Oil cements China-Russia alliance

In the 1960s, Dmitri Polyakov, an informant on the Soviet Union, leaked to the CIA that Sino-Russian relationship has deteriorated.

This intelligence report prompted the U.S. to normalize relationship with mainland China, which contributed to the Soviet Union's dissolution and China's economic boom decades later.

Much of China's economic success can be attributed to exports to the U.S. and foreign direct investments from the U.S.

Now, economic relationships between these two countries have worsened -- trade imbalance and debt monetization are two issues -- and new realities may drive China back to the arms of Russia.

The new reality is that China needs energy and Russia is only too happy to supply it.

Russia is the second largest oil exporter (behind Saudi Arabia) and the largest oil producer in the world. Under the government of Vladimir Putin, the energy sector's size relative to the overall economy grew and became an increasingly important asset for Moscow.

This burgeoning sector is responsible for the bulk of the Russian government's revenues and accumulation of foreign exchange reserves. It is a key foreign policy tool for Putin and funds his domestic policy. Energy production is simply too important for the Russian government, which is unlikely to cut back or cede control over it.

China, for its part, may have already become the largest energy consumer in the world in 2009. While the U.S. still tops the world in oil consumption and imports, China in 2010 imported 239 million tons of oil, up 17.5 percent from 2009, reported the General Administration of Customs.

Imports in 2010 accounted for 52 percent of China's total consumption. By 2020, analysts think that figure will jump to 65 percent. Having to import over 50 percent of one's oil is a globally recognized energy alert level, said China Daily, a state-run newspaper.

China's surge in oil and overall energy consumption reflects its huge manufacturing base and growing domestic consumer demand.

Furthermore, China is already wary of its primary source of oil imports, which comprises of shipments from the Middle East. This route takes the precious cargo though the Strait of Hormuz, across the Indian Ocean, and up the Strait of Malacca. At any of these points, China-bound oil shipments face potential threats from foreign naval powers.

It's thus easy to imagine China, one of the largest buyers of energy, and Russia, a leading exporter of it, becoming natural friends.

Indeed, the Sino-Russian relationship is getting close and closer.

Last November, China and Russian decided to dump the U.S. dollar and instead use their domestic currencies for bilateral trade.

Since January 1 2011, Russia has also pumped 390,000 tonnes of crude oil to China. This Sino-Russo pipeline is expected to transport 15 million tonnes of crude oil per year until 2030.

Email Hao Li at hao.li@ibtimes.com