Russia-China gas deal benefits both countries

June 19, 2014 10:22 am

A gas deal between “Gazprom” and China National Petroleum Corporation (CNPC) signed on May 21, 2014, during a two-day Shanghai visit of a Russian delegation led by President Vladimir Putin became the biggest contract in the history of post-Soviet Russia.

The overall cost of the 30-year agreement is $400 billion The gas delivery volume will amount to 38 billion cubic meters each year.

russia china gas“This is a milestone event for the gas industry of Russia, and of the Soviet Union too. This is the biggest contract in the history of the whole gas industry of the former USSR and the Russian Federation, country- and volume-wise,” said Vladimir Putin after the contract was signed.

The exact price of gas shipments from Russia to the PRC is kept secret; however, it is known to be connected with the market prices of oil and oil products and calculated in the same fashion as the price for the European consumers. The cost is estimated to be $350–$390 per thousand cubic meters (TCM) of gas, while the average price of gas for the countries of the far Russian abroad in 2013 amounted to $387 after excise and customs duties and VAT.

China will pay $25 billion as a pre-agreed advance payments: this capital will be used to build the “Power of Siberia” pipeline which will ship gas to China from the Eastern Siberia gas fields starting from 2017. Overall, infrastructure investment from both sides will potentially amount to $75 billion

At the same time, Moscow and Beijing signed a series of cooperation agreements in many fields, including banking, telecommunications, space, transportation, engineering and other industries.

The Russia-China gas deal triggered immediate reaction from politicians, experts and foreign mass media. For instance, Forbes suggests that the steps taken by the US and the EU have forced Moscow to accelerate its turn to the Asian gas market ahead of Canada and the United States.

“The West may have overplayed its hand in thinking it could impose sanctions and deeply harm the Russian energy sector. If anything, Russia has demonstrated that it has a willing customer in China and, moreover, that it is willing to substantially deepen its economic ties with China,” writes the periodical.

The Washington Post notes that Russia has made significant adjustments in the economic relations with its neighbors and created a new export market by signing this contract.

“The [gas] deal marked a new partnership between two countries that have at times mistrusted each other but have also sought to counter U.S. influence in global affairs,” says The Washington Post.

At the same time, American CNBC news channel reports that the deal between Moscow and Beijing will not bring significant short-term consequences, but still calls it a major step.

The US journalists admit that the deal not only gives Vladimir Putin an opportunity to counter the Western sanctions, but also signals changes in global policy and economy fields.

“As Russia sees a new economic partner in China, Beijing has found an investment in the future of its neighbor.” CNBC notes.

Julian Evans, a British reporter, suggests that both sides will benefit from the contract: the Russians will receive great investments and modern technologies, and the Chinese will resolve the energy security issue and expand their presence in the Russian market.

“Further EU support of the US sanctions against Russia will lead to losses of 30 to 50 percent of Russian market by European companies with a benefit to the Chinese rivals as soon as by the end of this year, with losses in strategically important sectors (power, oil and gas industries and IT technologies) being even bigger,” he speculates.

Julian Evans also recalls the Chinese deal with the Ukrainian government at the end of 2013. According to them, China planned to build an oil and gas terminal in the now-Russian Crimea to reduce the risks that may arise from the development of the situation in Iran, from which the PRC buys more than half of its imported oil, and increase its own supplies.

In addition to that, the reporter finds it possible that Moscow will have to involve Chinese companies in its Arctic Shelf projects duet to increasing economical and political isolation of Russia by the EU.

Ashley Smith, a journalist from Britain, points out that the two countries have already been collaborating by establishing the Shanghai Cooperation Organization and adopting a common position on Kosovo, Syria and Iran issues. In her opinion, the signed gas deal signifies the foundation of a new alliance.

“Of course, neither [side] wants to directly challenge the U.S., which still dominates the world system, but they have made it abundantly clear that they want a multipolar world order to replace the American-ruled unipolar world order,” she writes.

At the same time, Guardian highlights the fact that the Moscow-Beijing deal is a direct threat for the European countries, which largely depend on Russian gas shipments and cannot find an adequate replacement for it in terms of price and volume.

“Developing alternative sources will take time. Liquefied natural gas is an option available from a number of sources, namely Qatar, Nigeria and the US, but the cost of importing it will be higher than the cost of importing gas, and new infrastructure will be required to receive shipments. […] Given its position as a gas exporter, Russia was able to act quickly in diversifying its customer base by turning to China. As a gas customer, Europe does not have this flexibility,” says Guardian.

Considering the sanctions, the Ukraine issue and the signed gas deal with China, experts from various parts of the world begin to agree that Russia and Europe must seek the ways to resolve the tension.

In particular, Nadine Godehardt, consulting fellow of Asia Research Division at German Institute for International and Security Affairs, expressed her belief that both Moscow and Brussels still need to cooperate.

“Surely, Europeans start to think about ‘other options’ than Russian gas. However, Russia will remain an important energy partner and Europe also one of the most important partner for Russia which again underscores why dialogue between the two sides is crucial,” she explained.

From the expert’s point of view, this is why the EU used sanctions as the most effective and strong way to influence Moscow without using radical measures.

“Sanctions are the strongest instrument the Europeans have without cutting all lines of communications,” Nadine Godehardt clarified.

In her opinion, the leaders of both Russia and China used the situation to sign the mutually beneficial treaty.

“For Vladimir Putin, it was a chance to symbolically show the world that there are ‘other options or other partners’ and that he does not rely on Europe. For Xi Jinping, the deal is a chance to show that China-Russia relations are important to China,” the expert emphasized.

According to her, the signed contract may be vital for Russia in order to develop the Siberian gas fields and building the transportation infrastructure. At the same time, it may be crucial for China in order to implement its “new Silk Road” project.

Discussing the background of the deal, Nadine Godehardt noted that the decision for Russia to build a “pivot to Asia” was expected and became apparent many years ago. This was signified by Xi Jinping taking over the leadership in the PRC and his positive attitude towards Russia, as well as cooperation between the countries on many issues in the UNSC and other international organizations.

In her opinion, the signed contract, which was preceded by a number of equally significant agreements, does not by itself assure that the countries began to cooperate tightly: only the actions of Moscow and Beijing in the oncoming years will prove or disprove it.

“If there is something like a new Russian-Chinese unity emerging, it would be crucial to actually realize the bilateral agreements they have signed in due time,” Nadine Godehardt emphasized.

In his turn, Tao Wang, Resident Scholar at the Carnegie-Tsinghua Center for Global Policy (China), expressed his belief that the new partnership will benefit both countries.

“I think that with this natural gas deal China and Russia could develop into a relationship that is based on substantial energy supply like both oil and gas and intensive economic development on both sides. There will be much better conditions for improving political collaboration and trust between Russia and China. So far we have a lot of going on between China and Russia on the political level, but the current economic exchange and traded goods between these two nations is not comparable to that of China and the US or China and the EU. So, in the future, if there is more collaboration in energy, in oil and gas between these two countries, I think the political collaboration will be much more enriched,” he said in an interview to “PenzaNews” agency.

According to the researcher, Moscow’s decision to move to the East market was a long-term decision, and the negotiations started approximately 20 years ago. However, the events in Ukraine and pressure from the EU and the US because of the Crimea issue have considerably accelerated the negotiation process.

“In terms of gas exporting market, [Moscow] always wanted to have an East side consumer – either China or Japan or other Asian market – to balance with the European market, so it would be much better to have two big markets in hand than having one. On the other hand, China is also in need of having extra gas supply sources to meet the roaring demand,” the expert noted.

According to him, the gas deal was expected by the US businessmen and politicians.

“I was in Washington, DC, on a few meetings with people in the gas sectors and experts in policy research community – they all seemed to be very positive about this possibility,” Tao Wang explained.

russia china gas dealDiscussing the economical aftermath of the sanctions, he suggested that Western oil and gas companies would only be affected by the negative consequences in the short term. However, the expert also noted that the empty space in the market will be quickly filled by their competitors, because Russian oil and gas industry still requires foreign expertise and technologies.

“if they would be asked to leave Russia’s markets even for a short while, there will be window for some of their competitors to move in, especially national oil companies in India, China, Qatar and other countries. But sooner or later [Western companies] will come back to Russia and continue to collaborate,” Tao Wang emphasized.

At the same time, Andrei Ostrovski, Doctor of Economics, professor and vice-principal at the Institute of Far Eastern Studies (IFES), suggested that the European energy market, in which Russian gas takes a share of more than 30%, may suffer serious losses.

“The problem is first of all for Europe, for those countries who have fairly tightly-knit and well-developed economic contacts with Russia: for Germany, France and even for Great Britain. This may also come as a serious hit for the other countries. Only those states that don’t have large foreign trade with Russia will avoid it,” the expert explained.

In his opinion, the Western countries are aware that losing Russian energy supply shipments will lead to them potentially going to the PRC.

“China can indeed compete for Russian gas and oil right now. It even has certain advantages, if you consider that the Chinese economy is rising quickly, while the European economy is stagnating,” the researcher said.

Discussing the reasons behind Russia’s move to the East, he highlighted both long-term reasons, such as the shift of economical life to Asia and China’s developed economy, and the Ukrainian crisis and the position of the US and the EU in it.

In addition, the expert said that Moscow should have targeted Eastern countries as early as at the beginning of this century, and pointed out that the country lost significant profit because of this delay.

“Since ‘Gazprom’ hadn’t signed the contract earlier and bargained with China, Russia lost a significant portion of its share in the Chinese market. In 2006, a deal between China and Turkmenistan was struck, and the latter now ships around 25-30 billion cubic meters of gas to the PRC, and a gas pipeline was built between the countries,” the IFES professor explained.

According to him, the relationship between Moscow and Beijing will develop in many ways, including external trade, the volume of which is projected to reach $100 billion by 2015, and $200 billion by 2020.

In his turn, Mark Harrison, Professor of Economics at the University of Warwick, England, suggested that the Russia-EU relationship will likely stay sour because of the Ukraine and Crimea issues.

“For Russia and the EU, sadly, tension seems to be the dominant theme today and this seems likely to persist,” he said.

From the researcher’s point of view, the sanctions may cause losses for both sides.

“Western companies stand to lose access to Russia’s great oil and gas reserves. Russia stands to lose Western investment and expertise,” Mark Harrison explained.

Despite that, the expert pointed out that the fact that the Western politicians acted to their own detriment in this respect was not unexpected, because no one would pay any attention to their actions otherwise.

In his opinion, the current situation may lead to Russia becoming increasingly isolated on the international level, while a trend in this direction was apparent even before the Ukraine crisis. Mark Harrison also added that such developments may lead to Russia’s position becoming worse than China’s.

“China has many business partners but very few real friends with shared values and shared long term interests. But China is prospering economically, so everyone wants to do business with China. […] Russia is not prospering economically, so the incentives to do business with Russia may diminish over time,” the professor said.

Mark Harrison emphasized that the Russia president Vladimir Putin’s active promotion of the Eurasian economic union as an alternative to European integration grew as well as the Ukrainian issue developed.

According to the expert, it was obvious that Moscow would turn to Beijing in this situation.

“It makes sense that Russia would seek insurance against rising tensions in Europe by looking for a closer relationship with China,” he added.

At the same time, Mark Harrison highlighted a number of potential reasons for conflict between the potential allies, and suggested that both countries took a step towards each other mostly to stand against their common opponent.

“For Russia and China the relationship will develop on the basis that the two countries are strategic rivals that find it convenient to do business and cooperate to limit Western influence in their two spheres,” he said.

Stefan Liebich, Bundestag member and representative of the Left Party of Germany, also called the cooperation between Moscow and Beijing beneficial for the former party.

“For some time, Russia has been interested in closer economic and political relations in the East. The dispute with the European Union following the crisis surrounding Ukraine has accelerated these trends,” he said.

At the same time, the politician highlighted the importance of active negotiations between Russia and the EU.

“From Russia’s point of view there is nothing bad to be independent and to maintain relationships to the East and to the West. From the perspective of Western Europe, however, there is no evidence to lose Russia as a partner. The economic ties are very tight and that should remain so,” the German MP emphasized.

He also added that the sanctions and the draft of the next set, caused big disputes among the politicians and economists, while fracking and nuclear energy lobbies use the debates for their own interests. In total, according to Stefan Liebich, this harms everybody affected by the sanctions.

“I think one should refrain from turning this spiral further on and on. In the end it costs jobs in Russia and the EU and does not help anybody in Ukraine,” he said.

“I very much hope that in Europe on both sides those who want a Europe standing together and not a new cold war will prevail. The relationship between Russia and China and the relationship between the EU and China should become closer regardless of it. For the advantage of both sides,” the Western politician concluded.

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