Cover Page

International Student Undergraduate Graduation

Thesis ( session)
Topic ： Brief Analysis of Factors Influencing
Crude Petroleum Exports from Russian Federation to PR
China from 2010 to 2020

College: Business School

Major: International Economics and Trade
Class: B class
Name: Boos Artur
Student ID: 20510120005
Supervisor: Ms.Sandra
Date of completion:_____________________________
 ABSTRACT
This research analysed factors influencing crude petroleum exports from Russian
Federation to PR China from 2010 to 2020. The research objectives include to investigate the
geopolitical factors influencing the trade dynamics, such as pricing mechanisms, transportation
infrastructure, and market conditions and to investigate the economic factors influencing the
trade dynamics between Russian Federation and PR China. In carrying out the study, qualitative
approach was used. Data collection in this research involves document analysis and literature
review to gather information on trade agreements, economic policies, market dynamics, and
factors affecting crude oil exports. The data analysis process will entail a thorough examination
of the collected data to identify patterns, trends, and correlations related to crude oil exports
between Russia and China. Qualitative interpretation was employed to derive meaningful
insights into the factors influencing the trade dynamics during the specified timeframe.

The research revealed among others that China and Russia share some common interests
that drive cooperation, including shaping the international order and seeking better relations
with the West. Despite cooperation, the relationship is marked by potential competition and
friction, particularly due to Russia's concerns about China's growing power. Global geopolitical
tensions and their impact on the economy significantly influence trade dynamics. This includes
the use of economic relations as a tool to achieve geopolitical objectives. Based on findings, the
research recommends that China and Russia should continue to strengthen their energy
cooperation by promoting investment and joint ventures in the energy sector. This could include
the development of new oil and gas fields, as well as the expansion of infrastructure for energy
transportation. While the China-Russia oil trade has been growing steadily, it is essential for
China to diversify its energy sources to reduce dependence on a single supplier. China should
explore opportunities to increase imports from other countries and develop its domestic energy
resources.

Keywords: Geopolitical Factors, Energy Security Dynamics, Trade and Investment Cooperation,
Pipeline Infrastructure Development, Sanctions and Logistical Challenges

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 摘 要

这项研究分析了 2010 年至 2020 年俄罗斯联邦向中华人民共和国出口原油的影响因素。研究

目标包括调查影响贸易动态的地缘政治因素,如定价机制、运输基础设施和市场条件,以及调查
俄罗斯联邦和中华人民共和国之间贸易动态的经济因素。在开展这项研究中,采用了定性方法。
数据收集包括文件分析和文献综述,以收集有关贸易协议、经济政策、市场动态和影响原油出
口的因素的信息。数据分析过程将包括对收集的数据进行彻底检查,以识别与俄罗斯和中国之
间原油出口相关的模式、趋势和相关性。采用定性解释来获得有关影响指定时间框架内贸易
动态的因素的有意义见解。

研究发现,中国和俄罗斯分享一些共同利益,推动合作,包括塑造国际秩序和寻求与西方的更好
关系。尽管合作,但这种关系也存在潜在的竞争和摩擦,特别是由于俄罗斯对中国日益增长的力
量的担忧。全球地缘政治紧张局势及其对经济的影响显著影响贸易动态。这包括将经济关系
用作实现地缘政治目标的工具。根据研究结果,研究建议中国和俄罗斯应继续加强能源合作,通
过在能源行业促进投资和合资企业来实现这一目标。这可能包括开发新的油气田,以及扩大能
源运输基础设施。虽然中俄原油贸易一直在稳步增长,但中国仍需要多元化其能源来源,以减少
对单一供应商的依赖。中国应探索增加从其他国家进口和开发国内能源资源的机会。

关键词: 地缘政治因素、能源安全动态、贸易和投资合作、管道基础设施发展、制裁和物流
挑战

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 TABLE OF CONTENTS
COVER PAGE..........................................................................................................................i

ABSTRACT.............................................................................................................................ii

TABLE OF CONTENT..........................................................................................................iv

INTRODUCTION

1.1 Background to the Project.............................................................................................1

1.2 The Purposes of the Project...........................................................................................3

1.3 Significance of the Study..............................................................................................3

1.4 Delimitation...................................................................................................................4

LITERATURE REVIEW

2.1 Introduction...................................................................................................................5

2.2 Theoretical literature review.........................................................................................5

2.2.1 Strategic Trade Theory..............................................................................................5

2.2.2 Application of the Theory to the Study..........................................................................7

2.3 Empirical literature review............................................................................................7

2.3.1 Russian Oil and Exports: A Brief History.................................................................7

2.3.2 Economic Rationale vs. Strategic Gains..................................................................10

2.3.3 Impact of Geopolitical Events.................................................................................11

2.3.4 Policy Interventions.................................................................................................13

2.5 Literature Synthesis.....................................................................................................15

RESEARCH METHODOLOGY

3.1 Introduction.................................................................................................................17

3.2 Research Design..........................................................................................................17

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3.3 Data Collection Method..............................................................................................17

3.4 Data Analysis..............................................................................................................17

3.5 Ethical Considerations.................................................................................................18

3.6 Limitations..................................................................................................................18

DATA PRESENTATION AND ANALYSIS

4.1 Introduction.................................................................................................................19

4.2 Geopolitical factors influencing the trade dynamics between China and...................19

4.3 Economic factors influencing the trade dynamics between China and Russia...........22

SUMMARY OF FINDINGS, CONCLUSION, AND RECOMMENDATIONS

5.1 Summary of Findings..................................................................................................29

5.2 Conclusion...................................................................................................................30

5.3 Recommendations.......................................................................................................30

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 CHAPTER ONE

INTRODUCTION

1.1 Background to the Project

Oil commerce and collaboration between China and Russia started in 1992 and
gained significant traction starting in 1999, when it made up just 7% of all imports
(Bahgat, 2020). China and Russia have established a significant political, economic,
and trade connection in the twenty-first century. They have also expanded military
cooperation and energy commerce, among other areas. Russia is now China's third-
largest oil export source as of 2014. Thus, the oil trade between China and Russia
will contribute to the realisation of the oil trade's diversification policy in addition to
lowering China's import costs which support consistent economic growth and
guarantee the security of China's oil imports. Therefore, it is crucial to research how
China and Russia's oil trade affects each other (Mia, 2019).
From the above, one can see that in the global energy market, the trade connection
between PR China and the Russian Federation is vital. Russia's shipments of crude
oil to China have increased significantly over the last ten years and are now a vital
part of their bilateral economic relations (Gao and Liang 2018). Numerous variables,
such as geopolitical dynamics, concerns about energy security, and economic
collaboration between the two nations, have an impact on this trade flow. PR China
is one of the biggest energy users in the world, and the Russian Federation is known
for having vast petroleum reserves. This trade relationship has changed as a result of
shifting market dynamics, regulatory actions, and energy consumption.
In 2022, Russia was the number 8 economy in the world in terms of GDP (current
US$), the number 12 in total exports, the number 30 in total imports, the number 63
economy in terms of GDP per capita (current US$) and the number 45 most complex
economy according to the Economic Complexity Index (ECI). The top exports of

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Russia are Crude Petroleum ($133B), Petroleum Gas ($71.5B), Refined
Petroleum ($67.4B), Coal Briquettes ($36.5B), and Gold ($14.6B), exporting mostly
to China ($101B), India ($40.4B), Germany ($27.7B), Turkey ($25.3B),
and Italy ($25.1B) (Observatory of Economic Complexity, 2023).
China on the other hand, since the 1990s, the growth of Chinese oil consumption has
accelerated dramatically due to the rapid growth of the domestic economy
(Leung 2010). A stable supply of petroleum resources is currently essential to
improve China’s socio-economic development, as petroleum products are almost
used in every sector (Tang et al. 2011).

By the end of 2018, China’s oil consumption was up to 877.0 million tonnes of
standard coal and growing at a rate of 4.0% p.a., accounting for 18.9% of total
primary energy consumption, second only to coal, as shown in Fig. 1. Moreover,
petroleum products consumption reached 356.9 million tonnes in 2017, as shown in
Fig. 2 (Chen et al., 2020). The Chinese petroleum industry is predicted to grow

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steadily in the coming decades, continuing to account for a stable share of around
20% of the total primary energy mix (Yang et al. 2016). It is against the above
background that this research aims to briefly analyse crude petroleum exports from
Russian Federation to PR China from 2010 to 2020 and current trends.

1.2 The Purposes of the Project

The primary objectives of this research project are to analyze factors influencing
crude petroleum exports from the Russian Federation to PR China from 2010 and
2020. Specifically, the project aims to:

1. Investigate the geopolitical factors influencing the trade dynamics, such as

pricing mechanisms, transportation infrastructure, and market conditions.
2. Investigate the economic factors influencing the trade dynamics between
Russian Federation and PR China

1.3 Significance of the Study

This study holds significant importance for various stakeholders. Firstly,

policymakers and government officials in both Russia and China can benefit from a
comprehensive analysis of the crude petroleum trade. The findings can inform their
decision-making processes related to energy policies, infrastructure investments, and
bilateral cooperation initiatives.

Secondly, industry stakeholders, including oil and gas companies, shipping and
logistics firms, and energy traders, can gain valuable insights into market dynamics,
pricing mechanisms, and potential growth opportunities in the Russian-Chinese
energy trade.

Lastly, researchers and scholars in the field of international trade, energy studies, and
international relations can use this research as a foundation for further analysis and

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contribute to the existing body of knowledge on energy cooperation between Russia
and China.

1.4 Delimitation

This research focuses specifically on the analysis of crude petroleum exports from
the Russian Federation to PR China between 2010 and 2020. The study will
primarily examine the volume, value, and market dynamics of this trade flow. While
other aspects of energy cooperation, such as natural gas or renewable energy, may
indirectly influence the trade relationship, they will not be the primary focus of this
research.

Furthermore, the study will primarily rely on publicly available data, industry
reports, and academic literature. The availability and reliability of data sources may
impose limitations on the depth and scope of the analysis.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

The analysis of crude petroleum exports from the Russian Federation to PR China is
a topic of significant economic and strategic importance. Recent studies have delved
into various aspects of this trade relationship, considering economic rationale,
strategic gains, and the impact of geopolitical events on oil prices.

2.2 Theoretical literature review

2.2.1 Strategic Trade Theory

Strategic Trade Theory, also known as the New Trade Theory, is an economic
framework that examines the role of government intervention and strategic behavior
of firms in international trade (Krugman, 1979). This theory challenges the
traditional assumptions of free trade and highlights the potential benefits of strategic
government policies in certain industries.

One of the key proponents of Strategic Trade Theory is Paul Krugman, who
developed the theory in the 1970s and 1980s. Krugman's seminal paper, "Increasing
Returns, Monopolistic Competition, and International Trade," published in the
Journal of International Economics in 1979, laid the foundation for this theory
(Krugman, 1979). He argued that industries characterized by economies of scale,
product differentiation, and imperfect competition can generate positive externalities
that justify government intervention to enhance national welfare.

Strategic Trade Theory suggests that governments can positively influence the
competitiveness of domestic industries and enhance their market share in
international trade through various strategic policies. These policies include

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subsidies, export promotion, research and development (R&D) grants, intellectual
property protection, and strategic trade agreements.

For instance, governments can provide subsidies or tax incentives to domestic firms
to offset the disadvantages they face in competing with foreign firms (Helpman &
Krugman, 1985). By doing so, governments aim to shift the competitive advantage in
favor of domestic industries, allowing them to capture a larger share of the global
market.

Strategic trade policies also emphasize the importance of R&D and innovation.
Governments can support R&D activities through grants, funding research
institutions, and promoting collaboration between academia and industry (Ethier,
1982). This focus on innovation aims to create technological advancements and
product differentiation that provide a competitive edge in international markets.

Furthermore, strategic trade agreements, such as bilateral or regional trade

agreements, can enable participating countries to coordinate their policies and create
a larger market to counter the market power of dominant countries (Staiger &
Grossman, 1990). These agreements often involve provisions for intellectual
property protection, market access, and regulatory harmonization, fostering a
conducive environment for trade and investment.

Critics of Strategic Trade Theory argue that government intervention in trade can
lead to inefficiencies, distortions, and a misallocation of resources (Grossman &
Helpman, 1990). They contend that strategic policies may favor specific industries at
the expense of others and can lead to trade disputes and retaliatory measures from
other countries.

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2.2.2 Application of the Theory to the Study

Firstly, the theory highlights the potential benefits of government intervention in

promoting the competitiveness of domestic industries. In the case of crude petroleum
exports, the Russian government has implemented strategic policies to enhance its
position in the global market. This includes investments in infrastructure, such as
pipelines and port facilities, to facilitate the transportation and export of crude
petroleum to PR China.

Secondly, the theory emphasizes the importance of economies of scale and product
differentiation. The Russian Federation possesses vast reserves of crude petroleum,
making it one of the world's largest exporters. By leveraging economies of scale in
production and transportation, Russia can offer competitive prices to PR China,
attracting demand and gaining a larger market share.

Additionally, the theory underscores the significance of innovation and technological

advancements. Russia has made efforts to improve the efficiency of its petroleum
extraction and refining processes, as well as invest in research and development
activities to enhance the quality of its petroleum products. These innovations
contribute to product differentiation and help maintain a competitive edge in the
Chinese market.

2.3 Empirical literature review

2.3.1 Russian Oil and Exports: A Brief History

Russia has a lengthy history with oil. Russia was among the first nations to produce
oil, and by the end of the 1800s, it produced over one-third of the oil produced

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worldwide. As oil gained popularity as a fuel, the Soviet Union placed more and
more focus on creating its own reserve base. This endeavour was a huge success, as
the Soviet Union became the clear world leader in oil production by the 1980s. The
USSR produced 624 million tonnes of oil at its peak in 1987, more than either Saudi
Arabia or the US. In the peak year, the USSR produced 570 million tonnes of oil, of
which more than 90% came from the Russian Federation (figure 2).
Figure 1: Russia’s Oil Production and Consumption, 1985-2009 (million tons)

Russia's oil industry saw a similarly severe fall at the same time that the Soviet
Union fell apart. Production has dropped to 303 million tonnes by 1996, 47% below
its peak. Contributing factors to the collapse were prohibitions on foreign businesses
ready to take on larger Russian oil projects, a sharp decline in investment spending,
and inefficiencies caused by Soviet manufacturing practices. But by the end of the
decade, there had been a significant improvement in Russia's oil sector. The
reorganisation and privatisation of the oil industry in the 1990s, the growing use of
Western technology that made it possible to revive defunct oil fields, and the notable
increase in oil prices after 1999 have all been largely blamed for this. Oil exports

8
have been vital to Moscow's leadership for many years. The majority of the other
Soviet republics and the Communist Bloc as a whole relied heavily on oil supplies
from the Russian Soviet Federative Socialist Republic (RSFSR) throughout the
Soviet era. Delivered at a significant discount, this oil was essential to keeping the
bloc's centrally planned economy afloat. Druzhba (Friendship), the longest oil export
pipeline in the world, was constructed in 1964 as part of this plan to supply crude oil
to East Germany, Poland, Czechoslovakia, and Hungary. As oil exports to European
market economies increased, the Soviet leadership began to rely more and more on
oil as a source of hard money.

The Soviet State Planning Committee's All-Russia Research Institute for Complex
Fuel and Energy Problems estimates that in 1985, oil exports brought in 39% of the
USSR's total hard currency earnings. The post-Soviet Russian economy also
depended heavily on oil export earnings. Even though Russia's oil output has
drastically decreased, these funds were crucial for the country's government budget
during the economic crisis of the 1990s. The key factor that kept oil profits high was
the concurrent decline in domestic oil use. Due to a significant economic
reorganisation and a decline in demand, Russia's oil consumption was reduced by
50% between 1990 and 2000, from 250 million tonnes to 124 million tonnes. In a
similar vein, Russian oil corporations started exporting their crude to more profitable
markets in Europe rather than the Commonwealth of Independent States, where it
was often sold at a discount. Oil export volumes expanded quickly in the 2000s while
production rose and consumption stayed constant.

Lastly, it is important to remember that during the last several decades, Russia's oil
industry's geographic location has also changed. The southern portion of European
Russia, in the Volga-Urals area, served as the industry's centre at first. With its peak
production in the 1970s, attention turned to West Siberia, which has continued to be

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the centre of Russia's oil industry. East Siberia, the Far East, and the Arctic are three
new regions of the Russian Federation where large oil producers have steadily
increased their efforts to hunt for chances. However, as will be discussed below, this
region's output has been dropping in recent years.

2.3.2 Economic Rationale vs. Strategic Gains

Research by the Carnegie Endowment for International Peace (2022) highlights

Russia's extensive efforts to develop new outlets for oil exports, including
infrastructure projects in multiple directions. While these initiatives have policy and
economic implications, questions arise about the necessity for all these projects given
the absence of bottlenecks in reaching foreign markets (Pfeffer and Salancik, 2003).

One of the main justifications for the ESPO project is that Russia must adapt to
changes in the world oil market. According to the International Energy Agency
(IEA), the Organisation for Economic Cooperation and Development's member
nations have already reached their peak oil consumption. China and India in
particular are the growing economies in Asia that will contribute most to future
increase in oil demand. By creating a quicker connection to Asia, the ESPO Pipeline
is helpful in this situation. Additionally, it aids Russia in expanding its export
markets. Liu (2021). This would make it possible for Russian oil firms to offer their
crude oil for sale in Europe at more affordable rates. That being said, the BPS-II
project in the Baltic area cannot be justified on the grounds that it will not contribute
to Russia's efforts to diversify its crude oil customer base. Rather, the BPS-II offers
further financial advantages; as it absorbs some of the petroleum supplied via the
Druzhba Pipeline or the ports of Ukraine, it may be able to lower transit fees paid to
other nations (Oliver, 1991).

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The primary economic justifications for the BAP and the Samsun-Ceyhan Pipeline,
both of which would need passing through foreign territory, are very different. Over
the last ten years, there have been sporadic demurrage penalties for Russian oil
exporters as a result of Bosporus congestion. Even while these accidents have mostly
been seasonal, there are worries that as more Kazakh crude oil begins to flow to
Black Sea ports, they may become more regular and severe. Therefore, a pipeline
that avoids the Turkish Straits would reduce possible traffic, saving Russian oil
corporations from having to pay such fees (Bakirtas, 2020).

However, when considering Russia's pipeline projects—both ongoing and planned—

in their whole, the business case for Moscow's export-driven capacity growth
strategy seems thin. Such a significant expansion requires the capacity to raise crude
oil output by an equivalent amount. However, there is no assurance of this. By the
middle of the following decade, production is expected to stabilise as newly
developed oil fields struggle to offset the drop in older resources.
Moreover, by 2030, output is only expected to rise by 40–45 million tonnes,
according to the baseline scenario in Russia’s Energy Strategy 2030, a document
formally authorised by the Russian government at the end of 2009. More gloomy is
the IEA's World Energy Outlook 2010, which projects a roughly 50 million tonnes
drop in Russian crude output by 2030 under its New Policy Scenario. The
International Energy Agency (2010) projects a decrease in the overall export of crude
oil and petroleum products due to the expectation that domestic oil consumption
would be relatively unchanged.

2.3.3 Impact of Geopolitical Events

The impact of the Russia-Ukraine war on crude oil prices has been a focal point in
recent research (Smith & Johnson, 2023). This conflict significantly affected oil price

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volatility and altered price trends. Long-standing research has focused on how the
geopolitical landscape affects the global oil market, with varying degrees of success
in earlier investigations. Qin (2021) provides evidence that disputes associated to
OPEC raise geopolitical risk and have a major impact on OP. According to Bakirtas
(2020), there is a direct correlation between OP and the informational efficiency and
possible dynamical structure of the oil market, which may be impacted by
geopolitical events such as terrorist acts.

According to Khan et al. (2021), geopolitical risk is the primary driver of oil price
volatility and is used to monitor changes in the oil market in order to reduce the
danger of unstable geopolitical conditions. According to Li et al. (2021), the oil
market in Brazil, Russia, India, China, and South Africa (BRICS) is affected by
geopolitical risk in diverse ways, with China having the most impact. According to
Liu et al. (2021), geopolitical concerns have a long-term favourable impact on energy
volatility, such as that of oil. Even if this spillover impact is transient, Adekoya
(2022) note that oil is highlighted as a net receiver of spillovers during the period
with high RGR produced by the Russia-Ukraine saga.

According to Qian et al. (2022), the oil market fluctuates greatly when geopolitical
risk increases, and during an economic slump, it is more accurate to forecast OP
based on the geopolitical environment. Others, however, contend that OP is not
always impacted by the geopolitical environment. According to José (2016), global
events had a favourable impact on OP up to 2000 but no discernible impact beyond
that year. According to Bouoiyour et al. (2019), geopolitical actions have a
favourable impact on OP, but geopolitical threats have no appreciable impact.
According to Su et al. (2019), oil only possesses political characteristics for a limited
time, and there are both favourable and unfavourable effects of geopolitical risk on
OP. Nonejad (2022) suggests that the accuracy of OP forecasts based on geopolitics
may not increase if the geopolitical risk falls below previous minimums.
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According to Wang et al. (2022), there is a negative correlation between the yield of
open-source petroleum (OP) and geopolitical risk at various phases. The geopolitical
environment is impacted by the oil market, in turn. Hendrix (2017) demonstrates that
while there is no discernible effect in non-petrostates, high OP clearly leads conflict
behaviours in petrostates to grow. According to Bakirtas and Akpolat (2020),
military spending in seven OPEC nations—Algeria, Ecuador, Iran, Kuwait, Nigeria,
Saudi Arabia, and Venezuela—is a direct result of oil exports and OP Granger,
increasing the likelihood of geopolitical crises.

2.3.4 Policy Interventions

Another study discusses the design and implementation of price caps on Russian oil
exports post-February 5, 2023 (Brown et al., 2023). Notably, crude oil exported by
pipeline was exempt from these caps, impacting petroleum product purchases. Russia
invaded Ukraine on February 24, 2022, marking a significant uptick in the ongoing
conflict (Babina et al., 2023). A wide variety of penalties, including the freezing of
Russian central bank reserves, were swiftly implemented in response to this unlawful
and unwarranted attack by the United States, the European Union, and its allies.
Despite harming Russia's economy, these extraordinary measures did not end the
war. Russian assault persisted, resulting in a significant death toll and destruction of
civilian infrastructure. One measure to solve that difficulty was the introduction of
the price ceiling on Russian oil (Hausmann et al., 2024).

Two major objectives underlie the price limit. First of all, it is a crucial component of
a larger set of sanctions meant to lower Russia's foreign exchange earnings and limit
its ability to conduct war in Ukraine. Sanctions are often intended to restrict
government income and subject belligerent nations to a certain level of economic
hardship. Reducing oil export earnings is a crucial potential lever to lessen Russia's
capacity to wage war (Johnson et al, 2023). There were three possible outcomes:

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Russia will find it more difficult to maintain its currency rate if its foreign exchange
reserves are reduced; Russia will be less able to purchase weapons from other
nations, such as drones and ammunition; and reduced expected future federal
government revenues will limit the government's overall capacity to fund and
conduct war, including the local currency component (e.g., paying soldiers and
domestic armaments suppliers) (Hausmann et al., 2024).

The second objective of the price cap was to allow Russian oil to continue to be sold
on the international market in the face of an expected full EU embargo and services
ban. The European Union said at the beginning of May 2022 that it would ban the
importation of Russian refined goods and marine oil, as well as the supply of EU-
based services for the transportation of Russian marine oil to nations outside the
EU.6 Speculators anticipated that the United States, which was preparing a similar
import embargo, and other Western nations would adopt the European Union's stance
(Johnson et al., 2023). The restriction on imports by the European Union went into
force for crude oil on December 5, 2022, and petroleum products on February 5,
2023. Many analysts projected that, if the EU embargo and services ban were
enforced without exceptions, Russia would not be able to export 1-2 million barrels
of oil per day, which may result in a sharp increase in oil prices and exacerbate
global inflationary pressures (Babina et al., 2023).

The G7 and its partners, often referred to as "the coalition," are in charge of
implementing the price restriction on Russian oil. Since the coalition nations imposed
embargoes on the acquisition of Russian oil in addition to the price ceiling, it is
appropriate to think of the coalition as a collection of service providers rather than a
group of present buyers of Russian oil. Large crude oil tankers can transport their
cargo to any port that is adequate, thus since the invasion, Russia has gradually
diverted its crude exports by sea to China. By the middle of 2022, however, it was

14
shipping more than 1 million barrels per day to India, a country that had not
previously been a major client of Russian crude (Korhonen & Simola, 2022).

Since the cap is fixed at a certain price level expressed in dollars per barrel of oil, it
will not automatically fluctuate in response to changes in the price of crude oil on the
global market, such as the Brent benchmark price.8 The alliance could theoretically
reset the price ceiling on a regular basis in response to events such as sharp
fluctuations in global oil prices or military operations by Russia. For crude oil, the
price cap has stayed at $60 per barrel thus far, and for high- and low-quality refined
petroleum products, it is $45 and $100, respectively (Hausmann et al., 2024).

Importantly, the restriction also applies to any purchases of Russian crude oil shipped
by sea after December 5, 2022, as long as those purchases include financial, marine,
or other services from any organisation under the legal authority of a coalition
member. Petroleum products were subject to comparable caps after February 5, 2023.
The limit does not apply to crude oil exported by pipeline. The price ceiling will not
apply to purchases that do not include coalition services, such as those made by a
Chinese trader who ships his goods to a Chinese refinery, pays for it with rubles
through a Chinese bank, and has insurance from a Russian corporation. The price cap
is only in effect up to the "first landed sale," which means that, as long as coalition
services are used, purchases made while the oil is still in the sea are subject to it (Li,
2021).

2.5 Literature Synthesis

In reviewing the empirical literature from 2010 to 2020 on crude petroleum exports
from the Russian Federation to PR China, various methodologies and findings have
been examined. While most studies utilized methods like the ordinary least square

15
(OLS) approach, the results varied across different studies and countries, even when
employing the same methodology. The diversity in results could be attributed to the
use of different independent variables in these studies.

Unlike previous research, the existing literature lacks a comprehensive examination

of the specific contributions of the crude petroleum sector in the Russian Federation
to the economy of PR China using the variables considered in this study. Notably,
prior studies did not focus on analyzing the impact of crude petroleum exports on the
economic growth of PR China, particularly in comparison to other sectors like
manufacturing, agriculture, and mining.

Therefore, this study aims to fill this gap by conducting a detailed analysis of the
crude petroleum exports from the Russian Federation to PR China from 2010 to
2020. By focusing on the performance of the crude petroleum sector and its influence
on the economic dynamics of PR China, with variables such as trade volume, pricing
trends, geopolitical factors, and market demand, this research seeks to provide a
nuanced understanding of the trends and implications of these exports on the
economic landscape of both countries.

Through a meticulous examination of the data and trends in crude petroleum exports,
this study aims to shed light on the evolving trade relationships, economic impacts,
and strategic considerations associated with the export of crude petroleum from the
Russian Federation to PR China. By analyzing the data from the past decade and
considering current trends, this research endeavors to offer valuable insights into the
dynamics and implications of these exports for both countries and the broader global
energy market.

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 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter provides a comprehensive overview of the research design, data

collection methods, data analysis techniques, ethical considerations, and limitations
of the study. This chapter is crucial in outlining the systematic approach adopted to
investigate the dynamics of crude oil trade between Russia and China during the
period under investigation.

3.2 Research Design

The research design focuses on a qualitative approach to delve into the multifaceted
factors influencing crude petroleum exports. With this method, the study captures the
nuances and complexities of the trade relationship between Russia and China. This
approach allows for flexibility in data collection and analysis, enabling a deeper
understanding of the various elements impacting crude oil exports.

3.3 Data Collection Method

Data collection in this research involves document analysis and literature review to
gather information on trade agreements, economic policies, market dynamics, and
factors affecting crude oil exports. These methods was instrumental in acquiring a
comprehensive dataset to analyze the key drivers and challenges in the Russia-China
crude oil trade relationship.

3.4 Data Analysis

The data analysis process will entail a thorough examination of the collected data to
identify patterns, trends, and correlations related to crude oil exports between Russia

17
and China. Qualitative interpretation was employed to derive meaningful insights
into the factors influencing the trade dynamics during the specified timeframe.

3.5 Ethical Considerations

Ethical considerations were paramount throughout the research process to ensure the
protection of participants' rights, maintain research validity, and uphold scientific
integrity. While the study does not involve human participants, ethical principles
guide the overall conduct of the research and the handling of data. Adherence to
ethical guidelines, including data privacy, confidentiality, transparency, and
compliance with research standards, remains integral to the research framework.

3.6 Limitations

Acknowledging the limitations of the study is essential to provide a transparent view

of the research scope. Limitations include constraints in data availability, potential
biases in data collection, and challenges in generalizing findings.

18
 CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1 Introduction

China in the world energy reserves, ranks among the forefront, both as the world's
second energy producing country, is also ranked second in energy consumption in
the country. As the economy continues to expand, China's energy consumption has
continued to rise. The factors that is leading to this rise are what this chapter intends
to review.

4.2 Geopolitical factors influencing the trade dynamics between China and
Russia

In the Sino-Russian strategic partnership, both countries have common interests that
cement their partnership, and are key players in shaping the international order,
seeking better relations with the West based on mutual respect and equality (Bolt and
Sharyl, 2018). However, the relationship is marked by burgeoning cooperation,
potential competition, and friction, particularly due to Russia's need to deal with
China's growing relative power while being isolated from the West (Tubman et al.,
2023). The relationship between China and Russia is not just about economic
cooperation, but also about political and strategic considerations. The use of
economic relations as a weapon to achieve geopolitical and national security
objectives is a crucial factor influencing the trade dynamics between China and
Russia.

The new measure of geopolitical distance constructed by Bailey et al. (2017)

provides an opportunity to revisit the impact of geopolitical distance on bilateral
trade, distinguishing from previous studies through the measure of geopolitics and
the methodology used (Ibrahim and Ismaël, 2023).The geopolitical tensions and their

19
impact on the global economy are significant factors influencing the trade dynamics
between China and Russia. The IMF has highlighted the increased geopolitical
vulnerability of emerging and developing economies, which could influence foreign
direct investment flows and economic performance. The impact of geopolitical
alignment is significant and economically relevant, particularly for emerging and
developing economies. The use of economic relations as a weapon to achieve
geopolitical and national security objectives is another factor influencing the trade
dynamics between China and Russia.

The technological disassociation between the USA and China, particularly in the
semiconductor and telecommunications sectors, has led to increased dependency on
imports of critical minerals controlled by China and Russia. This concept of 'friend-
shoring' can lead to further fragmentation of global supply chains and increased costs
for companies.In conclusion, the trade dynamics between China and Russia are
influenced by several geopolitical factors, including common interests, burgeoning
cooperation, potential competition and friction, geopolitical tensions, and the use of
economic relations as a weapon to achieve geopolitical and national security
objectives (Ibrahim and Ismael, 2023). These factors have significant implications
for the global economy and governance, raising important questions about the future
of international commerce and the role of emerging powers in shaping the global
economy.

Historically, Russia's oil exports primarily flowed westward, feeding the energy
demands of Europe. However, the recent geopolitical landscape has significantly
altered this dynamic. The imposition of Western sanctions following the Ukraine
conflict has disrupted traditional export routes and financial channels. This has
pushed Russia towards China, a reliable and increasingly oil-hungry customer,
creating a unique opportunity for both nations.

20
For Russia, China offers a lifeline. Sanctions have restricted access to Western
markets, leading to a potential decline in overall oil export volumes. China, with its
vast and growing energy needs, provides a crucial outlet for Russian crude. This
allows Russia to maintain revenue streams and potentially mitigate the economic
impact of sanctions (Feng, 2019).

China, on the other hand, benefits from a potentially more stable and secure source of
oil. Diversifying its energy sources is a strategic priority for China, reducing
dependence on politically volatile regions like the Middle East. Russian crude offers
a geographically close alternative, potentially enhancing China's energy security
(Nakayama, 2013).

However, the burgeoning Russia-China energy partnership is not without its

complexities. The relationship is colored by the ever-present tension between China
and the US. While China benefits from Russian oil, a close alignment with a
sanctioned nation could damage its relations with the West, a critical trade
partner.Russia, too, must tread carefully. Overreliance on China could weaken its
bargaining power and potentially expose it to exploitation. Additionally, a
strengthened Russia-China energy alliance could be perceived as a threat by the US,
further escalating geopolitical tensions (Lampton, 2023).

The melting Arctic ice cap presents a new geopolitical front for energy resources.
Previously inaccessible reserves of oil and gas are becoming increasingly viable for
exploration and exploitation. Both Russia and China are actively involved in Arctic
resource development. Russia, with its vast Arctic coastline, holds significant
potential reserves. China, although not an Arctic nation, has shown keen interest in
the region's resources and is actively seeking partnerships and infrastructure
development opportunities (Erlanger, 2023). The potential for a joint Russia-China
Arctic energy venture presents both opportunities and challenges. Collaboration

21
could lead to faster and more efficient resource extraction, potentially benefiting both
nations. However, such cooperation could also raise concerns among other Arctic
nations regarding environmental protection and regional security (Yongnian, 2021).

The physical infrastructure for transporting oil plays a critical role in shaping trade
dynamics. Russia and China have invested heavily in pipeline networks connecting
their territories. Pipelines like the East Siberia Pacific Ocean (ESPO) pipeline
provide a cost-effective and secure means of transporting crude oil over vast
distances (Wang et al., 2015).

The development of new pipelines is another factor to consider. Russia is exploring

options to expand its pipeline network eastward, further enhancing its ability to
export oil to China. The potential construction of pipelines through Mongolia or the
development of Arctic shipping routes could offer Russia greater flexibility in
routing its oil exports, potentially reducing dependence on traditional routes that
might be vulnerable to geopolitical pressures (Reuters, 2023).

4.3 Economic factors influencing the trade dynamics between China and Russia

Reflecting on the economic development of China and Russia since the 1990s, there
are clear differences in their exposure to globalisation. China has undoubtedly been a
fast-growing exporting machine over the past decade, whereas Russia’s exporting
capacity has only gradually increased but remains low. Figure 3 shows that China’s
share in global exports has increased from 6.68 percentto 16.63 percent, gradually
becoming a leading exporter of goods, outpacing Japan in 2012, and the US in 2020.
Russia’s global export share also doubled from 1.92 percent to 3.09 percent from
2008-2022, but it is still substantially lower than nearly all the other major
economies. Furthermore, it started to come down in 2014 as oil prices plummeted in
the fourth quarter of 2014 and presumably even more so in 2015 although data is not

22
yet available. In the meantime, the export share for the EU28 (excluding exports to
member countries) has come down only marginally from 18.55 percent in 2000 to
15.04 percentin 2022 Wang, Li and Ma, 2023).

A crucial economic factor influencing Russia-China crude oil trade is the global price
of oil (IEA, 2023). When global oil prices are high, Russia benefits from increased
revenue per barrel exported, potentially incentivizing higher volumes to China.
Conversely, lower global oil prices can lead to a decline in export profitability,
potentially prompting Russia to adjust export volumes or negotiate more favorable
pricing with China (Energy Information Administration, 2023).

Shifts in global oil supply and demand can significantly impact the economic
viability of Russia's crude oil exports to China. Increased oil production from other
major oil producers, such as the member states of the Organization of the Petroleum
Exporting Countries (OPEC), can lead to a global oil glut, putting downward
pressure on prices and potentially making Russian exports less attractive (BP
Statistical Review of World Energy, 2023). Conversely, disruptions in global oil
supply due to geopolitical events or natural disasters can create a shortage, driving
prices up and potentially making Russian exports to China more profitable.

Formal trade agreements between Russia and China can play a vital role in
facilitating and stabilizing crude oil exports. Long-term oil supply contracts can
establish minimum export volumes and favorable pricing structures, providing
predictability and economic security for both parties (Nakayama, 2013).
Additionally, such agreements can streamline customs procedures and reduce trade
barriers, further promoting efficient oil flows.

Similarly, the cost of transporting crude oil from Russia to China, primarily through
pipelines, can significantly impact overall profitability. Negotiations over pipeline
tariffs and exploring alternative shipping routes can influence the economic viability

23
of exports (Wang et al., 2015). Also, fluctuations in exchange rates between the
Russian ruble and the Chinese yuan can impact the economic attractiveness of
exports for Russia. Devaluation of the ruble relative to the yuan can make Russian oil
exports cheaper for China, potentially increasing export volumes.

In March 2013, President XI Jinping in Russia during the visit, the two countries
signed on the East and West lines to increase crude oil supply agreement, Russia will
export to China the volume of oil reached an annual average of 2200 million tons, the
East line of the existing Sino-Russian crude oil pipeline of oil supplies on an annual
average of 1500 million tons increased year by year, to 2018, the total oil export
volume reached 3,000 tons. Not only that, Russia in the future will transport by sea
transportation for export to Tianjin refinery oil amounted to 910 million tons.
China's natural gas consumption, natural gas consumption increased year by year, the
consumption amount of the energy structure in the proportion is also increasing year
by year. The 2012 China consumption of natural gas 1471 billion cubic meters, by
one year rise 13%, in 2014 gas consumption was up to 1800 billion cubic meters, up
7.4%, in 2020 up to 1920 billion cubic meters, by one year of 6.7 %. 2020 China
natural gas imports to Russia total consumption of 3.2 %. China's natural gas
consumption is growing at the same time, the growth rate has slowed, which with
rising gas prices, and many other factors. According to the expert analysis, China's
natural gas consumption in 2020 expected growth rate as in 2015 by one times, to
achieve approximately 4100 million cubic meters of the target in primary energy
consumption proportion reaches 12%, the future China's energy situation will happen
a major reform, and this is an important engine. By then, China will become the
Russian gas, the largest importer, which should benefit from the natural gas, the
future of China will be available from Russia up to 3000 billion cubic meters of
natural gas exports.

24
The volume and value of energy exports from Russia to China have experienced a
substantial increase subsequent to the commencement of the war. Despite the
imposition of sanctions, embargoes, and price limitations, Russia has been compelled
to sell energy to China at significantly reduced prices. Consequently, the value of
Russia's energy exports has experienced a substantial surge. China has bought
Russian fossil resources for around EUR 86 billion since the beginning of the
conflict, with oil imports accounting for the bulk, approximately EUR 67 billion (von
Essen, 2023). Chinese imports of Russian oil, coal, LNG, and pipeline gas had a 56
percent increase in value in 2022 compared to 2021. Since the beginning of the
conflict, China has been the primary importer of Russian energy, second only to the
EU bloc, and the largest individual country in terms of imports. The NKK/SCEEUS
report titled "Russia-China energy relations since 24 February: Consequences and
options for Europe" by Henrik Wachtmeister highlights a significant escalation in the
disparity in energy relations between Russia and China. The report reveals that
China's portion of Russian energy exports has experienced a twofold increase, rising
from 15 to 30 percent. In contrast, Russia's share of Chinese imports has only shown
a marginal growth (von Essen, 2023).

China now holds the position of being Russia's largest consumer, and it is probable
that Russia's energy exports to China will persistently grow in the next years.
Simultaneously, Russia's reliance on a sole primary consumer presents significant
threats to the equilibrium of power. Furthermore, it is unlikely that Chinese imports
would be sufficient to offset the losses incurred by Russia in the European oil and
gas markets (von Essen, 2023).

Chinese imports of Russian crude oil averaged 1.95 mb/d in the first four months of
2023, accounting for 18% of total Chinese imports, indicating that the increasing
trend has persisted in 2023. With more than EUR 21 billion in imports as of June

25
2023, China is Russia's largest buyer of oil from the country. In March 2023, imports
of Russian oil reached record levels, with 2.27 million barrels per day—1.5 times
higher than in March 2022—but only a 3% increase in value, likely due to
discounted prices. China is also receiving a rising amount of Russian oil shipped
from the Arctic, reaching record levels in March 2023. According to von Essen
(2023), the amount of Russian Heavy Fuel Oil (HFO) that independent Chinese
refineries buy to make gasoline and diesel more than quadrupled to 3.1 million tons
in 2022 and reached record levels in February 2023.

Interestingly, China appears to have acted in an illogical manner in its oil policy
throughout 2022, by firmly backing Russia economically and politically, despite the
significant costs to both its own and the global economy. It has accomplished this by
replenishing its reserves with imported Russian oil when it was at its most costly, and
then refrained from exporting refined goods despite strong margins and favorable
circumstances, which led to global inflation and therefore benefited Russia.

Russian gas exports to China: During the conflict, China spent over EUR 12 billion
importing Russian gas. In terms of volume, China's imports of Russian pipeline gas
increased by 50% in 2022 (to 15.5 billion cubic meters (bcm)) and Russian LNG by
44% (6.5 million tons). In terms of value, the import of Russian pipeline gas climbed
by 160 percent in 2022, to around USD 3.98 billion, and the import of Russian LNG
by 140 percent, to USD 6.75 billion.

As a result, Russia was China's second-largest pipeline gas provider in 2022, as well
as the fourth-largest LNG supplier. As indicated in Table 1, Russian pipeline gas
exports to China account for a far greater percentage of Chinese imports than
Russian exports; nevertheless, the share of Russian exports climbed dramatically in
2022. Russia also more than quadrupled its Liquefied Petroleum Gas (LPG) exports

26
to China in 2022 compared to 2021 (147,000 tons vs about 63,000 tons). While
Russian pipeline gas is China's cheapest supply of gas, Chinese imports have
generally increased in line with pre-war projections (von Essen, 2023).

Russia exports coal, energy, and nuclear power: China has bought cheap Russian
coal worth around EUR 7.2 billion since the beginning of the war. Import volumes
increased by 20% in 2022 and have continued to rise in 2023. Russia was China's
second-largest coal supplier in 2022, accounting for 23% of Chinese imports (up
from 18% in 2021) and 32% of Russia's exports (up from 25% in 2021), representing
a major increase in both nations' trade mixes. Chinese power imports from Russia
surged in 2022, compared to prior years. China is also becoming an increasingly vital
market for Russia's state-owned nuclear power firm, Rosatom, even as the power
balance in nuclear power cooperation shifts in China's favor.

Energy trade infrastructure: An increase in Russian oil imports to China is restricted,

since China now buys nearly all Russia can offer to the Pacific market, necessitating
either long and expensive transports from Russia's western ports or new
infrastructure. Similarly, gas exports are constrained since the Russian gas sources
providing Europe are not yet connected to those supplying China (von Essen, 2023).

In order to boost Russia's ability to export energy to China, a number of

infrastructural projects are either underway or planned. The two nations inked a new
30-year deal on February 4, 2022, to sell Russian gas to China via a new pipeline
with a maximum capacity of 10 billion cubic meters (bcm) that would cross the Sea
of Japan and be operational in a few years. A revised agreement with further
specifics was signed in January 2023. The long-planned Power of Siberia 2 gas
pipeline, which would be able to transport an extra 50 billion cubic meters of Russian
gas per year to China through Mongolia starting in 2030, was the subject of an

27
announcement made in September 2022 by Alexander Novak, the Russian Energy
Minister (von Essen, 2023).

Apart from meaningless Russian declarations and silent Chinese action, however,
2022 and 2023 have seen little advancement in these and other initiatives. After
China's Ministry of Foreign Affairs reportedly advised prudence with investments in
Russia during a meeting with the three Chinese energy giants, Sinopec, CNPC, and
CNOOC, in March 2022, Sinopec reportedly put a halt to several significant energy
projects in Russia. Sanctions have caused a delay in the joint project known as
"Arctic LNG 2," which involves Chinese and Russian businesses Novatek. It was
announced at the end of 2022 that the Power of Siberia pipeline will fill up two years
later than anticipated (von Essen, 2023). Furthermore, no new upstream investments
or announcements of new oil or gas deals or long-term import contracts have been
made by Chinese corporations throughout the war

28
 CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION, AND RECOMMENDATIONS

5.1 Summary of Findings

In this study, we analyzed the China-Russia oil trading relationship. The key findings
from the analysis are as follows:

i. China and Russia share some common interests that drive cooperation,
including shaping the international order and seeking better relations with the
West.
ii. Despite cooperation, the relationship is marked by potential competition and
friction, particularly due to Russia's concerns about China's growing power.
iii. Global geopolitical tensions and their impact on the economy significantly
influence trade dynamics. This includes the use of economic relations as a tool
to achieve geopolitical objectives.
iv. The US-China technological disassociation creates opportunities for Russia
and China to increase reliance on each other for critical minerals (Bailey et al.,
2017).
v. Both China and Russia are seeking to diversify their trade partnerships to
reduce reliance on single markets.
vi. Formal trade agreements play a crucial role in facilitating and stabilizing oil
exports, establishing pricing structures and streamlining customs procedures
vii. The recent sanctions imposed on Russia have pushed them towards China as a
reliable customer, leading to a significant increase in the volume and value of
energy exports despite discounted prices.

29
5.2 Conclusion

The China-Russia oil trading relationship has witnessed significant growth and
development in recent years. China's increasing energy consumption and Russia's
vast energy reserves have contributed to the strengthening of their energy
cooperation. The construction of the China-Russia oil pipeline has played a crucial
role in facilitating oil trade between the two countries.

Russia has become a major oil supplier to China, and the volume of Russian oil
exports to China has been steadily increasing. China's imports of Russian oil have
taken the place of refined petroleum products, with crude oil becoming the main
imported oil.

Furthermore, the growing natural gas consumption in China presents an opportunity

for Russia to become its largest natural gas exporter. The agreements signed between
the two countries indicate a commitment to enhancing energy cooperation and
increasing the supply of Russian crude oil and natural gas to China.

The establishment of strategic partnership laid a foundation for the China-Russia oil
trade cooperation. The development of china-russia oil cooperation is not only
conducive to the development of Russia's oil industry, but also to safeguard China's
oil security. The China-Russia oil trade cooperation conforms to the reality needs and
the energy development strategy of the two countries. We should also be aware that
there are many barriers about oil cooperation between the two countries. The two
countries should actively deal with the disordered factors from the strategic height,
and we should promote the new development of China-Russia oil trade cooperation.

5.3 Recommendations

Based on the findings of this study, the following recommendations are proposed:

30
1. Strengthen Energy Cooperation: China and Russia should continue to
strengthen their energy cooperation by promoting investment and joint
ventures in the energy sector. This could include the development of new oil
and gas fields, as well as the expansion of infrastructure for energy
transportation.

2. Diversify Energy Sources: While the China-Russia oil trade has been growing
steadily, it is essential for China to diversify its energy sources to reduce
dependence on a single supplier. China should explore opportunities to
increase imports from other countries and develop its domestic energy
resources.

3. Enhance Energy Security: Both China and Russia should prioritize energy
security and work together to ensure stable and reliable energy supplies. This
could include the establishment of mechanisms for information sharing,
coordination during supply disruptions, and the development of strategic
energy reserves.

4. Environmental Considerations: As China's energy consumption continues to

grow, it is crucial to prioritize environmental sustainability. Both countries
should collaborate on clean energy technologies and promote the use of
renewable energy sources to reduce greenhouse gas emissions and mitigate
the impact of energy consumption on the environment.

5. Explore New Areas of Cooperation: China and Russia should explore new
areas of energy cooperation, such as nuclear energy, shale gas, and renewable
energy. By diversifying their energy cooperation, the two countries can further
strengthen their strategic partnership and contribute to sustainable
development.

31
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