Current energy situation in China and Russia was analyzed, and key imperatives of the energy strategies of the two counties as well as the role they attributed to one another in their energy security were identified. The comparative analysis of statistical data of Federal Customs Service of Russia and GTU China between 2000 and 2015 helped us to analyze the energy trade between two countries, its scale and structure, and identify the main factors influencing Sino-Russian energy trade and cooperation. These factors has been divided into big categories: challenges and opportunities.

Opportunities

Russia’s Energy Supply. Russia is rich in energy resources. Russia owns the largest natural gas reserves in the world, the second largest coal reserves, and the eighth largest oil reserves. Russia is one of the world’s largest producers of energy, most of which it obtains from oil, natural gas and coal. Russia is also one of the world’s biggest electricity producer[1].

China’s Energy Demand. China has been witnessing a stable increase in their energy consumption for years. Increasing economic growth characterized by high industrial activity is the main reason behind it. That is why China is actively seeking for more opportunities to import energy resources.

Complementary Trade Diversification Strategies. China and Russia feature prominently in each other’s energy trade diversification strategies. China is eager to diversify its oil imports away from the Persian Gulf—which supplies almost half of its crude imports—and away from the sea lines of communication because of their vulnerability to disruption on the high seas by various modern navies. Russia wants to diversify its energy exports away from Europe to have greater flexibility in energy trade.

Geographical Proximity. The fact that China and Russia are neighbors is the biggest reason for growing energy exports from Russia to China. The two countries share a 4,200 kilometer (km) border. This geographical proximity allows for direct trade free from third-party countries, in order to avoid transit fees and take the power to withhold supplies.

Friction with Europe. The swift development of shale gas in North America has forced Russia to respond, as LNG shipments were re-routed from the US to Europe. This massive arrival of gas in Europe resulted in a drastic drop in spot gas prices, which in turn has encouraged European consumers to ask Gazprom to ease the conditions of its long-term gas supply contracts. The oversupply of gas in Europe, combined with severe drops in demand as a result of the recession, meant that Gazprom has been unable to deliver the volumes it has become accustomed to in the recent past. That was the first step on the way of Russian-Chinese cooperation [2].

Challenges

Insufficient development of transport system. Currently the main routes of oil deliveries to the Pacific market require combined ways of transporting by pipeline, rail, transshipment in sea ports of the Far East:

1．lby ESPO pipeline to Skovorodino and then by rail to Kozmino terminal – 15.3 million tons;

2．lby pipeline to the port of De-Kastri (the project “Sakhalin-1″) and Korsakov (Sakhalin-2″) – 13.1 million tons;

3．lrailway delivery to China – 9.5 million tons.

4．lvia the ESPO oil pipeline (to Skovorodino) and “Russia – China” (Skovorodino – Daqing) – 0.5 milion tons (in 2010 – technology oil), 15 million tons per year since 2011[3, 57].

Railway. One of these weaknesses is the single – track line length of 400 km, connecting Zabaikalsk with TRANS-Siberian railway. This way is mainly used for daily train Moscow-Beijing (roundtrip), for the train to Chita. Cargo trains can use this line only in the intervals between the passenger transport. This causes the problem that a total of 4, maximum of 5 trains can go in a day. Another stumbling stone is the lack of high-speed trains.

The Russian ports on the Pacific ocean and the Baltic sea can also double the performance of shipment. More specifically, they can increase the turnover of tonnage by 50% and the volume of TEU by 150-200%[4].

Import and export customs duties. Russia’s export duties are one of the most important sources of income of public budget, the fiscal role is extremely important. Export duty on crude oil and oil products account for a majority of all the revenue from export duties. Export duties also play the main role in the taxation of the gas sector in Russian economy. At the same time one of the most important problems that Russian companies are facing, while conducting trade with China, is the taxes and duties imposed on goods imported into and exported out of the country.

Underdeveloped regions of Russia on the border with China. The south eastern Siberia that borders with China is a poorly developed territory. It’s development is hampered by the lack of migration.

The main obstacle to Chinese investment in Russia is corruption. Being confident in their impunity, the border guards found in Chinese passports nonexistent errors and openly demand bribes.

Inviting business partners from China to Russia is harder than from any other country. You need to provide a letter of guarantee, putting in the arrival and departure flights, and even tell exactly which room Chinese guests will live.

Russian laws.You can hire Russian lawyers, but often even they can’t explain to Chinese businessmen how to proceed. The Chinese just don’t understand why every line in the approved Charter of the company requires a lot of extra paper work and written permissions. Russian Consulting company, which brought several Chinese companies to the Russian market, confirms that for the Chinese, the Russian paperwork is sometimes an insurmountable obstacle.

Numerous formalities and complexities while signing a contract. Signing the contract, Chinese entrepreneurs must first sign protocols of intentions with Russian party , then transmit the relevant documentation to central and provincial authorities. Then they have to consult the General Consul of China. During all the procedure, Chinese businessmen have to visit Russia at least twice, go to Beijing twice and many times show up in the Province Chamber of Trade, where their business is registered. It takes at least one and a half months. In such a situation, the Russians often begin to doubt about the seriousness of the Chinese party. High prices, the difficulty of obtaining visas, complicated procedures for the Chinese workers’ registration in Russia make the cooperation between two countries almost impossible.

Under-developedChina’s power transmission system. There is no national grid. There are six regional grids instead—five managed by the biggest one. The lack of a unified national grid system hampers the efficiency of power generation nationwide and heightens the risk of localised shortages. Regional power shortages happen often when generation drops in one province or region and the lack of long-distance power transmission capacity means that power cannot be routed in from other regions where there is surplus capacity[5]. This system also slows down the electricity trade.

Slow customs service. The Chinese side has raised the question of slow service provided by Russian forces at the border. Large amounts of cash flows on the border lead to congestion, and the companies have no other way but to wait, the extra time increases the delivery costs.

Worls oil and gas prices. The dynamics of the China-Russia energy relationship have been shaped by fluctuations in world oil prices. In the 1990s, when world oil prices were low and the Russian oil industry was starved for capital, Russia was more interested in selling oil and natural gas to China than China was in buying. The increase in the average annual price of oil from $14 per barrel in 1998 to $72 per barrel in 2007 and China’s own oil consumption and import growth over this period—a source of upward pressure on world oil prices—created anxiety in Beijing about the security of China’s oil supply[6].

This energy insecurity made Beijing increasingly eager to finalize the oil and gas pipeline negotiations. Unfortunately for China, the feeling in Russia was not mutual. The rise in oil prices fueled the growth of resource nationalism in Russia, motivating Moscow to expand its control over oil and natural gas resources. The sharp rise in natural gas prices also contributed to the lack of progress on the Kovykta pipeline by rendering the low prices insisted on by the Chinese even more unattractive to the Russians. Sino-Russian negotiations over the export of Russian natural gas to China have collapsed repeatedly over China’s refusal to pay internationally competitive prices for natural gas.

The level of integration. In 2010 Russia and China have decided to use their own national currencies for bilateral trade,instead of the U.S. dollar . The move is aimed to improve the relations between Beijing and Moscow and to protect their domestic economies in the conditions of the world financial crisis[7]. A significant barrier to cooperation an is the lack of a single commercial arbitration institution and insurance system. The opening of direct banking relations has not solved the question of payment completely.

Competition with other countries.

Kazakhstan and Turkmenia. Having the fourth-largest gas reserves in the world , Turkmenistan hopes to reduce dependence on the main market – Russia – due to the expansion of exports to Asia. It started to export gas to China in late 2009 via a new pipeline Turkmenistan – Uzbekistan – Kazakhstan – China. Vietnam. It’s is the largest supplier of coal to China at 24.6 million tonnes for 2007.

Monetary factor. Of course after the devaluation of ruble in 2014 year for Russians the prices in China have become much less attractive. Russian imports from china declined to 36.2% in the first half of the year 2015. The main causes of the situation, according to Russian and Chinese analysts, are the volatile exchange rate and devaluation of the currency. Chinese exporters are cautious about the increased foreign exchange risks.

The fear that the economic expansion of China is only the beginning to territorial expansion. The far East development of Russia will depend completely on imports of the workforce, primarily from China.

Culture differencies. For Russians it’s also difficult to understand Chinese. When presenting the industrial zone, you can hear something like: “We build the nest and waiting for the Phoenix. What is it about? It turns out that  Chinese meant that they were forming a favorable investment climate.

Incorrectness of some regional leaders and the Russian media, which do not considered the common interests of the two countries, but often allow themselves  unfriendly remarks about China.

To sum up, we can notice that relationships are complementary. Russia has rich reserves, while China has a huge, ever-expanding market for energy. Russia can get the funds that are necessary for economic development, and China can get energy from Russia to modernize its economy and to improve the quality of life. However, the research shows that there are still some problems that can stumble the development of Sino-Russian trade and cooperation.

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