FENG Shaolei:Sino-Russian Energy Cooperation: Challenges and Significance

Source：Valdai Discussion Club

Reprint link：http://valdaiclub.com/asia/76660.html

FENG Shaolei

Sino-Russian energy cooperation in the wake of 2014 is developing with great breakthroughs. This historic progress is without doubt of great significance. In the meantime, no wonder it will face difficulties and challenges that have never been met before.

Firstly, there are three issues that must be clarified.

The first issue comes from the causes for the falling of the energy price in 2014. Until now there are still diverging opinions about this issue. Many hold the opinion that because of the cyclical changes of the world economy, especially the decline of the growth rates of the emerging economies, including that of China, huge fluctuations arise in terms of the relationship between supply and demand in the field of energy all over the world, which consequently influences the ups and downs of energy prices. The revolution of the shale gas in America has brought hope to many countries that seek to diversify the energy supply for them, which is also an important factor for price changes. Such kind of opinion basically denies the existence of conspiracy theory in the fluctuations in the international energy prices. Instead, it emphasizes the effects of the economic cycles and the relationship between supply and demand in the markets.

However, there is another kind of opinion that points out: the hypothesis of the economic cycles fails to solve all the problems. In 2008, the revolution of the shale gas had not occurred in America. Neither had the decline of the growth rates of emerging economies appeared. Then why did the oil price at that time fall sharply from $140 to the mere $40 a barrel? Nowadays, the global demand for oil is still increasing, despite the fact that the growth rate of the demand is limited. The shrinking demand for oil is out of the question. At least the development speed of India is surpassing that of China, and China will remain its growth rate of 6% to 7% for a relatively long period of time. Meanwhile, the economic indices of America are rather strong.

As a result, this kind of opinion proposes that the falling of oil prices at present has almost nothing to do with the relationship between supply and demand or the market cycles as people usually assume. Instead, it is related with the involvement of the futures markets since the beginning of the 21st century and subsequent involvement of huge amounts of speculation. Also the changes in the quantitative easing policies of America since the outbreak of the 2008 global financial crisis have caused large amounts of energy-dollars to go everywhere for rent-seeking. At the very least and from the objective perspective, this aggravates the crisis.

In my own opinion, the oil price crisis should be evaluated from the perspectives of multiple angles. I am afraid the conspiracy theory fails to control the overall situation. Even President Putin himself accounts the percentage of the conspiracy theory for only 25%. In the context of the international energy market with so many trade entities, any conspiracy schemed by a single party will find it really difficult to be dominant among so many trade entities. At the same time, the involvement of the futures markets for the last ten years and the migration of speculative capital everywhere will influence the ups and downs of the oil price. Besides, Daniel Yergin, the authority in the field of the energy research, emphasizes that the advantages of the technological improvement and the system innovation will have a strong effect on the falling of the oil price. He asserts that the revolution of the shale gas is still in its primary stage, and it will definitely continue.

In general, it is possible that the energy price will fall during the fluctuations in the mid and long term. But there is no need to exaggerate this kind of changes too dramatically. Although the falling of the energy price will be beneficial to the consumers, once the sharp decrease of the energy price leads to the large-scale deflation in the context of the challenges of the global deflation, it will not only initiate social conflicts but also intensify the geopolitical competition. This will also do harm to the exploration of the new energy. It is obviously no good news for anyone.

From this perspective, the energy cooperation between China and Russia is of great significance for stabilizing the falling trend of the whole economy and mitigating the crisis.

The second issue is whether it is necessary or possible to transform through reforms the economic mode of being over-dependent on the traditional energy in the context of falling energy prices.

Overall speaking, the crisis now faced by Russia is an unprecedented crisis with the brand-new connotations. This crisis is the consequences of the interaction among many factors, such as the Ukraine crisis, the Western sanctions, the falling of both the energy price and the exchange rate of the ruble, the capital flight and so on. All these factors converge to a certain time node to break out abruptly during the process of brewing, breeding, and developing to the extremes. Such a complicated political and economic phenomenon is rare.

Since it is a crisis of the brand-new connotations, it means that the issue can not be solved only by figuring out the external causes, but by advancing the reforms seriously and from the core parts in the internal system. Russia is having a serious debate about the future reforms, which testifies to the necessity of the reforms. I think there are at least two aspects that are worth our attention.

Firstly, there is no need to exaggerate the value of the theory of energy curse. There is a big controversy in the Western academia about whether the countries with huge amounts of natural resources must be detached from the market. Many countries that are rich in natural resources such as Norway, Canada, and Australia have made great achievements in the development of their market economy. This is to prove that resource-abundant countries can also make use of the market mechanism to some different degrees.

Secondly, any market-oriented reform needs certain political conditions, especially the peaceful external political conditions. It is hard to imagine that a major country will be able to advance the open and to some extent risky market-oriented reform satisfactorily in an external environment full of hostility.

In this sense, the energy cooperation program between China and Russia has the duty and the necessity to fully play the role through the cooperation in making full use of the economic complementarity endowed by nature. Also the market mechanism should be sought to be used in such an important cooperation process. At least, the eagerness for the technological innovation in China and Russia will also push the progress forward.

The third issue is about how to assess the prospects of the energy cooperation between China and Russia. Should it be predicted to be the alliance of authoritarian regimes simply from the perspective of geopolitics or should it be evaluated from a wider perspective?

First of all, there is a vital principle in international politics and economics, which states that the development of the world economy relies first on the political cooperation among major countries. China and Russia should seek the cooperation not only in politics, but also the cooperation itself should be included in a broader-spectrum political cooperation. That is the prerequisite for any economic cooperation.

Meanwhile, the energy infrastructure built during the 1960s and 1970s between Russia and the European Union has guaranteed the steady relationship between Russia and the Europe, the two important political and economic regions, for half a century. By the way, I hold the opinion that such kind of guarantee function will not totally disappear owing to the present crisis. It can be envisioned that once China and Russia have formed the similar energy cooperation infrastructure as that between the Europe and Russia, it will be beneficial not only to the two countries, but also to the social and economic development in the core zone of the Eurasian continent. And this will definitely be favorable for the peace and stability of the whole international order.

Feng Shaolei is Director of the Centre for Russian Studies at the Key Research Base of Humanities and Social Sciences at the Chinese Education Ministry. He is also Dean of the School of Advanced International and Regional Studies at East China Normal University in Shanghai.