Russia strikes $400bn game-changing gas deal with China

By bne IntelliNews May 21, 2014

Ben Aris in Moscow -


Russia and China have closed what has been dubbed "deal of the century" - a $400bn gas deal that will supply energy to the burgeoning Chinese market for at least the next decade, RT reports. The agreement represents a new and deeper strategic partnership between the two biggest BRIC countries that could change the balance of power in the world. 

China's economy is growing by leaps and bounds, but a quirk of geography means that, although the country is massive, it has little in the way of natural resources. It is missing all the key inputs that its factories need to make profits, with energy and minerals topping the list. Russia has the opposite problem. It has a vast and largely unpopulated territory that is home to nearly every raw material imaginable. However, its traditional customers in Western Europe for its gas have become unhappy about Russia's reliability, so are threatening to reduce the amount of Russian gas they import as soon as they can.

"We view the deal as positive for Gazprom from a strategic point of view, as it allows it to enter the world’s fastest-growing gas market and will indirectly help in negotiations with European gas consumers," says Ildar Davletshin, an analyst with Moscow investment bank Renaissance Capital.

Together the Sino–Russian partnership has been called "the best synergy on the planet." The trouble is they don't like each other very much. Even during the Communist era, China and Russia failed to unite against the capitalist world.

Yet in the last few years the two countries have been growing together in a marriage of convenience. Chinese President Xi Jinping chose to visit Russia first following his elevation to the post last year and Russian President Putin has thrown enormous resources into developing Russia's Far East to better tap the Chinese market.

The Socialist ideology has been discarded as the foundation of their political systems and business has taken over. The two countries have little problem trading with each other. The Chinese are nothing if they are not mercantile and the Russians are also these days most interested in making money. But their relationship will change following the gas deal. 

Going into business together

Russia's showdown with the West over Ukraine has meant that the Kremlin has swallowed its traditional misgivings about cozying up to China and decided that the two countries should go into business with each other.

China currently relies heavily on coal to fuel its power plants, and suffers from pollution as a result. The Chinese would love to import Russian gas, especially to its underdeveloped northwest territories. 

The point with gas is that it's best suited to be sent through pipelines (though liquified natural gas shipped by tanker is growing). The point with pipelines is that once they have been built they cannot be moved. It is a binding relationship. The EU worries about Russia's power to cut off its gas supplies, though the Kremlin is as dependent on the revenues from their gas exports as the EU is dependent on Russian energy imports. And the same is true for China with knobs on.

The big difference between China and the EU is that Brussels has already built an extensive distribution network that runs throughout the Continent. As China has not until relatively recently imported gas, it doesn't have a wide pipeline distribution network. The Gazprom deal means not only will China have to spend $400bn on Russian gas imports over the next 30 years to deliver some 38bn cubic metres a year (cm/y), the real commitment is the even larger sums it will have spend on building a domestic gas distribution network. Countries don't make this sort of infrastructure investment lightly, especially if they are not sure of the continued friendship of the supplier of the gas. 

The upshot is that this gas deal is a de facto strategic partnership treaty that needs to be maintained for decades and probably much longer. Ukraine's pipeline network that links Russia to Europe, for example, has been in existence for more than 50 years; even in the Soviet-era Russia continued to export gas to Western Europe despite being in a Cold War with the Nato allies. 

There is no word on the all-important price of the gas. The Russian side is reportedly insisting on between $350 and $380 per 1,000 cm of gas – the same sort of price that Russia charges its European clients. The Chinese, realising they have Russia over a barrel, is asking for a discount on the order that the other countries of the Commonwealth of Independent States (CIS) receive – somewhere between $180 and $200.

And it is a buyer's market. The Chinese did not have to do a deal with Russia. They have already done extensive gas supply deals with the countries of Central Asia. A gas supply deal signed with Turkmenistan could meet much of China's immediate needs in the short to medium term. China can afford to shop around. However, the Kremlin is showing itself to be very business-minded and driving as hard a bargain as it can. 

The deal is also indicative of a shifting balance of power in the world. The emerging markets have been emerging for two decades now, but several are starting to converge rapidly with the developed world. Last year the UNDP upgraded Russia to a "high income" country -- in other words it is now officially an emerged market. Likewise, China has gone from a backward bucolic economy to the powerhouse of global growth in the last two decades. 

This is the emerging markets decade. The developed world should be throwing itself in to engaging with the BRIC countries, but so far have largely confined themselves to trade deals, or private enterprise building factories. By contrast the Sino-Russian deal suggests that the emerging markets are committing themselves to fully cooperate with each other.


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