Cablegate: Chinese Premier Wen Visits Moscow; Focus On

DE RUEHMO #5429/01 3201510
P 161510Z NOV 07

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 005429



E.O. 12958: DECL: 11/15/2017


Classified By: Ambassador William J. Burns: Reasons 1.4 (b/d).

1. (C) Summary. Chinese Premier Wen Jiabao arrived in Moscow November 5-6 to close the "Year of China" in Russia. His visit focused on trade and energy. While the Russian MFA portrayed the visit as a successful expression of flourishing economic relations, the Chinese Embassy cautioned that the agreements reached are only the first steps of a potentially fruitful relationship. The Chinese Embassy expressed frustration at the lack of follow-through on the seemingly impressive number of bilateral agreements already in place, blaming Russia's inherent suspicion of Chinese economic power, as well as increasing Chinese self-sufficiency in areas such as weaponry. The Chinese Embassy speculated that relations would improve as Russia becomes more economically self-confident. No agreements were signed on the East-Siberian Pacific Ocean (ESPO) pipeline, but Transneft told us delays were due to construction issues and the Chinese need to establish purchase agreements with crude suppliers, not political concerns. Russian gas exports to China are likely to take off after completion of the ESPO pipeline, and Gazprom is positioning itself to monopolize the trade, putting pressure on ExxonMobil-operated Sakhalin 1, who also hopes to get in the game. Four agreements were signed expanding civil-nuclear cooperation, but broke little new ground. End Summary.

2.(SBU) Chinese Premier Wen Jiabao visited Moscow November 5-6, concluding a four-nation tour that included Uzbekistan, Turkmenistan, and Belarus. Wen met with President Putin, PM Zubkov and FM Lavrov. MFA First Asia Director Department Andrei Kupik told us on November 13 that the visit was very successful, noting this was one of a number of recent high level meetings between the GOR and China, including five meetings this year between President Putin and Chinese President Hu Jintao. Nine deliverables were signed, including documents on economic and nuclear cooperation.

Economic Focus of Wen Visit ---------------------------

3. (C) Kupik gave an upbeat assessment of the economic success of the visit, noting that trade was at $33 billion in 2006, and the GOR expected it to reach $60 billion a year by the end of the decade. He acknowledged that Russia needed to increase the level of high-tech exports to China, and that industrial cooperation was lower than it could be, but remained optimistic about the energy, real estate, and space sectors. He hyped the upcoming March businessmen's council, which the GOR intends to be a government-supported mechanism to facilitate bilateral investment, especially for small and medium businesses.

4. (C) While the range of agreements, joint statements, and MOUs signed during Wen's visit appears impressive, Chinese Embassy Economic and Commercial Section First Secretary Li Jianmin and attach Ma Chi cautioned that these are only first steps in realizing the Sino-Russian economic potential. Comparing official occasions such as this visit to a stage, they emphasized that the goal is to provide companies and the private sector -- the real actors -- the place and opportunity to forge mutually beneficial relationships. The governments, they implied, will not be the main drivers of the bilateral economic relationship.

5. (C) Although our Chinese Embassy contacts described the Wen visit in positive terms, they expressed frustration with the Russians on a number of economic issues. Li indicated that none of the agreements signed last year, when former Prime Minister Fradkov visited China had been implemented. While bilateral trade between Russia and China has grown, amounting to $50 billion for the first nine months of this year as compared to $33.4 billion for 2006, Chinese companies continued to experience considerable difficulties doing business in Russia. Part of the problem, according to Li and Ma, is Russian xenophobia and wariness of China's rapid economic growth. These attitudes prevent the Russians from taking full advantage of China's comparative advantage in labor-intensive manufacturing. Russian wariness is a natural reaction for a former superpower on the ascent again after a decade of chaos, exacerbated by the long shared border between the two countries and a history of mutual enmity. They expressed the belief that once Russia became more self-confident, it would cease to view China as a threat.

Energy is Key -------------

6. (SBU) Beyond diplomatic visits and agreements, energy is MOSCOW 00005429 002 OF 003 critical to the Russia-China economic relationship, playing on both the competitive instincts of each country and their mutual dependence. Russia is a nearby source for China to fuel its explosive economic growth in the medium- and long-term, and Russia sees China as one of the major future consumers of Russian, especially East Siberian oil and gas. As partners, Russia and China are working to complete by 2009 the first phase of the East-Siberian Pacific Ocean (ESPO) pipeline, which would deliver up to 600,000 barrels/day to China. A second phase of the pipeline would send 1.6 million b/d to East Asia.

7. (SBU) Although the press focused on the lack of an intergovernmental agreement on ESPO during Wen's visit, Transneft tells us it is unnecessary, and that delays are due to construction and engineering problems and the need for China to conclude purchase agreements with crude suppliers. Currently all oil to China (about 200-300 thousand b/d) is sent via rail, and Rosneft, the principal supplier via this route after inheriting most of Yukos, has already announced that due to greater potential profits elsewhere and the inefficiency of rail transport, they will not renew the Yukos-era contract for supplying China. China's oil companies are also finally establishing a foothold in Russia after years of striking out. CNPC helped finance Rosneft's purchase of former Yukos producing arm, Yugansneftegaz, and has a small joint venture with Rosneft as well. Sinopec reportedly had a pre-arranged deal to give Rosneft a 51% stake in Udmurtneft, after Sinopec bought the company from Russian-British venture TNK-BP in 2006. (Note: Perhaps inadvertently confirming widely reported rumors that China played a role in Rosneft's acquisition of Yukos' Yuganskneftegaz, First Secretary Li complained that state-owned China National Petroleum Corporation (CNPC) has yet to see the Russian side keep up its part of the bargain from CNPC's $6.1 billion provision of financing to Rosneft. End Note.)

8. (C) Gas shipments to China are at present non-existent, but should surge once proposed pipelines come online, early in the next decade, and as China aggressively moves to shift from coal to greater reliance on relatively clean natural gas. ExxonMobil-operated Sakhalin 1 is negotiating with China to supply 8 billion cubic meters of gas, but is facing pressure from Gazprom, which insists that it be the sole exporter to China. Gazprom fears that an independent supplier to China from Russia's Far East could undermine its own efforts to develop gas and dominate the export of gas from the region.

9. (SBU) Meanwhile, the two countries are engaged in a "great game" over energy in Central Asia. China sees Turkmenistan and Kazakhstan as needed alternative and complementary sources to Russian oil and gas, and has busily been signing agreements to help secure their energy riches. Prior to coming to Moscow, Wen visited Ashgabat, where he and Turkmen President Berdymukhamedov reportedly discussed energy deals, including a proposed gas pipeline and the active participation of Chinese companies in exploration and production activities in Turkmenistan. The gas pipeline from Turkmenistan would be routed through Kazakhstan, which like Turkmenistan is interested in diversifying its export routes and reducing its reliance on Russia. There is a separate proposed gas pipeline from Kazakhstan to China as well as an oil pipeline currently moving Kazakh crude east. These deals complicate the Russia-China relationship, but are likely as unstoppable as China's economic growth. Russia, cognizant of its own current gas-balance problem, needs continued access to Central Asian gas. Russia would also prefer that the former Soviet republics remain dependent on Russia for transit, and to eliminate them to the extent possible as direct competitors in both the East Asian and world energy markets.

10. (SBU) Russia and China pledged to strengthen civil nuclear energy ties by agreeing to build two new nuclear reactors in China and to enlarge the capacity of a gas centrifuge uranium enrichment facility, which would help China meet growing demand for nuclear power output. Russia's Atomstroiexport reportedly made a preliminary deal worth over $5 billion with China's Jiangsu Nuclear Power to build two additional reactors at the Tianwan nuclear power plant, bringing the total to four. No time frame for construction of the reactors has been set. Rosatom Director Sergei Kiriyenko and Chairman of China's Defense, Science, Technology and Industry Committee Zhang Qingwei signed a protocol on November 6 to amend a 1992 agreement to build an enrichment facility on Chinese territory. Russia's nuclear fuel services company Tekhsnabexport (TENEX) and Chinese Atomic Energy Industry Company (CAEIC) finalized an agreement to an expansion of existing cooperation to construct a fourth MOSCOW 00005429 003 OF 003 set of gas centrifuges at the facility in Hanzhun.

Weapons Deals Less Important ----------------------------

11. (C) Chinese first secretary Li confirmed that the number of weapons deals between Russia and China are on the decline, as the Chinese military switches its focus from hardware to technology. Even on the technology side, China is relying more and more on its own R&D rather than technology transfers from the Russians. Using fighter jets as an example, Li claimed that Chinese planes are now at the level of the newest generation of Sukhoi jets, "if not better." The Russian MFA is still bullish on arms sales, despite Li's comments and previous reporting (reftel). Russia maintains that it still produces world-class weapons at discount prices.

Close of the "Year of China" ----------------------------

12. (C) Wen's visit celebrated the official end of the "Year of China" in Russia. More than 200 cultural events -- 50 of them considered major -- took place in Russia during 2007. Kupik told us that both sides will repeat these reciprocal "culture years," as they believe they led to an increased level of not only cultural, but also political and economic, cooperation. China is planning another "Year of Russia" in 2009, and Russia will repeat the "Year of China" in 2010. Kupik told us exhibitions and performances of Chinese culture would continue through the end of 2007. According to Kupik, when Wen recognized this would likely be his last meeting with Putin as President, Putin assured him that the strengthening of Chinese-Russian ties would not change, even after he left office.

Comment -------

13. (C) In contrast to statements by Chinese Embassy officials, who downplayed the economic significance of these recent discussions, MFA and press reported favorably on the state of Russia-China economic cooperation. A public positive front keeps the door open to constructive discussions on contentious issues such as oil supplies to China, and serves as a superficial counterweight to the more important U.S.-China economic relationship. By extolling the partnership with China, Russians want the Chinese to see that their neighbor to the north also offers great two-trade trading and market potential. BURNS

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