A Study On The Political Risks Of Sino - Russian Oil And Gas Cooperation

Energy issues are among the most important problems facing the world today. One’s country survival and development are closely connected to energy security. Chinese national economy continues to develop at a rapid pace along with the energy consumption growth, while domestic energy production does not meet the demand. Russian Federation is the world’s largest oil and gas producer and yet China’s biggest neighbor. Naturally, Sino-Russian energy cooperation provides a problem solving opportunity:to reduce China’s energy supply dependence upon Middle East oil-producing countries, along with the diversification of oil and gas import sources. From Russia’s perspective, fast-growing energy market in China is highly attractive and alternative to European one.On the face of it, the oil and gas cooperation between China and Russia is of a great strategic significance and conforms to interests of both parties. Though, this is only one aspect of an issue, in today’s world, oil and gas as non-renewable resources, are being widely used as a political tool in the interstate bargaining process. In fact, there are no oil and gas without political motive behind in the21st century. Oil and gas investments are subject to considerable political risks. Therefore, due to a number of reasons, political risks must be analyzed and addessed to ensure stable and mutually beneficial cooperation between China and Russia in the oil and gas sector. The main objective of this paper is to carry out a qualitative analysis of political risks in oil and gas cooperation between China and Russia.The introduction provides a brief review of the relevant literature, research questions are clearly stated and determine the research design and data collection methods. The focus of the first chapter is the concept of political risk and political risk analysis, theoretical framework is developed to determine political risk factors. The second chapter explores oil and gas industry specific political risks and political risk assessment models as well. Political risk analysis is studied as a decision-making and management tool. Chapter three provides case study and focuses at different levels of political risks in Sino-Russian oil and gas cooperation, political risk management strategy is offered.Investment climate in Russia is ambivalent:foreign capital and technologies are needed, while the state wants to retain the control over large investment projects, especially in strategic sectors. The main actors in the Russian oil and gas industry are president, prime minister and state-owned companies Gazprom and Rosneft as well. Therefore, political risks in oil and gas industry stem from the top-level government, rather than local authorities. Investor’s home and host country’s relations can seriously affect political risks faced by investors, because all key decisions are carried out at the highest level government.Traditionally, the highest political risks faced by foreign investors in Russia’s oil and gas industry is posed by the risk of nationalization. However, the risk of nationalization is negligibly small, if all negotiations are carried out at the top level of governments. Political risks may come at regional levels resulting into a number of operational issues, such as taxes, import and export licensing, legislative changes and price controls. Though, if the Russia benefits from an investment project, the most difficult problems will be easily resolved with the assistance of Russian authorities.Sino-Russian oil and gas cooperation is full of uncertainties, some steps should be taken to overcome mutual mistrust. After numerous failed attempts to invest in the Russian oil and gas industry by Chinese companies, oil-for-loans deals have become a new and effective mode of Sino-Russian cooperation. This model of cooperation offered a new political risks mitigation tool.Despite the lack of financial resources to develop new oil and gasfields alone, Russia does not welcome Chinese investment in strategic oil and gas fields. Resource nationalism is not only real, it is accelerating in intensity. Oil and gas investments will be considered as a potential threat, as Russia’s economy is heavily dependent on oil and natural gas exports. Mistrust hinders the development of oil and gas cooperation between China and Russia. Any major changes in Sino-Russian relations will directly affect the level of political risk for joint projects in the oil and gas industry.