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Originally published May 21, 2014 at 8:30 PM | Page modified May 22, 2014 at 6:37 AM

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Russia, China overcome past to sign game-changing gas deal

The agreement signed by the presidents of China and Russia on Wednesday, which will provide Russian natural gas to China for the first time, also carries major economic and geopolitical implications

The New York Times

Why it matters

The agreement signed by the presidents of China and Russia on Wednesday, which will provide Russian natural gas to China for the first time, also carries major economic and geopolitical implications:

The pact will bolster President Vladimir Putin’s “Eurasian Economic Union” by helping to draw Russia and China closer, forming a more powerful economic counterweight to the United States and Europe. This comes at a time when the Obama administration is trying to isolate Russia economically over the crisis in Ukraine and as American tensions with China are rising over cyberspying and China’s territorial disputes with its neighbors.

Russia secures a contract, worth an estimated $400 billion over 30 years, that is the biggest in the history of its natural-gas industry and provides Putin with an important new market for natural gas just when the European Union, its most important Western customer, is seeking to diminish its reliance on Russian gas.

China, the world’s leading consumer of energy, secures an important source of clean fuel at an advantageous price, decreasing the country’s reliance on imported coal and oil.

The New York Times



China and Russia signed a $400 billion gas deal on Wednesday giving Moscow a megamarket for its leading export and linking two major powers who, despite a rocky history of alliances and rivalries, have drawn closer to counter the clout of the United States and Europe.

The impetus to finalize the gas deal, which has been talked about as a game-changing accord for more than a decade, finally came together after the Ukrainian crisis forced Russia’s president, Vladimir Putin, to urgently seek an alternative to Europe, Moscow’s main energy market, which slapped sanctions on Russia and sought ways to reduce its dependence on Russian energy.

Putin, on a two-day visit to Shanghai, and the Chinese leader, Xi Jinping, oversaw the signing of the contract between Gazprom and China National Petroleum, the biggest natural-gas deal Russia has sealed since the collapse of the Soviet Union. The contract runs for 30 years and calls for the construction of pipelines and other infrastructure that will require tens of billions of dollars in investment.

The deal, which Putin called an “epochal event,” solidified a relationship between China and Russia that had been warming since Xi assumed power in 2012, as Xi and Putin have found common cause.

“The Sino-Soviet rift that brought the two countries to the brink of nuclear war in the ‘60s has been healed rather dramatically,” said Strobe Talbott, president of the Brookings Institution and the chairman of Secretary of State John Kerry’s Foreign Policy Advisory Board.

Ostensibly on the same side during the Cold War, the Asian neighbors even then competed for global influence with their divergent brands of communism. They fought a brief but explosive border war in 1969, and later took opposite sides in conflicts in Vietnam and Afghanistan.

They have similar views of the U.S., however, including opposition to its unilateral military actions in Kosovo, Iraq and Libya, and wanted to “take Uncle Sam down a peg or two,” Talbott said. Putin, in particular, wanted to make a point of showing that the U.S. and its NATO partners were in decline.

The deal offered a lift for the Russian economy, he said, and China’s validation of Russia’s improving world image.

At the same time, Xi was unhappy with the Obama administration on issues ranging from Washington’s outspoken support of its military alliance with Japan, its criticism of China’s actions in the South China Sea, and its hard line on cybertheft, said Shi Yinhong, a professor of international relations at Renmin University in Beijing.

Although China had expressed neutrality over the Ukraine crisis, the strained relations with the U.S. in other spheres tipped that position in favor of Russia, Shi said. Xi and Putin have met seven times, he noted.

Those factors appear to have finally pushed the two sides to an agreement, whose final sticking point had been price. The final price of the Russian gas, which will flow through a 2,500-mile pipeline from two fields in Siberia, was not disclosed, and energy markets were trying to parse who gained the bigger advantage.

With Russia’s economy near recession, and the International Monetary Fund projecting 0.2 percent growth this year, Putin was desperate to get the deal done, energy experts said.

The chief executive of Gazprom, Alexey Miller, said the contract called for Russia to supply 38 billion cubic meters of gas annually over 30 years, making the price about $350 per thousand cubic meters. In 2013, the average price of Gazprom’s gas in Europe was about $380 per thousand cubic meters.

Morena Skalamera, a fellow at the Geopolitics of Energy Project at Harvard, said Putin was more willing to concede on price than he was before the Ukraine crisis.

“If the European market was a question mark before the Ukrainian crisis, now with sanctions, Putin needed China even more,” she said.

“Politically it is important for Putin to show that the ‘Greater Russia’ is back on the international scene and that it has other, non-Western options to restore its rightful place.”

In exchange for a lower price, China offered a loan of about $50 billion that will finance development of the gas fields and the construction of the pipeline by Russia up to the Chinese border, Skalamera said.

The Chinese would build the remaining pipeline, and gas is scheduled to start pumping in 2018, she said. The production of U.S. shale gas also gave Russia incentive to rapidly complete the deal with China and to seek other markets in Asia, Skalamera said.

In remarks after the signing, Putin stressed that the price of the gas was based on the market price for oil, just as it was for Russia’s gas supplies to European countries.

Without the oil-price benchmark, Russia would be under pressure to renegotiate European prices, said Kenneth Courtis, a founding partner of Thames Investment. The price of Russian gas to Europe is based on fluctuations in oil prices, making it more expensive than gas that China buys from Central Asia, he said.

Even under the new agreement, Europe will remain Russia’s biggest market.

“The rapid rise of U.S. natural gas is giving Europeans genuine market options,” Skalamera said.

China was under no such pressure, having lined up substantial and cheaper flows of gas from Central Asia. Siberian natural gas does give China a cleaner substitute for the fossil fuels — coal and petroleum — that provide most of its energy needs, and cause much of the pollution smothering China’s cities.

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