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Title: Emerging geopolitical challenges for China's foreign policy Catholic Junior College Teacher Advisor: Melanie Lum

Research Members: Team Leader Nguyen Tien Cuong Rachel Oh Grace Tan Lance Lee Wei Li Justin Lam 1. Introduction

In recent years, Chinas interest in extending its influence over Central Asia has become increasingly evident. Fuelled by its rising energy needs, Central Asia is fast becoming the most important energy supplier for China due to its geographical proximity and relative political stability. China has also experienced relative success in wooing these countries despite existing but limited anti-China sentiments. The Middle East, on the other hand, is considered politically unstable while Chineses complex oil relations with African countries are further complicated by competing US interests in the region. An added advantage of furthering its interests in building relations with Islamic countries in Central Asia is the guarantee of border security for restive Xinjiang in West China. Thus compared with other regions, Central Asia presents most opportunities for China to reap geopolitical and economic benefits from its influence in the region. However, given Russias and Chinas vested interests in the region due to their geographical proximity, tensions between these two strategic partners have inevitably been growing. Competing factions within the Russian policy elite are having extensive debates over whether Russia should align itself with the USA to curb Chinas hegemonic force in Central Asia, given its increasing naval strength. This report will attempt to analyze the dynamic relationship between China and Russia over oil interests in Central Asia and its impact on Chinas approach to foreign policy. Recommendations are also provided on how the potentially hostile developments in the region can be properly and sensitively managed with a coherent and consistent China foreign policy agenda. 2. Chinas Growing Energy Needs

There is undoubtedly a strong link between Chinas approach in foreign policy and its growing need for energy security, both in oil and natural gas, in Central Asia. China is currently the worlds second largest oil consumer, and is projected to become the biggest by 2030 (Ebel, 2009). Natural gas is not traditionally a major energy source in China, but its share in the countrys consumption mix has increased rapidly in recent years. China has become a net natural gas importer by 2007 (Peterson, 2011). Chinas robust economic growth will no doubt further boost its energy thirst, which makes the search for energy security an imperative for Beijing. While the Middle East remains the largest source of Chinas oil imports, this region is becoming increasingly more politically instable. Moreover, oil coming out of the Persian Gulf has to pass through two of the main energy transport checkpoints the Strait of Hormuz and the Strait of Malacca, both of which are out of Chinas control . These threaten Chinas energy security. In terms of natural gas, China is also diversifying its import sources to achieve its targeted share of natural gas in its overall energy mix of 10% by 2020, whereas it only accounted for 4% in 2010 (Ebel, 2009). Under such circumstances, the proximity of oil and natural gas of Central Asian energy-rich states especially with Kazakhstan and Uzbekistan as the main trading partners, play a crucial role in diversifying Chinas energy sources and enhancing Chinas energy security. For example, Chinese companies hold a 22.5% stake in Kazakhstans oil and gas industry. Chinas annual trade with Kazakhstan is also significantly higher with Kazakhstan than with any of the other Central Asian states, which range from only US $657m (96.1 billion KZT) with Kyrgyzstan, to US $1.5 billion (219 billion KZT) with Turkmenistan and Uzbekistan (Central Asia Online, 2011). Furthermore in June 2010, the CNPC signed an agreement with Uzbekistans national oil company to purchase 10 bcm of natural gas each year. A spur to the Turkmenistan-to-China pipeline, which sent 4 bcm of natural gas to China in 2010, is under consideration to pump Uzbekistans own natural gas to the PRC (The Times of Central Asia, January 7). In December 2010, the Asia Trans Gas Uzbek-Chinese joint venture created by Uzbekneftegaz and the CNPC opened the second strand of Uzbek section of the Turkmenistanto-China gas pipeline. It should allow the flow of LNG to the PRC through the pipeline to reach its expected annual level of 15 billion bcm in 2011 (UzReport.com, December 29, 2010). These volumes should meet half of the PRCs annual demand for imported LNG (The Times of Central Asia, December 27, 2010) Moreover, Chinas foray into the Central Asian energy sector is also based on broader geoeconomic and geopolitical agenda. Besides its investments in fossil fuel resources, more extensive Chinese economic and political influence into Central Asian countries is underway. In addition to the development and transportation of Central Asian oil and natural gas, Chinese state enterprises have also invested in the regions infrastructure, such as railroads and highways, bringing about mutual benefits to the host countries (Ruoxi, 2011) 3. Sino-Russian Energy Relations

Sino-Russian energy relation has been relatively limited because of significant suspicions from both sides particularly from Russia. Russia has traditionally been the dominant player in the Eurasian energy market. It holds the worlds eighth largest crude oil reserves, and its oil

production has recovered from a post-Soviet slump to eclipse the oil production of Saudi Arabia. Between the mid-1990s and 2009, Russian oil production grew from around 3 million barrels per day to approximately 10 million per day (Petersen, 2011).Over the same period, Russian domestic oil consumption has remained steady at 2-3 million per day, allowing Russia to increase its exports to 7 million per day in 2009. In addition to its generous oil reserves, Russia holds the worlds largest natural gas reserve, some 25 per cent of the worlds proven total (Chapman, 2011). With 48 trillion cubic metres, Russias proven natural gas reserves are almost as large as those of Iran and Qatar, the worlds number two and three in terms of proven reserves, combined. Russia has consistently been the worlds biggest natural gas producer only to be marginally surpassed in 2009, when the shale gas boom in the US increased its production to 566 billion cubic meters (bcm), compared with Russias 546 bcm. Russias position as the worlds biggest natural gas exporter, however, has remained unchallenged (Marketos, 2009) However, the energy trade links between China and Russia have been limited mostly due to undercurrents of tensions and suspicions. Although Russian oil sales to China have expanded rapidly from negligible levels in the mid-1990s, they remain limited. According to the US Energy Information Agency (EIA), Russia was Chinas fifth most important crude oil supplier in 2010, after Saudi Arabia, Angola, Iran and Oman, and barely ahead of Sudan and Iraq. China has bought some Russian liquefied natural gas (LNG) on the open market, but it has yet to establish ties in this market. The foreseeable future for closer energy ties seems bleak as there is greater force keeping them apart. Russia will continue to look west for its main energy markets while China will be wary of relying on Russia for its burgeoning energy needs (Ruoxi, 2011). Furthermore, some important energy trade links between China and Central Asian states have significantly alarmed Russia due to their geopolitical and economic threats. The KazakhstanChina oil pipeline, developed by the China National Petroleum Corporation (CNPC) and the Kazakh oil company KazMunayGas (KMG), opened in December 2005 as the first outlet of oil from Central Asia that bypasses Russia (Ebel, 2009). Four years later, in December 2009, the Turkmenistan-China natural gas pipeline, running from Turkmenistan through Uzbekistan and Kazakhstan to Chinas northwest Xinjiang region, was inaugurated during Chinese president Hu Jintaos visit to Turkmenistan. These pipelines signify the official end of Russias near monopoly over Central Asian oil and natural gas exports. Most recently, in addition to investments in state companies, Chinese investments and industrial stakes in Central Asia have further expanded through smaller businesses. In a display of soft power, the Chinese government has opened many Confucius Institutes to teach Mandarin in capitals across Central Asia. Thus, with energy cooperation as a locomotive in bilateral economic integration, China is gaining political leverage through Central Asias reliance on its business investments and becoming a major geopolitical force in the region. Chinas foothold in Central Asias oil and gas resources could undermine Russias vested economic interests in two ways. One economic impact is Russias diminished share in Central

Asias energy export volume. In the case of oil, currently the majority of Kazakh oil still goes through Russia. One of the major pipelines linking Kazakhstan and Russia is the Caspian Pipeline Consortium (CPC) oil pipeline, which in 2009 carried 597,000 bbl/d (barrels per day) of Kazakh oil from Tengiz and Karachaganak oilfields to Russia, accounting for nearly hal f of Kazakhstans net oil exports (Ebel, 2009) In contrast, in 2010, the Kazakh-China oil pipeline reached its designated full capacity of 10 million tons per year (roughly equaling to 200,000 bbl/d). This figure is projected to increase rapidly, because in October 2009, CNPC and KMG signed a framework agreement to double the pipeline capacity to 400,000 bbl/d by 2013 (EIA, 2011.) This is faster than the projected growth of Kazakhstans total oil production, which is to double its current volume only by 2019. As a new consumer interested in Kazakhstan for its oil resources, China has gained a steady foothold, reducing the size of Russias piece of the Kazakhs oil pie. The second economic impact on Russia of Chinas foray into the Central Asian energy sector is even more profound. The emergence of Central Asia-China oil and natural gas pipelines, among other realized and planned pipelines, broke the longstanding Russian monopoly on the export routes of Central Asian energy market. The consequence of this change is particularly sharp when it comes to gas pipelines. Unlike oil, natural gas cannot be easily or economically transported by tankers, and, thus, pipelines are the main means of gas transport. This necessitates the maintaining of long-term relationship between the consumer and the supplier. In the past, the lack of pipeline routes bypassing Russia left the Central Asian gas exporters little leverage to bargain with Russia. Russia benefited from purchasing Central Asian natural gas at a price much lower than the international market price. Now that the Central Asian states have gained more leverage from the diversification of their natural gas outlets and markets, however, Russia had been forced to pay near market price for these resources. Moreover, despite common interests, an undercurrent of distrust runs between China and Russia. Russia is acutely aware of Chinas growing economic and strategic superiority and it fears being marginalized in a world dominated by rivalry between the two global superpowers, the US and China. China, meanwhile, regards Russia not as an equal partner but a middling power sometimes prone to rash actions. Top Russian foreign policy makers reckon that by acting as Chinas raw material appendage, Russia may unintentionally help China to reinforce its own military-industrial complex and thus hasten that countrys rise to economic and military superiority. They fear a further reduction in Russian arms sales to China (one of the few Russian industries aside from energy that benefits from Chinas booming demand); increased competition in global markets for military hardware; and finally the potential threat that China poses as an emerging power. In addition to military and economic competition, some Russians are also concerned that China could gain influence over Russias vast far eastern territories which are rich in resources but increasingly devoid of people (Petersen, 2011). The concern is that Chinese immigration, trade and investments could translate into political influence in these regions. This can be evidently seen in the lack of border pipelines, pricing disagreements and political domestic pressure for rent-seeking practices that has been elaborated in the earlier part of this report.

The Way Forward Proposed Framework for Economic Cooperation Although Central Asian economic interests are evidently important to China, Chinas assertiveness in expanding its geopolitical and economic influence in the area should take into clear consideration of her comprehensive strategic partnership with Russia in a broader, global geopolitical framework. If the oil and natural gas of Central Asian states were the only determinants influencing Russian and Chinese foreign policies towards each other, the two states would have been engaged in overt conflict over the control of these resources, regardless of mitigating factors. However, in reality, the Russia-China competition is not such a zero-sum game solely based on the control over Central Asian energy resources. Russia and China are not the only players in the arena of world politics or in Central Asia, neither is the Central Asian energy resource the only thing that Russia and China take into consideration when making foreign policies. Instead, the Russia-China relationship, often dubbed as a strategic partnership, is based on broader common interests in a much more complex background of world politics. Given the rapidly increasing economic might of China, China is in a privileged position to initiate concessions with Russia both geopolitically and economically in Central Asia. Speculations have been rife about Chinas economic growth. In March 2011 the chief executive of the Hong Kong and Shanghai Banking Corporation said China will overtake the United States to become the worlds largest economy by 2050. Only a month later, the International Monetary Fund saved China 34 years in this process by forecasting that Chinas economy will surpass that of America in real terms in 2016. These are mere hypothetical predictions, but they definitely demonstrate the worlds deep concerns about Chinas economic growth, which disturb not only the US, but also Russia. As analyzed above, the Russia-China partnership is based on their shared stance against the uni-polar world order. Thus, if the world power structure were to be significantly altered by Chinas challenging of the USs dominant position at some point in the future, this could undermine the basis of the cooperative relationship between Russian and China and urge Russia to treat China as a more imminent threat. Unpredictable parameters in the political calculus of this issue such as shifts in Central Asian states domestic politics, recovery or decline of the global economy, changes to the regional and global power balance, Chinas rapid rise, and other unpredictable incidents could all lead to the escalation of the previously mitigated tensions between Russia and China in the region. Therefore, although the constructive relationship between Russia and China in Central Asia is based on sound logic, its preservation should not be taken for granted. Instead, the development of the Russia-China partnership will rely on further efforts by the two sides to enhance mutual understanding and trust, as well as to strengthen multilateral cooperation in the region. This would be the conditions under which a friendly geopolitical framework can be initiated and instituted by China in collaboration with Russia. Some proposed solutions by academics have been promising. With special regard to the Shanghai Cooperation Organization (SCO), Marketos (2009) argues that in spite of some competing interests in the strategic perceptions of the SCO members, the situation is far from

being a zero-sum game. There are several issues in which the members have strong converging interests, such as maintaining regional stability. According to Marketos, The SCO is the sole institution with the potential to become a nucleus of a broader regional cooperation regime today. However, for such a development to take place, the SCO has to open up, both in terms of its agenda and its membership. The United States, in particular, should be granted observer status, since even in this part of the world; formulating effective regional policy without the US is difficult. Furthermore, the authors vote for a strengthening of regional cooperation mechanisms, with rather than against the United States, could be a very reasonable means for absorbing geopolitical tensions related to Chinas rise. However given the complexities involved and Chinas disinclination for multilateral cooperation in strategic national interests such as energy security, other bilateral China-Russian initiatives can also be recommended. Given the sensitivities involved, Chinas geopolitical advances into Central Asias energy resources must be moderated and exhibit genuine sincerity to legitimize Chinas restrained dominance in this region. A realistic geopolitical framework, dividing Chinas and Russias vested economic interest and as well as regular regional military drills and increased arms trade links proposed by China can be the first step to further assuage Russia of Chinas intent. More military dialogues between the two countries to again deepen the arms trade links initiated by Chinas Peoples Liberation Army (PLA) leadership can significantly reduce Russia suspicion and reservations about Chinas sincerity. This is because the initiation of dialogue of the more assertive part in Chinese top leadership would definitely signal a genuine concern to address the latent tension by Chinese government

Furthermore, Chinas encouragement and support for Russias presence in Africa, although seemingly far-fetched, can be a preemptive move to tighten the strategic partnership which is vital in ensuring Chinas peaceful rise vis--vis United States all-encompassing presence in the world. Given the existing economic status that Russia is enjoying due to oil prices, Russian presence in Africa can be employed by China to counterbalance the presence of US presence which may be hostile to Chinese vested economic interests in these areas. Conclusion Chinas rise has brought about increasing tensions around the world. The fight for re sources and influence in various parts of the world will inevitably impede its peaceful rise. Chinas top leadership and foreign policy elites are within themselves plagued with competing schools of thoughts extensively debating on how to best optimize Chinas rise without invoking premature and unnecessary obstacles. This paper seeks to argue that instead of confrontation and asserting its power, China can cooperate with Russia to share their influence in the region through the setting up of regional cooperation mechanisms such as the SCO and involving the

United States as an observer. In the near future, Chinas leaders are unlikely to make such a bold move due to the incoming leadership transition. However, as China plays its part as a responsible global player, such a solution may be viable. Meanwhile, with the complexities inherent in joint geopolitical concerns existing in diplomatic discourse between Russia and China, this issue beckons to even more conscientious investigation by Chinese foreign policy makers in the unpredictably altering world order.

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