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Medvedev Seeks to Diversify China Trade From Energy

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Russia's President Dmitry Medvedev
Russia's President Dmitry Medvedev took his first presidential trip outside the former Soviet Union to China in 2008, is returning for a three-day visit. Photographer: Casper Hedberg/Bloomberg

Sept. 24 (Bloomberg) -- President Dmitry Medvedev travels to China next week in a bid to diversify trade even as Russia plans to boost oil and gas exports to its Asian neighbor.

Medvedev, who took his first presidential trip outside the former Soviet Union to China in 2008, is returning for a three-day visit on Sept. 26 to push his agenda of Russia’s modernization away from a “primitive” resource-based economy.

At the same time, Russia is set to open its first oil pipeline to China this year and plans to add natural-gas deliveries in the future, expanding from traditional markets in Europe. The risk is that demand from China, the world’s biggest energy consumer, could drown out Medvedev’s attempts to export more value-added goods, analysts said.

“The danger for Russia is that it becomes little more than the energy and materials supplier for China,” said Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow. “In that event, Russia’s political relevance not only to China, but to the rest of the world, would start to diminish.”

Last year, about 74 percent of Russian exports to China were natural resources, while 68 percent of Chinese imports to Russia were machines and technical equipment, according to the Federal Customs Service in Moscow.

Uphill Battle

“China has an interest in diversifying its imports from Russia and to an equal extent to increase its exports of machines,” Sergei Prikhodko, Medvedev’s foreign policy aide, told reporters in Moscow.

Medvedev, who is wooing international partners to participate in a Russian version of Silicon Valley and develop industry, faces an uphill battle in China as energy plays an increasingly bigger role in relations.

His delegation for the China trip, dominated by commodities and energy companies, reflects this difficulty. Vladimir Strzhalkovsky, chief executive officer of Russia’s biggest miner OAO GMK Norilsk Nickel, and Oleg Deripaska, head of aluminum producer United Co. Rusal, will travel with Medvedev, according to Prikhodko.

Alexei Miller, chief executive officer of Russia’s gas export monopoly OAO Gazprom, will be on hand, Prikhodko said. “A whole range of documents on expanding cooperation in the oil and gas sphere will be signed,” he said.

Lukoil-CNPC Agreement

While Russia plans to augment oil deliveries to China with gas, Gazprom is locked in talks over the pricing formula. Gazprom profit still depends on meeting a quarter of gas demand in the European Union, where prices are pegged to the oil market in long-term contracts.

OAO Lukoil, Russia’s largest non-state oil company, plans to sign an agreement with CNPC during Medvedev’s visit to deliver gas it produces in Uzbekistan, Chief Executive Officer Vagit Alekperov said on Sept. 17. Last year, China opened a gas pipeline to Turkmenistan, breaking Gazprom’s near monopoly over the former Soviet republic’s export routes.

OAO Rosneft, Russia’s largest oil producer, and CNPC may build a refinery within two years, RIA Novosti reported on Sept. 21. Rosneft CEO Eduard Khudainatov will travel with Medvedev.

Russia agreed last year to supply China with oil for 20 years in return for a $25 billion credit to state oil company OAO Rosneft and the national oil pipeline monopoly OAO Transneft. Igor Sechin, Prime Minister Vladimir Putin’s deputy for energy, attended the groundbreaking ceremony this week for a $5 billion oil refinery in Tianjin to be built by Rosneft and China National Petroleum Corp. In August, Putin opened the first section of the East Siberian Pacific Ocean pipeline, which will feed the link to China.

‘Tied Deal’

“Russia has been increasing its energy and materials supply but China has bought little else and not made any material investments in Russia other than paying in advance for energy supplies,” said Weafer. “That is a tied deal and benefits almost nobody other than China.”

Anatoly Isaikin, head of Russian weapons dealer Rosoboronexport, will be in the delegation, though China stopped buying big-ticket arms like ships and jet fighters from Russia in 2005, further increasing the share of energy in the trade balance, said Konstantin Makiyenko, deputy head of the Center for Analysis of Strategies and Technologies, a Moscow-based defense research center.

National Currencies

Once Russia’s top weapons client, China hasn’t been in the top five in terms of contracts since 2007, Makiyenko said.

Prikhodko said that while no arms deals are planned for this trip and revenue from sales to China isn’t growing, Russia is “moving to a higher stage” that includes licensed production.

Medvedev will use this trip to push for expanding the use of national currencies in trade with China, Prikhodko said.

“The role and significance of the yuan will grow over time, and we hope the same will happen for the ruble,” he said. “When banking cooperation becomes more mature, we will move toward cooperation between financial platforms and exchanges.”

VTB Group’s deputy chairman, Vasily Titov, will travel with the president and oversee signing of a credit agreement with Industrial and Commercial Bank of China, Prikhodko said.

Russia’s gravitation toward Asian energy markets is logical, given that “structurally crippled Europe doesn’t promise much growth at all,” said Roland Nash, head of global strategy at Moscow-based Renaissance Capital.

“If Russia is going to be ensured that it enjoys the same growth rates it did over the last decade, it can’t really look to Europe,” said Nash. “It’s a balance; you have to take technology from the West and growth from the East.”

To contact the reporters on this story: Lucian Kim in Moscow at lkim3@bloomberg.net; Lyubov Pronina in Moscow at lpronina@bloomberg.net

To contact the editor responsible for this story: Willy Morris at wmorris@bloomberg.net

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