in mining, logging, textile and construction industries around the world, generating  $2.3 billion a year for the regime.

Which is one of the points where Russia enters the picture. Along with China, Russia is the main employer of North Korean workers. Thirty thousand North Koreans are estimated to work there.

Earlier this month, the Russian ambassador to the UN rejected the United States’ call for new sanctions against North Korea following its latest missile test. Instead, though it supported previous UN sanctions, it repeated China’s calls for restraint on all sides, similarly worried about the risk of instability that could be triggered by a strict sanctions regime.

Washington views the Russian position on North Korea, which is suspects to be opportunistic, sceptically, and as a sanctions busting. Last month, it imposed sanctions on two Russian companies, one for allegedly supplying a North Korean firm involved in the nuclear programme, the other for shipping petroleum products to North Korea.

Russia’s trade with North Korea is minimal: total trade last year was worth $77 million. That is a deceptive figure because much of the trade goes via China. Up to $500 million would be more realistic.

Still relatively tiny (and nothing compared to what it was in Soviet days). However, it jumped in the first quarter of this year, by 85% year-on-year, according to Russia’s customs service. The bulk of this consisted of Russian exports of coal ($26.7 million-worth) and oil ($1.2 million-worth).

Often forgotten, there is a railway that runs from the Russian side of the short Russia-North Korea border across the Tumen river to Rajin (seen above in a 2011 photograph), a North Korean port from which Siberian coal is shipped. New port facilities had been built in a joint venture with the South Koreans until they pulled out last year.

Sanctions-busting fuel deliveries to compensate for those lost from China also get through to North Korea clandestinely via this route. North Korean coal reportedly goes in the opposite direction. The line has four rails to accommodate both Russian and Korean gauge rolling stock.

However, the recent spike in Russian exports goes against the trend of falling exports over the previous three years, a trend mirrored by China, as it happens.

Last week, during President Xi Jinping’s visit to Moscow, he and his Russian counterpart President Vladimir Putin said the two countries would co-operate to defuse the North Korean crisis. Russia will not undercut Beijing’s leadership on the issue, but it is steadily inserting itself into the equation and is likely to be opportunistic, adding a further layer of complexity and uncertainty to an already seemingly intractable situation.

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Filed under China-Koreas, China-Russia, Trade

Droning On

DJI Phantom 2 drone with GoPro camera. Licenced under Creative Commons.

IT IS A sign of the increasing sophistication of the country’s technology that Beijing is imposing controls on exports of some advanced drones and supercomputers. Or at very least a sign that Beijing wants its technology so regarded.

From the middle of this month, export licenses will be required for drones that can fly 1,500 meters high, stay airborne for longer than an hour and handle strong winds. Licences will be granted or withheld on grounds of national security, which will, in the manner of the times, inevitably be judged case by case.

There is also a bit of tit-for-tat at play. The export licensing scheme also covers supercomputer chips and follows US restrictions on computer hardware that can be sold to China. China’s Tianhe-2 is currently the world’s fastest supercomputer though the Obama administration has announced a programme to reclaim that title for the U.S. The Americans have concerns that the Tianhe-2 is being used for nuclear-weapons development

Meanwhile, China has become a leader in drone manufacturing. DJI Technology, the Shenzhen-based company whose drones have been flown (uninvited) into the White House grounds in Washington and onto the roof of the office of the Japanese prime minister in Tokyo, had sales of $500 million in 2014, more than any another maker of unmanned aircraft.

Sales of its best-selling Phantom line of commercial drones (seen above mounted with a GoPro camera) are unlikely to suffer from the new regulations, and so DJI will remain on track to become this year the first drone maker to record $1 billion in sales.

Update: DJI has 70% of the world market for commercial drones and is valued at $10 billion, according to an FT interview with one of its earliest outside investors, Neil Shen, who runs the China arm of the Silicon Valley investment firm, Sequoia Capital.

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The China-Blue Waters Of The Mediterranean

IT WON’T BE the first time that the PLA-Navy and its Russian counterpart conduct joint exercises. But it will be the first time they do so in the Mediterranean Sea. And that sends both a certain and a provocative geopolitical signal to Brussels, London and Washington beyond.

The foreign ministry has confirmed that two Chinese frigates and a supply ship will be among the nine warships involved in the exercises, which, Beijing says, will focus on actions where the two powers are likely to coordinate such as maritime resupply, rescue missions and escort duties. No damp squibs, the exercises will include live-fire practices.

The three Chinese vessels have been on anti-piracy duty off the Somali coast and were used in March to evacuate some 500 hundred Chinese citizens from Yemen.

There are no international high seas in the Mediterranean. All of it falls into the economic zone claimed by at least one of the some two dozen countries in it or bordering it. However, Chinese warships are no recent strangers to the waters. They evacuated more than 30,000 Chinese workers stranded in Libya after the overthrow of Qaddafi in 2011. Since then, a PLA-N frigate has twice been involved in the removal of chemical weapons from Syria.

The timing of the exercises is pointed. They will come shortly after President Xi Jinping visits Moscow on May 8th-10th. While there, he will attend the May 9th military parade to mark the 70th Anniversary of the end of the Second World War, which Russia celebrates the Soviet victory over Nazi Germany. NATO and other Western leaders are boycotting the event in protest against Russian President Vladimir Putin’s adventurism in Ukraine. Xi will be fêted as the honoured guest.

A contingent of PLA troops will march in the parade. The message is that both NATO and Asian nations should regard the China-Russia alliance as a growing counterweight on land and sea to the one between the United States and Japan. Beijing sees Washington’s pivot of its foreign and defence policy towards Asia as intended to hem in China.

Beyond the geopolitical posturing, there is substance to the growing reach of the PLA-N. Beijing has increasing national interests far from home, including in the Maghreb and more broadly the Middle East and East Africa. The PLA-N’s capacity to project blue-water power far from home is still meagre, but it is being built up systematically—now in the balmy waters of the Med as much as in the shipyards at home.

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Just How Good A Gas Deal Is Beijing Getting From Moscow?

THE KEY NUMBER we don’t know in China’s insert-your-own-very-large-number-here energy deal with Russia is the unit price state-owned China National Petroleum Corp. (CNPC) will be paying.  CNPC has finally signed the agreement to buy up to 38 billion cubic meters of natural gas a year from Gazprom for 30 years starting in 2018 (a new pipeline has to be built first). This Bystander hazards a safe guess that Beijing has got itself a very good deal.

The sale has always been necessary for Moscow to wean itself off its dependence on European markets for its energy sales, but merely convenient for Beijing, which has several sources other than Eastern Siberia from which it can meet its growing need for energy, especially cleaner energy than can be generated from its indigenous coal. After 10 years of negotiations between CNPC and Gazprom that have mainly been haggling over the formula that will determine the pricing, all that has changed is the situation in Ukraine. That has given a renewed sense of urgency to Russia’s need to secure non-European markets, while President Vladimir Putin’s two-day visit to China provides the platform from which to announce the deal with political benefits to both himself and his host. President Xi Jinping and CNPC’s chairman Zhou Jiping will have taken full advantage of that.

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Filed under China-Russia, Economy, Energy, Politics & Society, Uncategorized

China Picks And Chooses Its Gas Suppliers

Gazprom’s decision to put off construction of a $38 billion trans-Siberian gas pipeline for a year will trouble Moscow more than Beijing. The delay is because the two countries continue to be apart on pricing for new Russian gas exports to China.

China, for all its energy hunger, is the more ready of the two to wait to get the pricing it wants on the 38 billion cubic meters of gas it has agreed to buy annually from Gazprom. Russia, on the other hand, is anxious to get its oil and gas companies selling to Asia to cut their reliance on European markets.

The International Energy Agency recently estimated that China will absorb one-third of new LNG supplies worldwide over the next five years as its demand grows by 12% a year. In June, Rosneft signed a contract to supply 2.6 billion barrels of crude oil to China National Petroleum Corp. (CNPC) over the next 25 years, with CNPC also taking its first stake in a Russian gas-export project, 20% of Novatek’s Yamal LNG fields. Novatek, as Russia’s second-largest gas producer, is a Gazprom rival. CNPC will import 4 billion cubic meters of gas a year under its deal, likely starting in 2016.

Earlier this week, CNPC secured a deal to buy more gas from Turkmenistan. State-owned TurkmenGas will up its annual sales from 40 billion cubic meters a year to 65 billion cubic meters a year by 2020. China last year imported 20 billion cubic meters from Turkmenistan. The extra 25 billion cubic meters will come from opening up the second phase of TurkmenGas’s giant Galkynysh field. CNPC will do the development which is being paid for with Chinese financing. Gazprom can wait.

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Filed under China-Central Asia, China-Russia, Energy

China, Russia Settle East Siberian Oil Pricing Dispute.

Workers inspect PetroChina oil tanks in Daqing, northeast China's Heilongjiang Province, Jan. 10, 2011. Some 390,000 tonnes of crude oil have been delivered to China as of 22 p.m. Monday through an oil pipeline linking Russia's far east and northeast China, since it began operating on Jan. 1, 2011. The pipeline which originate in the Russian town of Skovorodino in the far-eastern Amur region, enters China at Mohe and terminates at Daqing, both in northeast China's Heilongjiang Province. The 1,000-km-long pipeline will transport 15 million tonnes of crude oil from Russia to China per year from 2011 until 2030, according to an agreement signed between the two countries. Some 72 kilometers of the pipeline is in Russia while 927 km of it is in China. (Xinhua/Wang Jianwei)

The long-troubled negotiations over China’s purchases of Russian oil have reportedly taken a step forward. Russian press reports say a new deal ensures a below-market price for China’s oil imports from East Siberia. Russia’s largest state-controlled oil company, Rosneft, and the pipeline monopoly, Transneft, are to give China National Petroleum Corporation (CNPC) a $1.50 a barrel discount on the oil it gets via the East Siberian-Pacific Ocean pipeline relative to the market price of Russian oil shipped to other buyers from the Pacific Ocean port of Kozmino.

China receives the vast majority of its Russian oil via a spur on the pipeline from Skovorodino to Daqing, shown above, that opened in January, 2011. But it is starting to buy Kozmino cargoes as an alternative to Iranian oil. Rosneft reportedly says the deal will cost the Russian side $3 billion a year in revenue. That seems haggling hyperbole, rather than a real number. The arithmetic suggests $3 billion over the life of the contract would be closer to the mark. Whatever the true figure, the Russians may just have to write it off as the cost of ending the dispute. China funded the building of the pipeline with a $25 billion loan but claimed Transneft overcharged for transport costs. These are part of the formula for pricing the oil with which the loan is to be repaid at a rate of 15 million tonnes of crude a year from 2011 to 2030.

The two countries still have outstanding negotiations over natural gas. Price is a point of contention in those discussions, too. However, there has been agreement that Russia will start supplying China with Eastern Siberian gas in 2015.

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The Cold War’s Role In Triggering China’s Economic Reforms

Deng Xiaoping took smart advantage of the Cold War between the U.S. and the Soviet Union encouraging the normalization of Beijing’s relations with Washington to open up U.S. technologies and trade to China’s emerging manufacturers. With America acting as handmaiden to China’s integration into the world economy and China having cheap labour, sitting at a crossroads of global trade, adapting the best of foreign development models to its own circumstances and maintaining a solid political commitment to economic reform, a unique combination of political and economic events converged that allowed China to develop as it has done over the past 30 years.

That, in summary, is the view of Andrey Denisov, Russia’s first deputy foreign affairs minster and the China hand among his country’s senior diplomats, given in an interview to Vestnik McKinsey, a Russian-language publication of the international management consultancy. (A shortened English version has been published in the McKinsey Quarterly.)

It is a conventional analysis with the exception of the Cold War point that Denisov says tends to be “overlooked” but for which he makes a compelling case that it was a critical catalyst. Denisov also provides the American or European reader with a necessarily different perspective on China’s development, and there are some telling if unstated comparisons with Russia’s own economic reforms after the collapse of the Soviet Union. (The Russian version is titled, The Chinese Path: Lessons for Russia.)

Denisov is similarly succinct about the challenges China faces in replacing imitation with innovation and in dealing with the environmental, farming, water and corruption problems that economic reform has brought. He also talks about Russia’s development of its own Far East and its future relations with Asia. Well worth the read.

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