China and Russia last week signed a huge, long-awaited agreement on natural gas sales. The $400 billion deal, the largest in the history of the Russian (and Soviet) gas industry, is being hailed as the cornerstone of a new partnership between Moscow and Beijing, “a watershed event” in the words of Russian President Vladimir Putin.
It has already triggered handwringing about a China-Russia axis that invariably follows every meeting of the two countries’ top leadership. The gas agreement is important, but it is not a historical turning point.
Beijing and Moscow have for a decade been discussing, and then negotiating, a deal that would supply Russia’s oil and gas reserves to the ever-thirsty Chinese economy. Such an agreement would serve both countries — and the world — well. It would diversify Russian export markets, find customers closer to the huge oil and gas fields in the distant east and provide a source of investment for the infrastructure needed to get those resources out of the ground and to foreign markets. China would have a cleaner source of power, diversify its energy sourcing, and would minimize the vulnerability of its energy supply routes. But final agreement proved difficult, with price apparently the big sticking point.
Moscow’s incentive to strike a deal increased in the wake of the Russian annexation of Crimea and the unrest in Ukraine, as Putin sought ways to diminish Western influence over his economy. In his mind, a long-term gas deal shifted the stakes in Russia’s relations with the West and would provide yet another pillar of the strategic partnership that he has sought to forge with China that would counter, if not undermine, the U.S.-led international order that both countries see as detrimental to their own national interests.
The deal that emerged is a 30-year arrangement that will deliver 38 billion cubic meters of gas a year starting in 2018, and is said to be worth $400 billion in total. That figure comes from the head of Gazprom, the Russian gas company, and likely includes other costs, such as building infrastructure to develop gas fields and pipelines to deliver the gas, which is reportedly worth $70 billion but the actual price per unit of gas is “a commercial secret.”
The secrecy serves several purposes. It allows both sides to save face after difficult negotiations, permitting both to declare themselves winners. This is important given suspicions that Putin badly wanted a deal in the aftermath of his Ukrainian adventures and was prepared to compromise to get one. Moreover, keeping the price under wraps means that Europeans cannot compare the price they pay for Russian gas, currently about $380 per 1,000 cubic meters.
While both sides are celebrating, a little sobriety is in order. While creating a new customer is welcome, Gazprom will still send four times as much gas to Europe as China. Western leverage will persist. And if the deal with China has been priced at $350 per 1,000 cubic meters as is widely believed, then Gazprom will find its revenues squeezed.
Analysts believe the dividends may be reduced because Gazprom will have to pay for the massive infrastructure demands — the largest construction project in the world, said Putin. But given the permeable relationship between Gazprom and the Russian state, investor concerns are unlikely to top the list of management priorities.
China welcomes the chance to diversify its energy suppliers, and Beijing will pay significantly less for the gas than it would elsewhere. The Chinese commitment to help develop the Russian gas fields — some reports have Beijing paying as much as $25 billion upfront to jumpstart production — will pay dividends for all of Asia.
China will not consume all of the new production. Other consumers, such as Japan, will benefit from a “local” supplier with cheaper transportation costs.
As always, however, grand strategic questions hang over this deal. Every time China and Russia reach some agreement it is seen as the first step toward a new global order. The launch of the Shanghai Cooperation Organization, or the two countries’ “strategic partnership,” produced equally breathless speculations. The reality is quite different.
China and Russia may share contempt for the existing international order, but neither is very comfortable with the other after general points of agreement are identified. Both, for example, want stability in Central Asia, but both believe it is the rightful leader of the area.
Moscow wants to check the ability of those gas-producing nations that might challenge Gazprom’s leading role in the industry. Beijing has signed deals with those same governments to diversify its suppliers and to undermine Gazprom’s prominence. More significantly, China seeks leading-edge technology and investment, along with export markets, to fuel its economy. Russia offers few prospects in that regard; China’s bilateral trade with the United States alone is three times the size of its trade with Russia.
In short, a wider aperture suggests China has other interests that may very well outweigh its partnership with Russia. That should not diminish the significance of the new deal, but it does demand that it be put in perspective.
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