The Geopolitical Impact of the Increasing Trade and Investment Relations between the National Oil Companies of China,

Iran and Russia

Koen Groot (5694000) koen.groot@gmail.com Universiteit van Amsterdam The Political Economy of Energy Research Project Supervisor: Second reader: Handed in: dr. M.P. Amineh dr. O.H. Holman July 19th 2010

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Abstract

This thesis is an inquiry into the geopolitical impact of the trade and investment relations between the national oil companies (NOCs) of China, Russia and Iran. The increased cross-border trade and investment between the NOCs of China, Russia and Iran contributes to the development of a coalition between these states based on a cross border network of trade, investment and security relations. The emerging coalition contributes to the capacity of China, Russia and Iran to pursue their foreign policies through power projection. By doing so the transnationalization of the NOCs contributes to rolling back the influence of the US in the region. This is the geopolitical impact of the increasing trade and investment relations between the national oil companies of China, Russia and Iran.

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Map 1. The Peoples Republic of China

Source: University of Texas, Perry-Castaeda Library Map Collection, http://www.lib.utexas.edu/maps/

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Map 2. The Russian Federation

Source: University of Texas, Perry-Castaeda Library Collection, http://www.lib.utexas.edu/maps/

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Map 3. The Islamic Republic of Iran

Source: University of Texas, Perry-Castaeda Library Map Collection, http://www.lib.utexas.edu/maps/

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Table of content
Acknowledgment ..................................................................................................................................................... 9 List of tables .......................................................................................................................................................... 10 List of figures ........................................................................................................................................................ 10 List of acronyms .................................................................................................................................................... 11 List of companies .................................................................................................................................................. 12 1. Chapter I Geopolitical Order and the Challenger States ............................................................................... 14 1.1 Introduction............................................................................................................................................. 14 1.1.1 1.1.2 1.1.3 1.2 1.3 Oil and gas in China, Russia and Iran ........................................................................................... 14 The transnationalization of state capitalism .................................................................................. 15 Geopolitics and the transnationalization of Chinese, Russian and Iranian national oil companies 16

Methodology ........................................................................................................................................... 18 Theoretical framework ............................................................................................................................ 20 Geopolitics .................................................................................................................................... 20 Geopolitical order.......................................................................................................................... 21 Contender states ............................................................................................................................ 21

1.3.1 1.3.2 1.3.3 1.4 2.

Structure of thesis ................................................................................................................................... 24

Chapter II The Role of Oil and Gas in China, Iran and Russia .................................................................... 26 2.1 Introduction............................................................................................................................................. 26 2.2 China ....................................................................................................................................................... 27 Introduction on China .................................................................................................................... 27 China's political and institutional landscape .................................................................................. 27 Chinas economy ........................................................................................................................... 29 The political economy of oil and gas in China .............................................................................. 32 Chinas foreign policy ................................................................................................................... 37 Concluding remarks on the role of oil and gas in China ............................................................... 40 Introduction on Russia .................................................................................................................. 42 Russias political and institutional landscape ................................................................................ 42 The Russian economy ................................................................................................................... 44 The political economy of oil and gas in Russia ............................................................................. 47 Russias foreign policy .................................................................................................................. 52 Concluding remarks on the role of oil and gas in Russia .............................................................. 55 Introduction on Iran ....................................................................................................................... 57 Iran's political and institutional landscape ..................................................................................... 57 Irans economy .............................................................................................................................. 59 The political economy of oil and gas in Iran ................................................................................. 65 Irans foreign policy ...................................................................................................................... 68 Concluding remarks on the role of oil and gas in Iran .................................................................. 71 2.2.1 2.2.2 2.2.3 2.2.4 2.2.5 2.2.6 2.3 2.3.1 2.3.2 2.3.3 2.3.4 2.3.5 2.3.6 2.4 2.4.1 2.4.2 2.4.3 2.4.4 2.4.5 2.4.6 2.5

Russia...................................................................................................................................................... 42

Iran .......................................................................................................................................................... 57

Three States with compatible interests driven by fossil fuel needs ......................................................... 72

3.

Chapter III The relations between China, Iran and Russia .......................................................................... 74 3.1 Introduction............................................................................................................................................. 74 3.2 The main issues in the relations of China, Russia and Iran..................................................................... 76

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3.2.1 3.2.2 3.3 3.3.1 3.3.2 3.3.3 3.4 3.4.1 3.4.2 3.4.3 3.5 3.5.1 3.5.2 3.5.3 3.6 3.6.1 3.6.2 3.7 3.7.1 3.7.2 3.8 3.9 4.

History on the relations ................................................................................................................. 76 Regional security issues ................................................................................................................ 76 The trajectory of recent diplomatic relations between China and Russia ...................................... 78 The trajectory of recent diplomatic relations between China and Iran .......................................... 78 The trajectory of recent diplomatic relations between Russia and Iran ......................................... 79 The development of Sino Russian trade ..................................................................................... 81 The development of Sino Iranian trade ...................................................................................... 83 The development of Russian Iranian trade ................................................................................. 84 The investments relations of China and Russia ............................................................................. 85 The investments relations of China and Iran ................................................................................. 86 The investments relations of Russia and Iran ................................................................................ 88 Bilateral security relations ............................................................................................................. 90 Multilateral security relations ........................................................................................................ 93 Cooperation on economic and energy issues ................................................................................. 94 Cooperation on regional security issues ........................................................................................ 95

Development of the Diplomatic Relations between China, Russia and Iran ......................................... 78

Trade relations between China, Russia and Iran .................................................................................... 81

Development of the Investment Relations between China, Russia and Iran .......................................... 85

Development of the security relations between China, Iran and Russia ................................................. 90

Impact of the relations on the shared interests ........................................................................................ 94

Impediments to the forging of a coalition ............................................................................................... 97 Development of Coalition centered on a cross-border network .............................................................. 99

Chapter IV Power Projection of the relations between China, Iran and Russia ........................................ 102 4.1 Introduction........................................................................................................................................... 102 4.2 The Power Projection of China, Russia and Iran .................................................................................. 103 US power projection in the region............................................................................................... 103 Comparison of the military capabilities ...................................................................................... 104 China power projection in the region .......................................................................................... 106 Russia power projection in the region ......................................................................................... 106 Iran power projection .................................................................................................................. 107 International investments ............................................................................................................ 109 OECD Investments ...................................................................................................................... 110 The economic leverage of China, Russia and Iran ...................................................................... 111 The ability of China, Russia and Iran to project economic power through cooperation ............. 112 4.2.1 4.2.2 4.2.3 4.2.4 4.2.5 4.3 4.3.1 4.3.2 4.3.3 4.3.4 4.4 4.5

The ability of China, Russia and Iran to project economic power through trade and investment ........ 108

What are the impediments to the pursuit of Chinas, Russias and Irans foreign policy interests? ..... 114 A coalition with greater regional influence ........................................................................................... 115

5. Conclusion An emergent coalition with a growing power projection ........................................................ 117 Appendices .......................................................................................................................................................... 121 Bibliography ....................................................................................................................................................... 123

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Acknowledgment

The writing of this thesis has taken place in the context of the thesis project The Political Economy of Energy; therefore I would like to express my gratitude to our teacher and my thesis supervisor dr. M.P. Amineh for the extensive support. Furthermore I am grateful to dr. O.H. Holman for acting as the second reader of this thesis. Moreover, I thank my classmates and the staff of the Universiteit van Amsterdam, especially those teachers and students that have expanded my vision, increased my insight and provided me with inspiration. Last but not least I want to show my gratitude to my loved ones, family and friends for their moral support, patience and understanding.

- A je to -

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List of maps Map 1: Map 2: Map 3: List of tables Table 2.1: Table 2.2: Table 2.3: Table 2.4: Table 2.5: Table 2.6: Table 2.7: Table 2.8: Table 2.9: Table 2.10: Table 3.1: Table 3.2: Table 3.3: Table 3.4: Table 4.1: Table 4.2: List of figures Figure 2.1: Figure 2.2: Figure 2.3: Figure 2.4: Figure 2.5: Figure 2.6: Figure 2.7: Figure 2.8: Figure 2.9: Figure 2.10: Figure 2.11: Figure 2.12: Figure 2.13: Figure 2.14: Figure 2.15: Figure 2.16: Figure 4.1: China Labour Force per Sector 1995 China Labour Force per Sector 2005 China Value Added per Sector China Total Energy Consumption by Type China NOCs Refining Capacity China Oil Imports by Origin Russia Labour Force per Sector Russia Value Added per Sector Russia Share of Fuel to Export to GDP Iran Labour Force per Sector 1997 Iran Labour Force per Sector 2007 Iran Value Added per Sector Iran Total Energy Consumption by Type Top Iranian Oil Destinations 2008 Iran Share of Fuel to Export to GDP Natural Gas Production and Reserves China FDI Outflow 32 32 32 34 37 42 47 48 49 62 62 62 64 64 65 66 109 China Key Economic Indicators China Oil and Gas Profile China National Oil Companies Size in 2008 Russia Key Economic Indicators Russia Oil and Gas Profile Oil Companies in Russia 2008 Russia National Oil Companies Size in 2008 Iran Key Economic Indicators Iran Oil and Gas Profile NIOC Reserves China Russia Iran Trade Size and Source of Arms Exports to China Size and Source of Arms Exports from China Size and Source of Arms Exports to Iran Military Expenditures Military Capabilities 31 33 36 46 50 52 54 61 66 69 82 91 92 93 104 105 The Peoples Republic of China The Russian Federation The Islamic Republic of Iran 5 7 9

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List of acronyms ADB ASEAN Bpd CAR CDB CPC CPC CIS EAEC ECO EIA EIU EU FDI GDP IEA IMF IOC IPO IPO IRI MoC MoP NATO NOC NGO OJSC OPEC PRC SCO SOE SWF TNC UAE UN UNSC US WB WTO Asian Development Bank Association of Southeast Asian Nations Barrels per day Central Asian Republic China Development Bank Caspian Pipeline Consortium Communist Party of China Commonwealth of Independent States Eurasian Economic Community Economic Cooperation Organization Energy Information Administration Economist Intelligence Unit European Union Foreign Direct Investment Gross Domestic Product International Energy Agency International Monetary Fund International Oil Company Iranian Privatization Organization Initial Public Offering Islamic Republic of Iran Ministry of Commerce Ministry of Petroleum North Atlantic Treaty Organization National Oil Corporation Non-Governmental Organization Open Joint Stock Company Organization of the Petroleum Exporting Countries Peoples Republic of China Shanghai Cooperation Organization State Owned Enterprise Sovereign Wealth Fund Transnational Corporation United Arab Emirates United Nations United Nations Security Council United States (of America) World Bank World Trade Organization

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List of companies Usual Name CITIC Group CITIC Resource CNOOC CNPC Gazprom Gazpromneft IOOC NICO NIOC NIGC NPC NIORDC Norinco PetroChina Rosneft Sinopec Group Sinopec Corporation Sinochem Transneft Unipec Yanchang Petroleum Zhenhua Oil Company Zhuhai Zhen Rong Official Name China International Trust and Investment Corporation CITIC Energy and Resources Holding China National Offshore Oil Corporation China National Petroleum Corporation OJSC Gazprom OJSC Gazpromneft National Iranian Offshore Oil Company Naftiran Intertrade Company National Iranian Oil Company National Iranian Gas Company National Petrochemical Company National Iranian Oil Refining and Distribution China North Industries Corporation PetroChina Company OJSC Rosneft China Petrochemical Corporation China Petroleum and Chemical Corporation China National Chemical Industry Import-Export Corporation OJSC Transneft United Petroleum and Chemical Corporation Shaanxi Yanchang Petroleum Group China Zhenhua Oil Company Zhuhai Zhen Rong Company

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1. CHAPTER I GEOPOLITICAL ORDER AND THE CHALLENGER STATES

1.1

INTRODUCTION

1.1.1

Oil and gas in China, Russia and Iran

This thesis sets out to chart the trade and investment relations between the national oil companies of China, Russia and Iran. The aim is to describe how these relations fit within the increased cooperation between these states on economic, diplomatic and security levels. The thesis furthermore is an attempt to provide a description of an emerging coalition amongst China, Russia and Iran based on a cross border network of trade, investment and security relations. By adding to this the power projection of these states, the thesis seeks to establish the geopolitical implications of this coalition. The premise of this thesis is that although the three states under research are inherently different and conflicts in the relations between these states do occur, this is outweighed by their similarities which I regard as the foundation of their increased cooperation. In all three states energy plays a vital role. China, due to the lack of sufficient domestic energy resources, has rolled out a going out strategy that focuses on securing foreign energy resources through the acquisition of international fossil fuel assets and fossil fuel delivery contracts. Through this strategy, the state ensures the economic growth is not hampered. The International Energy Agency has forecasted that global crude oil demand in 2010 will increase with more than two percent (IEA, 2010), of which 40 percent is attributable to China, a number that is perceived to grow in the next years towards 45 percent (IEA, 2010). In Russia and Iran the exploitation of the vast fossil fuel reserves is the linchpin of their economies. The share of the fossil fuel economy to the Russian gross domestic product in 2010 is projected at 25 percent (Abelsky & Ulaeva, 2010), oil and gas exports revenues of 230.25 billion US dollars make up almost half of Russias total export revenues in (WB, 2010). In Iran the export revenues of oil and gas made up nearly 80 percent of total export revenues in 2007 (EIU, 2009b), while the contribution of the fossil fuel sector to the gross domestic product in the same year is estimated at 24 percent (WB, 2010). The fossil fuel economy in all three states is under control of the state; the fossil fuel reserves are in state hands, legislation is in place to keep foreign investors from majority shares in fossil fuel activities1, national oil companies (NOCs) are the predominant actors in the exploration, production,
1

In Russia a law passed in 2005 prohibits foreign investors from participating by more than 50 per cent in fossil fuel ventures (Proedrou & Frangonikolopoulos, 2010: 85). The Subsoil Law amendments moreover have eliminated the traditional federal/regional two-key government joint control regime in favour of a new one-key sole federal control regime. Exclusive power is now in federal hands; the Ministry of Natural Resources, and the Russian Federation Government itself,

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refinery and distribution of fossil fuel and derivative products, while the oil and gas rents are often extracted and deposited in sovereign wealth funds (SWFs). The oil and gas revenues are crucial to the political elite in Russia and Iran, where the national oil companies play out vital parts in the political economy of energy. In 2007 oil and gas revenues provided by the state owned National Iranian Oil Company contributed between 40 to 80 percent of government revenue in Iran (EIU, 2008b). The state controlled2 Gazprom produces approximately 80 percent of all gas produced (ibid, table 2.6) in the world largest gas producing country, in addition Gazprom is by law the sole exporter of gas in Russia. Both Russia and Iran dispose of institutions that govern the productive apparatus through ministries, departments, agencies and direct participation in the NOCs. Next to this the Iranian and Russian states control the accumulation process through the SWFs that have considerate capital holdings, in the case of Russia a reported 142.5 billion US dollars and in Iran a reported 23 billion US dollars in 2008 (SWF Institute, 2010). The control over the fossil fuel reserves and the management of the fossil fuel economy by the state are a reflection of state capitalism3 in which the main economic actors are state officials. The institutions that are managed by the state officials, which in case of the fossil fuel economy are the national oil companies, cannot be regarded separate from their respective states, they are part and parcel of the authoritarian regimes that govern these states. The state class or political elite in authoritarian states such as China, Russia and Iran depend for their survival on the capital extracted from the (fossil fuel) economy through state owned enterprises and accumulated in SWFs. The accrued capital allows for the state class to remain in power independently of society and without accountability, moreover by remaining in charge of the production process, the political elite deters an independent economic or commercial class from rising.

1.1.2

The transnationalization of state capitalism

In recent years the state owned enterprises of China, and to a lesser extent Russia, have expanded their business beyond national borders. This is especially witnessed in the fossil fuel sector where in 2009 alone the foreign investments of Chinese NOCs totaled approximately 32 billion US dollars (Duce &
at the expense of the regional Governments (Novikova, 2005: 672). In China, the PRC constitution vests the ownership of all mineral resources with the state (MacBride et al, 2005: 822). In Iran the state exerts sovereignty over its natural resources including petroleum; they are part of the public domain and as such are at the disposal and control of the Ministry of Oil and affiliated companies, while all the assets will remain at the disposal and control of the government of the Islamic Republic of Iran (Sistani, 2005: 786).
2

State controlled because the Russian state owns a 50.002% controlling stake in Gazprom (Gazprom, 2008).

State capitalism following Bremmer is a system in which the state functions as the leading economic actor and uses markets primarily for political gainin which the existence of close ties binding together those who govern a country and those who run its enterprises is an essential feature (2009: 41, 44). In state capitalism moreover, the state uses markets primarily for political gain...by using markets to create wealth, that can be directed as state officials see fit, in order to maximize the states control over the economy and its development and thereby maximize the states (class) survival (Bremmer, 2010).

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Ying, 2010) and accounted for 13 percent of total global oil and gas acquisitions in that year (Energia, 2010). Although the scope of investments of the Chinese and Russian investments is global, a significant proportion is directed to the region. The trade and investment of the Chinese, Russian and Iranian NOCs is moreover increasingly directed towards one another and their home states (ibid. chapter 3.2 and 3.3). This is reflected in the vast investments of Chinese NOCs in Russian and Iranian oil and gas assets, in the trade contracts signed by Iranian and Russian NOCs to deliver oil and gas to China, Russian gasoline deliveries to Iran and the establishment of a gas troika between Russia, Iran and Qatar4. The increased outward directed operations and activities of Chinese, Russian and Iranian NOCs are an exponent of the transnationalization of state capitalism, which is described by Harris (2009: 6) as the dramatic growth in government-controlled assets and wealth through which state owned enterprises have gained major influence in the global economy. In the case of China and Russia especially and Iran to a lesser extent, this is attributable to the rise of energy prices and trade surpluses, the influx of capital through cross-border investments and the increase in intra-trade.

1.1.3

Geopolitics and the transnationalization of Chinese, Russian and Iranian national oil companies

The growing influence of these authoritarian states can also be regarded from the perspective of geopolitics; in that case Russia, Iran and China can be considered contender states5. This is reflected in the behavior of Russia, China and Iran in international relations, where these states rival with the United States for influence and openly seek contestation with the United States in international affairs. China, Iran and Russia moreover most often do not share the liberal views on state, society, the economy and international relations of the United States and their allies6. The role of state-owned enterprises, in this case national oil companies, is essential for the emergence of authoritarian states in the global economy (Harris, 2009). China, Russia and Iran use the transnationalization of their state owned enterprises, in this case the growing trade and investment relations between the national oil companies, to pursue their interests and increase their influence in the international system.

In 2008 the governments Iran, Russia and Qatar agreed to institutionalize their cooperation in gas, through the establishment of the Big Gas Troika. Together the states hold over 60% of global gas reserves. The aim is to implement and coordinate joint projects covering the whole value chain (Gazprom, 2006: 7; Pustilnik, 2008)
5

Following Amineh and Houweling (2010: 222), contender states challenge the legitimacy of the foreign policy of a hegemonic power and the (geopolitical) order it created. The current stage in international relations is commonly regarded as a crisis of hegemony (Amineh and Houweling, 2010: 231), in which no one hegemonic power dominates. Arrighi refers to the current period as domination without hegemony (Blair, 2009: 220). I however still regard the contender states to voice their contestation towards the US primarily (as the declining hegemonic power), the states that were internal to the US led geopolitical order referred to as the Pax Americana (Amineh and Houweling, 2010: 229) and the institutions established within this order. The states internal to the order are regarded to consist of the North-American, European and Asian liberal democracies, as well as regional allies such as Turkey, Brazil, and Saudi Arabia.
6

Ibid footnote 5.

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Through the going out strategy (Chen, 2010: 46) which advocates the acquisition of international fossil fuel assets and delivery contracts by Chinese national oil companies, China seeks independence from foreign powers for the supply of energy resources. In Russia, Iran and China, the capital that is accrued through the state owned enterprises and deposited in national banks and invested in SWFs, allows the authoritarian states to develop less dependent on western interference. They are able to do so because of the accumulated capital, whereas no adherence to World Trade Organization, International Monetary Fund, World Bank or western national policies is required for the supply of funds. Furthermore while the economies of these states grow, so do their respective economic entities, while growing in size their operations grow and become increasingly transnational and more integrated in the global economy, creating more independence on and more bargaining power for these states. The trade and investment relations of the Chinese, Russian and Iranian national oil companies are quintessential for the development of these states. Through the investment of Chinese NOCs Russia and Iran are able to modernize their fossil fuel sectors and their economies in general, while the deliveries of Iranian and Russian fossil fuels to China fulfill its growing energy needs. The shared interests of the states have the potential to develop into long-term cooperation. Institutionalized cooperation is already perceivable although so far no organization has been established in which Russia, China and Iran are full members. The closest to this is the in 2001 established security oriented Shanghai Cooperation Organization, where China and Russia are full members while Iran is an observing member. Security cooperation between these states however is already existent on bilateral levels, predominantly through arms trade and training. The trade and investment relations between the national oil companies of Iran, China and Russia thus seem to relate to shared interests, other patterns of relations and possible cooperation between these states. The development of all of this can have a geopolitical impact, in terms of cooperation and power projection. This thesis seeks to describe the geopolitical impact of these relations by answering the question, What is the geopolitical impact of the cross border trade and investment relations between the Chinese, Iranian and Russian national oil companies? In order to do so the ensuing chapters of this thesis threat the sub questions that are presented at the end of this chapter. This now chapter continues with a description of methodology, the theoretical framework and the structure of the thesis.

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1.2

METHODOLOGY

The aim of this thesis is to indicate the geopolitical impact of the mutual cross border trade and investment relations of the Chinese, Iranian and Russian national oil companies (NOCs). The mutual cross border trade and investment relations between the NOCs are considered an element of the transnationalization of the NOCs, the development of this concept and of geopolitical impact will be further developed in the theoretical framework. The operationalization of these concepts however is within the scope of this part. In order to do so the thesis combines quantitative and qualitative elements based on primary sources such as corporate annual reports and reports of international organizations, as well as secondary sources, mostly books and journal articles and reports by specialized agencies. The inquiry into the cross border trade and investment relations are the quantitative element of the thesis, which is the basis for the qualitative element that is the indication of the effects and geopolitical impact of these relations. The first part of the research is the descriptive part focusing on the role the fossil fuel sector in the politics, economy and foreign policy of China, Russia and Iran. For this purpose use will be made of primary and secondary information regarding the institutional make-up of these states, and the economic and energy profiles both at a global level and at the level of the states under review. The data and sources used for this purpose will be amongst others: labor statistics from the International Labor Organization (ILO), statistics on economic structure and growth by the World Bank (WB), data on trade and investment by the International Monetary Fund (IMF), secondary economic information from agencies such as the Economist Intelligence Unit (EIU) and information gathered by research institutes focused on energy such as energy Information Administration (EIA) from the United States, the International Energy Agency (IEA) from the Organization for Economic Cooperation and Development (OECD). For more insight in the political structure and the regimes of these states the works of different scholar will be guiding. For instance: Abrahamian (2008) and Rakel (2009) on Iran; Aslund (2004), Belopsky (2009) and Proedrou and Frangonikolopoulos (2010) on Russia; and the works of Xu (2010) and Zhou (2009) on China. The study of the NOCs in China, Russia and Iran is based on annual reports and corporate websites of the NOCs, combined with secondary sources such as the work by De Graaff (2010), Harris (2009), the James A. Baker III Institute for Public Policy on the changing role of NOCs in international markets (2007) and more articles from academic journals such as the Asian Survey; Energy Policy; Eurasian Geography and Economics; International Affairs; International Security; Journal of World Business; Journal of Middle Eastern Geopolitics; Oil and Gas journal; Political Geography; and Third World Quarterly. For the study of foreign policy the works of Barzegar (2010), Ehteshami (2008), Mankoff (2008), Monaghan (2008), Larson & Shevchenko (2010), Lukyanov (2010), Lynch (2009), Glaser & Medeiros (2007), Cho & Jeong (2008) are leading.

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The results of this should result in a description of the role of oil and gas in the politics and economy of Iran, China and Russia and how this is reflected in the foreign policy. This leads to the subsequent part of the research which is the inquiry into development and impact of the investment and trade relations between the Chinese, Iranian and Russian NOCs. The transnationalization of the NOCs is measured in terms of cross-border trade and investment relations, moreover how these relate to diplomatic relations and security relations between Russia, China and Iran. This part focuses on the way trade and investment relations between the NOCs develop within and influence the relations in diplomatic and security context. The main variables of analysis in this part of the thesis are: First the diplomatic relations between China, Russia and Iran based on reporting by daily and weekly periodicals, official government documentation and existent research. Second the intrastate investment and trade between the fossil fuel sectors in China, Russia and Iran. And third the military and security cooperation and agreements between theses states as well as with regional organizations. Extensive use will be made of the sources used for the earlier parts of the inquiry such as the annual reports from NOCs, book and journal articles, however complemented with reports from the Stockholm International Peace Research Institute and the International Institute for Strategic Studies; as well as numerous articles from newspapers and periodicals amongst which were the International Herald Tribune, the Guardian, the Wall Street Journal, Business Week, the Financial Times, the Asia Times, the Tehran times, the Moscow Times and China Daily. This will result in a better understanding of the development of the cross-border trade and investment relations of Chinese, Iranian and Russian NOCs. A better understanding moreover of how they relate to and impact the cross-border relations between these state on diplomatic and security levels, as well as the development of a coalition based on a transnational network of trade, investment and security relations. The third part of the inquiry is the power projection and the ability to project economic power through trade, investment and cooperation of China, Russia and Iran. The military power projection of the states on an individual level, as well as on an aggregate multilateral level is under study here, moreover how this is impacted by the developing relations between these states. Power projection is measured in size and influence of military capabilities and relations. The ability to project economic power through trade, investment and cooperation is measured in terms of the outward investment of these states and the increased cooperation between theses states and others. This part builds on the earlier mentioned sources supplemented with the works of Roy (2007), Yoshihara & Holmes (2008), Hunter (2009), Holslag (2009), Donnelly & Monaghan (2007) and Rich (2009). The final part of the inquiry relates the transnationalizing NOCs to the developing coalition between Russia, China and Iran, and the power projection of these states on an individual and aggregate level. This part deals with the geopolitical implications of mutual cross-border trade and investment relations between Russia, China and Iran, in terms of coalition formation and power projection.

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1.3 1.3.1

THEORETICAL FRAMEWORK Geopolitics

Geopolitics is the practice that is concerned with writing of the geographical meanings and politics of states (Toal, 1999: 109); geopolitics is the statecraft that enframes all foreign policy practices (Toal, 1998: 18). Geopolitics moreover is the study of this practice. Within the field of geopolitics a debate has been going on between classical and critical geopolitics. This debate can be understood as the debate between a problem solving theory and a critical theory (Kelly, 2006: 25). Following Cox (1986: 208) problem solving theory does not call into question the general pattern of institutions and relations. Critical theory disregards this premise of problem solving theory, since the social and political order is not fixed but changes overtime (Cox, 1986: 209), patterns of institutions and relations cannot be taken for granted. Critical theory does so by concerning itself with the origins of institutions and social and power relations as well as the extent to whether and how they are changing (Cox, 1986:208). Critical geopolitics thus is the critical study of geopolitics, where instead of accepting geopolitics as a neutral and objective practice of surveying global space, geopolitics is contextual and is implicated in the ongoing social production of power and political economy (Toal, 1998:17). Whereas critical geopolitics places the existing structures of power and knowledge in question (Toal, 1999: 107). The challenge to critical geopolitics is to describe and identify structure in the international system, moreover trace its origin and to document the particular historical specificity of hegemonic practices and their multiple domains of operations (Toal, 2003: 79). The resulting question regards the nature of the structure in contemporary international society, if any. Although the United States is regarded the remaining superpower (Toal, 2003: 77), or the dominant force in world politics today (Agnew, 2005: 1), the economic and geopolitical position of the US is in decline (Toal, 2003: 77). This notwithstanding, the US is still able to exercise its power through the agency of its government and a set of other institutions, corporate, philanthropic and intergovernmental, whose basic structures and norms are those of the marketplace society that has developed in the United States in the nineteenth and twentieth century (Agnew, 2005: 1). In order to understand the structures in the international system, attention should be paid to the political economic dynamics of policy, in order to understand the why in geopolitics in addition to the how (Mercille, 2008: 572).The work of Amineh & Houweling (2010) provides a description of how and why world structures, referred to as geopolitical orders come into place. The result of this is a framework in which geopolitics is supplemented with the forces released from the global political economy (Amineh & Houweling, 2010: 222).

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1.3.2

Geopolitical order

If the aim of this thesis is to place the developments of the trade and investment relations of the Chinese, Russian and Iranian national oil companies in a broader context and to make inference about the impact of this on geopolitics. Then the description of how and why power relations develop and transform in the international domain is required. The work of Amineh & Houweling (2010) on the transformation of the post-cold war geopolitical order provides a framework in which the developments of the relations between the states under research coalitions can be placed. The guiding concept is geopolitical order which is described as a world structure generated by sequential industrialization (Amineh & Houweling, 2010: 222). Sequential industrialization refers to the process in which the social dynamics on domestic, regional and global levels overtime shape state, society and the international system. Geopolitical order supposes a structure in international relations. Hegemony is core to the concept of geopolitical order, whereas the order is generated by and created around hegemonic states. The foundation of hegemonic power is leadership in terms of productivity, wealth and military. Geopolitical order however is much more encompassing than hegemony. There are four elements that give expression to the structure of geopolitical order as posited by Amineh & Houweling (2010: 222). First the alignment between and among ruling elites of the hegemonic power and those in states exposed to pressures to catch up, which results in a coalition of allies to the hegemonic power and form the core of the geopolitical order. Second the ability of a hegemonic power to transform inter-state anarchy into a temporary, rule governed hierarchical order which enables the hegemonic coalition to exert its dominance. Third the order deters the catching-up of contender states external to the order, through opposing the contender states, the influence of the contender states is diminished thereby prolonging the geopolitical order. Fourth the framework of geopolitical order is related to the dynamics that result from the continuous process in which wealth is re-distributed amongst states. This process has the result that the position of states within the international system changes over time, thereby the structure of the international system changes over time. The occurrence of a change in geopolitical order is heralded by a crisis in hegemony (Amineh & Houweling, 2010: 231) this is the period of time in which due to global economic redistributions contender forces amass. This affects the strength of the geopolitical order which results in a reorientation of policy, ultimately resulting in the shift towards a new order.

1.3.3

Contender states

This thesis seeks to establish the geopolitical impact of the increased trade and investment relations of the Chinese, Russian and Iranian national oil companies. The conception is that these relations are in fact a reflection of the contestation of China, Russia and Iran. Contender states challenge the dominance of a hegemonic power and the order it created (Amineh & Houwling, 2010: 222). These

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states dispute the dominance of a geopolitical order, reject the vision of the hegemonic power on the governing of state and society that is translated into foreign policy and permeates throughout the geopolitical order, and thereby challenge the legitimacy of the geopolitical order. If contender states are able to acquire sufficient leverage in terms of productivity, wealth and military capabilities, moreover are able to establish a coalition, this could ensue a challenge of hegemony resulting in a transformation of geopolitical order. In China, Russia and Iran the state is a major agency in the mobilizing and accumulation of capital, the predominance of state owned enterprises is a reflection of this. The increased transnational activities of the NOCs can not be regarded as separate from the state, whereas these companies are controlled by the political elite or state class7; they are part and parcel of the state. The foreign directed activities of these NOCs therefore need to be regarded from a foreign policy perspective, whereas the foreign policy both in concept and practice presents the trajectory of how the interactions with other states will develop. How does the transnationalization of the NOCs fit within the foreign policy of China, Russia and Iran? How does the transnationalization relate to their contestation? In order to determine the geopolitical impact of the increased trade and investment relations of the Chinese, Russian and Iranian national oil companies these developments need to be regarded from the foreign policy context, in terms of coalition formation and power projection. Transnationalization refers to the increased transnational or cross-border flow of information, money, goods and people (Hofmeister & Breitenstein, 2008: 481). The transnationalization of the national oil companies of China, Russia and Iran in this thesis refers to the cross-border trade and investment relations in by the NOCs in the fossil fuel sectors of these states. If the aim is to determine to what extent this transnationalization contributes to the establishment of a coalition based on a developing cross-border network of trade, investment and security relations. Then the focus should be on how the developing cross-border relations between the NOCs relate to the relations between China, Russia and Iran on a diplomatic, security and general economic level. By relating the different levels and evaluating the impact of the NOCs trade and investment on the other levels, it is possible to make a statement about the formation of a network and an associated coalition. The development of such a coalition can have ramifications for the power projection of China, Russia and Iran. Power projection refers to the overall capability of a state to develop an infrastructure of influence over distance, through treaties and alliances, which provides the ability to sustain and develop interests far afield (Scott Thompson, 1987: 1 8). Besides the military power projection, there is the element of power projection which refers to the ability to project economic power (Boaz, 2004) through investment, trade and cooperation. Via involvement in other countries states seek to secure their interests, especially in the energy sector, which is reflected in the US involvement in the
7

State class following Cox (1987: 364) refers to predominance of state officials in the accumulation process and in the control of the countrys productive apparatus. The state class is the representation of the state as a major agency for mobilizing and accumulating capital in most late developing or industrializing countries where the state is a major agency (Cox, 1987: 364).

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domestic politics in Ukraine and Georgia and its involvement in Central Asia (Amineh and Houweling, 2010: 246). The development of a cross-border network can increase the power projection of these states in two ways. The trade, investment and security relations can contribute to the development of domestic military and economic capacity in these states, which can result in greater individual power projection capabilities. While the increased cooperation between these states can also result in the development of multilateral approaches to security, thereby increasing the power projection of the coalition as a whole. This thesis seeks to establish how the transnationalization of the Iranian, Russian and Chinese NOCs relates to the contestation of these states, through establishing the geopolitical impact of the increasing trade and investment relations between the national oil companies of China, Russia and Iran. For the study of the geopolitical impact this thesis focuses first on the contribution of the NOCs trade and investment activities to the development of a cross-border network, in order to then focus on the power projection of the coalition forged by this cross-border network.

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1.4

STRUCTURE OF THESIS

In the following chapter the fossil fuel sectors of China, Russia and Iran are at the centre of attention. The aim of the second chapter is to describe the impact of fossil fuels on the foreign policy of China, Russia and Iran. While oil and gas are crucial in all three states, a distinction is made between the consumer state China and the producer states Russia and Iran. The chapter presents an analysis per state. First China, then Russia and finally Iran, thereby describing the following aspects: In the beginning attention is paid to the importance of the fossil fuel sector to the political elite and to the role of the political elite in the fossil fuel economy. The focus then shifts to the share of the fossil fuel sector in the economy and the structure of the fossil fuel sector. The final part describes the foreign policy of the three states, moreover the influence of the fossil fuel sector on the foreign policy. In doing so this chapter provides an answer to the question, What is the role of fossil fuels in the foreign policy of China, Russia and Iran? The energy relations between China, Russia and Iran are the scope of the third chapter, more specifically the trade and investment relations between the Chinese, Russian and Iranian national oil companies. In this chapter a description is presented of the way the energy relations contribute to and fit within the pattern of increased diplomatic, economic and security relations between China, Russia and Iran. By doing so the chapter charts the development of an emerging coalition between these states, structured around a transnational network of information, technology and capital between China, Russia and Iran. Through the description of these aspects, this chapter presents an answer to the question, How do the trade and investment relations between Chinese, Russian and Iranian national oil companies relate to the broader diplomatic, economic and security relations, and how is this manifested? The fourth chapter provides an analysis on the geopolitical impact of the increased cooperation between China, Russia and Iran. The chapter provides an account of the geopolitical impact in terms of the capacity of China, Iran and Russia to pursue their interests as put forward in their foreign policies. Moreover, how that pursuit is influenced by the increased relations between these states. In this chapter the focus lies on the military power projection and the ability to project economic power. In the chapter answers the question, what is the geopolitical impact of the developing coalition between China, Russia and Iran? The fifth and final chapter is the conclusive chapter. Based on the elements from the preceding chapters this chapter seeks to answer the research question: what is the geopolitical impact of the cross border trade and investment relations between the Chinese, Iranian and Russian national oil companies?

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[25]

2. CHAPTER II THE ROLE OF OIL AND GAS IN CHINA, RUSSIA AND IRAN

2.1

INTRODUCTION

Fossil fuels are of crucial importance to China, Russia and Iran although to different extents and in different ways. This chapter provides a description of how and why oil and gas play an important role in the states under review. In the economies of Russia and Iran fossil fuels are of vital importance. The revenues earned in the fossil fuel sector provide a vast contribution to the gross domestic product and the budget of government in Iran and Russia. In China where economic growth fuels the increases in energy demand, oil and gas inflows provide the necessary sustenance to sustain economic growth. In this chapter a description is presented of the fossil fuel economy in the three states under review. Attention will furthermore be paid to the role of the regime and the associated political elite on the oil and gas rents. The chapter pays attention to the institutions in these states that enable the political elite to manage the fossil fuel economy. In none of the three states the domestic environment can adequately serve the needs of the oil and gas sectors. A combination of the need for markets, fossil fuel reserves, capital investments and knowledge, which can not be obtained domestically, is present in China, Russia and Iran. These needs are reflected in the foreign policy of all three states under review. The foreign policies of China, Russia and Iran moreover reflect tendencies towards increased cooperation between these states that are the result of these fossil fuel needs. This chapter provides an in-depth description of the above and thereby seeks to answer the following questions: What is the role of the political elite in the fossil fuel sector? What is the importance of the fossil fuel sector to the domestic economy? What is the role of fossil fuels in the foreign policy of China, Russia and Iran? In order to do so this chapter describes the different elements, regime and institutions, economy and foreign policy per state ending in a conclusion for each state. The final part is an overall conclusion on the findings in this chapter thereby answering the aforementioned questions.

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2.2

CHINA

2.2.1

Introduction on China

The Peoples Republic of China (PRC) was founded in 1949 by Mao Zedong. The foundation of the PRC followed on the expelling Chiang Kai-shek which resulted in the till date enduring situation of the two Chinas, the PRC on the mainland and the Republic of China on the island of Taiwan. During the rule of Mao communist policies were implemented. The most renowned policies of these are the great leap forward initiated in 1958, which resulted in mass mobilization and collective labor in rural areas, a bottom-up approach towards self-sufficiency and the cultural revolution of 1966 lasting till 1976. After the death of chairman in 1976 a power struggle emerged that ultimately resulted in the shift of rule to Deng Xiaoping. The economic policies implemented under the rule of Deng have tremendously contributed to the growth of China, of which it now reaps the fruits. Since the introduction of the economic reforms, Chinas economic growth has doubled from an average of 4.4 percent annually before 1978 to an average of 9.5 percent after 1978. (Xu, 2010: 3). The process of economic development that is now in progress for over 30 years, has transformed the worlds once largest developing country from a centrally-planned economy into a mixed market economy. Even though much has changed, amongst others a historically unparalleled economic growth and reduction of poverty (Xu, 2010: 3), many other things have remained the same; the state is still authoritarian, with one party ruling the state and no direct elections for the executive and legislative powers. It is this authoritarian regime type with a state-led economy that has allowed China to develop at this pace. 2.2.2 Chinas political and institutional landscape

The state of China, characterized by the one party system is moreover characterized by a regime which is described as a combination between political centralization and economic regional decentralization (Xu, 2010: 5). This regional specialization Bai et al (2006) refer to results in the collusion between levels of government (Zhou, 2009). The primary organs of state power in China are the National People's Congress (NPC), the State Council and the presidency. The NPC elects the President of the PRC and approves the appointment of the Premier of the State Council. Whereas the State Council which is led by the Premier is the executive organ of the central government while through the Standing Committee the State Council also has major decision-making authority. The regime as depicted by Xu (2010: 5) distinguishes between on the one hand, the substantial national governments control whereas the Chinese political and the personnel governance structure are highly centralized. The appointment of sub-national government officials is directed from above, which provides the national government with an instrument to ensure regional and other sub-national officials adhere to the policies of the central government. Very different from a democratic regime, [27]

whereas no sub-national politicians are elected, not directly nor indirectly, which results in a lack of representation and accountability. While on the other hand the sub-national governments have been delegated the governance over the national economy. These sub-national governments govern regional economies that vary from provinces, to municipalities and counties. The regional economies operate to an extent in autonomy whereas the regional governments are responsible for the providing of public services, the making and enforcing of laws, within their jurisdictional discretion and economic policy. Unlike the China under the years of Chairman Mao, the economy is no longer centrally planned, although the economy remains controlled by the state class (Xu, 2005). In recent years especially, the policy focus of the regime on its institutions has been on decentralization of government authority with respect to its government bureaucracy, which is another very influential structure within the Chinese institutional framework. The aim is to create smaller more efficiently operating ministries with more influence of market forces, which could present a power struggle. In addition to the power that resides in the central government, there is the parallel structure of the Communist Party of China (CPC). Within the CPC the National Party Congress is officially the highest decision-making body, congregating approximately every five year, the party Central Committee is empowered to act during in between the Congresses. The political bureau (Politburo), the standing committee of the Politburo and the Secretariat are the other principal bodies of the CPC. The Secretariat resides over Politburo and Central Committee daily activities, the Politburo acts whenever the Central Committee is not in session, while the Politburo is headed by the standing committee. Through this military like hierarchy policy directions are developed that are to be executed by the government, while the CPC supervises the implementation. A final important institution is the Peoples Liberation Army (PLA), Chinas military which remains to be influential (Dumbaugh & Martin, 2009: 6). Although collusion between different levels of government and different important institutions such as the PLA and the ministries occurs, which can be exacerbated by the decentralization and debureaucratization, the CPC remains the most important institution. With a membership of nearly 78 million in 2009, one out of every twelve adults is a member (China Today, 2010) more importantly it resides over state personnel, policy, propaganda and the PLA (McGregors, 2010). Those in top positions of the state owned organizations; the national oil companies and the sovereign wealth funds have approval of the CPC. Through this the CPC remain in control over the states accumulation and productive apparatus.

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2.2.3

Chinas economy

Table 2.1 China Key Economic Indicators

1999 Population M GDP US dollars Bn GDP per capita PPP US dollars Real GDP Growth percent Exports US dollars Bn Imports US dollars Bn Trade Balance 1,251 991 7.10

2000 1,262 1,081 8.00

2001 1,273 1,176 7.50

2002 1,284 1,266 8.00

2003 1,292 1,648 10.00

2004 1,300 1,936 10.10

2005 1,308 2,303 4,186 10.40

2006 1,314 2,780 4,798 11.60

2007 1,321 3,460 5,548 13.00

2008 1,328 4,416 6,146 9.00

2009 1,334 4,863 6,717 8.20

194.70 249.10 266.10 325.70 438.30 158.70 214.70 232.10 281.50 393.60 36.00 34.40 34.00 44.20 44.70

593.40 762.50 969.70 1,220.00 1,434.60 1,179.20 534.40 628.30 751.90 59.00 134.20 217.80 904.60 315.40 1073.90 360.70 909.90 269.30

Source: Economist Intelligence Unit Country Reports China (2000 2009) Economist Intelligence Unit Country Profiles China (2000 2009)

After five years of double-digit gross domestic product (GDP) growth, China faces a decrease in its growth, with the global economic slowdown resulting in worldwide recessions, bringing down the demand of Chinese products, which is also witnessed in the rollback of exports. The growth of China however is persistent and with over 30 years of 9 percent per annum average growth rates. The impact of China on the global economy is considered, although the GDP growth declined from double digit figures to 8.2 percent in 2009 (table 2.1), according to IMF statistics of April 2010 (IMF, 2010) Chinas 2010 GDP growth is expected to be 9.7 percent, this would constitute a 31.6 percent contribution to expected 2010 global GDP growth (IMF, 2010). While the population growth in the worlds most populated state is stabilizing and expected to decline in the near future, the growth in GDP is predominantly attributable to development in the urbanized economies where the value added of economic activities is increasing. This growth that is related to the diversification and modernization of the economy is reflected in the tremendous growth in GDP per capita (table 2.1). Per capita income however is still low, in 2009 the individual annual income in China still only ranked one hundredth in the world, this is attributable to the division of wealth, whereas in the past three decades of reform and opening up, the gap between rural and urban China has actually increased (Yu, 2009). Domestically the economy has been changing, with an 8 percent increase in the service sector labor force as a result (figures 2.1 and 2.2), Chinas economy is diverging and developing a way from an agricultural, low-value added manufacturing economy into a more diversified economy. Not only in terms of workforce, but also in terms of value added (figure 2.3).

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Figure 2.1 Iran China labour force per sector in percentage of total national employment - 1995
24,80 52,20 23,00 Agriculture (%) Industry (%) Services (%)

Figure 2.2 Iran China labour force per sector in percentage of total national employment - 2005
31,30 44,80 23,80 Agriculture (%) Industry (%) Services (%)

Source: China Statistical Yearbook 1997

Source: China Statistical Yearbook 2007

The change is also observable in the foreign direct investments it attracts. In 2008 capital inflows surged to a historic high of 108 billion US dollars, China thereby became the third largest FDI recipient in the world, after the US and France (UNCTAD, 2009: 50). The structure of inflows however is changing, although manufacturing still accounts for about half of inflows to China, increasingly more inflows are targeting high-tech industries drastically.
Figure 2.3 China value added per sector in percentage of GDP
60 50 40 30 20 10 0 1988 1998 2002 2005 2007 2008 Agriculture Industries Services

Source: World Bank, (2010), China at a Glance 2010, (http://devdata.worldbank.org/AAG/chn_aag.pdf). Economist Intelligence Unit Country Profile China 2000 - 2008

For years China has functioned as an export market driven by foreign direct investment (FDI), however recent developments show that currently the Chinese economy is looking outward, searching for new markets and technologies, by making use of accumulated foreign reserves in sovereign wealth funds and national banks. Chinese outward FDI in 2008 surged to 52 billion US dollars, 132 percent up from 2007, and its outflows continued to grow in early 2009 (UNCTAD, 2009, p. 53). Many large Chinese SOEs are urged by the state to invest abroad, in order to secure much needed access to natural

[30]

resource, predominantly fossil fuels and mineral reserves and technological resources, know-how and market access (Xu, 2010: 4). This is an indication of the deep involvedness of the Chinese government is deeply involved in business, and moreover the absence of a clear separation between government and business. The role of energy in Chinas economy The vast economic growth of Chinas has resulted in a need for additional sources of energy. While in the past decade China was self-sufficient in oil and gas it is currently the second largest exporter in the world preceded only by the US. The unquenchable thirst for energy has even resulted in China, the state with the largest resources of coal in the world, to start importing coal. China however seeks to move away from coal, by far its largest source of energy (figure 2.4), as it increasingly witnesses the environmental degradation and urban pollution as the result of coal use. The booming automobile industry is another source of the surge in energy demand. Car sales in 2004, for example, were about 5 million, making China the third-largest car market after the United States and Japan (Dorraj & Currier, 2008). China's auto sales exceeded 13.64 million units in 2009, making it the largest automotive market in the world (Sydney Morning Herald, 2010). The imports of oil and gas to China have surged, whereas in 1998 fossil fuel imports accounted for about five percent of total imports, in 2008 this had increased to an amount of approximately 15 percent (WB, 2010a).
Table 2.2 China Oil and Gas Profile (Oil and petroleum in million barrels, gas in million cubic meters) Oil Crude oil production Petroleum consumption Petroleum production* Refinery capacity Proved reserves** 1999 1,166.18 1,592.71 1,410.93 1,586.66 24.00 25.17 22.14 1.37
Percentage of world total

2008 1,383.42 2,858.32 2,370.80 2,279.79 16.00 76.03 77.19 2.27

Percentage of world total

4.85 5.76 5.31 5.43 2.32 1.04 0.92 0.94

5.15 9.13 7.85 7.31 1.20 2.45 2.47 1.29

Gas Production Consumption Proved reserves*** *2006 figures **billion barrels ***trillion cubic meters

Source: Energy Information Administration. 2010. International Energy Statistics Database, (http://www.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm).

That the increase is demand driven is also observable in table 2.2, where petroleum consumption has nearly doubled from 1999 to 2008, while crude oil production has increased with an approximate ten percent. In order to more aptly deal with the increased consumption of energy, the Chinese government has developed an array of strategies that deal with energy efficiency, impact of fossil fuel use, energy security and carbon emissions. Having attained the 2005 goals, government officials now

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set new target for more efficient energy use between 2011 and 2015. Chinas strive for energy efficiency and development of sustainable energy however has implications that are beyond the impact on the natural environment. Through setting high standards, the government seeks to induce innovation, whereas Chinese companies already account for about 40 per cent of the global supply of solar panels, even though only accounting for one percent of the global solar market (Gu, 2009). This sector is especially interesting since it is not yet as established as other industries in which China seeks to participate globally. The renewable energy industry provides China with a chance to become leader in technology, which would allow for the creation of powerful companies in new, potentially large industries (Dyer, 2009).

Figure 2.4 China Total Energy Consumption by type

3% 1% 6% Natural gas 0,06% Nuclear Hydro electric power Other Renewable Oil Coal 70%

20%

Source: Energy Information Administration (2009), Country Analysis China

2.2.4

The political economy of oil and gas in China

Due to earlier described factors, China increasingly needs more gas and oil, without this its economic growth would hamper. A hampering of growth, could lead to speculations about the capabilities of those in power, which is something the ruling elite are not looking forward to. Not now the regime faces more contestation, via new sources such as the internet, but also by the growing middle class. Economic growth is a crucial to the political elite, through their state owned enterprises (SOEs) they seek to establish this. The national oil companies (NOCs) are the key element of the state in the hunt for oil and gas. Another aim in the development of sufficient influx of oil and gas is the diminishing of dependency on a small number of states and little diversity in the distribution routes. Policy strategies applied are geographically disbursed, although the relations with regional neighbors Russia and Iran seem to become increasingly important. When observing [32]

the developments of the NOCs in China, especially their international activities, the going out strategy that China pursues in order to secure sufficient supplies of oil and gas is clearly visible. The going out strategy executed by Chinas NOCs is the main source of global 2010 demand growth in crude oil, accounting for 40 percent of 2010 incremental demand, now 1.7 million barrels per day, and nearly 45 percent of 2010-2015 growth (IEA, 2010: 4). In 2009 China National Petroleum Corporation (CNPC), China Petrochemical Corporation (Sinopec) and China National Offshore Oil Corporation (CNOOC) have spent around 29 billion US dollars worldwide to acquire oil and gas assets in the period of January 2009 to April 2010 (IEA, 2010: 21). In the same year CNPC and Sinopec have also signed equity for oil deals with eight countries valued at a total of 77 billion US dollars (IEA, 2010: 21). The Chinese NOCs have moreover been a major source in mergers and acquisition, having committed to investing at least 18 billion US dollars, accounting for 13 percent of total global acquisitions in 2009. Nearly all of these mergers and acquisitions were in exploration and development, of which many in Iraq and Iran (IEA, 2010). Altogether Chinas NOCs have used over 120 billion US dollars in their mission to secure oil and gas supplies), their role is key in the political economy of oil and gas in China. The Chinese oil and gas sector In 2008, China produced 1.4 billion barrels of crude oil and became the worlds fifth largest oil producer. Chinas three state-owned enterprises, namely SINOPEC, PetroChina, CNOOC, and a provincially owned enterprise, Shaanxi Yanchang Group, held 98.3 percent of Chinas crude oil proven reserves and 86.8 percent of Chinas refinery capacity as of the end of 2008. Currently seven state owned corporations are active in the oil industry, of these CNPC, CNOOC and Sinopec are the largest. Historically the Chinese domestic oil and gas market was divided over four NOCs each with a specific part of the value chain to focus on. CNPC focused on the upstream onshore sector, Sinopec focused on downstream, and CNOOC focused on the upstream offshore (OGJ, 2010), whereas Yanchang Petroleum is the provincial upstream and downstream corporation in northeastern mainland. Currently these four are the ones holding licenses for oil and national gas exploration in China. The modern Chinese petroleum industry was created in large part in 1998 when the Chinese government mandated the restructuring of state-owned assets to establish CNPC in the north of the country and China Petrochemical Corporation (Sinopec) in the south. The restructuring of the oil industry reflected the efforts of Chinas central government to introduce market mechanisms in the hope of inducing efficiently in NOC operations. The strategic significance of oil industry urged the central government to only partially liberalize the industry, by creating a form of oligopolistic competition among its three NOCs. However, destructive price wars between the companies forced the central government to resume a role in setting oil prices in the domestic market (Liou, 2009: 676 677). Prior to restructuring, CNPC had been engaged in upstream exploration and production

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throughout China since 1988 when it replaced the Ministry of Petroleum Industry. Sinopec was engaged in mid/downstream refining and distribution. A third firm, CNOOC presided over most offshore oil and gas production and has managed to retain its pre-1998 control since restructuring. All three of the Chinese majors have restructured and conducted relatively successful international IPOs. The role of the central government in the NOCs is significant, especially in the three large ones, the governing and regulation however takes place throughout a broad set of ministries and other type of government bodies. NOCs activities are evaluated by the National Development and Reform Commission (NDRC) and the State-owned Assets Supervision and Administration Commission (SASAC) (Liou, 2009, pp 684). Concerning the NOCs overseas expansion, primary bureaucratic regulators include the NDRC, the Ministry of Commerce (MoC), the Ministry of Foreign Affairs (MFA), the SASAC, and the State Administration of Foreign Exchange, furthermore assisted by the Export-Import Bank of China (China Eximbank) and the China Export and Credit Insurance Corporation (Sinosure) which are governmental institutions in charge of providing financial support for NOCs outbound investment. (Liou, 2009: 686)

Table 2.3 China National Oil Companies Size in 2008 (Natural Gas in billion cubic meters, Crude Oil in million barrels, turnover in billion US dollars*)

Reserves Crude Oil Natural Gas Production Crude Oil Natural Gas Overseas production Crude Oil Natural Gas Corporate figures Turnover

CNPC 21,998.00 2,443.80

Sinopec 2,841.00 2,644.00

CNOOC 1,490.00 159.24

Yanchang CITIC n/a 0 362.00 0

Zhenhua Sinochem Total China NOCs n/a 0 119.00 0 26,120.00 5,247.04

1,014.70 61.75

296.80 83.00

154.07 6.42

74.83 0

23.18 0

38.33 0

14.20 0

1,616.11 151.17

223.66 6.73

66.07 n/a

8.73 2.35

0 0

23.18 0

38.33 0

158.76 0

359.97 9.08

188.40

219.99

18.45

6.89

2.40

2.93

45.21

484.26 2,340,088

Employment 1,167,000 358,304 3,584 780,000 10,200 n/a 21,000 *when converted: 0.128175 US dollars/HK dollars and 0.146423 US dollars/RMB (9/6/2009) conversion rates

Source: Annual reports and corporate websites of: CNPC, Sinopec, CNOOC, Yanchang, CITIC, Zhenhua and Sinochem; Pradan, (2009); OGJ ( 2008)

In an effort to manage the problem of fragmented authority over the energy industry, in 2008 the National Energy Administration (NEA) was established to facilitate communication between practitioners and government bodies. The power and autonomy of the NEA however have been met

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with skepticism as authority continues to lie with the more senior leadership of the NDRC and Chinese industry leaders (Blumenthal et al, 2009). Recently the NEA has ordered the NOCs to form a consortium to tender for overseas oil and gas to avoid direct competition, whereas the competition merely results in bringing down the price of exploitation. NOCs not only seem to be effective executors of the Chinese state, moreover they are part and parcel of the state. Although at times the NOCs seem to be behaving more like IOCs when entering in overseas competition, so far the central government has always been able to wheel them back in. Underneath an overview is presented of the different NOCs active in China.

The National Oil Companies of China

In the past decade an industry has developed in China of incredible proportions, an industry moreover that solely consists of state owned enterprises, which have made optimal use of this characteristic in their international expansion. Backed by state funds and party diplomacy the Chinese national oil companies are taking advantage of the global economic downturn, by acquiring complete companies, taking stakes in gas and oil projects and securing long-term contracts for crude oil supplies with producer states. Besides going out and securing natural resources, the Chinese NOCs now see mastery of technology as a crucial component of their overseas strategy (McNulty, 2010). In 2009 Chinese national oil companies acquired for over 32 billion US dollars (Duce & Ying, 2010), CNPC / PetroChina alone spend 11.65 billion US dollars.8 While in 2008, as displayed in table 2.3, total NOC overseas crude production equaled nearly 360 million barrels.
Figure 2.5 China NOCs Refining Capacity 17% Sinopec 42% PetroChina CNOOC Yanchang Petroleum Other

3% 6%

32%

Source: CBI China (2009), http://research.cbichina.com/download/EnergyReport/09%20petroleum.pdf

Adding the NIOC CNPC 1.7 billion US dollars deal the for North Azadegan oilfield; the 5 billion US dollars gas deal of CNPC with Iran for the South Pars Gas field. (AGF, 2009); the 1.9 billion US dollars PetroChina stake in Athabasca Oil Sands Corporations MacKay and Dover oil-sands projects (Klump, 2010); Shell CNPC Syria oil and gas unit deal for 35 percent CNPC share at 1.5 billion US dollars (Zhihong, 2010); CNPC Shell deal regarding Australian Arrow Energy, 50 percent of 3.1 US dollars billion acquisition (BBC, 2010).

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China National Petroleum Corporation, or CNPC originates in the early years of the peoples republic in 1949, whereas before 1988 when the central government created the company in the light of the broader market oriented reforms, CNPC activities were performed by the now dismantled Ministry of Petroleum. In 1988 China established the CNPC as a state owned company that would handle all Petroleum activities in China. CNPC is China's largest oil and gas producer and supplier, with a 57.06 percent share in 2008 crude oil production and a 79,5 percent of Chinas total natural gas production (CNPC, 2008), as well as the worlds 13th largest oil and gas company in terms of reserves (OGJ, 2008). PetroChina Company Ltd. is established as a joint stock company with limited liability under the Company Law of the Peoples Republic of China in 1999 as part of the restructuring of the China National Petroleum Corporation. In 2010 PetroChina is the largest oil and gas company in the world in terms of market capitalization (PFC Energy, 2010). As off September 2008 CNPC holds a 86, 32 percent stake in PetroChina (CNPC, 2008; PetroChina, 2008). China National Petroleum Corporation (CNPC) leads the charge in overseas upstream petroleum investment. The chairman of PetroChina Jiang Jiemin, has announced to be looking to invest 60 billion US dollars in the next decade on overseas acquisition (Duce & Ying, 2010). China National Offshore Oil Company, abbreviated to CNOOC was established in 1982 for the purpose of administering offshore petroleum operations with foreign entities. Today CNOOC maintains exclusive rights to offshore petroleum exploration and production and is Chinas largest producer of offshore crude oil and natural gas, as well as one of the largest independent oil and gas exploration and production companies in the world (OGJ, 2008). CNOOC mainly engages in oil and natural gas exploration, development, production and sales and has four major production areas in offshore China. CNOOC is increasingly active outside of China, acquiring assets in Africa, Australia, Indonesia, Latin America and Iraq. China Petrochemical Corporation (Sinopec) established in July 1998 on the basis of the former China Petrochemical Corporation and is one of the original three Chinese NOCs and remains one of the largest Chinese petroleum and petrochemical enterprise group. Sinopec Group is a state-owned company solely invested by the State, functioning as a state-authorized investment organization in which the state holds the controlling share. In 2000, the group established China Petroleum and Chemical Corporation or Sinopec Corporation, a joint stock company with 75,84 percent of stateowned shares (Sinopec, 2008), in 2010 Sinopec Corporation is the worlds seventh largest oil and gas company in term of market capitalization. Sinopec furthermore holds a 50 percent share in Unipec (China International United Petroleum & Chemicals Co., Ltd. (UNIPEC) with Sinochem, China's largest oil trading company. Founded in 1950 China National Chemicals Import and Export Corporation, abbreviated to Sinochem is a multinational conglomerate, in 2009 it converted to the joint-stock company Sinochem Corporation with Sinochem Group holding 98 percent of the shares and Cosco a Chinese logistics and trade company holding two percent (Sinochem, 2009). Sinochem is Chinas largest state-owned oil

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and petrochemical import and export company (Xu, 2008), however as of recent it has diversified its business into both upstream as well as downstream activities. In 2007 Sinochem has obtained a crude oil distribution license as well as an oil products wholesale license by the Chinese Ministry of Commerce (Sinochem, 2007). The large industrial conglomerate and defense giant China North Industries Corporation, abbreviated to Norinco operates in the national oil and gas market through China Zhenhua Oil Company, or Zhenhua Oil. Norinco due to its involvedness with arms sales and engineering and construction projects in Iraq and Syria established Zhenhua Oil to cooperate with CNPC in these states (Xu, 2007). Zhenhua Oil has entered the refinery business through starting refinery in northeast China in 2009 (Aizhu, 2009). The China International Trust and Investment Company, or CITIC Group, is the majority shareholder in the CITIC Resources Subsidiary with 54 percent. The CITIC Group is a multi-business group company, established in 1979 (CITIC Resources, 2010). In 2008 CITIC Resources is active in the production in two oilfields located in Kazakhstan and Indonesia (Duce, 2010). The firm has also announced to invest in new projects in China, Kazakhstan and Indonesia (Duce, 2010). In 1905 the Shaanxi Peoples Provincial Government established the predecessor to the since 2006 officially named Shaanxi Yanchang Petroleum (Group) Corp. Ltd. or shortly Yanchang Petroleum. In the course of 2005 state-owned Shaanxi Yanchang Petroleum Group Co. was formed by merging 21 exploration and development companies and three refineries (China daily, 2005). Unlike the other NOCs Yanchang Petroleum is not under the State-owned Assets Supervision and Administration Commission (SASAC), but remains controlled by China's northwestern Shaanxi provincial government. Yanchang only operates on the domestic market. Zhuhair Zhen Rong was established upon the approval of the State Council in 1994 and is predominantly involved with crude oil imports. In addition, the company is also involved in trade concerning oil-related products and hi-tech fields, including R&D of telecommunication software and consulting services. Chinas foreign policy

2.2.5

For the development of its economy China is dependent on the outside world for natural resources, technology and for markets. Recent years show the emergence of soft power in Chinas foreign policy concept and practice (Wang, 2008: 257). China seeks to integrate hard power and soft power in its grand strategy in order to secure its interests. Spurred by the expansion of its economy China faced growing shortages of resources, from the mid 1990s on China started looking outward for essential natural resources such as oil, thereby entering in relations with the Middle East, Central Asia, Latin America and Asia. Energy diplomacy,

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or nengyuan waijiao (Zhu, 2009: 59), became an increasingly important aspect of Chinas foreign policy. The foundation for Chinas strategic interaction with regional states is Chinas security concept of xin anquan guan, through which it seeks to achieve collective security cooperation among Asia-Pacific countries, with the aim to shape the regional security order in Asia (Glaser & Medeiros, 2007: 295). In addition to the security concept there is Chinas Asia Policy of mulin, anlin, fulin which translates to bringing harmony, security and prosperity to the neighbors (Yue, 2008: 442). This fits into the spillover generated by Chinas globalizing economy, which resulted in the promotion of trade liberalization with the Association of South East Asian Nations (ASEAN). Chinas regional policy has transformed from bilateralism to multilateralism which is reflected in the increased involvement in regional organizations such as the Shanghai Cooperation Organization (SCO) and ASEAN. The foreign policy concept of heping jueqi or peaceful rise is one of the first concepts introduced into Chinas foreign policy under Hu Jintao. (Glaser & Medeiros, 2007: 292). The peaceful rise concept aims to keep China from confrontation with major powers (whereas) through pursuing the peaceful path, socialism and capitalism can compete with each other while enjoying peaceful relations and learning from each other :.. (this should ensure that) the rise of China will not disrupt the global balance and trigger a war, (as) China seeks an equal status as a big country in the international community so as to contribute to peace (Glaser & Medeiros, 2007: 296). Peaceful rise has been introduced to project a positive conception of China instead of one that terrifies neighbors and other states. As China depends on the external world, the new foreign policy aims to pursue its interests through persuasion and cooperation rather than by force. This urge is reflected in the peaceful development concept, the successor to peaceful rise, which is similar to the peaceful rise concept although in a linguistic sense is less offensive, this is also reflected in the adoption of the harmonious world concept in peaceful development (Cho & Jeong, 2008: 468). Another switch in Chinas external behavior is observed in its interaction in the internal affairs in other states. Whereas the principle of non-interference in internal affairs of other states has been central to Chinese foreign policy, this historically important principle dates back to the five principles of peaceful coexistence published in the Sino-Indian treaty on Tibet in 1954 (Wint, 1960: 65). This principle of non-interference however sees contestation by the participation of China in UN peacekeeping activities. Since 1990, when Chinese military observers served in the United Nations Truce Supervision Organization (Ling, 2007: 47), China has been an active peacekeeping force for the UN with currently over 8000 peacekeeping troops dispatched (Zhu, 2009, 60). Chinas participation in UN-led peacekeeping needs to be understood from the perspective of China, the through participating in these missions, an image of China as a responsible and benevolent power is projected. The image of China as a soft and benevolent power is moreover reflected in the description of the Chinese approach to development as the Beijing Consensus. This Beijing consensus exists of three conceptions, Chinas development model is based on innovation, it considers sustainability and

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equality as top priorities and it strives for self-determination in foreign policy (Cho and Jeong, 2008: 461). This perspective on development provides late-developing states with an alternative to the Washington consensus neo-liberal approach, which is perceived with great interests especially by authoritarian leaders in South Asia, Africa, Latin America and the former Soviet-states (Cho and Jeong, 2008: 461). The soft power approach in Chinas foreign policy can be questioned, especially as China in its foreign affairs has to deal with territorial conflicts including with Taiwan and Japan. With regard to Taiwan, China pursues the one-China policy this rejects the existence of Taiwan as a sovereign state and has resulted in the militarization of the Taiwan Strait. China however does not depend on soft power alone; China continuously develops its hard power in order to secure the access it requires, visible in the military development and the increased bilateral and multilateral security relations between China and states in the region (Ibid, chapter 3.6). This is reflected in the foreign policy practice of regional security, through: the bilateral Treaty on Good-Neighborly Relations, Friendship and Cooperation between Russia and China of 2001, the establishment of the Shanghai Cooperation Organization (SCO) in 2001, the ascendance of Iran to observer status in the SCO in 2005 and the involvement of China in ASEAN + 3. The development of Chinas foreign policy is important for the understanding of the relations that China has with Russia and Iran. The foreign policy practice of China towards Russia and Iran is to be understood especially in terms of regional security and energy security. The development of both security and energy relations between China, Russia and Iran are extensively developed in the next chapter, while the following part discusses Chinas going out strategy.

Foreign energy policy strategy

The non-interference principle is highly valued by China, moreover is regarded as very important in the way it want to be related to itself. China however is dependent on the exterior for natural resources and markets, seeking independence through diversification. In the case of oil this can be witnessed in figure 2.6, China has a set of strategic partners for its supplies of oil, although already geographically dispersed, China seeks to increase this. On the other hand it seeks special cooperation with a smaller group of states, predominantly Russia and Iran, for its energy security which will be elaborated upon in the third chapter. Through applying its vast capital resources Chinas foreign energy strategy secures its economic needs without entering into force, thereby paving the way for its continued economic growth. The importance of oil and gas to Chinas economic development and national security has made energy crucial to its foreign policy. The aim is to assert state control over sufficient strategic resources and ensure the safe passage of oil transited to China from abroad, referred to as the going out strategy (Chen, 2010). Regarding the security of sufficient oil and gas supplies, the Chinese

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government has urged its national oil companies (NOCs) to make use of the global economic downturn to acquire as many oil and gas resources and assets as possible.
Figure 2.6 China Oil Imports by Origin a. 2007 Sudan Others 18% 6%

Kuwait 3%

b. 2008
Venezuela 3%

Others 16%

Sudan Kuwait Congo 6% 5% 3%

Kazachstan

Kazachstan 3% Oman 8% Russia 7% UAE 3% Saudi Arabia 20%

Oman 8% Russia 8%

3% Libya 3% Saudi Arabia 20% Iran 15%

Angola 17%

Iran 12%

Angola 13%

Source: Energy Intelligence Administration Country Analysis China 2009

Supported by Beijings diplomatic efforts as well as the stockpile of foreign reserves, the NOCs adhere to this. China pursues the going out strategy in a wide range of oil-producing regions. Through its NOCs China is active in every fossil fuel rich region of the world, save for the Gulf of Mexico, including Africa, Canada, the Caucasus, Central Asia, East and South Asia, Latin America and the Middle East. While in every region it again deals with several states and NOCs. The going out strategy needs to be understood as the predominant driver of the transnationalization of the Chinese national oil companies.

2.2.6

Concluding remarks on the role of oil and gas in China

In China the political elite through the Communist Party of China is still in vast control over the economic production apparatus. The fossil fuel sector adheres to this depiction, whereas the state controls the exploration, production, refining and sales of oil and gas (products) through the national oil companies. Through controlling this process, the political elite moreover are capable of deterring the rise of a class of large private business owners that could compete with the current elite for power. The imports of oil and gas are crucial to China, whereas the consumption grows far beyond the domestic supply, due to the industrialization, the increase in wealth of the population and the mover away from highly polluting coal. The foreign policy of China, focusing on soft power and noninterference is aimed at developing a benevolent picture of China. This should allow China to successfully pursue its interests of access to resources and markets without causing conflict which would be time-consuming and thereby costly to the economic growth. The going-out strategy

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disposes the national companies of the diplomatic and financial backing to go out and acquire fossil fuel assets and delivery contracts. Contradictions however exist in China which might at one point result in developments that could turn out to be disruptive for the regime. The difference in the intensity of economic development in the east and the west, or urban and rural areas, leads to an increase in GDP per capita but at same time to an increase in inequality. The growing middle class might at one point challenge the regime, and push for more democracy, choice or influence. The CPC is the propaganda mechanism of the state and China moreover is renowned for its censorship. The arrival of new communication technologies and internet applications however provide the opposition for more democracy with tools that can make it stronger. The increased involvedness of SOEs and NOCs through their listed subsidiaries in the global economy where they operate in competition with private owned TNCs, might transform them into more private actor like behavior. So far the political elite still controls these companies. However through moving beyond national borders these NOCs acquire some autonomy. While the Chinese central government develops legislation and oversight to deal with this, at some point it could be possible that NOCs through their vast size in terms of personnel and capital develop their own internal dynamics and thereby their own trajectory. A trajectory moreover that might not be in line with the regime in Beijing. The economic growth trajectory offers speculation in terms of how benevolent the foreign policy of China remains, whenever relative growth slows. In that stage China might not have the benefits of vast trade surpluses anymore to finance longer term cooperation activities, and might switch to use of force to secure its interests.

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2.3

RUSSIA

2.3.1

Introduction on Russia

As heir to the throne of the in 1991 dissolved USSR the Russian federation is by far the largest state in world in terms of geography, stretching over two continents. The population of the country however is estimated at just over 140 million people and is declining due to the aging population. Since the dissolution of the USSR, several political ideological winds have gone through Russia, of liberalization and nationalization, however the current model which balances both, however in favor of the state, makes it another state in which major parts of the economy are state-led. Under the rule of Putin, Russias booming economy steered the state back into international waters where it increasingly pursues an influential role, not the least in the region. Reasserting influence in former Soviet states and forging alliances with other regional powers as is witnessed in the establishment of the Shanghai Cooperation Organization. In the years of the 2000s leading up to the global economic downturn, Russia has enjoyed high rates of economic growth (table 2.4) predominantly contributable to its vast resources of oil and gas. The fossil fuels exploitation, production, refinery and trade make up as sector that is paramount to the Russian economy as well as to the states rule. Whereas the oil rents, which have been increasingly nationalized in the recent decade, the control over the production system and the crucial resources supply the political elite with the means to prolong their rule, through achieving economic growth and creating an international power position. How this has developed is the subject of the ensuing part. Russias political and institutional landscape

2.3.2

Understanding the regime in Russia is best done via an historical analysis. Proedrou and Frangonikolopoulos (2010: 81) explain the crucial role that liberalism played in Western Europe as politico-economic and ideological current resulting in the here highly valued liberal democracies, has never played that same role in Russia. Whereas post French revolution Russia remained a monarchy and when by means of the Russian revolution the monarchy crumbled the proletariat ascended to power, not the bourgeoisie as in the western European states, which in turn resulted in a the liberal ideas not being embedded to the same extent in the Russian and Soviet systems. The liberal premises of individual freedom and that the individual comes before the community have never infused the Russian state, community interests moreover played and till date play a pivotal part in Russian politics. After the post-Soviet liberal reforms especially in the domain of the economy, seemed to have gained ground. Putins presidency however led to the diminishment of checks and balances in the political process, and the trajectory away from participatory democracy (Proedrou and Frangonikolopoulos, 2010: 81), gravitating political power to the state, the party and his siloviki

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moreover. This however has not resulted in general outcry by the people for more liberal rights and democracy, quite the contrary actually, where according to polls held before the Presidential elections of 2008 indicated that more than 70 percent of Russians would have voted for him in case he would have been able to run for President again. The poll moreover indicated that the Russians would have welcomed an amendment of the constitution if that allowed Putin to run for a third term (Proedrou and Frangonikolopoulos, 2010: 81). All efforts to introduce liberal democracy in post-soviet Russia notwithstanding, the political system in Russia remains deeply centralized. Putins presidency reinforced even further this aversion towards a liberal regime and led analysts to characterize the Russian regime as liberal authoritarianism and managed democracy (Proedrou and

Frangonikolopoulos, 2010: 81). The vast size of the Russian Federation assumes a division in numerous regions and several varieties of territorial units, the latter is exacerbated by the heritage of the Soviet Union, in which regions experienced varying degrees of autonomy, this remains the same in contemporary Russia. Many of these territories reflect the ethnic divisions used in Soviet times, the largest of these ethnic territories enjoy the status of autonomous republic, of which 21 exist, although the majority of them boast an ethnic Russian population. The other regions are designated the status of oblast which translates to province, krai or territory, okrugs or autonomous districts, while Saint Petersburg and Moscow are the two federal cities. Although the regional division seems inherent to the sheer size of the state, it is rather hard to control. In effect Putin has devoted his rule to restructure the states institutional make up, establishing seven super regions, headed by specially selected Presidential representatives. Through changing the composition of the Federation Council moreover Putin made it easier to remove regional governors that opposed the Kremlin (EIU, 2008a). The political forces of influence in the Kremlin are not limited to parties whereas in Russian politics the so-called political clans are also a considerable political force. Especially the siloviki clan, an, albeit incoherent, group of politicians related to the Russian security forces such as the FSB, and the former KGB, has become powerful during the rule of Putin. All siloviki share the same interest in reasserting state influence at the cost of the oligarchs form the Yeltsin era, the strive for a strong state is what reunites them. Saint Petersburg liberal Medvedev is not considered part of the siloviki, which explains the recent moves of Moscow announcing to sell off state owned enterprises. Under the rule of Putin, the political elite have tightened their grip on the economy. Not only through the nationalizations in the petroleum sector and the reforms in the constitutions related to foreign ownership in fossil fuel development. The presence of the Kremlin inner circle at the boards of the Russian national oil companies, Rosneft, Gazprom and Transneft (Mankoff, 2008: 47), provides the political elite with even more influence. The establishment of the Oil Stabilization Fund in 2004 and the National Welfare Fund in 2008 has provided the political elite with funds in which the fossil fuel economy rents are accumulated. These sovereign wealth funds provide the elite with a capital pool estimated at 142.5 billion US dollars (SWF Institute, 2010a) the funds are managed by the

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Ministry of Finance. The capital of the National Welfare Fund especially can be used at the discretion of the regime with aim of diversifying the Russian economy. Another institution that is related to the political elite is the Federation of Independent Trade Unions in Russia (FNPR). This union confederation is Russias largest trade union with an estimated membership base of nearly 30 million (International Labour Organization, 2005). In Russia unions no longer have a monopoly, this implies that they have to compete for survival and have to rely on the political elite. Especially since those in control of the FNPR seek to maintain the assets of the FNPR that are at their disposal (Sakwa, 2002: 321). By doing so the Federation of Independent Trade Unions of Russia (FNPR) becomes a tool for the political elite in Russia that can use the union apparatus to influence and mobilize the FNPR membership base (Robertson, 2007).

2.3.3

The Russian economy

Table 2.4 Russia Key Economic Indicators 1999 Population M GDP US dollars Bn GDP per capita PPP US dollars Real GDP Growth percent Exports US dollars Bn Imports US dollars Bn Trade Balance 145.6 195.9 6.30 39.54 36.01 2000 145.2 259.7 10.00 44.86 60.17 2001 144.4 309.9 5.00 53.76 48.12 2002 145.3 346.5 4.30 60.97 46.28 2003 144.2 431.5 7.30 76.07 59.86 2004 143.5 588.8 7.20 2005 142.8 763.6 6.40 2006 142.6 2007 142.3 14,746 8.10 354.40 223.49 130.92 2008 141.8 15,963 5.60 471.60 291.86 179.74 2009 141.4 14,946 -7.80 298.82 194.70 104.12

989.4 1,294.4 1,676.6 1,322.7 7.70

- 11,861 13,239

75.55 105.03 101.89 107.25 135.93 183.21 243.57 303.55 97.38 125.30 164.28 85.82 118.27 139.27

Source: Economist Intelligence Unit. 2000 2009. Country Report Russia Economist Intelligence Unit. 2000 2009. Country Profile Russia

In the post-communist years when the economic policies of glasnost and perestrojka reigned supreme, most state-owned enterprises (SOEs) were dissolved and privatized. The wave of privatizations that continued under the rule of former President Yeltsin has led to the rise of corporate empires let by oligarchs like Chodorkovskis Yukos. The 1990s were grim years for Russia in economic terms, but the recovery of the Russian economy after the financial crisis of 1998 was the start of ten years with an average growth of 6.8 percent per annum. The arrival of Putin indicated an end to the so-called bandit capitalism. In October 2006 Putin stressed the preponderant role the state has to play in economic activity, emphasizing the need for the consolidation of state-owned companies (Proedrou & Frangonikolopoulos, 2010: 84). This strategy is especially well established in the fossil fuel sector, where thanks to nationalization and control of private oil company activity the Kremlin is in charge. The introduction of the 2005 federal law concerning natural resources, prohibits foreign investors from

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participating by more than 50 per cent in ventures for the exploration of hydrocarbons, is an example of the strategies pursued by the Kremlin (Proedrou and Frangonikolopoulos, 2010: 85). After a decade of uninterrupted economic growth, Russia faced an economic decline in 2009, which is the result of the global economic crisis bringing down demand for Russian products in general and in oil and gas more specifically. Due to the global reach of the crisis it also severely affected the price of oil and gas which have declined steeply. The world financial crisis and the decline in global energy prices have revealed Russians reluctance to reform its economy during the past decade of economic prosperity, indicating the dependence of the government on oil and gas rents. Changes in Russias employment figures reveal that the share of the labor force in services has increased slightly (figure 2.7, with roughly 1.5 percent at the cost of the agriculture sector. These numbers however not very well reflect the structural reforms necessary in the economy.
Figure 2.7 Russia labour force per sector in percentage of Iran total national employment a. 1998
11,70 59,20 29,10

b. 2008 9,00
61,80

Agriculture (%) Industry (%) Services (%)

29,20

Agriculture (%) Industry (%) Services (%)

Source: International Labor Organization (2010) Laborsta (http://laborsta.ilo.org/)

Taking a closer look at the composition of the industrial sector it becomes evident that heavy industry still is a large part, whereas in 2009 fuels, energy and metallurgy together accounted for 35 percent of total industrial output (EIU, 2009b), while electricity and food accounted for an additional 35 percent. The structural reform necessary thus relates to the industrial output shifting towards high-tech industry, as this is the business of producing products with a much higher value added.

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Figure 2.8 Russia value added per sector in percentage of GDP 60,00 50,00 40,00 30,00 20,00 10,00 0,00 1998 2002 2005 2006 2008 Agriculture Industry Services

Source: World Bank (2010) Russia at a Glance (http://devdata.worldbank.org/aag/rus_aag.pdf)

Another important observation is the low percentage of small and medium-sized enterprises (SMEs) present in the Russian economy, estimated at 10 percent to 15 percent (EIU, 2009b), whereas 50 percent would be the number in an average developed market economy. The result of this is reflected in a low capacity to develop innovations, whereas entrepreneurial activity is an antecedent to the introduction of new products, new methods of production and other innovations that stimulate economic activity (Schumpeter, 1939). Higher levels of SMEs and thus of entrepreneurship are essential for the development of a diversified, high value adding economy. The need for new technologies, that are necessary to establish more high value added production, is reflected in the outward FDI of Russia in 2008, which reached a new high of 52 billion US dollars (UNCTAD, 2009:75). This is also reflected in the activities of Russian state owned enterprises that have shifted their strategies from a market focus to a technology focus, thereby looking to gain access to know-how and technological innovations The role of energy in Russias economy Medvedevs speech on Thursday 12 of November said it all, when he attacked the country's economic backwardness, its primitive and humiliating dependence on the exports of raw materials and its chronic and ubiquitous corruption (Tkachenko, 2009). This dependence on raw material exports and the resulting exposure therefore to fluctuations in price levels are the reason for Russias economic decline in 2009 (Tkachenko, 2009). In order to deal with this Russia needs to develop an economy that is higher up the value chain, with more technologically advanced and higher value adding industries. Thus in order for Russia to fulfill its ambitions of returning on the world stage it needs economic growth and an economy moreover that is less dependent on the exports of oil and gas

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products and thereby less volatile to economic downturns. In 2009 Russias economy shrank by 7.8 percent while Chinas grew by 8.2 percent (table 2.4 and 2.1). What Russia needs is economic diversification into more sophisticated parts of the value chain, through more production of higher value-added products, with according technological developments. Recently Russia has made an effort to put the nation on the world map as a good place for investors, high-tech investors moreover, whereas Russia is looking to develop a silicon valley in which it allegedly will invest 3.5 billion US dollars (Humber, 2010). At a forum in St. Petersburg in June President Medvedev enrolled the strategy for the modernization of the Russian economy, towards an economy that is more technologically advanced and less based on oil and gas. Proposed economic reforms included the privatization of state owned enterprises whereas the goal was set to reduce the number of SOEs from 230 to 159, this not including NOCs and other large SOEs that already have private shareholders (Kramer, 2010a)

However up till date, the oil and gas revenues are still crucial to the economy, whereas the sector remains the largest contributor to export revenues, estimated at 49 percent according to the World Bank (figure 2.9) and 64 percent by the US Energy Intelligence Administration (EIA, 2009). The contribution of fossil fuel exports to GDP in 2008 alone were already over 13 percent, at 230.25 billion US dollars (WB Russia, 2010). The share of the entire Russian fossil fuel economy to GDP seizes to increase from 20.5 percent in 2001 (Kuboniwa et al, 2005) to 25 percent today (Abelsky and Ulaeva, 2010).

2.3.4

The political economy of oil and gas in Russia

The political economy of oil and gas in Russia is determined by a precarious blend of domestic political power, economic development and power projection. Oil and gas continue to comprise the

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largest economic resources Russia disposes off and taking into account global trends of increased oil and gas demands IEA (2009) these assets are likely to only become more valuable. The power moreover to ensure access to these resources is shifting from energy consumer states to energy producer states (Gallis, 2006). The control over Russias vast energy supplies is increasingly returning to the state, whereas in 2008 Gazprom and Transneft produced about 85 percent of all gas and 32 percent of all oil. However prices of oil and gas are volatile and subject to speculation especially in times of economic downturn such as the current triggered by the financial crisis of 2008.
Table 2.5 Russian Oil and Gas Profile ((Oil and petroleum in million barrels, gas in million cubic meters) Oil Crude oil production Petroleum production* Petroleum consumption Refinery capacity Proved reserves** Gas Production Consumption Proved reserves*** *2006 figures **billion barrels ***trillion cubic meters 1999 2,218.82 1,301.21 926.23 2,461.93 48.57
Percentage of world total Percentage of

9.22 4.90 3.35 8.43 4.70

2008 world total 3,415.23 12.70 1,685.40 5.58 1,064.34 3.40 2,000.93 6.41 60.00 4.50

589.70 396.81 48.14

24.48 16.43 33.06

662.22 475.70 47.57

21.30 15.24 27.04

Source: Energy Information Agency. 2010. International Energy Statistics Database, (http://www.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm).

The oil and gas sector in Russia is unlike that of Iran and China not the sole domain of state owned organizations. The government however holds major stakes in the sector through a small set of national oil companies Gazprom, Gazpromneft, Rosneft and Transneft as well as through having tight relations and considerate influence in the operations of non-government owned Russian oil companies Lukoil, TNK BP and Surgut-Neftegas. The operations of international oil companies in Russia have become limited since the passing of the federal law concerning natural resources which prohibits foreign investors from participating by more than 50 per cent in ventures for the exploration of hydrocarbon (Proedrou and Frangonikolopoulos, 2010: 85). The state moreover has ownership of the subsoil resources and is the only party that, at times in agreement with lower bodies of government, grants licenses for the exploitation of these resources. (Novikova, 2005: 672).The Russian oil and gas sector has undergone significant changes in the past decade, numerous mergers and acquisitions have reshaped the landscape which has in turn become rather statist. For its supply of oil and gas, Russia heavily depends on pipeline capacity and controls this through the oil and gas pipeline complexes of respectively Transneft and Gazprom, as well as its 31 percent share in the Caspian Pipeline Consortium. Over 70 percent of Russian crude oil production is exported, while the remaining 30 percent is refined locally. The Russian economy has been hit hard by the crisis, especially due to decreases in demand for national resources. Facing a decline in funds [48]

available for investment in national resource exploitation projects, Russian has had to return to the IOCs for further investment in the development of its assets. In June 2009 Prime Minster has invited Royal Dutch Shell to the table to discuss a deal concerning the development of Sakhalin-3 and Sakhalin-4 natural gas projects (Popova, 2009). The need for investment in the oil and gas sector is made clear in the following sentence from the Rosneft 2008 Annual report: An effective and transparent system of corporate governance is essential for the sustainable development of Rosneft, for enhancing the companys social responsibility before all interested parties, and for raising the companys investment appeal (Rosneft, 2009). Significant investments are especially needed for the crucial development of pipelines towards Asia and Europe, projects that are under development are South-stream, for Caspian and Russian gas to Eastern-Europe which is in competition with the non-Russian initialized Nabuco-complex; Northstream for the supply of gas to Northwest Europe; and the Eastern Siberia-Pacific Ocean pipeline to China, Korea and Japan. Although the oil and gas pipeline complexes in its majority are owned and managed by NOCs, respectively Transneft and Gazprom, the odd one out is here is the Caspian pipeline complex. This is a 50 percent Kazak and Russian government owned and 50 percent private owned consortium that develops the Caspian pipeline system which connects the Western Kazakhstan oil field with the marine terminal near Russian Novorossiysk on the Black Sea shores. The pipeline runs through Russia and is thereby the only not fully government owned and controlled pipeline system on Russian soil, whereas Transneft has a 31 percent stake, although 19 percent of the consortium is controlled by friendly neighbor Kazakhstan and 12.5 percent by Lukoil (Caspian Pipeline Consortium, 2010).

The Russian oil and gas sector In the past decade, the Kremlin has tremendously tightened its grip on the oil and gas sector. In 2004 Russia's government effectively renationalized Yukos, when it seized the company's primary production unit, Yuganskneftegaz, and auctioned it off to Rosneft for 9.3 billion US dollars. In 2005 the government boosted its holding in Gazprom to over 50 percent by paying 7.5 billion US dollars for an additional 10.74 percent stake through the state-owned firm Rosneftegaz. Through this acquisition, the state now holds a majority stake in Gazprom, this enables the state liberalize trade in the firms shares in order to attract foreign capital. This materialized with the initial public offering in December 2005. Although Gazprom remains state-controlled, the successful liberalization of share trading has helped the NOC to raise much needed investment funds, which had not been available on the domestic market. The Russian oil and gas sector as mentioned earlier is not the sole domain of NOCs. Although all infrastructure is state owned and managed by Transneft for oil and Gazprom for gas, and Gazprom moreover produces over 80 percent of all Russian gas (table 2.6) and nearly 92 percent of all gas

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produced by Russian oil and gas majors (table 2.6) However both private-owned and state-owned enterprise operate in Russias exploration, production and refining segments. Besides Gazprom and Rosneft three large corporations are active, mainly in oil, these are Lukoil, Surgutneftegas and TNKBP, than there is a set of smaller corporations of which Tatneft, Russneft and Bashneft are the predominant ones. Russneft and Bashneft however have been acquired in 2010 by Russian conglomerate Sistema (Ermakov and Bierman, 2010). International oil companies (IOCs) are also active in the industry either as minority shareholders, whereas BP holds 50 percent of TNK-BP and ConocoPhilips 20 percent in Lukoil (Poussenkova, 2010) or as stakeholders in projects, such as Shell in the development of Sakhalin-3 and Sakhalin-4 natural gas.

Table 2.6 Oil Companies in Russia 2008 (Natural gas in billion cubic meters, crude oil in million barrels, market value in billion US dollars) Company Gazprom Rosneft Lukoil Surgutneftegas TNK-BP Total Russian oil and gas majors NOC percentage in major total NOC percentage in Russia total Oil Production 314.58 776.30 661.44 451.71 503.78 2,707.81 40.29 31.94 Gas Production 549.70 12.38 14.20 14.10 10.10 600.48 93.61 84.88 Market Value 74.55 34.07 26.62 19.65 9.45 164.34 66.09 -

Source: Annual reports of Gazprom, Rosneft, Lukoil, Surgutneftegas and TNK-BP; Poussenkova (2010)

The landscape of the Russian oil and gas sector however is still changing whereas the private companies that still operate in Russia face increasing contestation from the Russian government. After the reintegration of Yukos and Sibneft into state structure, and Gazprom affiliate Gazprom Neft acquiring majority stakes in Sibir Energy, Slavneft and Tomskneft (Gazprom Neft, 2009), more nationalization of oil and gas assets are expected. The acquisition of Bashneft and Russneft by the financial corporation Sistema, is considered a step up to an acquisition of now Sistema owned Russneft and Bashneft business units by Rosneft (Corcoran, 2009). This is fuelled by the talks of ONGC an India NOC with Rosneft and Sistema to explore oil and gas opportunities in Russia (Sharma, 2010). Although the Kremlin not only exerts its influence and increasing grip on the Russian oil and gas sector via its NOCs, the private enterprises that operate on Russian soil are also under influence of the Kremlin, whereas the Kremlin amongst others sets export quotas for these firms. The relationship between the privately owned oil companies and the state is a precarious one, where the state is perceived to always be able to turn towards nationalization. This is witnessed in the recent statement by President Medvedev in response to the BP invoked oil spill in the Gulf of Mexico,

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questioning the firms continuing existence and moreover its future activities in Russia (Keating, 2010), this is not far from a direct threat at the address of BP to nationalize or at least restructure its Russian assets.

The Russian national oil companies

Open joint stock company (OJSC) Gazprom was formed in 1989 as successor to the Soviet Ministry of the Gas Industry, in terms of market capitalization Gazprom is the largest gas company in the world (PFC, 2010) and produces approximately 80 percent of all gas and 9 percent of all oil and gas condensates in Russia. On November 5, 1992, President of the Russian Federation signed a decree on formation of the OJSC Gazprom. Together with its subsidiaries the corporation is referred to as the Gazprom group. The Russian state is a The group is the owner of the gas pipeline system in Russia with a length of over 160,000 kilometer, thereby providing gas to predominantly European markets of which Gazprom fulfills about 25 percent of all gas demand. The company furthermore provides for the refining of circa half of Russian gas and 13 percent of Russian oil, while generating 16 percent of all domestic electricity (Gazprom, 2009a). As from 2009 on OJSC Gazprom holds 95.68 percent Gazprom Neft shares (Gazprom, 2009b). Gazprom Neft is the crude oil and petroleum refinery branch of the Gazprom group acquired in 2005, before this the company was known as Sibneft. OJSC Transneft is the Russian state owned enterprise (SOE) that is owner and monopoly operator of the nations network of oil pipelines. Transneft is established in 1991 as successor to the USSR Ministry of Oil Industry Main Production Department for Oil Transportation and Supplies, Glavtransneft, which was in charge of the Russian oil industry and pipeline system. The join-stock company Transneft ownership structure is composed of 75 percent government shares and 25 percent tradable shares, the Russian government however is the only party with controlling shares. Transneft transports approximately 93 percent of all Russian produced oil through its pipeline system which has a total length of 50,000 kilometers, amongst the worlds largest oil pipeline systems (Transneft, 2010). Through its subsidiary OJSC Transnefteproduct, Transneft also owns and operates Russias only, pipeline system for refined oil products (including diesel fuel, gasoline and kerosene). The overall length of Transnefteproducts system of oil products pipelines is estimated at nearly 20,000 kilometer. Transneft also is 31 percent shareholder of the Caspian Pipeline Consortium. In 1995 OJSC Rosneft was established by Russian government decree, this was the privatization of the state enterprise by the same name. During a state run action of Yukos assests in 2004, Rosneft acquired a controlling stake in, the now fully integrated subsidiary, OSJC Yuganskneftegaz the oil franchise of Yukos, through doing so it acquired Russias second largest oil production complex. Through several stake-takings, acquisitions of assets and an IPO in 2006, Rosneft has turned into Russias largest national petroleum company accounting for more than 20 percent of crude output in 2007. In 2009 Rosneft produced around 2.2 million bpd and refined slightly less than 1

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million bpd, making it Russia's largest refiner, it produces a fifth of Russia's oil and is the largest oil company in the world's largest crude producing country. (Rosneft, 2009),
Table 2.7 Russia National Oil Companies Size 2008 (Natural gas in billion cubic meters, crude oil in million barrels, petroleum product in million tons, turnover in billion US dollars^ and pipelines in kilometers)

Reserves** Natural Gas Crude Oil* Production Natural Gas Crude Oil* Petroleum product* Corporate figures Turnover Employees

Gazprom 33,123.20 21,183.55 549.70 314.58 41.50 105.23 393,600

Rosneft 784.00 17,694.07 12.38 776.30 46.44 68.99 161,912

Transneft" 0 0 0 0 7.11 71,928 47,455

Total Russian NOCs 33,907.20 38,881.62 562.08 1,090.88 87.94 181.33 627,440.00 207,825.00

Pipelines 160,370 0 ^ when converted: 0.0320288 US dollars/RR (16/6/2010) conversion rates " 2007 figures *for Gazprom including gas condensates ** Proved and probable reserves

Source: 2008 Annual reports of Gazprom, Rosneft and Transneft; Gazprom Management Report 2009

Running up to the 2008 election a schism between the Gazprom and Rosneft became a possible reality, whereas Gazprom was related to current President and chairman of Gazprom Medvedev and Rosneft was related to the other runner for the presidency Ivanov Medvedev being the chairman to Rosneft. In November 2006 the chief executive officers of Rosneft and Gazprom signed a cooperation agreement on that is set to end rivalry between the two National Oil Companies (Kramer, 2006). While the two companies are linked with different factions, the Kremlin benefits from this agreement whereas through a cooperation instead of competition between these firms and with the Subsoil law passed prohibiting foreign companies to take majority shares in Russian oil and gas endeavors, the Kremlin can tighten its group on the nations oil and gas sector. Russias foreign policy

2.3.5

Russia in the age of the Soviet Union in the Cold was a superpower, after the dissolution of the union it has fallen from this position. The Russian Federation first suffered an economic crisis, related to the falling apart of the union, which was exacerbated by the economic mismanagement during the Yeltsin days of oligarchs and bandit capitalism. The rising energy prices of the 2000s however have mad

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Russia a resurgent power, a power that has not yet found a place in world politics (Larson & Shevchenko, 2010: 64). Due to the vast size of the country, Russia has interests in several regions although they differ per region which is reflected in the foreign policy. Russia regards the former Soviet states in Eastern Europe, the Caucasus and Central Asia as its backyard and primary sphere of influence. Then there are the neighboring regions of Western Europe and East Asia, each with different dynamics, although both are crucial in its foreign energy policy. Finally the relations with the US are an important element of the Russian foreign policy. For understanding Russian policy one has to understand that the Russian President is the central factor in determining Russias foreign policy course because of the enormous constitutional authority and controlling access to wealth and power (Mankoff, 2008: 42), which has increased as a result of reforms executed under Putin. The interests and preferences of the person in charge of Russia therefore are an important determinant in the foreign policy of Russia.

Between West and East

The collapse of the Soviet Union initiated a short-lived strong pro-Western policy orientation, this however soon changed to a more balanced foreign policy in which Russia sought western cooperation on economic issues, while looking to reassert its influence on the regional and on the global level. Under Yeltsin and also during the first years of Putins presidency, Russia had a low foreign policy profile (Wu, 2009: 118). After the collapse of the Soviet Union, Russia was in bad shape whereas Moscow suffered a significant cut in natural resources, military capability and population due the secession of former Soviet states. The first years of Yeltsin were characterized by a liberal pro-western policy, this however changed in the later half of the 1990s, when the foreign policy focus shifted from Atlanticism to Eurasianism (Wu, 2009: 118). The shift however only materialized to a certain extent in practice whereas Russia due to the dire state of its economy still had no real bargaining chips. Only in 1999 during the Kosovo crisis did Russia show opposition to the West, when it occupied Pristina airport which was not in line with the international agreements (Guardian, 1999). During the presidency of Putin change came to Russia, not only on a domestic political and economic level did Moscow seek to reassert more influence, it also aimed for a greater stance in the world. Exemplar for the position Putin envisioned for Russia in the world was his reference to the break up of the Soviet Union, which he regarded as the greatest geopolitical catastrophe of the 20th century (Lukyanov, 2010: 19). Under Putin Russia aimed to reclaim its place in the world, and was willing to do so by shifting its orientation from West to East, although good relations with Washington were preferred as they are regarded as critical to Russias overall security (Mankoff, 2008: 43). The aim is to remain calm, and except for the 2008 invasion in Georgia, Russias actions show a lack of aggression towards a series of challenges by the US. Challenges like there were the admission of the

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Baltic States to NATO, the support for Kosovos independence from Serbia, the withdrawal from the Anti-Ballistic Missile Treaty and the missile defense project.

Turn to the East

The outbreak of the Color revolutions in the former Soviet from 2003 to 2005, posed a great challenge to Russian foreign policy. The Russian political elite mostly regarded the revolutions as attempts from foreign powers to invade the Russian sphere of influence (Wilson, 2010: 31). In order to role back this influence, Moscow seeks to tighten its grip in its backyard, a key ongoing commitment of Russian foreign policy has been to maintain influence in the former Soviet states (Wilson, 2010: 32). During the Presidential term of Putin Russia foreign policy became more assertive which is reflected in the South Ossetia war, where it sought to roll back western power in its backyard. The frequently returning shutdowns of gas supplies to former Soviet states are also a reflection of this. The shutdowns are partly aimed at enforcing Russias influence as well as demonstrating the ability and willingness of Russia to shut down gas supplies to Europe. Russia's role as a major oil and gas producer allows it to pursue a more aggressive foreign policy. Russia however is operating from a tenuous position as it seeks to enhance its influence over the energy-rich Caspian region and secure demand for its energy exports in Europe and Asia. Therefore it aims to develop alliances. The cooperation with China in the Shanghai Cooperation Organization (SCO) has to be considered in this light. The SCO is aimed at developing a security imposing force in the greater Central Asian region, thereby rolling back the influence of other non-regional powers. In order to do so Russia has also shown increased cooperation with Iran, in which it also expects to hold growing economic stakes as a market for nuclear technology.

Balancing interests

With the ascendance to power of Medvedev came a new official foreign policy concept. This new policy gives more way to Medvedevs vision which is for Russia to pursue a well-balanced foreign policy to defend its interests in a non-confrontational way ensuring Russia sustains its position in the world (Monaghan, 2008: 717). Although under Medvedev Russias foreign policy might again be shifting towards the West, Moscow will remain committed to the great power aspirations. The better relations with Washington have to be regarded in this perspective where the relations will have to be based on a partnership of equals (Mankoff, 2008: 50). The relations with the East will continue to be of great importance, where China remains to be its largest client for fossil fuels in the future and a strategic partner in securing the region and rolling back non-regional powers in Central Asia. While the Russias foreign policy towards Iran is also significant, not only for the development of shared fossil fuel interests but also as political ties with Tehran provide Moscow with leverage towards

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Washington (Larson & Shevchenko, 2010: 65). The development of influence in the region, and in former Soviet states more specifically remains a top priority. This is reflected in the 2010 establishment of a customs union between Russia, Ukraine and Kazakhstan (Kramer, 2010d).

Foreign energy policy strategy

Through strategically applying its energy resources as a foreign policy strategy, Russia seeks to increase its influence and leverage in the region. The political economy of oil and gas in Russia ties in to this, whereas through the state-led NOCs Russia acquires influence in Central Asian energy resources. Through building pipeline complexes it looks to achieves multiple goals. Through connecting the Russian oil and gas pipeline complex with that of Central Asian states such as Kazakhstan it obtains influence whereas it can reroute and market their fossil fuels. While through +connecting its own oil and gas network with that of consumer markets such as China and Europe, it creates more trading capacity for Russian oil and gas as well as for Central Asian fossil fuels. Moreover through creating more linkages with Iran and China it seeks to establish stability in the region. Russian foreign energy policy strategy towards Iran moreover also takes in account the closer cooperation amongst Caspian Sea gas producing nations, as well as between Shanghai Cooperation Organization members, possibly leading to the establishment of an organization some would refer to as an OPEC with bombs (Gertz, 2006). 2.3.6 Concluding remarks on the role of oil and gas in Russia

Developments in the past decade have reassured the control of the economy to the political elite. Through the national oil companies, the sovereign wealth funds and institutions such as the labor union, the Russian political elite are able to exert great power over the productive apparatus and accumulation process in the states. The oil and gas sector play a crucial part in this, whereas the oil and gas revenues contribute a large share to the gross domestic product and moreover fill the sovereign wealth funds. In order to service the gas and oil needs of China, Russia develops fossil fuel production and pipeline projects in its Eastern regions, however to do so it needs access to more capital. In order to service these needs it increasingly cooperates with China, in oil and gas for asset deals. The global economic crisis has pointed out that the source of Russias economic rise is also its Achilles heel. Russia seeks to develop its economy to be higher up the value chain, for which it again needs investment capital. Through Russia has arrived at a point where it seeks to develop both relations with the East and the West which is reflected in its foreign policy. The foreign energy policy strategy of Russia is aims to maximize the leverage of its energy sector in general and fossil fuel sectors especially. Russia increases its influence in the fossil fuel sector of the Central Asian states.

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Russia cooperates with Iran on gas and supplies nuclear technology and gasoline to Iran. While in China and Europe, Russia develops markets for its oil and gas. There are however internal contradictions that could harm Russia in the longer term. While Russias economy is regarded as too reliant on fossil fuels, the fossil fuel sector provides the elite with great power, when Russias economy diversifies this could change the position of the political elite. While Russia develops strong ties with Iran and China, it also fears and competes with the influence of these states. The influence of China in the Central Asian Republics is regarded ambiguously, as China jumped in the void Moscow left after the collapse of the Soviet Union, China through cooperation in the Shanghai Cooperation Organization provided Russia with a new tool for influence in the region. Russia regards the non-civilian nuclear developments of Iran with suspicion, where it does not regard a nuclear power at its southern border as favorable, although the Russian military-industrial complex greatly benefits from the development of Irans civilian nuclear capacity.

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2.4

IRAN

2.4.1

Introduction on Iran

The Islamic Republic of Iran is often considered an authoritarian and belligerent theocracy. This is fuelled by the Islamic Revolution of 1979, Irans rhetoric towards Israel, the violent aftermath of the 2009 elections are facts, the framing of Iran as pertaining to the Axis of Evil, the disputes of Iran with the UN security council concerning its nuclear ambitions and the perception of Islamic law in the West. Of course these are abstractions and although at times factually based, they do not draw a complete picture. The scope of this thesis however only allows for a quick review of the complexities of the Iranian state and society. The perception of Iran as an at least uncooperative nation, whose role in international society moreover is increasingly marginalized in terms of international law due the different rounds of sanctions imposed by the United Nations Security Council, is important. The status of Iran in international society is a crucial factor in the development of Iranian economic and foreign policy, how this is the case will be discussed in this chapter. The year 1979 was a defining year for contemporary state of Iran, whereas this year marks the implementation of the current Iranian constitution, which was preceded by the Islamic revolution. This Islamic revolution took place by a coalition of Islamic, secular, and liberal Islamic social forces. It was the combination of these forces, and not Ayatollah Khomeini and his followers alone, which enabled a mobilization of the masses (Rakel, 2009, 105). This coalition shattered soon after when liberal and secular Islamic force were kept out of power and even though up till his death Khomeini was able to impede major conflicts between rivaling factions to break out, after his demise these divisions intensified and are the antecedents to the current dominant factions in Iranian politics (Rakel, 2009). Irans political and institutional landscape

2.4.2

The main institutions of the Iranian state regime have their legitimacy either in the 1979 constitution, as is the case for the religious supervisory bodies; the council of the guardian, the expediency council and the assembly of experts. Or they find their origin in the 1906 constitution, as is the case for the republican institutions; the legislative, executive and judiciary branches of government. The religious foundations or bonyads make up a third group of institutions crucial to the regime, these are semi governmental economic institutions well connected to the political elite (Rakel, 2009). The premise of the Iranian political system is the velayat-e faqih, or the government of the jurist system which was developed by Ayatollah Khomeini. This system was reinforced in 1988 by adding a new dimension velayat-e motlaqah-e faqih, or the absolute governance of the jurist. In this system the supreme leader which currently is ayatollah Khamenei, is the head of the political system (Rakel, 2009: 108). Through elections held every four years the Iranian people elect the head of state, currently President

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Ahmadinejad and the parliament or Majli. Besides this the Iranians in election held every six years, elect the assembly of experts who in turn appoint the supreme leader. The candidates for the Presidential elections however have to be approved by the council of the guardian which in turn consists of 6 appointed members by the supreme leader and six appointed members by the head of the judiciary branch and approved by the parliament. Although the supreme leader is formally the ultimate authority and has discretionary power over all, in day to day operations the complexity of rule in Iran increases due to the authority that is associated with the different institutional actors. The President resides over domestic policies but has no say when it comes to the military; this is left to the office of the supreme leader (Rakel, 2009). In matters of foreign affairs the foreign Minister and the Presidents office can draft however the supreme leaders office must concur. The intricacies of the political power in Iran are even more complex when taking into account the existence of different factions, whereas officially no political parties exist. Currently four factions can be distinguished (Rakel, 2009: 123); the neo-conservative faction, the conservative faction, the pragmatist faction, the reformist faction. These factions compete for the favor of the supreme leader, while the supreme leader is ensure no side gains too much power whereas this could lead to fractures in the revolutionary consensus (Brumberg and Ahram, 2007: 30). Due to internal dynamics the stance of these factions vis--vis each other as well towards sociocultural, economic and foreign policy has been dynamic. In their search for more power all factions as well as all relevant institutions at some point are related to the nations main source of revenue, the oil and gas sector. Over 60 percent of the governments revenue derives from the fossil fuel sector (Marcel, 2006: 248), whereas the firm is obliged to disburse 25 percent of its profits from crude and when prices are high a deposit to the oil stabilization fund (Brumberg and Ahram, 2007: 30). In effect the majority of all government spending is ultimately derived from money remitted to the national treasury by NIOC. In addition the company accounts for the subsidization of fuel in the domestic market. The in 1999 established Oil Stabilisation Fund manages the returns from the NIOC and currently disposes of 23 billion US dollars. Currently the Oil Stabilisation Fund is being reformed into the National Development Fund which has a greater focus on economic diversification (NIOC, 2010b). These sovereign wealth funds provide the political elite with funds. The religious foundations called bonyads that operate under the supervision of the Supreme Leader are managed by the revolutionary guards, the Pasdarans (Roy, 2007: 129). The parastatal bonyads are governed neither by commercial law nor by public finance (Roy, 2007: 129). The NIOC and the religious foundations provide the political elite with a strong grip over the economy in general and the fossil fuel sector more specifically.

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2.4.3

Irans economy

Table 2.8 Iran Key Economic Indicators

1999 Population M GDP US dollars Bn GDP per capita PPP US dollars Real GDP Growth percent Exports US dollars Bn Imports US dollars Bn Trade Balance 2.00 21.03 13.43 7.60 65.70 55.20

2000 66.40 71.90

2001 67.20 85.50

2002 67.60 114.8

2003 68.20 116.4

2004 68.80

2005 70.80

2006 71.60 222.88

2007 72.40 286.06

2008 73.30 337.34

2009 74.20 358.92

134.00 189.35

5.30 28.35 15.21 13.14

5.80 23.09 18.13 4.97

7.60 28.19 23.79 4.40

7.50 28.24 22.04 6.20

7.10 33.99 29.56 4.43

8,967 4.70 64.37 43.09 21.28

9,689 5.80 76.06 50.02 26.04

10,619 7.80 97.40 56.58 40.82

11,418 6.50 98.41 67.25 31.16

11,478 0.50 70.14 57.16 12.99

Source: Economist Intelligence Unit. 2000 2009. Country Report Iran Economist Intelligence Unit. 2000 2009. Country Profile Iran

After the revolution of 1979 Irans economy was nationalized, thereby substantially reducing the private sector, up till date the government still controls 65 to 70 procent of the economy (Askar et al, 2010). This share however is declining due to the privatization program which will be discussed at a later point in this part. The earlier mentioned bonyads, were created after the revolution to safeguard the Islamic Republic's revolutionary principles and to provide charity to the poor. The economic activities of bonyads now account for some 11 percent of the Iranian GDP (Karbassian, 2000), bonyads enjoy monopolies in certain sectors (Marcel, 2006: 240). As from 1990 on the Iranian economy is directed through five year plans, the trend in these plans is towards a smaller role of the state in managing the economy in favor of more market mechanism (Marcel, 2006: 240). In the past decade only slight shifts have taken place in the economic structure in terms of Irans labor force (figure 2.10 and 2.1). The share of agriculture is still very large as is the share of industry, not only in size of the labor force also in the terms of contribution to GDP (figure 2.12). Heavy industries, especially oil and gas related make up the largest share of its industrial sector, which in turn depends on volume as its source of income, whereas the added value of natural resources and heavy industrial goods is low and moreover volatile due to speculations in the oil and gas prices.

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Figure 2.10 Iran labour force per sector in percentage of total national employment - 1997

Figure 2.11 Iran labour force per sector in percentage of total national employment - 2007

24,35 44,63 30,79

22,80
Agriculture (%) Industry (%) Services (%)

45,10 32,00

Agriculture (%) Industry (%) Services (%)

Source: International Monetary Fund (1999) Country report

Source: International Labor Organization (2010) Laborsta (http://laborsta.ilo.org/

Iran is subject to UN, European Union, and US sanctions as a result of its nuclear ambitions, and as an alleged sponsor of terrorism. Its main trading partners are China, Japan, Germany, Italy, South Korea, and the UAE. With oil output limited by OPEC quotas, Iran has been striving to increase gas production, especially in the South Pars field in the Persian Gulf. In the longer term, Iran also plans to increase oil-refining capacity from 1.5 million barrels per day (bpd) in 2008 to 3 million bpd by 2012. However of total employment the companies under that reside under the Ministry of Petroleum, account for approximately 0.8 percent (Ministry of Petroleum, 2010).
Figure 2.12 Iran value added per sector in percentage of GDP 60,00 50,00 40,00 30,00 20,00 10,00 0,00 1988 1998 2002 2004 2007 Agriculture Industries & mining Services

Source: World Bank (2010) Iran at a Glance 2010 (http://devdata.worldbank.org/AAG/irn_aag.pdf)

Economist Intelligence Unit Country Profile Iran 2000 - 2008

The Iranian economy is in strong need of diversification in order to decrease the dependence on fossil fuel exports. The Iranian oil and gas sector is in need of modernization to optimize the exploitation of fossil fuel reserves. The Iranian energy sector is in need of alternative sources of energy, such as nuclear energy, or more energy efficiency in order to fulfill domestic energy demand without

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endangering export capacity. For all the above Iran requires investment capital, which it has been strapped of due to earlier mentioned sanctions. After the reopening of the upstream oil sector in 1994 (Leverett & Noel, 2006), the international oil companies (IOCs) were the primary investors in the Iranian fossil fuel sector. The regulation in place however, especially regarding the buy-back contracts were not perceived as lucrative by the IOCs even after adjustment in 2004 (Marcel, 2005: 43). As a result Iran has only taken in an approximate amount of 10 billion US dollars of IOC investment in the fossil fuel sector (Leverett & Noel, 2006). Iran needs large-scale investment and technology transfers to develop its fossil fuel sector and while the IOCs do not seem to make vast investments in Iran, Tehran turns to Chinese and Russian NOCs for investment capital and technological expertise. This shift towards the east is exacerbated by the adoption of economic sanctions by the United Nations Security council in June, which imposes more restrictions on the business activities with Iran. In order to increase the attractiveness of investing in Iran, the Iranian government has of recently started to employ the tool of privatization. According to Article 44 of the Iranian Constitution, the economy of Iran is to consist of three sectors: state, cooperative, and private. This article has been amended in 2004 to allow the privatization of the Iranian economy. In 2007, Supreme Leader of the Islamic Revolution Ayatollah Seyyed Ali Khamenei called on government officials to speed up the implementation of the policies outlined in the amendment to Article 44 of the Constitution, which calls for the privatization of staterun companies. According to the Fourth Five-Year Socio-Economic Development Plan (2005-2010), the Iran Privatization Organization (IPO), affiliated to the Ministry of Economic Affairs and Finance, is responsible for setting prices and offering shares of state-run companies on the privatization list to the general public. The Iranian government has announced to decrease state-ownership in the economy by 20 percent in 2015, moreover in order to achieve the goal set in the 20 years outlook plan that ends in 2021, Iran envisages to need to attract 80 billion US dollars of foreign investment in its economy (Tehran Times, 2009c and 2009d). In February 2010 Iran announced to privatize part of its power plants (Tehran Times, 2010c). With the in April announced privatization of over 500 state-owned companies, the IPO expects to raise approximately 12.5 billion US dollars (PressTV, 2010a). The firms that are targeted for privatization vary from carmakers, industrial producers, agricultural companies, financial institutions, power plants, petrochemical firms and airports. Although the government has announced that critical parts of the oil and gas sector will remain in public hands, several oil and gas related companies have been announced to be sold. Iran is looking to privatize several companies related to its NOC, out of which five belong to the National Iranian Oil Company, five are affiliates of the National Iranian Gas Company, and two are related to the National Iranian Oil Refining and Distribution Company nine to the National Petrochemical Company. While the managing director of Iran's National Petrochemical Company (NPC) already announced that all

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shares of the domestic petrochemical firms will be offered to the public in the frame of a holding company in the run of 2010 (Tehran Times, 2009a). Towards the end of 2009, the IPO furthermore announced to privatize 80 percent of the states northern regions exploration rights, including the Caspian region (Tehran Times, 2009b), as well as 40 percent of its stake in the state-controlled Iranian Oil Terminals Corporation, although the ownership of the jetties, metering facilities and storage tanks will still remain in government hands (United Press International, 2009).

The role of energy in the economy of Iran With a rapidly increasing population, of nearly 13 percent in the past decade and a growing GDP per capita (table 2.8), Irans energy consumption is staggering. While investments in its oil and gas sector have decreased mainly due to the economic sanctions, the oil and gas sector is operating increasingly inefficient. In 2009 approximately 97 percent of Iranian energy used was based on oil and gas (figure 2.13). Future prospects seem rather pessimistic if Iran will not quickly deal with the increasing share of its fossil fuels being used domestically, otherwise this will damage the volumes available for export, which would result in a downward spiral.

Figure 2.13 Iran Total Energy Consumption by type

Figure 2.14 Top Iranian Oil Destinations in 2008 Japan 3% 17% 20% China India South Korea EU 8% 16% South Africa Other

19%

17%

Source: Energy Information Administration. 2009. Country Analysis Iran

Whereas in the 1970s the oil and gas sectors share contribution to GDP varied between 30 to 40 percent (EIU, 2008a) predominantly through export revenues, the 2007 share of fossil fuels to GDP is estimated at nearly 24 percent (WB, 2010c) also reflected in figure 2.15. This is contributable to OPEC oil output ceilings, maturity of fields and dated level of technology related decreases in output of oil and gas, increases in domestic consumption of oil and gas as well as war damage to production facilities. In 2007 however oil and gas revenues still provided between 40 to 80 percent of government revenue (EIU, 2008a) and nearly 80 percent of all export revenues (WB, 2010c), reflected in figure 2.20.

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Figure 2.15 Iran Share of Fuel to Export to GDP

80,00% 70,00% 60,00% 50,00% 40,00% 30,00% 20,00% 10,00% 0,00% 1998 2007 Fuel exports as % of GDP Total export as % of GDP Fuel exports as % of Total exports

Source: World Bank (2010) Iran at a Glance (http://devdata.worldbank.org/AAG/irn_aag.pdf)

The exports of oil and gas are for more than 50 percent directed at the Asian states of China, Japan, South Korea and India, while combined with the European Union this is 72 percent (figure 2.14). Expansion of exports to the European Union is difficult due to trade restriction, while the demand for Iranian oil and gas increases in the Asian states especially in China. Because of its geo-strategic position Iran is a vital international player within its region and beyond. Whereas Iran is the only state bordering the Persian Gulf, where approximately 40 percent of the world's energy is transported daily, and the greater Central Asian region which is increasingly turning into the dominant region for gas production and distribution. With its vast quantities of carbon based natural resources, Iran ranks amongst the top three holders of both proven natural gas, with over 15 percent of world total (table 2.9) and oil reserves, with over 10 percent of world total (table 2.9). Given the resources and geographical location, Iran is an energy superpower. However due to the economic sanctions with underinvestment as a result, Irans fossil fuel economy does not live up to its potential, this is amongst others reflected in Irans gas production which is low compared to its resources (figure 2.16). Another example is that despite of the abundance of crude oil, Iran imports gasoline whereas Iran does not have sufficient refining capacity to fulfill the domestic gasoline demands. In 2009 Iran had to import approximately 130,000 barrels of gasoline per day making up circa an 80 percent of all product imports (EIA, 2010). In order for Iran to live up to its potential, Iran needs to invest for which it needs to attract foreign capital, making its economy and fossil fuel sector in particular more appealing to foreign investors is crucial, the privatization of the Iranian economy is an expression of this.

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Table 2.9 Iran Oil and Gas Profile (Oil and petroleum in million barrels, gas in million cubic meters)
Percentage of Percentage of

Oil Crude oil production Petroleum production* Petroleum consumption Refinery capacity Proved reserves** Gas

1999 1,298.31 415.26 439.83 528.52 89.70 57.79 59.81 23.00

world total

2008 1,478.35 623.66 635.47 529.62 138.40 116.30 118.96 26.85

world total

5.40 1.56 1,59 1.81 8.69 2.40 2.48 15.80

5.50 2.07 2.03 1.70 10.39 3.74 3.81 15.26

Production Consumption Proved reserves** *2006 figures **billion barrels ***trillion cubic meters

Source: Energy Information Administration. 2010. International Energy Statistics database, (http://www.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm).

The struggle to increase output, ties into two problems whereas the deterioration in the, mature, oil fields, results in a general decline in Irans oil productivity while there is a lack of investment capital that is needed to introduce new and more efficient technologies. The solution for this is to generate circumstances that are favorable to and thereby induce foreign investment. The impact of the low stance of technology is displayed figure 2.16, which compares the global position of Irans natural gas reserves and production as related to other large gas reserve holding and producer states. While Irans gas reserves are estimated at 1045,66 trillion cubic feet, or about 16 percent of the world total, only Russia (23,4 percent) holds more natural gas than Iran, and only one other country, Qatar (13,8 percent) holds nearly as much gas as Iran. However about 62 percent of Irans natural gas reserves have not been developed yet in terms of production Iran (BP, 2009), which is reflected in the low production level as related to Russia (figure 2.16a).
Figure 2.16 a. Natural Gas Production Top 5 States (Billion cubic meters) b. Natural Gas Reserves Top 5 States (Trillion cubic meters)

700,00 600,00 500,00 400,00 300,00 200,00 100,00 0,00

50,00 40,00 30,00 20,00 10,00 0,00

Russia US Canada Iran Norway
Russia Iran Qatar T urkmenistan Saudi

Source: BP. 2009. Statistical Review of World Energy 2009

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The growing national consumption of fossil fuel resources due to population growth exacerbated by the increased standard of living, constrains the profitability of the sector whereas less oil and gas is available for exports. Investments in the refinery capacity as well as in other aspects of the sector are necessary to increase production levels and thereby allowing for the economically highly important oil and gas exports to remain intact. This in economic terms illogic situation is partly because the Iranian government heavily subsidizes the consumption of electricity and other fuels to its rapidly growing and more intensive energy using population. These large energy subsidies that currently make up around ten percent of the gross domestic product (Brumsberg et al, 2009: 17) have stimulated strong growth in energy demand which is particularly observable in the electricity and transport sectors (Brumsberg et al, 2009:17). The elimination of these subsidies would probably result in more energy conservation and more energy efficiency which would result in lowering energy demand. The downside of this is deemed unfavorable by the state, whereas economic growth could be hampered or civic unrest could break out. Irans nuclear agenda has to be regarded from this perspective as well. The development of nuclear power plants which could contribute to the domestic energy supply has already proven successful to other states such as France where it constitutes about 30 percent (NEA, 2010). However due to the negative perceptions by international powers of Iran, especially as related to Israel, attaining a solid nuclear program will take more time. 2.4.4 The political economy of oil and gas in Iran

All efforts for modernization notwithstanding, so far NIOC has not been able to meet the main goals of the fourth development plan for the oil and gas industry, whereas much of NIOCs strategic planning has already been focused on the three priorities of recovering and rejuvenating older oil fields, maximizing the potential for gas and increasing refining capacity to meet domestic demand. The results of this are barely perceivable whereas the projections for Irans oil and gas industry remain pessimistic NIOC and affiliates remain short of production goals. According some analyses Iran will no longer be able to export oil by the year 2015 (Brumberg and Ahram, 2007). International sanctions and ageing oil fields have made it hard for Iran to raise production, but the Islamic Republic could do more to make investment in the sector attractive for foreign firms. In search for more foreign capital, Iran adopted a policy focused on the privatization of the economy which increasingly includes the oil and gas sector. The vast resources available in Iranian soil pose the state for a conundrum which it seeks to resolve via the operating of these sources through state-owned corporations. The existence of these oil and gas riches provides the government with two juxtaposed demands. Maximize the revenues and profits generated by the exploitation of these resources and commercialization in international markets so to benefit the Iranian national treasury and prolong the current rule. While also safeguarding Irans

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national resources and ensuring the resources serve the nation as a whole, both in terms of sufficient energy supplies as well as in terms of responsibly applying the accrued revenues in order to achieve a diversified economy that will benefit the nation as a whole. The role of the national oil corporation of Iran, NIOC is crucial in the political economy of oil and gas in Iran. The National Iranian Oil Company however has estimated that approximately 70 billion US dollars is needed over the next ten years to repair Irans enfeebled oil infrastructure, and Iranian officials expect foreign oil companies to contribute up to three-fourths of the required investment (Chen, 2008). The ongoing process of privatization is aimed at supplying the fossil fuel economy of Iran with the means to upgrade capacity, thereby supplying NIOC with funds. As the privatization rents are to be spend by the NOC in the fossil fuel sector, the states establishes that it will remain in control of the fossil fuel economy, however with foreign equity holders as partners. These foreign parties however will not be the IOCs, as predominantly Chinese investors are attracted to the opening market of Iranian resources. In 2008 China already was in important trading partner of Iran, in terms of crude oil exports (table 2.21.), the Chinese Iranian intra trade will be discussed in-depth in the third chapter. The Chinese in 2009 invested over 15 billion US dollars in Iranian oil and gas projects9.

The Iranian oil and gas sector

In 1949 the National Iranian Oil Company (NIOC) was established with the aim of performing the exploration, development, production, marketing of Iranian crude oil and natural gas (NIOC, 2008). NIOC and its affiliates are very much intertwined with the Ministry of Petroleum (Marcel, 2006:62). While the state has control over NIOC, the company itself also disposes over methods to influence policy. The technical expertise inherent in NIOC and more importantly absent in the Ministry of Petroleum (MoP) provides the company discretion when it comes to operational policy and strategy. Another way of influencing policy is through seeking alignment with factions in government that rival with those in power (Brumberg and Ahram, 2007: 33), this can result to be effective whereas the supreme leader will always balance out interests of different factions in order to keep his leadership intact. A crucial aspect of relations between the government and the company are the implications of the five year plans for NIOC, whereas the policy aims set in these plans are guiding for the strategies pursued by the NIOCs. In the fifth development plan which covers economic policies for the years 2010 to 2015, the main objectives that have been formulated and translated into policies for Irans oil and gas sector. These policies show a clear overview of what the perceived challenges are of the industries, and thereby NOCs main challenges, moreover how the company envisages tackling them. These policies predominantly describe a focus on energy efficiency, efficiency in operations and
9

In chapter 3.4.2, through adding 2009 Sino Iranian investments

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technology, investments in advanced technologies and human capital, more oriented towards exports, the establishment of a national development fund focused on the diversification of economy, increased cooperation with producer and consumer countries in the region and privatization (NIOC, 2010b). By being the sole developer of Irans vast hydrocarbon reserves the National Iranian Oil Company is considered to have the second largest reserves in the world in term of Total Reserves in Oil Equivalent in 2008, only after Saudi Arabia (OGJ, 2008). NIOC operates under the MoP which has overall responsibility for the country's energy sector. Although officially NIOC is one of four organizations that function under the MoP, NIOC is the predominant body, while the other three are considered NIOC affiliates each handling a specific aspect of the oil and gas industry. This division of labor and sovereignty is undergoing some changes; this however will be discussed later on. Besides NIOC which is involved with oil and gas exploration and production, refining and oil transportation; there is the National Iranian Gas Company (NIGC) which manages gathering, treatment, processing, transmission, distribution, and exports of gas and gas liquids. Furthermore there is the National Iranian Petrochemical Company (NPC) handling petrochemical production, distribution, and exports; and fourthly the National Iranian Oil Refining and Distribution Company (NIORDC) which handles oil refining and transportation, with some overlap to NIOC.

Table 2.10 NIOC Reserves (Oil in billion barrels, gas in trillion cubic feet and total in billion barrels of oil equivalent) 2004 2005 2006 2007 2008 132.74 137.66 136.16 138.22 137.62 969.38 948.19 991.63 993.40 1,045.66 305.00 306.63 312.87 315.20 324.00

Crude oil, NGL, and condensates Gas Total reserves of hydrocarbons Source: National Iranian Oil Company. 2008. Annual Report

Besides the division in terms of functionality there is a division in terms of geography regarding the upstream activities whereas the National Iranian Offshore Oil Co. (IOOC) is in charge of offshore oil fields in the Persian Gulf; the National Iranian South Oil Co. (NISOC) is in charge of onshore oilfields in southern Iran; Pars Oil & Gas Co. (POGC) is in charge of the offshore North and South Pars gas fields and Khazar Exploration & Production Co. is in charge of Iran's Caspian Sea sector. Furthermore there is the National Iranian Tanker Company (NITC) which controls the second largest fleet of tankers in OPEC (EIA, 2010). NIOC and the other affiliates are a moderately large supplier of employment in the state, whereas the group including NIGC, NPC and NIORDC is estimated to have between 120,000 and 180,000 employees (Brumberg and Ahram, 2007), whereas in 2007 the nations workforce consisted of over 21 million people, of whom 6,7 million were active in the industrial sector (ILO, 2010).

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The nature and structure of the Iranian oil and gas sector and the National Iranian Oil Company along with that will change due to the impact of the privatization policy which as of 2009 on is also applied to the fossil fuel economy. However by precluding on the assessment of the economic relations between China, Iran and Russia of the next chapter, the stakes Chinese firms are taking in the Iranian fossil fuel sector seem to indicate that especially non-IOCs are taking part in the privatization process. This suggests the start of a privatization process in which ownership of parts of the economy shift from one government to the next. The implications of this are vast, whereas this would imply even closer relations between China and Iran. Irans foreign policy

2.4.5

Iran is hit hard by the isolation due the economic sanctions; its economy remains dependent on oil and gas, while the fossil fuel sector is highly underinvested and inefficient. As earlier explained this poses serious problems for the future, as oil and gas export revenues might fall to zero and drain the Iranian economy from its lifeline. The economic sanctions imposed by the United Nations Security Council in June 2010 are likely to exacerbate this. However through the cooperation with states in the region and to its east Iran seeks to withstand its isolation from the West. The foreign policy of Iran reflects this inclination towards the East. In the foreign policy of Iran three issues are central, US Iran bilateral relations, regional disputes and the nuclear issue (Barzegar, 2010: 183). The three issues are

interconnected and are reflected in some sort of combination in the foreign policy of Iran.

Iranian foreign policy and the Middle East

The primary interest of Iran in the Middle East is to become the dominant power, with a special focus on control over the Persian Gulf (Roy, 2007: 116), thereby attaining more control over the fossil fuel gateway of the world. The foreign policy of Iran towards the Middle East has switched numerous times, between prioritizing its immediate neighbors and allies or the regional powers. This is reflected in two complementary aspects present in Iranian foreign policy, an alliance building policy that is focused on developing and nurturing relations with likeminded (Shia) regimes and forces in its proximity and an accommodating policy which aims to develop tighter relations with regional powers, currently the Arab states, Egypt, Saudi Arabia and the US (Barzegar, 2010: 181). The neighborhood of Iran is an uncertain one, characterized by failed and unstable states to its east and west, a highly militarized strait in the south and transforming states in the north. Although Irans geography accommodates its defense with mountainous terrain, seas, great rivers and deserts at its borders, the great share of Irans political and economic capacity is allocated to its defense. Security of the region for the Iranian political elite has is regarded as synonymous to national security

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this is reflected in the Iranian security policy of interconnected security, which refers to defense through military engagement (Barzegar, 2010, 180). Faced with the arrival of US troops on both eastern and western borders, Irans foreign policy of the recent years has been most concerned with the challenges posed to sovereign integrity (Barzegar, 2010: 181). While maintaining relations with Egypt and Saudi Arabia and seeking direct relations with the United States, the emphasis of Irans foreign policy is on Irans regional allies like Syria and Hezbollah. This is reflected in Irans main focus however is on developing an alliance building policy with two fronts, a Shia axis and an anti-Israel coalition (Roy, 2007: 117). Through developing linkages between its nuclear program and Middle Eastern contestation to Israel, Iran sought to integrate the nuclear issue in the regional dynamics and thereby develop support for it. (Barzegar, 2010: 173). Through cooperating with the regional allies it seeks to role back the influence of the US. The policies have allowed Iran to develop considerate influence in the region, whereas Hezbollah is an ally of Iran (Roy, 2007: 107), those in power in Syria align themselves with Iran (Roy, 2007: 109) the Hezbollah-Hamas axis (Roy, 2007: 56) moreover links Iran to Hamas, while the new government in Iraq is close to Iran (Roy, 2007: 73). The Shia that are in power in Iraq (Roy, 2007: 2 ) however are not a homogeneous group the two key political Shia actors reflect the primary divide. Where Sistani hails from an Iranian background, al-Sadr is of Arab descent. If the nationalist sentiments between groups that potentially form around the leaders will increase this could have an impact for Irans influence in Iraq (Zweiri, 2008: 116). Stability in Iraq is of importance to Iran, especially as with a secured Iraq, the US will have no more need for a military presence in Irans neighbors soil. As a matter of fact in recent years Iran has already supported the US in a neighboring country, when Iran aided with the operation in Afghanistan in 2001 (Barzegar, 2010:179). Through cooperation Iran seeks to minimize the threat posed by the US in the region, Iran also seeks to avoid direct conflict with the US in Iraq and the Persian Gulf. (Barzegar, 2010, 179)

From West to East

Before the Islamic revolution was oriented towards the West, after 1979 this was no longer the case, when Iran pursued a policy of neither East nor West (Fakil, 2006: 52), seeking independence from Western liberal and Soviet socialist interference. The isolation of the Iran-Iraq war however, turned the Iran right to the West, first the US and then EU. However with the implementation of sanction, the Iran-Libya (Fakil, 2006:52) in particular, shutting the Iranian fossil fuel sector off from operations of foreign companies, unless Iran would stop pursuing the current nuclear agenda and would pay more respect to human rights. Thereby trade and commercial ventures became contingent on social and political reform (Vakil, 2006: 53).

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Reluctant to implement counter revolutionary reforms, the regime Iran started to look for new states that provide access to capital and markets. This heralded the shift in focus from the west to the east, where energy hungry great powers arise. Irans international foreign policy is now oriented towards China, Russia and India where human rights violations and proliferation proclivities are considered practical matters of regime survival (Vakil, 2006, 51). The switch is observable in the policy stance of Iran towards the activities of Russia in Chechnya, Nagorno-Karabakh, and Tajikistan in an approach of accommodation with its northern neighbor (Vakil, 2006: 57), the support of Tehran for the one-China policy (Fars News, 2008b) and the ascendance of Iran to the Shanghai Cooperation Organization as an observer state as well as the issued request for full membership,

Foreign energy policy strategy

The shift from the West to states in Asia, predominantly China, India and Russia, is above all observable in the foreign energy policy strategy of Iran on a number of issues. The securing of gasoline supplies, securing of investment, the development of energy markets and the development of strong energy ties with its neighbors; all these issues involve strategies in which China or Russia participate. All international fossil fuel related activities are developed through the National Iranian Oil Company and its affiliates. Irans foreign energy strategy provides it with the leverage to pursue a non-western foreign policy trajectory. Due to the shortage in refinery capacity Iran is dependent on imports for its gasoline needs, while the boycott decimates the potential suppliers, the Chinese and Russians are less reluctant to serve Iran with the much needed gasoline. In order to service the fossil fuel needs of India and China Iran has established the development of a gas pipeline to Pakistan, which can be extended towards China or India. Currently China seems to most interested and has already offered to participate in the development when the pipeline to Pakistan was finalized in June 2010 (Fazl-e-Haider, S., 2010). The Iranians moreover seek to develop long standing ties with the Chinese national oil companies, through the execution of join projects abroad, as well as in Iran. Tending to energy needs of the Chinese comes with the necessary investments which are crucial for the modernization of the fossil fuel sector and the industrialization of the Iranian economy. As the level of knowhow and technology of the Chinese NOCs are not apt yet to service the Iranian needs, Iran has to develop cooperative ties with its technologically more advanced NOCs in Russia. In 2008 Iran along with Qatar and Russia established a Gas Troika, in which the three states will cooperate for the coordination and implementation of joint projects over the entire gas value chain. The cooperation with its neighbors is another key strategy, currently the NIGC is focusing on Irans neighboring countries whereas as they are regarded as key for the development of gas markets in Europe (NIOC, 2010a) as well as in the Far East. Iran moreover has the intention to increase its international downstream activities, for this purpose the NIOC international subsidiary NICO is to be

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merged with other subsidiaries to be better equipped and more efficient (Naftiran, 2010). NIOC furthermore seeks to exploit its immense gas reserves on international scale, which implies that increasingly attention is paid the transportation to foreign markets, through pipelines as well as LNG shipments. However, currently Irans foreign energy policy strategy is aimed at securing gasoline supplies, investment and market access, through cooperation with especially Chinese and also Russian, Indian and other national oil companies. 2.4.6 Concluding remarks on the role of oil and gas in Iran

The political elite in Iran are on top of the economy, where they control the vast share of the economy predominantly directly through state owned companies, especially in the national oil sector which is the greatest contributor to the gross domestic product, or through the religious foundations. As the result of years of isolations due to the years of war and economic sanctions, Irans economy in general and the fossil fuel sector more specifically are in dire need of modernization. The share of the fossil fuel sector to the general economy has increased, while it increases to be underdeveloped in comparison to its international counterparts. The vast resources offer Iran great opportunities, but before being able to capitalize on this it needs to invest a great deal in the modernization of its fossil fuel sector. Not only the economy put Iran in a tenuous position, the regional instability adds to this. Irans foreign policy is aimed at seeking regional cooperation in order to reassure stability and moreover control in the region. While on an international level the Iranian foreign policy seeks to assure cooperation with powers that wont pose demanding restrictions on its domestic policies and moreover are able to provide it with access to capital, markets as well as support on the nuclear issue. The Iranian foreign energy policy strategy is aimed to leverage Irans natural riches in return for this. Internal contradictions however might pose problems to Iran in the near future. The domestic energy demands are especially challenging. If nothing changes in the domestic energy supply and in the efficiency of the fossil fuel sector in Iran, the domestic energy consumption will leave be larger then production, thereby depriving the country of its greatest source of revenue. Another contradiction is in the state society relations, while the population of Iran is in general affluent and educated more then other states in the region, the rule over society is not democratic. Although the current situation is rather stable even when regarding the riots and demonstration after the 2009 elections, the future could very well change the nature of the state society relation towards a more democratic one.

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2.5

THREE STATES WITH COMPATIBLE INTERESTS DRIVEN BY FOSSIL FUEL NEEDS

China, Russia and Iran are all states shaped by developments in the previous century, the Islamic revolution in Iran, the collapse of the Soviet Union for Russia and the rise and rule of Mao in China. As a result of these developments the three states share an authoritarian regime, whereas liberal democracy has not infused these societies. The states are characterized by many institutions that contribute to the execution of their rule which have in all circumstances resulted in a dominance of the state in various domains. The political elite in all three states have control over the economy, although in different ways they all share the great influence of state owned corporations, which makes the main economic actors part and parcel of the state. The oil and gas sector in China, Russia and Iran is characterized by the domination of national oil companies. The fossil fuel sectors are crucial in all three states. The sectors significantly contributes to the gross domestic product of producer states Russia and Iran; the fossil fuel sector in China has to assure a continuous and increasing supply of fossil fuels, which it lacks domestically, to keep the economy in motion. The political economy of oil and gas ties these states together. On the one hand China with heaps of capital seeks to invest in foreign oil and gas projects as a means to control the inflow of sufficient oil and gas. On the other hand Iran and Russia face considerate shortages for the development and modernization of the fossil fuel sector and diversification of the general economy. The importance of the fossil fuels is also reflected in the foreign policy strategies of the three states. Whereas Russia and Iran seek to use their vast resources to fulfill their interests, be it a greater exertion of influence in the region or access to capital and markets. While China applies the accumulated foreign reserves as lubricant to gain a foot on the ground in fossil fuel producer states, with the aim to on to secure long term delivery contracts and control over production. The national oil companies, are the main exponents in the economic relations related to energy, whereas all transaction develop through them and all is facilitated by the state, funds, relations and diplomatic support. As a result the destinations of the states seem to be increasingly interwoven.

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3. CHAPTER III THE RELATIONS BETWEEN CHINA, IRAN AND RUSSIA

3.1

INTRODUCTION

The previous chapter has presented a picture of three states in which fossil fuels are of crucial importance. While Russia and Iran boast enormous fossil fuel reserves, China is in ever more need of fossil fuels because of its growing energy demand. While Russia and Iran moreover are in need of capital to invest in development and modernization of their fossil fuel sector and the diversification of their economy, China disposes of tremendous foreign reserves it is willing to spend and lend. These compatible needs result in the development of trade and investment relations between the national oil companies of these states, which as previously described dominate their respective fossil fuel sectors. This chapter focuses on the energy relations between these states, to be precise the trade and investment relations directed by the national oil companies between China, Russia and Iran. In this chapter moreover, a description is presented of the way the energy relations contribute to and fit within the pattern of increased diplomatic, economic and security relations between China, Russia and Iran. By doing so the chapter charts the development of an emerging coalition between these states, structured around a transnational network of information, technology and capital between China, Russia and Iran. The chapter discusses the following questions. What are the main issues in the relations between these states, what are their shared interests? How do the diplomatic relations between the states develop? How do the trade and investment relations between the national oil companies of the states develop? How do the security relations between the states develop? What is the impact of this on the shared interests of these states? What are the impediments to the development of increased relations? The second part of this chapter focuses on the main issues in the dealings between these states, thereby paying attention first to the historical context of the relations and then to the specific issues. These issues or shared interests are energy security, regional security and the nuclear issue. The third part describes the development of the diplomatic relations between the states. In the fourth part the trade relations are described, thereby paying attention primarily to the trade relations between the national oil companies and in a second instance to the development of non-fossil fuel related trade. In the fifth part the investment relations are described, again first and foremost those of the national oil companies and then the non-fossil fuel related investments. After this the sixth part describes the development of security relations. The seventh part relates the described developments in the relations between the three states to the context. In this part attention is paid to the impact on the earlier described shared interests as well as to the impact of bilateral relations on the multilateral context. The eighth part describes the possible impediments to the further development of relations and cooperation between China, Russia and Iran. The final and concluding part of this chapter presents an answer to [74]

the question: How do the trade and investment relations between Chinese, Russian and Iranian national oil companies relate to the broader diplomatic, economic and security relations, and how is this manifested?

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3.2 3.2.1

THE MAIN ISSUES IN THE RELATIONS OF CHINA, RUSSIA AND IRAN History on the relations

The geographic proximity of China, Russia and Iran has given way for a vast trajectory of historical relations between the states. These have established a precedent for the current increased relations especially because of the historical, perceived, spheres of influence that are the result of different imperial eras all three states have gone through. The relations between China and Russia are rich with disputes over borders and spheres of influence, so are those of Russia and Iran, while the Sino Iranian relations are less imbued with conflict and have predominantly a commercial signature. The late nineteenth and the twentieth century has posed numerous challenges to the Sino Russian relation; the annexation of Sakhalin by Russia, the independence of Mongolia supported by Russia and the worsening of the USSR China relations during the cold war. In the previous century Russia and Iran have had several conflicts as well, especially the interference of Russias imperial arm in the constitutional revolution and the soviet invasion of northern Iran. The collapse of the Soviet Union has given room for new relations between both Russia and Iran with the establishment of states in the southern Caucasus, establishing a frontier between the states. In the post-Soviet era the relations between China and Russia have also improved. Distrust and conflicting interests are common in the relations between China, Russia and Iran, their shared interests increasingly urge them to overcome the differences and take a unified approach to cooperate in the pursued of these interests.

3.2.2

Regional security issues

The regional security issues that concern China, Russia and Iran predominantly concern rolling back the influence of non-regional powers, the US first and foremost as well as reducing the influence of transnational crime, terrorism and separatism. To counter these issues the states not only take bilateral action, whereas the acknowledgement of these shared regional security interests is reflected in the establishment of the Shanghai Five in 1996. The Treaty on Deepening Military Trust in Border Regions that forms the basis of the Shanghai Five is the first expression of a modern attempt to the multilateral approach of the security of the region surrounding Central Asia, China, Kazakhstan, Kyrgyzstan, Russia and Tajikistan. Increasingly prevalent issues in the relations between China, Russia and Iran are the Iranian nuclear issue and the security of energy supplies in the region.

The nuclear issue

As Iran seeks to decrease its dependence on fossil fuels for the increasing domestic energy demand, the development of nuclear energy is crucial to Iran. Russia and China backing of this however grows

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more and more complex. Iran not only has vast reserves of fossil fuels that, of which China is in need, the state also boasts a substantial population with an increasing wealth, which creates a growing market place for Chinese and Russian exports. At the same time both China and Russia seek to develop an industry of nuclear technology, for which a nuclear energy powered Iran provides a convenient market place. The crux is the potential development of Iranian nuclear weapons; this perspective puts the pressure on the topic and makes it in international security issue. Although China and Russia openly support the development of Iranian civil nuclear capacity, a nuclear weapon armed Iran is perceived with caution by both states, especially as this could trigger a nuclear arms race in the Middle East.

Energy supply security

The Persian Gulf it the most fossil fuel reserve rich region in the world, whereas the Persian Gulf states of Iran, Iraq, Kuwait, Saudi Arabia, Qatar and the United Arab Emirates jointly dispose of 59.1 percent of global crude oil reserves and 39.7 percent of global natural gas reserves (BP, 2009). The predominant form of transport for oil and gas to China is overseas. In order for fossil fuels to pass from the Caspian Sea and Persian Gulf to China, the shipments have to pass several disputed choke points, primarily the Hormuz strait, also referred to as the king choke point (Adams, 2003: 57) where 40% of all worlds overseas oil trade is taking place (EIA, 2008). Securing the Persian Gulf and the Strait of Hormuz became a top priority for the US after facing the invasion of Iran by its Cold War rival the Soviet Union in 1979. The policy of the US, known as the Carter doctrine (Levy, 1979: 1008) was that the vital interests of the US in the Persian Gulf have to be protected by any means necessary, including military force. The militarization of the region was the result; the heritage of the Carter doctrine today is that the Persian Gulf is a highly militarized region, by security forces of regional and non-regional powers. Most of Chinas fossil fuels are transited through the Strait of Malacca, where 80 percent (EIA, 2009) of crude oil imports currently must pass en route to China. The straight of Malacca is a maritime corridor that is considered critical to the US, both for the deployment of its naval vessels, security of trade and the fighting of terrorism (Reuters, 2010a). As a result of this the US has increased its military presence in the region, which could at time be used strategically against China, along the lines of blocking the passageway for shipments to China, it is for this reason that China seeks to decrease its depends on crude oil import via the Malacca strait. The predicament of dependency for inflows of fossil fuels on chokepoints such as Malacca and Hormuz is not easy to overcome and will remain for to be so in the near future. The development of an elaborate pipeline complex connecting China, Russia and Iran could alleviate some of the dependence on the chokepoints.

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3.3

DEVELOPMENT OF THE DIPLOMATIC RELATIONS BETWEEN CHINA, RUSSIA AND IRAN

3.3.1

The trajectory of recent diplomatic relations between China and Russia

The majority of the diplomatic relations between China and Russia consider the coordination of energy related activities and cooperation on regional security policy strategies. In December 2004, Russia's Industry and Energy Minister Khristenko offered CNPC a 20 percent stake in Yuganskneftegaz (Xinhuanet, 2005), this however never materialized, as Rosneft acquired Yuganskneftegaz.. In 2004 Premier Wen Jiabao visited Russia and in October of the same year President Putin visited China. During the meetings Russia and China settled long-standing border issues and furthermore agreed to have joint military exercises in 2005. These military exercises, marked the first joint large-scale military collaboration between Russia and China since 1958 (Gundzik, 2005). China's relations with post-Soviet Russia took an even more cooperative turn when in 2006 President Putin visited Chinese President Hu Jintao in Beijing. During this meeting the leaders signed 29 agreements (Chan, 2006). In October 2009 Russian Prime Minister Putin paid a high profile visit to China. During this visit, Gazprom and CNPC signed a memorandum of understanding for the supply of Russian gas to China. (Eurasia Energy Observer, 2009). During this visit Putin furthermore signed trade and investment deals reportedly valued at 4 billion US dollars, embracing oil, gas, raw materials and engineering. Under which agreements leading up to the gas deal between Gazprom and PetroChina of December that year (Wong, 2009). In addition, the two sides recently agreed on a ten-year program of cooperation between Russian regions in the Far East and neighboring regions in China, which envisages the extraction of Russian raw materials and their processing with Chinese assistance. (EIU, 2009b). In a recent meeting between President Hu and prime-Minister Putin in May 2010, both leaders emphasized the need for cooperation on combating terrorism, separatism and extremism. President Hu stressed that as strategic cooperative partners, China and Russia share extensive interests on many major issues. Putin stressed that Russia is willing to strengthen pragmatic cooperation with China in all areas and expand the scope of cooperation, so as to constantly deepen the bilateral strategic and cooperative partnership (China Daily, 2010b).

3.3.2

The trajectory of recent diplomatic relations between China and Iran

Diplomatic relations between China and Iran are painted black, at least in the sense that black is the color of oil and virtually all diplomatic relations seem to be a step up to the closing of new energy deals between both states.

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In 2000, President Khatami granted the China National Petroleum Corporation (CNPC) an 85 million US dollars contract to drill 19 wells in existing natural gas fields in Southern Iran. This was followed by a 13 US dollars million oil contract between the two in 2001 (Dooraj & Currier, 2008). The extents to which the diplomatic activities of China are aimed at securing energy are witnessed in the approach of China to the Iranian nuclear issue. The opposition of China to UN sanctions in Sudan (Asia Times, 2005) could very well be interpreted as a sign of Beijings determinacy to oppose the imposition of multilateral sanctions on an energy-producing state in which Chinese companies operate. China has expressed at several occasions to regard the bilateral relations between Iran and China as important, in April 2010 the foreign Minister of China Bingguo stressed the strategic importance of Sino Iranian ties, moreover that bilateral relations should be further promoted (IRNA, 2010). The intricacies of Chinese position towards Iran and the nuclear issue, have been described by senior Chinese diplomats and party officials described as seeking to balance a range of interests. Mainly the ability to secure its supply of oil, regional stability, the protection of international norms such as non-proliferation, the security of China's northwest border with a significant Muslim population, the development of Chinese-Iranian relations, the development of US-Chinese relations, and the positions of the European Union and Russia (Asia Times, 2005). Although the recent imposed sanctions by the UN Security Council contra Iran (MacFarquhar, 2010), which were not vetoed by China and Russia, might lead to thinking otherwise. Iranian President Ahmadinejad has valued the resolutions as a piece of worthless paper, he also stated that "there is no reason to control or weaken the relationship; the main problem is with the United States, that must be resolved" (Graham-Harrison & Master, 2010). After the declaration by Ahmadinejad, the Chinese leadership announced that it was to pursue its relations with Iran (Peoples Daily, 2010a). China has furthermore denounced further imposed unilateral sanctions by the US (Wu, 2010).

3.3.3

The trajectory of recent diplomatic relations between Russia and Iran

Iranian and Russian relations are a mixture of mistrust and empathy, whereas Russia would prefer not to have a nuclear power on its southern borders and Iran remains wary of Russia after Tsarist and Soviet empires dealings with regard to Persia. Although on the other hand both states reject extraregional foreign influence, especially of the US, in the region as well as in the domestic affairs of both states. The role of both states in the stability of the region, the nuclear development of Iran and the shared interests related to fossil fuels and the possible institutionalized cooperation regarding this dominate the agenda of the diplomatic relations between both states. In 2007 Presidents Putin, during his visit to Tehran expressed his desire for a deeper relationship between the two countries moreover stressing the need for closer cooperation on security

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issues and deeper economic ties (Fathi, 2007). During this visit, which took place under the summit of the five Caspian Sea nations, Putin stated, We should not even think of making use of force in this region. This statement can be interpreted as a reaction to military threats posed by the Bush administration towards Iran (Dorraj and Currier, 2008). Acting on this statement he announced that Moscow considers an OPEC-like cooperation with Tehran on the sales of Irans natural gas (Meyers, 2007), this refers to the in 2008 established Gas Troika between Iran, Qatar and Russia (Gazprom, 2008). Russian Energy Minister Shmatko stated in July 2009 that it is "much better to cooperate with Iran in construction of nuclear power plants in order to ensure the transparency of Irans nuclear program. Shmatko went on to say that Irans nuclear energy sector represented a "significant market" for Russia (FarsNews, 2009). In October 2009 Moscow moreover has proposed to establish IranianRussian joint-ventures for the enrichment of uranium, to which Iran agreed (Erlanger and Landler, 2009). The proposal aimed to resolve the conflict between the Islamic Republic and the West over the nuclear activities of Iran. In November 2009 however Iran already drew back from the agreement (Heinrich, 2009). The impositions of a new round of UNSC sanctions against Iran in June 2010, which was not vetoed by Russia, might result in a temporary reset of diplomatic relations, especially as prime Minister Putin announced to indefinitely freeze missile sales to Iran, only days after voting in favor of the new sanctions (Haaretz, June 11 2010). However the situation remains ambiguous at best as days before voting on the UNSC sanctions, Russian prime-Minister Putin made a point to say that the United Nations sanctions against Iran over its nuclear program should not be excessive, should not put Iran's leadership nor the Iranian people in a tricky situation that creates barriers on the way of development of Iran's peaceful nuclear energy (Shamir, 2010). Cooperation between both states moreover would be mutually beneficial especially when seeking closer ties on gas affairs, either through the Gas Troika like coordination of volumes or on the level technological and capital support.

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3.4

TRADE RELATIONS BETWEEN CHINA, RUSSIA AND IRAN

The Chinese going out strategy is aimed at securing energy supply and moreover at becoming less dependent on few suppliers, the developments in its trade relations with Russia and Iran need to be regarded from this perspective. In the following a description is presented of how the trade relations have developed between the three states. In table 3.1 the bilateral trade figures between China, Russia and Iran are displayed, the development of the trade in the past five years has grown steadily. The decline in trade Russian trade, with China and Iran is attributable to the impact of the global economic crisis on the domestic economy of Russia, rather then to indigenous. The inter-trade of China, Russia and Iran encompasses more than energy related produce. An especially relevant aspect of this intratrade is the trade in arms; this however will be discussed in a consecutive part of this chapter, when discussing the military and security relations between the three. This part thence focuses predominantly on energy related trade.
Table 3.1 China Russia Iran trade Billion US dollars 2005 China - Russia China - Iran Russia - Iran 29.00 11.00 1.00 2006 33.40 12.00 2.20 2007 48.16 15.00 3.00 2008 57.00 20.00 3.70 2009 38.80 27.00 3.00

Source: International Monetary Fund Directory of Trade Statistics; Blagov (2010); Dorraj and Currier (2008); Reuters (2010b); Tehran Times (2006).

3.4.1

The development of Sino Russian trade

Fossil fuel trade In 2005 Moscow agreed to increase its electricity exports to China, to 800 million kilowatt hours in 2006, thereby more than doubling its 2005 supply. Following an export stop of Russian electricity to China as from early 2007, due to a dispute, in 2009 Russian suppliers exported about 900 million kilowatt-hours (kwh) to China. Russian energy companies now reportedly aim to export 60 billion kwh by 2020 (Blagov, 2010). This took place after both sides finalized a deal initiated in 2006, regarding future exports of electricity. In 2002, plans for this pipeline received a boost when Moscow pledged to invest 2 billion US dollars in an oil pipeline running from the Siberian city of Angarsk to Daqing in northeastern China. (Asia times, 2005) In 2005 Chinese banks provided 6 billion US dollars in financing for Rosneft's acquisition of Yuganskneftegaz, the deal was secured by long-term oil delivery contracts between Rosneft and the CNPC (Gundzik, 2005). Oil transports from Russia to China have reached 10 million tons in 2005, increasing to 15 million tons in 2006.

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So far all Russian oil is exported to China per railway, however in 2005 talks started concerning the construction of an oil pipeline from Siberia to northern China (Asia times, 2005), as part of Eastern Siberia Pacific Ocean pipeline (ESPO pipeline). This seems to take the Russian plans that date back to 2002, to a new stage. In 2008 Transneft and China National Petroleum Company agreed to build a spur line to carry 15 million tons a year, or 300,000 barrels per day, between the countries' trunk pipelines (Moscow Times, 2009) This deal will help China to achieve a more diversified inbound distribution of natural resources. Due to the increased trade between China and Russia, China has surpassed Germany as Russias largest trading partner in 2009, with bilateral trade reaching nearly 39 billion US dollars in 2009. The building of the Eastern Siberia Pacific Ocean (ESPO) oil pipeline will increase the trade and is projected to reach China in 2012 and begin carrying a million barrels a day. Exports to Asia are then expected to make up for nearly a quarter of all Russian crude (Kramer, 2010b). With the changing of distribution channels from railway to oil, Russia is already planning a new use of the potentially freed up railway capacity, where it aims to develop overland trade from its far east to its west. In 2009 oil supplies from Russia to China amounted to 7.8 percent of Chinas total oil imports, up from 6.5 percent in 2008 (Blagov, 2010). In December 2009 Gazprom and PetroChina signed an agreement on the principal conditions for delivery of gas from Russia to China; the final deal is to be struck in September 2010. (Rianovosti, 2010). According to Gazprom President Miller, future exports could amount to 70 Billion Cubic Meters per annum. In comparison Germany, Gazpromss largest European customer imported about 37 bcm in 2008. The first gas is expected to flow in 2014 although the full potential of 70 bcm is not near yet, whereas crucial infrastructure still needs to be developed, which CNPC can finance through oil and gas for equity deals is it did earlier with Rosneft and Transneft (EEO, 2009). The recent decline in Sino Russian trade is predominantly attributable to Russias negative economic growth, as the result of lower demand for imports and lower production capacity for exports, this however will most probably no more than a temporary downturn in an otherwise upward development.

Non fossil fuel trade

The trade relations between China and Russia go beyond that of fossil fuels, although they make up a lions share, Sino Russia trade covers spaceflight and aviation, nuclear power, mechanics and hightech industry. (China Daily, 2007).Through the signing of trade agreements, China and Russia have secured the diversity of the trade between the countries. These deals have a clear quid-pro-quo alloy, whereas the trade deals are often aimed to aid the industrial development of one another. The 2009 deals cover agreements on natural gas and petroleum oil, transportation, nuclear technology and the aerospace industry (People Daily, 2009).

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3.4.2

The development of Sino Iranian trade

Fossil fuel trade China has also become an active participant in the development of Iranian Caspian Sea oil and gas, aiding the modernization of its facilities in Neka and other regions. China is supportive to Irans attempt to bring Caspian oil and gas through pipelines to the southern Iranian ports for overseas transport to Asia and Europe. In 2006 China already surpassed Germany as Irans largest trade partner followed by other EU states. In 2007, Iran- China trade volume increased by 27 percent and reached 15 billion US dollars (Dorraj and Currier, 2008). In 2008 Iran exported nearly 150 million barrels of oil to China, contributing 15.8 billion US dollars, which equals over 75% of all Sino Iranian trade in that year (Fars News, 2009a). China has also signed an estimated 120 billion US dollars worth of oil deals with Iran over the past five years (Fars News, 2010b).In recent years economic relations between China and Iran have increased, whereas a number of Chinese firms are involved in major construction projects while China has signed an estimated 120 billion US dollars worth of oil deals over the past five years. Despite the sanctions already in place, two-way trade between China and Iran grew 35 percent last year to a total of 27 billion US dollars (Fars News, 2010). The trade of fossil fuels however is not one way whereas in 2009 Zhenhua Oil and CNPC supplied China with gasoline (Sampson, 2009), for reasons similar to the later discussed gasoline supplies from Russia to Iran, where Iran lacks refinery capacity. In September 2009, China increased its gasoline supply to Iran to one-third of total Iranian gasoline imports (Blas et al, 2009). In April 2010 a subsidiary of CNPC exported 600,000 barrels of gasoline to Iran, worth 110 million US dollars, while Unipec, the trading company of Sinopec and Sinochem confirmed the shipment of 250,000 barrels to Iran (PressTV, 2010b). In June 2010 Iran has finalized a 7 billion US dollars gas pipeline deal to export natural gas to Pakistan. The two states have signed an export contract that commits Iran to supplying its eastern neighbor with natural gas from 2014. China has shown interest in building a pipeline through Pakistan carrying Iranian gas to China (Fazl-e-Haider, S., 2010).

Non fossil fuel trade

China is also extensively involved in non-oil and gas trade with Iran. The non-fossil fuel exports of Iran to China predominantly consist of raw materials such as iron ore, polyethylene, aluminum, copper, marble, chrome ore, cast iron, lead, concentrated licorice, and sulfur (Tehran Times, 2010a).

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3.4.3

The development of Russian Iranian trade

Whereas both states boost vast fossil fuel reserves the fossil fuel trade between both states remains at a minimum, although due to Irans shortage of refinery capacity, Russia exports gasoline to Iran. In 2009 Iran was the largest trading partner of Russia in the Middle East, total trade between Iran and Russia however was only 11 percent of all China Iran trade. The size of trade notwithstanding, economic relations between Russia and Iran are crucial especially in relation to Irans nuclear ambitions, this however will be discussed under the investments heading. Trade between Russia and Iran is predominantly one way, towards Iran, whereas Russian exports of ferrous metals, cars and arms, which made up 93 percent of 2009 bilateral trade with Iran (Reuters, 2010b). Russia furthermore exports consumer goods and foodstuffs (Vakil, 2006: 57). In 2010 the states have signed deals to expand trade in the agricultural and telecommunications sector (Tehran Times, 2010b).

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3.5

DEVELOPMENT OF THE INVESTMENT RELATIONS BETWEEN CHINA, RUSSIA AND IRAN

Chinas going out strategy that has resulted in increased energy related trade between China, Iran and Russia is also determining for the mutual investment patterns between these states. Whereas Beijing has urged its national oil companies (NOCs) to make use of the global economic downturn (Chen, 2010: 46), which barely affected China especially not its purchasing power in terms of foreign reserve, as a result the acquisitions of Chinese NOCs have surged in the recent years. The mutual investments of the three states go beyond the realm of Chinas energy security, whereas there is a nuclear and a gas dimension to the trade between Russia and Iran, underneath a description of the developments is presented.

3.5.1

The investments relations of China and Russia

Fossil fuel sector investments

China actively seeks to secure its energy supply from Russia, oil, gas and electricity alike. It invests in pipeline construction, supplies loans in exchange for fossil fuel delivery contracts and moreover has started to invest in Russian NOCs as well as in different oil exploration and production projects. In December 2004, Russia's Industry and Energy Minister Viktor Khristenko offered the CNPC a 20 percent stake in Yuganskneftegaz. However as the liquidation of the company developed into a different direction, the deal did not materialize. However in 2005 Chinese banks provided 6 billion US dollars in financing for Rosneft's acquisition of Yuganskneftegaz, the deal was secured by long-term oil delivery contracts between Rosneft and the CNPC (Gundzik, 2005). At the initial public offering (IPO) of Rosneft in 2006 CNPC acquired a total of shares worth 500 million US dollars (ChinaDaily, 2006). In 2006 Rosneft and CNPC agreed upon a deal which involves the establishment of two joint ventures, one for oil producing in Russia and one for oil refining and retail sales in China (United Press International, 2006). In the same year Rosneft and Sinopec struck an agreement to jointly explore oil wells in the Russian republic of Udmurtia, through the acquisition of Udmurneft from TNK-BP on 51 percent Rosneft, 49 percent Sinopec basis (Rosneft, 2006) In 2007 Rosneft and Sinopec signed a deal involving the acquisition of Venineft, the then owner and operator of the Sakhalin-3 project, Rosneft was attributed a 74.9 percent stake in the company and the remaining 25.1 percent of shares went to Sinopec (Rosneft, 2007). In 2009 Rosneft obtained a 20-year, 15 billion credit from the Chinese Bank of Development , which in turn resulted in a long-term agreement on annual delivery to China of 66 million barrels of oil in 20112030. (Rosneft, 2009) For the financing of Russia's first pipeline to Asia, a 600,000barrels-per-day route that will have a link to the Pacific as well a spur to China, Rosneft and Transneft signed a deal in 2009 to borrow the money from China Development Bank (CDB). The deal includes a

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loan of 15 billion US dollars to Rosneft and 10 billion US dollars to Transneft, in exchange the Russian NOCs will supply 15 million tons of oil to CNPC for 20 years, starting in 2011 (Rosneft, 2009b). The investments in Russia help China to achieve its goal to secure sufficient energy supplies, not only through delivery agreements moreover through active participation in the exploration, production and distribution.

Non fossil fuel sector investments

Although the investments of China and Iran in the energy sector dwarf those in other sectors, the two states do have ongoing investment relations in logistics, agriculture, telecommunications, banking and insurance would also be extended (China Daily, 2009). The two states in support of each others economic develop seek to increase cross-border investments to machinery manufacturing and industrial chemicals. The investment relations between the states have been hard hit however by the global economic crisis (RIA Novosti, 2010).

3.5.2

The investments relations of China and Iran

Fossil fuel sector investments

The investment pattern between China and Iran is primarily one way, from China to Iran. These investments China makes through its NOCs are aimed at securing energy supply very similar to Russia. Due to the in chapter two described Iranian need for investment, lacking western investment partners as the result of economic sanctions, the consequent privatizations strategy of Iran, which plays directly into the hands of the Chinese. In 1997, CNPC began negotiations with the National Iranian Oil Company (NIOC) regarding a joint venture for offshore oil exploration in Iran as well as in third countries. In 1999, Chinese shipbuilders signed contracts valued at 400 million US dollars to build oil tankers for Iran (Chang, 2001, p. 237). In 2000 later, Iranian President Khatami visited China and signed a proposal for bilateral energy cooperation that included oil exploration joint ventures (Peoples Daily, 2000, June 22). Amongst these deals were a contact granted to the China National Petroleum Corporation (CNPC) to drill 19 wells in existing natural gas fields in Southern Iran (Dooraj and Currier, 2008). In June 2003, President Hu signed an agreement to build a 3,100-kilometer oil pipeline from Kazakhstans Aktyubinsk field to Xinjiangs Tarim basin in northwest China, where it will link into an existing pipeline network (Dreyer, 2004, p. 236). This pipeline will increase its annual flow to 20 million tons of oil in 2010, when the second stage of construction is completed (Du, 2007, p. A3). The China-Kazakhstan pipeline is the first cross-border pipeline used by China (Cornelius & Story, 2007).

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In March 2004, Chinas state-owned oil trading company, Zhuhai Zhenrong Corporation, signed a 25year deal to import 110 million tons of liquefied natural gas (LNG) from Iran (Gundzik, 2005). In October of the same year, Sinopec signed a 25 year deal, valued at 100 billion US dollars, that provides China with 150,000 barrels per day of crude oil and 250 million tons of LNG from Irans Yadavaran oilfield (China Chemical Reporter, 2004). In 2006 the Iranian government and CNOOC signed a 16-billion US dollars natural gas deal, regarding potential LNG exports of 1.3 billion cubic a day and the development of Iran's Yadavaran oilfield (Jones, 2006). Sinopec signed a 2.6 billion deal in 2007 to develop the onshore Yadavaran field, with initial production of 85,000 b/d after four years, which is projected to rise by 100,000 b/d in the second phase of development (Sampson, 2009). In 2007 Iran said China's Sinopec would invest around 2 billion US dollars under a deal signed on Sunday to develop the huge Yadavaran oil field (Hafezi, 2007). In 2008 China National Petroleum Corp. (CNPC) has signed a deal to acquire a 70 percent stake in developing the onshore North Azadegan oil field in Khuzestan, in South-western Iran for 2 billion US dollars (Dyer, 2009). China has shown interest in the lengthening of the Iran Pakistan gas pipeline, which has been discussed at the highest level in 2008 between former Pakistani President Musharraf and President Hu (RIA Novosti, 2008). China has issued a loan of nearly 700 million US dollars for Pakistan to construct a port at Gwadar (Chen, 2010: 46). Gwadar is located on the southwestern coast of Pakistan, close to the Strait of Hormuz on the Persian Gulf and just 72 kilometers from Iran. In 2009 CNPC signed a 4.7 billion US dollars deal to develop Phase 11 of the giant South Pars gas field, replacing France's Total as the major partner. (Agence France Presse, 2009). As of 2009 CNOOC is active in exploration at the North Pars field. (Sampson, 2009). In 2009 Beijing has also increased its intake of Iranian crude oil, with most of China's imports being handled by Zhuhai Zhenrong. In 2009 NIGC and a Chinese consortium signed a 3.39 billion US dollars for the an annual production of 10.5 million tones liquefied natural gas in the Islamic republic's South Pars field (Agence France Presse, 2009b). The signing of a Memorandum of Understanding between Sinopec and Iran in order to finance oil refinery projects to the value of 6.5 billion US dollars was another development in 2009 (EIU, 2009b). Non fossil fuel sector investments

The investments of Chinese state owned corporations in Iran are broader than the fossil fuel sector alone. Norinco, a Chinese states owned industrial conglomerate that amongst others is active in construction, has taken part in the expansion of the Tehran subway system while Chinese automobile and television manufacturers have opened factories in Iran (Leverett & Bader, 2005: 190192). In 2008 China has also announced to increase its activities in Iranian mining sector, in the mining and

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storing of titanium (Fars News, 2008a). In May 2009, China and Iran signed of on a number of agreements in economic cooperation totaling 17 billion US dollars. The agreements concern the Chinese assistance in the Iranian construction sector, the development of Irans railway system, the hosting of joint trade meetings and the establishment of an Iranian trade center in Xinjiang province (PressTV, 2009b). China is already active in the Iranian construction sector through aiding in the building of dams, ports, shipyards, airports, as well as in the development of the mining and the fossil fuel industry infrastructure (Tehran Times, 2010a).

3.5.3

The investments relations of Russia and Iran

Fossil fuel sector investments On the energy front, Russian oil companies, while not as advanced technologically as their Western counterparts, have the capability to increase the productivity of the older Iranian fields and develop new ones as they are found. In 2008 at a meeting with Iranian President Ahmadinejad and Gazprom President Miller discussed setting up a joint venture for oil and gas exploration and production in Iran and building transport and refining infrastructure, as well as discussing the supply Russian gas to northern Iran (Lowe, 2008). During this meeting representatives of the Qatari fossil fuel industry were also present, whereas during this meeting the three nations, Iran, Russia and Qatar established the Gas Troika (Gazprom, 2008). The Gas Troika aims to coordinate the implementation of joint projects covering the whole value chain, and the coordination of energy policy. Together the three states possess over 50% percent of the world natural gas reserves (BP, 2009). Gazprom has been active in the South Pars Field as from 1997 on and now aims to participate in the construction of an Iranian LNG plant using gas from the South Pars field. Gazprom also seeks to participate in the construction of the Iran-Pakistan pipeline (Pousenkova, 2010: 119). In 2008 NIOC and Gazprom have signed an agreement for the development of the North Azadegan oil field and a joint venture for the development of the South Pars gas field. Gazprom will moreover participate in the transfer oil from the Caspian Sea, swapping of Russian gas, technology transfers and the construction of a refinery (Payvand, 2008). In 2009 Iran has invited Gazprom to invest in a pipeline to connect Oman and the Caspian region (Eurasianet, 2009). Gazprom Neft has signed an agreement to start the development of the Iranian Azar and Changuleh oil fields (Moscow Times, 2010). The imposition of the economic sanctions on Iran in June 2010, have not halted the economic relations between Russia and Iran. As Russia and Iran will sign a road map which outlines their longterm energy cooperation (The Star, 2010). The energy cooperation pact reflects several deals, amongst which a deal for developing NIOC gasification technology, Russian oil Minister Shmatko furthermore states that whenever the demand is made clear, Russia is willing to deliver gasoline to Iran (Reuters,

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2010b). Both aspects are crucial whereas technology transfer and gasoline imports are essential to Iran, while the development also shows how Russia plans the deal with the sanctions.

Non fossil fuel sector investments Other than investing in fossil fuels, the bilateral investments of Russia and Iran also relate to Irans development of nuclear capacity. Russia has been the front runner in the development of Irans nuclear program, as it has been involved from the mid 1990s on (Vakil, 2006: 57). This is reflected in the construction of the Bushehr nuclear power station (Reuters, 2010b), where Moscow has built continuously and provided key technical guidance to Iran. Russia moreover has been involved in the training of 1500 Iranian nuclear scientists (Robinson, 2009).

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3.6

DEVELOPMENT OF THE SECURITY RELATIONS BETWEEN CHINA, IRAN AND RUSSIA

3.6.1

Bilateral security relations

China Russia In 2001 China and Russia signed the bilateral Treaty on Good-Neighborly Relations, Friendship and Cooperation, which marks the beginning of a new chapter in Russian Chinese security relations. The agreement regards arms and technology transfers by Russia and the resolving of a long-disputed border (Verbitz, 2006). Moscow and Beijing agreed to hold joint military exercises in 2005. This marks the first large-scale military exercises between Russia and China since 1958 (Gundzik, 2005). In 2009 China and Russia announced to hold over 25 joint maneuvers, thereby emphasizing the strategic element of their partnership (Halpin, 2009). The security cooperation between the two states have increased substantially in the past decade, while this seems only to be increasing as President Hu in June called for an increase in economic and military cooperation with Russia (Pronina, 2010).
Table 3.2 Size and source of arms exports to China Million US dollars 2000 Russia France Switzerland Ukraine UK Germany Israel Italy Total 1771 75 65 33 30 13 28 2015 2001 3081 69 65 67 40 14 28 3 3366 2002 2581 67 65 64 30 12 2819 2003 2031 62 65 5 30 14 2207 2004 2831 92 65 35 30 27 3080 2005 3224 89 65 84 30 19 3511 2006 3527 73 65 122 30 14 3831 2007 1248 68 65 58 30 6 1474 2008 1246 76 65 58 30 6 1481 2009 401 62 65 30 30 6 595 Total 21941 733 650 556 310 131 56 3 24379

Source: Stockholm International Peace Research Institute. 2010. Arms Transfers Database, (http://www.sipri.org/databases/armstransfers)

The increased cooperation on a security level is complementary to the arms trade between Russia and China In the ten years running up to 2009, China imported for nearly 22 billion US dollars in Russian arms (table 3.2). According to the head of Russia's armed forces Kvashnin, the defense industrial complex of Russia supplies the latest technologies to China (Asiatimes, 2005). Although in recent years this is changing due to the formation of Chinas domestic weaponry industry. Not surprisingly the steep decline in arms exports to China impacts the Russian armaments industry. Rosoboronexport Russias largest weapons exporter has revealed that its arms exports to China were falling. Chinas share in Russian arms exports fell from nearly 20.7 percent in 2008 to nearly 9 percent in 2009 (table 3.2). China has cut its arms imports, whereas it shifts its focus to military technology transfers and resorts to the domestic market for the development of arms (Blagov,

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2010). The Chinese arms industry has increased its export capacity with over 300 percent in 10 years (table 3.3). China Iran

Since the 1980s, Beijing has sold Tehran a large amount of military equipment as well as dual-use technology for the manufacture of nuclear, biological, and chemical weapons (Chang, 2001 p. 237). Beijing has supplied Tehran with advanced missiles and missile technology since the mid-1980s. In addition to anti-ship missiles, it delivered cruise missiles and assisted in the development of longrange ballistic missiles. The past ten years show a steady supply directed by Beijing to Teheran (table 3.4). Chinas assistance included the aid with the development of Iran's Shihab-3 and Shihab-4 missiles (AsiaTimes, 2005). The security relations between Iran and China resolve around the supplies of weapons, nuclear technology and associated training, although state officials announce the increase in security relations, they do not yet extend into the realm of military cooperation.

Table 3.3 Size and source of arms exports from China Million US dollars 2000 Pakistan Iran Bangladesh Egypt Myanmar Sri Lanka Sudan Namibia Venezuela Kuwait Other Total 64 63 9 3 32 26 77 272 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total 295 282 256 78 79 99 143 209 686 2191 83 111 88 90 63 81 77 77 77 810 2 6 1 184 54 10 266 12 45 59 59 14 24 24 24 261 43 5 44 32 76 2 205 14 2 10 17 10 8 53 146 14 95 2 14 4 14 143 9 66 66 141 14 27 41 41 123 26 23 24 99 12 33 67 5 42 142 76 51 42 547 496 515 632 282 306 599 412 544 870 4928

Source: Stockholm International Peace Research Institute. 2010. Arms Transfers Database, (http://www.sipri.org/databases/armstransfers)

China has moreover been involved in the Omid satellite project (Asia Times, 2005), which was launched in 2009. China has been accused of circumventing sanctions on Iran by selling dual use metals to Iran, which could be used for the manufacturing of weapons such as long-range nuclear missiles (Simpson & Solomon, 2008). The export and aid of China, in the development of the Iranian military capacity is likely to increase. In 2009 it was reported that Iran, in its quest for an advanced air defense system, has shifted its hopes from Russia to China. China owns a replica of the Russian S-300 (PressTV, 2009a), the weapon subject of Irans trade hassles with Russia.

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Russia Iran

In 2006, both the CSTO states and Iran were holding war games, in reaction to the growing militarization of the region by the US, through deployment of troops in Azerbaijan (Chossudovsky, 2006). The Deputy Director of the Russian Federal Organization for Military and Technical Cooperation Foumin has announced in 2008 that Russia and Iran are looking to increase joint military cooperation, with the aim of bringing greater stability to the region (Xinhuanet, 2009). In 2009 Russia and Iran have held joint naval exercises in the Caspian Sea according to a leaked report and confirmed by sightings (Julian, 2009).
Table 3.4 Size and source of arms exports to Iran Million US dollars 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total 343 296 95 86 14 14 389 267 14 14 1532 63 8 1 415 83 87 15 1 482 111 116 75 16 1 0 414 88 114 1 289 90 27 1 133 63 1 78 81 1 470 77 1 344 77 1 91 77 1 91 810 257 162 39 10 0 2807

Russia China North Korea Ukraine Belarus Germany Pakistan Total

Source: Stockholm International Peace Research Institute. 2010. Arms Transfers Database, (http://www.sipri.org/databases/armstransfers)

The bilateral security cooperation between Russia and Iran has other characteristics then joint operations alone, whereas Russia is the most important weapon supplier to Iran. Russia supplied over half the weapons supplied to Iran in the period from 2000 and 2009 derive from Russia (table 3.4). Russia has sold Iran the Tor-M1 air defense missile systems and helped train Iranians in the use of the Tor-M1 systems in 2005 (World Tribune, 2010). Russia has supplied ballistic missile technology, chemical and biological programs, and also a range of lucrative contracts for aircraft, jet fighters, helicopters, submarines, tanks, and air-defense missile systems to Iran (Vakil, 2006: 57). Friction however has been building between Moscow and Tehran over a proposed sale of S-300 anti-aircraft missiles to Tehran, a contract that Russia has suspended in 2009. After the imposition of UNSC sanctions in Iran in June 2010 Russian Prime Minister Putin stated that (Haaretz, June 11 2010) no further deals concerning missiles would be executed with Iran. Most recent developments seem to suggest that Iran is shifting to China for its supply of armaments, due to Russias hesitations to supply Iran, which is also reflected in the origin of arms imports to Iran (table 3.4). Although it might now seem that Russia is influenced by international pressures to seize its arms exports to Iran, in recent

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years Moscow has already proven not to take international law as totally rigid by not adhering to UNSC sanctions.

3.6.2

Multilateral security relations

The multilateral security relations between China, Russia and Iran have been in a process of development in the past decade whereas all three (to an extent) participate in the Shanghai Cooperation Organization (SCO). Within the region the states are part to other security organizations whereas Russia cooperates with Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, Belarus and Armenia in the Collective Security Treaty Organization (CSTO). CSTO cooperates with Iran in order to increase the regional security (PressTV, 2009c). The SCO is primarily a regional security organization, albeit aimed predominantly at the nontraditional security threats of terrorism, separatism and international crime. Extensive arms trades from Russia to China and Iran, as well as from China to Iran add to these relations. In 2001 the Shanghai Cooperation Organization (SCO) was established in Shanghai between China, Russia, Kazakhstan, Uzbekistan, Tajikistan and Kyrgyzstan, as a follow up to the Shanghai five which was established in 1996 without Uzbekistan. The SCO charter focuses on the development of mutual trust the consolidation of multidisciplinary cooperation in the maintenance and strengthening of peace, security and stability in the region to jointly counteract terrorism, separatism and extremism in all their manifestations, to fight against illicit narcotics and arms trafficking and other types of criminal activity of a transnational character, and also illegal migration to encourage the efficient regional cooperation in such spheres as politics, trade and economy, defense, law enforcement, environment protection, culture, science and technology, education, energy, transport, credit and finance, and also other spheres of common interest (SCO, 2001). The regional cooperation intended with the foundation of SCO thus seems to go beyond regular security cooperation, whereas it focuses directly at the threats of non-state actors and it seeks to cooperate on deeper economic ground. This economic, cooperation is widened by the ascension of Iran, India and Pakistan as observer states in 2008 and Mongolia already in 2004 as well as by the acceptance of Belarus and Sri Lanka as dialogue partners. In 2007 moreover at a SCO summit Russian President Putin called for an "energy dialogue, integration of our national energy concepts, and the creation of an energy club" (Eurasianet, 2007). All energy and economic security cooperation notwithstanding, there is a also hard security dimension to SCO as displayed in the joint military operations, such as in 2007, the SCO has pursued joint security programs more actively in recent years, including frequent military exercises, although it seems unable to act aptly to recent turmoil in Kyrgyzstan (Kramer, 2010c).

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3.7

IMPACT OF THE RELATIONS ON THE SHARED INTERESTS

The impact of the relations however go beyond their bilateral nature, whereas for example arms trade between Russia and Iran, influences the trade of arms between China and Iran. This is what Jervis revered to as (1997: 573) In a system, the fate of the units and their relations with others are strongly influenced by interactions at other places we cannot understand systems by summing the characteristics of the parts of the bilateral relations between pairs of them and at earlier periods of time. Therefore after reviewing the bilateral relations between these states on the different levels, they will now be placed in the larger context and their impact on the constellation of relations as a whole will be considered. Parallel with the development of increased energy and trade relations between the national oil companies of China, Russia and Iran, the relations on diplomatic, general economic and security level have also increased. This part provides the impact of this on the relations between China, Russia and Iran on different shared issues of interest.

3.7.1

Cooperation on economic and energy issues

The Chinese, Russian and Iranian NOCs develop growing mutual cross-border trade and investment relations. Chinese NOCs are increasingly investing in the development of Russian and Iranian fossil fuel projects; Iranian and Russia NOCs deliver higher quantities of fossil fuels to China on a yearly basis; Russian and Chinese NOCs deliver petroleum to Iran, it can hardly obtain elsewhere due to sanctions; the NOCs of all three states develop cooperation on infrastructural projects such as crossborder pipeline networks, between China, Russia and Iran. These growing cross border trade and investment relations between the national oil companies (NOCs) of China, Russia and Iran result in the development of a network, centered on fossil fuel exploration, production, refinery and distribution activities, in which the main actor are the NOCs. The research of De Graaff (2010), a network analysis of non-triad national oil companies from 1997 to 2007, also reflects these findings. In her study De Graaff describes the development in strength and size of relations between five selected national oil companies (NOCs), amongst which are NIOC, CNPC and Gazprom and international oil companies (IOCs). Although the result from her study suggest that the NOCs are becoming more entangled in the network of IOCs as well, from the graphs that depict the network size and strength (appendix 1) the increase in size and in number of interrelations between NIOCS, CNPC and Gazprom is clearly visible. The non-energy related trade and investment relations between China, Russia and Iran also give witness of considerate increases, although the impact of the recent global economic crisis did hamper the trade and investment involving Russia.

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3.7.2

Cooperation on regional security issues

Through both the bilateral and the multilateral approaches to security in the region between China, Russia and Iran, the states are able to jointly address several security issues. An important shared interest is to increase the military cooperation and capabilities in order to control the region from interference, of terrorists, separatists and non-regional powers. This is reflected in arms trade and training, covertly and openly, as well as in the joint military exercises such as the war games. While the regional cooperation also serves domestic interests, whereas China for example can benefit from cooperation with Iran in relation to the problems with its Muslim minority in Xinjiang. However the security cooperation reflects also specific converging interests, in order keep the region from destabilizing as in the case of the nuclear issue of Iran, or the security of fossil fuel supplies.

Pipeline complex

The national oil companies of China, Russia and Iran, are involved in the development of a crossborder pipeline network that links the fossil fuel sectors of these states. The investments and developments are numerous. In the gas pipeline complex important developments include those of Turkeminstsn towards Iran and China, as well that of Iran to Pakistan. Turkmenistan holds the fourth largest gas reserves in the world (BP, 2009) and has developed linkages in the pipeline network between China, Russia and Iran with the inauguration of two pipelines, thereby not only linking itself but also linking the China, Russia and Iran. The Turkmenistan-China pipeline through Kazakhstan was initiated in December 2009. (RIA Novosti, 2009), by 2012 this pipeline will deliver 40 billion cubic meters of gas per year, which is more than half of Chinas present gas consumption (table 2.2). In January 2010 Turkmenistan connected to Iran with the inauguration of the Dauletabad-Sarakhs-Khangiran (DSK) pipeline (Bhadrakumar, 2010) with a capacity of 20 billion cubic meters. Through the development of the Iran Pakistan gas pipeline, which will likely be extended to China, another connection between the Caspian production system and the Chinese market place is created. While in Russia the Eastern Siberia Pacific Ocean pipeline that is being constructed will contribute to the servicing of Chinese oil demand. While the Kazakhstan China pipeline which is yet another source for Caspian oil to Russia. The interconnectedness of the pipeline moreover allows for the directing of oil and gas from different sources to different destinations, thereby slowly creating an alternative for at leas part of the highly securitized maritime transports of fossil fuel.

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Nuclear issue

In their diplomatic and security relations, the states have become more attentive to the interests of the other states, which results in the development of compatible foreign policy approaches to specific issues. The approach of China and Russia to the UNSC sanctions also needs to be regarded from this perspective whereas Russia and China have quite possibly accepted to the sanctions, and influenced heavily the final set of sanctions, in order to ensure no worse unilateral US sanctions were imposed, which still happened, this however now is disputed because it goes against UNSC policy. The development of Irans nuclear capacity is also of interest to China and Iran as they seek to benefit from the development of Irans civil nuclear program, which provides an outstanding marketplace for their industries.

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3.8

IMPEDIMENTS TO THE FORGING OF A COALITION

What could prevent the rise of a coalition consisting of Russia, Iran and China from materializing? Amongst the biggest threats are the domestic development of contender forces, the rise of alternative energy sources, internal strife between Russia and Iran or China and Russia and the inertia of the cooperation between these states and the challenges to economic integration. The amalgamation of different social forces can result in a bottom-up revolution changing the entire structure of the states. This threatened to happen in Iran in 2009, in the period leading up to the presidential elections and afterwards when the by the opposition supported candidate Moussavi lost the election and the rule of Ahmedinejad was prolonged. In China instances of protest and contestation also arise, although the repressive powers seem to deal with this quite aptly. The revolution from below however is looming in both states. In Russia this does not seem to be the case, whereas the people seem to be in support of a state model that is tilted towards authoritarianism. If a democratic revolution is to materialize in Russia this needs to happen through direction from within the elites, the repressive apparatus of the Russian regime however has shown to be adequate in stopping this from happening, the dealings with former oligarch and Yukos president Chodorkovski can be regarded as an example of this. The growing attention paid to triple-bottom-line business practices, sustainable energy use, climate change regulation, energy efficiency, the creation of associated industries, moreover the aims of states to be involved in these industries with the aim of obtaining competitive advantages, as well as the unpredictability of innovations in alternative energy. These are all developments that could infuse a switch in energy use, resulting in declining energy price levels, bringing down economic rents of fossil fuel activities and investments thereby endangering the basis of the materializing coalition between Iran, China and Russia. The limited scope of economic transactions between Iran, China and Russia, the trade in natural resources and weapons present the vast majority of cross-border economic activity can potentially pose challenges to the extent and practice of economic integration. There are no long term gains for China to be attained through economic cooperation with Russia and Iran, other than securing access to resources and to a lesser extent markets. The economic relations are most likely to remain structural of nature focused predominantly on the extraction of natural resources; with smaller trade relations based in arms trade and nuclear activities. In an effort to prevent this colonial pattern of trade from becoming structural, recent agreements provide for Russian-built nuclear power plants in China and cooperation on ventures ranging from nanotechnology to non-military helicopters (Menon, 2009:123). The result of this might very well be successful for the diversification of trade and investment relations between the two states; however for the bulk of technology and machinery China turns to Japan, EU states and the US (Menon, 2009: 123).

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Struggles internal to the coalition might also occur, as is witnessed with the freeze in trade relation between Russia and Iran, and the occasional inability to agree upon contractual conditions between China and Russia which at times result in, Russias weapon of choice, bringing supplies to a halt. Whenever Russia uses this weapon against Belarus, Poland or Ukraine no serious repercussions can be expected, however in the case of serious aggravation and endangerment of energy security China might react otherwise. The incapacity of the states to react upon violence and external influence in their region, poses another threat to the forging of a coalition between the three, whereas the SCO has shown to be hesitative in times of violent conflict, as witnessed in the reluctance to interfere in an internal ethnic conflict in Kyrgyzstan (Tissdal, 2010), with regional radiation. If one of these threats indeed occurs, this will pose a challenge to the emerging coalition. The competing interests of the US in the region and the possible outbreak of conflict between Iran and the US or China and the US are another factor of uncertainty. The rivaling influences between the US and China, Russia and Iran in the region will be thoroughly discussed in the following chapter.

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3.9

DEVELOPMENT OF COALITION CENTERED ON A CROSS-BORDER NETWORK

The diplomatic relations between China, Russia and Iran are the common starting point for new national oil company (NOC) endeavors, whereas often meetings between high-ranked government officials are the scene of new deals between the national oil companies. Through the increased relations, increased absorptive capacity in case of minor disloyalty seems to develop. This is demonstrated in the non-vetoes of Russia and China on the United Nation Security Council (UNSC) sanctions imposed on Iran in July 2010, which have been more or less discarded with most Iranian rhetoric being aimed at the perceived illegitimacy of the sanctions. In their diplomatic relations, the states become more attentive to the interests of the other states which results in the development of compatible foreign policy approaches to specific issues. This is reflected in the Russian and Iranian support of the one-China policy and the Russian and Chinese support of the Iranian leadership after the derailed election of 2009, as well as in the approach of China and Russia to the UNSC sanctions which seems to have been aimed to decrease the impact of these sanctions on Iran. In the mutual economic and especially energy relations between the three states, China is the powerhouse, the driving force of trade and investments with Russia and Iran. Trade and investments between both states and China show tremendous growth, while trade and moreover investment between Russia and Iran has the potential to take off as well whenever breakthroughs take place in the nuclear activities of Iran, i.e. when nuclear power plants become reality, as well as when the formation of a gas price through production volume regulating institution merges. Until then Russia and Iran have too little to spare and invest in extensively. The security ties between the states also seem to deepen which is demonstrated and intensified by the creation of the Shanghai Cooperation Organization and the ascension to the organization of Iran as an observing member. The increased economic dependency, in terms of capital investments and energy supplies also seem to be inductive for increased security cooperation in order to jointly address stability and security, domestically as well as regionally. Aside from the multilateral security cooperation China, Russia and Iran also show strong bilateral security cooperation, in the form of joint military trainings and missions, and the development of capacity through arms trade and training. Although from the inquiry in this chapter it is hard to establish the extent to which the growing trade and investment relations between the Chinese are causally related to the increased relations between the three states on the other levels. The chapter does show that these increasing cross-border trade and investment relations contribute to the development of a network between these states that in turn contributes to the tightening of the relations between China, Russia and Iran. As a result a greater interdependency is created which induces more relations, as is witnessed in the Sino Russian economic relationship, where deals are struck to support domestic economic development of the states. While at the same time the states develop multilateral cooperation capacity which is reflected in the establishment of the Shanghai Cooperation Organization by China, Russia and the Central Asian

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states, moreover the admission of Iran as an observing member to this organization; as well as in the cooperation between Iran and the Collective Security Treaty Organization in which Russia and former Soviet states participate. The multilateral cooperation between these states is not only aimed at the development of security aspects, they furthermore cooperate on energy and other economic issues thereby creating more spill-over. Through all these activities a cross-border network is developing between China, Russia and Iran based on investment, trade and security relations. Through their growing common interests that result from this network interdependence a coalition between China, Russia and Iran centered on the cross-border network is taking shape.

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[101]

4. CHAPTER IV POWER PROJECTION OF THE RELATIONS BETWEEN CHINA, IRAN AND RUSSIA

4.1

INTRODUCTION

The previous chapter has provided a description of the trade and investment relations between the national oil companies of China, Russia and Iran. The chapter moreover has established how these traded and investment relations influence the diplomatic, security and broader economic relations between the states. The compatible interests of China, Russia and Iran regarding their energy, economic and security needs have results in a growing interdependence between these states on all the levels. The relations form a network of cross-border trade, investment and security relations. This network form the basis of a coalition between three states that cooperate in the pursued of domestic and regional interests. This chapter is an analysis on the geopolitical impact of the increased cooperation between China, Russia and Iran. The chapter provides an account of the geopolitical impact in terms of the capacity of China, Iran and Russia to pursue their interests as put forward in their foreign policies. Moreover, how that pursuit is influenced by the increased relations between these states. In this chapter the focus lies on the military power projection and the ability to project economic power. The chapter discusses the following questions. What is the power projection of China, Russia and Iran? What is the capacity of China, Russia and Iran to project economic power? What are the impediments to the pursuit of Chinas, Russias and Irans foreign policy interests? The second part of this chapter describes the power projection of the three states, which refers to their military capabilities individually and through cooperation on a multilateral level. Moreover attention is paid to how the developing relations between the states impact the power projection. The third part describes the implications of the increased relations between China, Russia and Iran in terms of their ability to project economic power through trade, investment and cooperation. The concluding part of this chapter provides an answer to the question, what is the geopolitical impact of the developing coalition between China, Russia and Iran?

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4.2

THE POWER PROJECTION OF CHINA, RUSSIA AND IRAN

Following the definition in the outline of the thesis, power projection refers to the overall capability of a state to develop an infrastructure of influence over distance, through treaties and alliances, which provides the ability to sustain and develop interests far afield (Scott Thompson, 1987: 1 8). In short, the power projection of a state is the ability to through military capacity obtain foreign policy interests. The development of a cross-border network between China, Russia and Iran can increase the power projection of the states in two ways. The trade, investment and security relations can contribute to the development of domestic economic and military capacity in these states, which can result in greater individual power projection capabilities. While the increased cooperation between these states can also result in the development of multilateral approaches to security, thereby increasing the power projection of the coalition as a whole. The foreign policies of Russia, China and Iran all reflect considerable interest in the region. The regional interests of China are reflected in Chinas foreign policy in a set of concepts: the oneChina policy refers to the illegitimacy of the Republic of China and the persuasion of other states not to acknowledge its sovereignty; the regional security policy that aims towards collective security; energy diplomacy executed through the going out strategy; and peaceful development which aims at not confronting other powers in the development trajectory. The Russian interests in the region are reflected in the foreign policy aims of: maintaining influence in the former Soviet states; rolling back the influence of non-regional powers through regional cooperation; the non-confrontational way of ensuring Russias role in the world; and the development and strategic use of fossil fuel markets in the East and West. The Iranian interests in the region are reflected in its foreign policy interests of: becoming the dominant force in the Middle East and imposing stability to the region; developing cooperation to secure its nuclear program, the supply of gasoline and the access to foreign investment; rolling back the influence of the US. Although all three states have their specific interests, for a great part their interests coincide. Developing a stable region from the Middle East, through Central Asia, to East Asia, without nonregional powers; the security of access to fossil fuel markets and reserves; moreover the preferred nonconfrontational, or at least stability maintaining way of doing so. In the execution of all these policies, China, Russia and Iran face the influence of the US in the region.

4.2.1

US power projection in the region

In the Cold War the US has build up an unprecedented and unparallel military in terms of capabilities. This military advantage allowed to the US to engage in several wars such as the second and third Gulf War in 1991 and 2004, the Balkan conflict in 1999 and the operation in Afghanistan in 2001. The US army however is costly, in terms of technology and technological advancement, and in terms of

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operational costs when dispatched. The military activities of the US cost the treasury dearly, especially in times when the economy is retracting. With all the deployments the US military might just have about reached its peak, where it will be hard to engage in more conflicts at the moment. The activities of the US in the region that is comprised by Russia, China, Iran and the in between countries is numerous. The deployments in Afghanistan and Iraq, military bases throughout Central Asia, the Middle East and the Far East, and the naval activity in the Persian Gulf as the heritage of the Carter doctrine, make the region a highly active region for a non-regional power. Although the deployments have different reasons, varying between control over access and supply of resources to the combating of terrorism and the toppling of unfriendly regimes. The power projection of the US in the region faces the regional powers China, Russia and Iran with a challenge to the pursuit of their foreign policy interests.

4.2.2

Comparison of the military capabilities

For an analysis on how the US power projection influences China, Russia and Iran in the pursuit of its foreign policies, a comparison of their capabilities in terms of expenditure and size.

Table 4.1 Military expenditures In million US dollars and percentage of GDP

2000 China 31,200 1.8 Russia 29,700 3.7 Iran 7,409 3.8 Total 68,309

2001 38,400 2 33,000 4.1 8,175 4 79,575

2002 44,400 2.1 36,600 4.4 6,148 2.5 87,148

2003 48,500 2.1 39,000 4.3 7,195 2.9

2004 53,100 2 40,600 3.8 9,109 3.3

2005 59,000 2 44,200 3.7 11,296 3.8

2006 68,800 2 48,400 3.6 12,233 3.8

2007 77,900 2 52,500 3.5 10,158 2.9

2008 86,200 2 58,300 3.5 9,174 2.7

2009 98,800 2 61,000 4.5 .. ..

94,695 102,809 114,496 129,433 140,558 153,674 159,800

US

377,228 380,271 426,982 485,975 529,673 554,930 563,549 578,340 616,073 663,255 3.1 3.1 3.4 3.8 4 4 3.9 4 4.3 4.6

Source: Stockholm International Peace Research Institute. 2010. Military Expenditures Database (http://milexdata.sipri.org/)

In table 4.1 the military expenditures of China, Russia, Iran and the US are portrayed both in absolute dollar denominations as well as in relative terms to GDP. In terms of GDP China only spends half of that of the US, while Iran about two thirds and only Russias military spending rivals that of the US. In absolute terms however the above is nonsense, purely descriptive non realistic observations, whereas

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the US budget yearly is about three fold that of the combined Chinese, Iranian and Russian budget. On the longer term China with its decades long high economic growth figures has the potential to catch up, especially if it would increase its budget relative to GDP.
Table 4.2 Military Capabilities

China Active forces

Army forces Navy forces Air forces Miscellaneous forces

Russia 2,285,000
1,600,000 255,000 330,000 100,000

Iran 1,027,000
360,000 142,000 160,000 365,000

US 523,000
350,000 18,000 30,000 125,000

1,580,255
662,232 335,822 334,342 247,859

Paramilitary / Civilian forces

660,000

449,000

40,000

11,035

Reserve forces

510,000

2,000,000

350,000

864,547

Total Active and Paramilitary/Civilian Total Active, Paramilitary/Civilian and Reserve

2,945,000 3,455,000

1,476,000 3,476,000

563,000 913,000

1,591,290 2,455,837

Source: International Institute for Strategic Studies. 2010. The Military Yearbook 2010

In terms of military capabilities displayed in table 4.2, which relates to the number of active and deployable armed forces. In this perspective China always outnumbers the US, while Russia rivals it when counting paramilitary forces. The armed forces of Iran never weigh up to those of the US in these terms. The combination of both budget and number of armed forces would make up the most credible assessment of the military power projection. The US army is most definitely due to its longterm higher levels of investments superior to the armies of the contenders. On the global level this implies that the contenders military power projection by no means rival that of the US. On the regional level however, due to their vast numbers that are readily deployable because of geographic proximity, the contenders military power projection rivals that of the US and its allies, especially with the intensified cooperation between states in the region along Shanghai Cooperation Organization (SCO) lines and moreover through the increase in participants to the regional security organization. The establishment of the SCO contributes to the regional approach to security cooperation. The military and security relations between China, Russia and Iran all pre-date SCO related activities. The bilateral security relations between the states extent from extensive weaponry trade relationships, to cooperation between the three states on military and nuclear technologies, the cooperation involves training of military personnel as well as the execution of joint military operations and trainings.

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The growing bilateral security relations between the states can be one of the strongholds of the SCO. Especially given the strategic position of its members, complemented with Iran, whereas they form a ring around Central Asia, an area in which other powers also seek influence. However before making statements on the impact of this military alignment, it is important to determine how the militaries of the three states compare to one another, moreover to the main extra-regional force present in Central Asia, the US, the state to which all three moreover reveal the most contestation.

4.2.3

China power projection in the region

The Chinese army is undergoing a modernization program which has improved the ability to execute an anti-access and area-denial strategy in the Western Pacific (Blair, 2010: 28). The approach of China to Central Asia is to curb US influence and fill in the void left by Moscow with the collapse of Soviet Union. In the Persian Gulf region China aids in the development of Irans military capacity through the numerous arms trade and defense technology development projects. While China is also becoming active in the Persian Gulf region itself with the establishment of a deep water port in Gwadar, Pakistan (Kaplan, 2009: on the Indian Ocean shores, near the Iranian border and the Gulf of Oman, furthermore near the waterways that connect to the Strait of Hormuz.. With these activities the projection of Chinas power in the Gulf region is developing. The presence of Chinas advanced equipped military in the Persian Gulf and the Far East, challenges the US (Wood, 2010). Although China is continuously developing its military capacity and also shows to be increasingly active in its region, Chinas most influential tool in securing access to markets and resources is through its ability to project economic power, discussed later on.

4.2.4

Russia power projection in the region

In its primary foreign policy interest, securing its influence in the former Soviet region, Moscow remains capable of dominating militarily (Blair, 2010: 30). It furthermore has showed its willingness intervene during the 2008 conflict in Georgia. The military of Russia is currently going through a modernization, with the aim to create an army that is more dependent on high tech equipment than on mass mobilization (Blair, 2010: 29). While Moscow is military present, or willing to make an appearance, in the former Soviet states it exerts little power projection towards the Middle East. Alongside the military trump, another approved method to pursue its foreign policy interests is through using its supplies of fossil fuels; this however is treated in paragraph 4.3.

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4.2.5

Iran power projection

Irans influence in the Middle East poses a remarkable challenge to the US power projection in the region. Its ties with Syria, Hezbollah, Hamas and the Iraqi regime, increasingly provide Iran with a great source of power and influence in the Crescent and the Levant. Although Iran seeks to be the dominant power in the Middle East it is not willing to risk open conflict with the US. The US however faces a challenge with Irans increasing influence, contestation and nuclear development, whereas toppling the regime is hard and war is not possible due to cost restraints. Iran also projects extensive power over the Persian Gulf. Iran's area-denial arsenal includes coastal and inland missile batteries, ballistic missiles to threaten Arabian fossil fuel facilities and U.S. bases. In the Persian Gulf Iran disposes over mines and shallow draft missile boats that are efficient in battling slow-moving U.S. warships (Wood, 2010). Iran furthermore is in the process of acquiring an air defense system to protect its nuclear facilities. Through its various sources of influence and military capacity Iran has a power projection over the Middle East and the Persian Gulf more specifically that challenges the US.

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4.3

THE ABILITY OF CHINA, RUSSIA AND IRAN TO PROJECT ECONOMIC POWER THROUGH
TRADE AND INVESTMENT

Parallel to the military power projection, there is the element of power projection which refers to the ability to project economic power (Boaz, 2004) through investment, trade and cooperation. Via involvement in other countries states seek to secure their interests, especially in the energy sector, which is reflected in the US involvement in the domestic politics in Ukraine and Georgia and its involvement in Central Asia (Amineh and Houweling, 2010: 246). The ability of states to project economic power is dependent of their domestic capabilities in terms of wealth and productivity, and the resulting attractiveness of the states to cooperate with in terms of shared interests as well as the ability to cooperate multilaterally. The growing ability of China to project economic power is visible in the economic development of China is the expansion beyond its border, where it secures access to markets and resources through trade, investment and cooperation. Access to these markets and resources is quintessential to the progress of its economic development. Economic power projection here thus refers to the ability of China as well as that of Russia and Iran to secure foreign markets and resources through trade, investment and cooperation. The emphasis throughout this part will be on China as this state is the economic power house that is constitutive for the growth in the relations between the three states. Iran and to a lesser extent Russia are still dependent on foreign investments to both optimize the fossil fuel economy and modernize the entire economy into diversified less dependent on fossil fuel rent ones. China is the core of the relations between the three states, whereas through the resource needs that are reflected in the foreign policy these states are linked. Although it is the alignment of interests between theses states that results in cross-border network of trade, investment and cooperation, which presents the center of the coalition between these states. In the region, especially due its resources richness, but in the world moreover China and the US, the top two consumers of energy according to the Energy Information Agency of the United States (2010), will increasingly compete for these resources and markets; thereby will increasingly seek alignment with other states in order to secure their interests. In the greater Central Asian region, China and Russia through their state owned enterprises actively seek to secure their energy interests, which is translated in the development of pipeline systems and investments in the fossil fuel operations of mainly the Central Asian republics of Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan and Turkmenistan, as well as in Pakistan and Afghanistan. The latter state would until midway 2010 never been regarded as a state vital to the geopolitics of Central Asia in relation to energy and resources. However in June 2010 a research revealed that Afghanistan boasts subsoil resources with an aggregate worth of approximately 1 trillion US dollars including lithium, gold and copper (Sengupta, 2010). China is active in the mining of these resources at the Afghan Aynak Coppermine the

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discoveries portent the arrival of intense competition between superpowers needing these minerals for their economic development. In a related development China has announced to nationalize the

exploration and production of rare earth minerals, of which it possesses 95 percent of total global reserves (Bradsher, 2010). Both rare earth minerals and lithium are essential resources for the production of semi-conductors. Ensuring steady inflows of these Afghan resources and also the Chinese rare elements might turn out to be crucial for the development of diversified economies with leading sectors in technology. While at the same time this strong concentration could lead to more conflict with other states over access.

4.3.1

International investments

The going out strategy of China has resulted in massive increases of outbound foreign direct investment (OFDI), as from 2000 on, which is reflected in figure 4.1, for 2009 the FDI of the three major Chinese NOCs alone accounted for 32 billion US dollars (Duce & Ying, 2010), total 2009 OFDI is therefore to expected to remain crescent.

Figure 4.1 China FDI outflow Billion US dollars

60,00 50,00 40,00 30,00 24,80 20,00 10,00 0,00 2000 1,00 2001 2002 12,26 6,90 2,70 2003 2,85 2004 5,50 2005 2006 2007 2008 21,26 Chinese OFDI 52,00

Source: Cheung (2009); United Nations Conference on Trade And Development. 2008. World investment report.

The investment activities predominantly relate to China, moreover to Chinese national oil companies, whereas these are the most prevalent exponent of the ability to project economic power through trade, investment and cooperation. Although Russian NOCs have as of recently also started to secure natural resource related activities outside of its borders. Through investing in operations, concessions, stakes and infrastructural projects the states affirm their grip on the resource rich regions, a process that emerged in the early 2000s, but really has taken up speed towards 2010. [109]

In 2003 Sinochems subsidiary Sinochem international E&P company acquired the Dubai-based Atlantis Holding Company, thereby gaining access to oil and gas production and exploration activities in Oman, the United Arab Emirates and Tunisia (Xu, 2007), in the same year Sinochem paid 100 million US dollars for a stake in an Ecuadorian oilfield run by ConocoPhilips, (China Daily, 2003). In 2006 CNOOC took a 2.7 billion US dollars stake in French oil major Total's African Akpo field (China Daily, 2010a). In 2009, Zhenhua oil signed has signed a long-term contract with Iraq National Oil Corporation and thereby became Asias second largest buyer of crude oil in Iraq, Zhenhua Oil furthermore signed crude oil procurement contracts with such oil producers and energy giants as Brazil National Oil Corporation, Congo (Brazzaville) National Oil Corporation and ConocoPhilips of America, scaling a new height in the scope of its first hand oil source. CNOOC recently acquired a bought a 50 percent stake in Argentinas Bridas for 3.1 billion US dollars in March (Johnson, 2010). In March, CNOOC signed an initial deal to develop a 2.5 billion US dollars barrel oil field in Iraq (Woke, 2010). In 2010 Sinopec has finished the construction of a 1,377kilometer pipeline in Brazil (Ying, 2010). In 2010 Sinochem purchased a 3 billion US dollars stake in the deep water Peregrino field, making it a 40 percent owner in the Brazilian offshore oil field with Norwegian Statiol (Johnson, 2010). In 2010 China announced to finance the construction of two bridges in Laos, that are aimed at establishing the Asian Development Bank (ADB) funded great Asian highway (McCartan, 2010). By doing so it seeks to connect the resource rich Southeast Asian regions with China.

4.3.2

OECD Investments

The ability of especially China to project economic power does not stop in the regions of the world that are not dominated by the activities of western transnational corporations, or the economies of liberal democracies. The reach of the contender state is increasingly invasive of the US and its allies. The investments in particular of China, do not only take place in its Asian backyard, their strap for cash geographical neighbors Russia and Iran and in virtually every underdeveloped non-industrialized natural research rich regions. China has started investing in OECD states, in crucial economic sectors moreover. The recent critical purchase by the partially Chinese owned second largest global commodity company Noble Group of a stake in the US based USEC the only American-owned provider of enriched uranium for use in civilian nuclear reactors (Bradsher, 2010). In addition to oil companies, large mining and metal companies from China have become more and more aggressive in acquiring overseas assets. In February 2008, in cooperation with US based Alcoa, Chinese SOE Chinalco acquired a 12 percent stake in Rio Tinto PLC in the United Kingdom, for 14 billion US dollars. This deal, Chinas biggest ever acquisition overseas, gave Chinalco nine percent ownership of Rio Tinto as a whole, making it the largest shareholder .While in July 2008 Chinese Sinosteel acquired a 51 percent stake in the Australian company Midwest, an iron

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ore mining firm, worth 1.4 billion US dollars (UNCTAD, 2009, p. 54). In June 2009 Rosneft signed a deal for a gas project with Crescent Petroleum from the United Arab Emirates. For the moment the deal regards a 49 percent stake in a concession projected at 2.4 trillion cubic feet and gas condensate of approximately 117 million barrels (Webb and Bakr, 2010). In 2009 PetroChina obtained approval from the Canadian government to take a stake in the Athabasca Oil Sands Corporations Mackay and Dover oil-sands projects for 1.9 billion US dollars (Klump, 2010). In the quest for more oil reserves Sinopec Group acquired Calgary-based Addax Petroleum Corporation for 7.56 billion US dollars in 2009. In March 2010 CNPC and Shell made a 3.1billion US dollars bid for Australian company Arrow Energy, in which each participates for 50 percent (BBC, 2010). In April 2010 Rosneft has made steps towards acquiring the share of Venezuelan NOC PDVSA in a German joint venture with BP (Zhadannikov, 2010). The deal would land Rosneft 25 percent in Ruhr Oil, the largest refiner of Germany, thereby increasing its total refinery capacity with 25 percent plus gaining direct access to technology and market share abroad (Rosneft, 2009). In May 2010 CNPC and Shell came to an agreement regarding an oil and gas unit in Syria in which CNPC will take a 35 percent share at cost of an approximate 1.5 billion US dollars. In March 2010, another stake in the Canadian oil and gas industry was acquired by a Chinese NOC when the Sinopec Group acquired a stake in Canadas oil-sand producer Syncrude Canada Ltd. for 4.65 billion US (Klump, 2010). This overview is perhaps incomplete and due to the rapid pace of the acquisitions more likely outdated, however the enumeration serves well to indicate the recent trend of Chinese and Russian SOEs investing heavily outside of their borders, moreover outside of their regional spheres of influence.

4.3.3

The economic leverage of China, Russia and Iran

Through their growing ties with other states based on trade, investment and cooperation China, Russia and Iran also dispose of leverage. The economies of the three states are amongst the largest in their region and thereby provide employment to migrant workers. The growth of the Russian economy has resulted in Russia increasingly providing jobs for Central Asian expatriates. The remittances of these expatriate workers constitute a growing source of income for several Central Asian republics (CARs), with estimates of up to 30 percent in the case of Tajikistani GDP (Leverett & Noel, 2006). Russia is also renowned for cutting oil and gas price deals with states its supplies, to in turn when these states do not act in the interest of Russia demand higher gas prices under threat of cutting suppliers, which is a frequently recurring tactic. The gas activities boasted by Iran and Russia might result in the cooperation between these states in an institution controlling output levels, thereby

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influencing price levels, in an OPEC like fashion. The establishment of the Gas Troika in 2009 by Russia, Iran and Qatar can be interpreted as a step up to this.

4.3.4

The ability of China, Russia and Iran to project economic power through cooperation

The ability of China, Russia and Iran to cooperate with other states is another reflection of the ability to project economic power. In this description the focus lies on the relations of China, Russia and Iran with states, which reflects an approach to the practice of international relations other then prevail in the international system. An increasing amount of states seems to at least show contestation to the US and its allies, and while doing so seek alignment or cooperation with contender states. This contestation do not only occur by states that are external to the order of the US, but also by states internal to the order, whereas core states such as Brazil and Turkey demonstrate contestation to the order and seek alignment with contenders. On the regional level increased cooperation has been growing in the past decade, the increased institutionalized cooperation on the regional level is witnessed in the establishment and development of several organizations, although the institutional landscape of Eurasia in terms of cooperation organizations, in whichever aggregate level or functional denomination, is rather scattered. A set of organizations stand out, due to the aims and member states. The first and foremost expression of the described phenomenon is the Shanghai Cooperation Organization (SCO). It consists of China, Russia, Kazakhstan, Kyrgyzstan, Uzbekistan and Tajikistan, moreover has two levels of non-full membership, through which India, Iran, Mongolia and Pakistan participate as observers and Sri Lanka and Belarus as dialogue partners. In 2009 Iran has applied for full membership however due to the sanctions imposed on Iran by the UN Security Council Iran is not likely to ascent in the near future, whereas this is not permitted according to the treaty. One of the explanations for success is that SCO represents the first non soviet-only organization in the region, as is the case in CSTO, which furthermore does not adhere to and aim to develop liberal democratic principles, as is the case OSCE (Marketos, 2009: 33). The SCO so it seems is here to stay, primarily established as a security organization it has developed spill-over tendency of regional groupings such as the EU, where economic cooperation and energy security are turning into increasingly important issues. The SCO moreover develops at a rapid pace when taking into consideration its precursor the Shanghai Five group consisting of China, Russia, Kazakhstan, Kyrgyzstan and Tajikistan, was established only in 1996, while the SCO was founded in 2001. The alliance forged by these SCO states, at all levels, boasts a contestation of incredible proportions in Eurasia, moreover when considering that every influential state in the region, from within the region, is represented here. Although whenever the SCO seeks to further develop the economic integration, the involvement of Turkmenistan and Afghanistan will required. The SCO

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furthermore has expressed an underlying goal which is to keep out other national or institutional players from influence in the region (Marketos, 2009: 37). The Eurasian Economic Community (EAEC) consists of Russia, Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan and Belarus, with Armenia, Moldova and Ukraine observing, all former Soviet states. While most of these former Soviet collectives seem to be not to vigorous, the aim of this organization, namely to establish a single economic space and a customs union, is highly ambitious. Moreover it presents the conviction that these states will turn to each other for alignment and cooperation purposes rather than to others. The Association of Southeast Asian Nations plus China, Japan and the Republic of Korea (ASEAN plus three) is a forum established for the coordination of cooperation amongst its members. ASEAN plus three is an important part of Chinas attempt to influence its backyard, moreover by doing so keep extra-regional powers out. The recently established customs union formed by Russia, Kazakhstan and Ukraine shows the ability of Russia to induce cooperation (Kramer, 2010b). Outside of the Asia region, increased cooperation is developing with states that show contestation towards the US. When Brazil and Turkey in May 2010 announced to have struck a deal with Iran on the enrichment of uranium (Guardian, May 17, 2010), suddenly two allies showed public contestation of the US and contested the US foreign policy. Turkey in 2010 increased to demonstrate what seems like a new regional strategy, when it supported an ambiguous flotilla of aid workers and protesters towards Gaza. The flotilla however never arrived as Israeli troops raided with deadly force, after which Turkey condemned its former ally unmistakable wordings by stating that the world has to punish Israel (Ravid, 2010). Other allies of China, Iran and Russia outside their region are Venezuela, with which all three have fossil fuel related deals. In Africa, China has relations with amongst others, Sudan, Angola, Mozambique and Equatorial Guinea. The relationship between China and Sudan is close whereas China has vetoed a round of United Nations Security Council proposed sanctions (Asia Times, 2005), while Sudan provides China with a steady income of fossil fuels. The ability of China, Russia and Iran to project economic power through cooperation is steadily increasing, especially in their region and to a lesser extent on a global scale. This is also witnessed in the growing number of states that actively cooperation with China, Russia and Iran, rather then with the US.

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4.4

WHAT ARE THE IMPEDIMENTS TO THE PURSUIT OF CHINAS, RUSSIAS AND IRANS FOREIGN POLICY INTERESTS?

The US is present in the greater Central Asian region, through military activities in Afghanistan, military bases in Turkmenistan, IOC investments in Azerbaijan and Kazakhstan. However also in neighbor states to Iran, China and Russia, via military activity, NATO alliance-building and investments of US based transnational corporations. Given the invested interests of the US in the region it seems increasingly willing to defend at costs of military intervention or deterrence. The behavior of China, Russia and Iran could potentially resort in violent conflict. Whereas through pursuing nuclear development, Iran might just encourage the wrath of Israel, leading to a showdown which ends with a US invasion of Iran. Or the show of force between China and the US, whereas the US supplies arms to Taiwan, while China expulses high ranked military officers from its territory, minor show of force. However the major constraints China holds on US government paper, could urge the US to protect its economic interests whenever China threatens to hold a fire-sale. This is exacerbated by Chinas continuous fossil fuel quest, which might at one point in time lead to a clash with the US over influence. With the pursuit of their foreign policies in the region, China, Russia and Iran face several other challenges then the US. The development of networks of organized crime and terrorists, insurgence from separatist and extremist forces, the great amount of instable regimes in the region, all pose threats to the pursued of their foreign policies.

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4.5

A COALITION WITH GREATER REGIONAL INFLUENCE

Through the development of alliances and their militaries, China, Russia and Iran are increasingly able to project a power over their region that allows it to pursue their interests, the presence of other powers not withstanding. Iran has obtained considerable influence in the Middle East to ties with Syria, the new Iraqi regime, Hezbollah and Hamas, it moreover disposes of modern military equipment it obtains via Russia and China. Russia has the comfort of having the entire region its wishes to exert influence over at its border, thanks to its large and rapidly modernizing army it will be increasingly able to influence these regions. China is developing a vast high-tech army which already has the potential to implement an anti access area-denial strategy in the Western Pacific. While China increases its influence in the Central Asian states and in the Persian Gulf region, China is becoming a force in the region that has the potential to match the US. China, Russia and Iran are increasingly able to project economic power in their region, through trade and investment and cooperation. By doing so they are able to secure access to resources and markets that are crucial to their economies. China is the one of the coalition that is also able to project economic power on a global level, although this is a rather new phenomenon and not as full fletched as the influence other great power have. The projection of economic power through trade, investment and cooperation of especially China is not limited to the developing world. The going out strategy has resulted in numerous, not only fossil fuel related, acquisition in OECD countries. While Iran as of recently is developing cooperate ties with Turkey and Brazil through their involvedness in the Iranian nuclear program, or more specifically the aim to hold back sanctions. Overall the states in the coalition are especially on a unilateral level increasingly able to project economic power through trade, investment and cooperation. On the other hand, the multilateral ties between China, Russia and Iran that are looming for other states that seek cooperation outside of the US sphere of influence. The increasing diplomatic, economic and military ties between China, Russia and Iran facilitate the growth of their respective economies, where the compatible needs especially in terms of capital and fossil fuels increasingly result in the satisfaction of this needs, with growth and growth perspectives as the result. This increase in growth increases the ability of the China, Russia and Iran to project economic power through especially investment, trade and cooperation. The coalition between China, Russia and Iran, as established in the chapter three, is centered on the cross-border network of trade, investment and security relations that is developing between them. The foreign policies of these states are aimed at securing these interests, which is reflected in the here discussed aspects of power projection and the ability to project economic power through trade, investment and cooperation. The states in this coalition are increasingly able to secure their interests in terms of access to foreign markets and resources, the growing relations between the states moreover attribute to the ability to do so. The growing ability of China, Russia and Iran to pursue their foreign policies with less resistance is the geopolitical impact of the developing coalition.

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5. CONCLUSION AN EMERGENT COALITION WITH A GROWING POWER PROJECTION

This par t is the culmination of this thesis, aimed at providing a conclusive answer to the research question posted in the beginning of this work: What is the geopolitical impact of the cross border trade and investment relations between the Chinese, Iranian and Russian national oil companies? This chapter consists of three parts. The first part provides a description of the research trajectory, the second part describes the research findings from the different chapters and the final part provides the amalgamation of findings forged into a conclusive account. This thesis set out to determine how the increasing trade and investment relations between the national oil companies of China, Russia and Iran impacts on geopolitics. In order to so I have presented a theoretical framework consisting of the concepts geopolitics as the statecraft that enframes all foreign policy practices. For the study of these practices I argue to opt for a critical geopolitical approach, where I seek to explain how the forces from the global political economy influence geopolitics. In this approach the thesis adheres to the concept of geopolitical order by Amineh and Houweling (2010) which provides a framework for the change in the structure of the international system over time. Following the framework of geopolitical order, an order is generated by a hegemonic state with an advantage in economic productivity, wealth and military capabilities. States that seek to catch up either align with the order or contest it. This contestation is based on a rejection of the vision of the hegemonic power on the governing of state, society and international relations. Whenever contender forces amass and are able to acquire sufficient leverage in terms of productivity, wealth and military capabilities, moreover are able to establish a coalition, this could ensue a challenge of hegemony resulting in a transformation of geopolitical order. In the current day and age states like China, Russia and Iran contest the dominant liberal vision that permeates from the once order of Pax Americana. In the recent years the state owned enterprises of these states, national oil companies and sovereign wealth funds especially, demonstrate a trend of transnationalization. This thesis seeks to establish how this transnationalization relates to their contestation, through establishing the geopolitical impact of the increasing trade and investment relations between the national oil companies of China, Russia and Iran. The operationalization of the impact on geopolitics consists of two elements that define geopolitical impact in this thesis and as a result were guiding in the inquiry. The first element is the relation between transnationalization and the development of a coalition based on a cross-border network of trade, investment and security relations. The second element is the geopolitical impact of this developing coalition in terms of power projection and the ability to project economic power.

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The premise of this thesis is that although the three states under research are inherently different and conflicts in the relations between these states do occur, this is outweighed by their similarities which I regard as the foundation of their increased cooperation. The first part of the inquiry provided a description of the domestic antecedents to the transnationalization of the Chinese, Russian and Iranian national oil companies. The political elite in all three states have control over the economy, in all three states the oil and gas sector is characterized by the domination of national oil companies. The fossil fuel sectors are crucial, where in producer states Iran and Russia the sectors are the largest contributors to the gross domestic product, the fossil fuel sector in China has to assure a continuous and increasing supply of fossil fuels, which it lacks domestically, to keep the economy in motion. The political economy of oil and gas ties these states together. On the one hand China with heaps of capital seeks to invest in foreign oil and gas projects as a means to control the inflow of sufficient oil and gas. On the other hand Iran and Russia face considerate shortages for the development and modernization of the fossil fuel sector and diversification of the general economy. The importance of the fossil fuels is also reflected in the foreign policy strategies of the three states. Whereas Russia and Iran seek to use their vast resources to fulfill their interests, be it a greater exertion of influence in the region or access to capital and markets. While China applies the accumulated foreign reserves as lubricant to gain a foot on the ground in fossil fuel producer states, with the aim to on to secure long term delivery contracts and control over production. The national oil companies are the main exponents in the economic relations of energy, whereas all transactions run through them and all is facilitated by the state, funds, relations and diplomatic support. As a result the destinations of the states seem to be increasingly interwoven. The second part of the inquiry provided an analysis on the impact of the transnationalization of the national oil companies, on the relations between China, Russia and Iran. Although from the inquiry in this part it was hard to establish the extent to which the growing trade and investment relations between the Chinese are causally related to the increased relations between the three states on the other levels. The inquiry does show that these increasing cross-border trade and investment relations contribute to the development of a network between these states that in turn contributes to the tightening of the relations between China, Russia and Iran. As a result a greater interdependency is created which induces more relations, as is witnessed in the Sino Russian economic relationship, where deals are struck to support domestic economic development of the states. At the same time the states develop multilateral cooperation capacity. This is reflected in the establishment of the Shanghai Cooperation Organization by China, Russia and the Central Asian states, while Iran is an observing member to this organization. The multilateral cooperation between these states is not only aimed at the development of security aspects, they furthermore cooperate on energy and other economic issues thereby creating more spill-over. Through all these activities a cross-border network is developing between China, Russia and Iran based on investment, trade and security relations. Through their

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growing common interests that result from this network interdependence a coalition between China, Russia and Iran centered on the cross-border network is taking shape. The third part of the inquiry provided an analysis of the geopolitical impact of the developing coalition centered on the cross-border network, in terms of power projection and the ability to project economic power. The coalition between China, Russia and Iran is centered on the cross-border network of trade, investment and security relations that is developing between them. The foreign policies of these states are aimed at securing these interests. Through the development of their militaries and the fostering of alliances China, Russia and Iran are increasingly able to project power over their region which allows them to pursue their interests, the presence of other powers notwithstanding. China, Russia and Iran are also increasingly able to project economic power in their region, through trade and investment and cooperation. By doing so they are able to secure access to resources and markets that are crucial to their economies. The geopolitical impact is that China, Russia and Iran are increasingly able to pursue their foreign policies with less opposition. This thesis sought to establish how the transnationalization of the Iranian, Russian and Chinese NOCs relates to the contestation of these states. The increased cross-border trade and investment between the NOCs of China, Russia and Iran contributes to the development of a coalition between these states based on a cross border network of trade, investment and security relations. The emerging coalition contributes to the capacity of China, Russia and Iran to project power. The transnationalization of the Iranian, Russia and Chinese NOCs thus contributes to the establishment and strengthening of a coalition. The cross-border relations that result moreover contribute to the growing ability of the states in the coalition to pursue their foreign policy interests. By doing so the transnationalization of the NOCs contributes to rolling back the influence of the US in the region. This is the geopolitical impact of the increasing trade and investment relations between the national oil companies of China, Russia and Iran.

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APPENDICES Appendix 1: Global non-triad NOC Network (actor affiliation) 1997 2007

Graph a: Global non-triad NOC Network (actor affiliation) 1997

Graph b: Global non-triad NOC Network (actor affiliation) 2007

Key:

Black Circles: NOCs Nodes right upper hand: Isolates Grey Circles: IOCs Node degree: Total number relations with other actors White Circles: Hybrids Tie strength: Total number affiliations between each pair

Source: Graaff, N., de (2011). A Global Energy Network? Expansion and Integration of non-triad National Oil States. Global Networks, forthcoming

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