“This is indeed a historic event for Russia’s gas sector. It is historic even looking back to the Soviet era too. This is the biggest contract in terms of sale by volume to any one country in the sector’s entire history, whether the Soviet period or modern Russia,” stated Russian President Vladimir Putin last week, after reaching a deal over gas shipments with his Chinese counterparts. The deal is, indeed, huge: Gazprom is set to deliver 38 billion cubic meters of gas to China starting in 2018. The total value of the agreement is estimated to be about $400 billion.
Getting there was not easy: Putin himself told reporters that “our Chinese friends drive a hard bargain as negotiators. [..] The work went on yesterday until half past three in the morning, and today, almost right from the morning, they were back at centre field once more.” Yet, both sides probably recognized that a rough night was well worth the result: a gigantic producer in need of cash has met a giant consumer willing to pay.
Selling to China is in line with Russia’s strategy of diversification away from Europe, its current top customer. According to Amanda Paul, Policy Analyst at the European Policy Centre, said in an email that “the deal with China gives Russia more options and represents only the first part of a much bigger plan to have much more Russian gas flowing to the far east.” The issue, from Moscow’s point of view, is that too much of its production is west-bound to Europe, presenting Russian companies with little alternatives should European demand slow.
Finding new partners provide Moscow with more room to maneuver, and that is part of the reason why in the Old Continent the deal did not elicit the same admiration it did in the East. Given that the dependence between Europe and Russia is mutual – European consumers depend on Moscow for importing energy and Moscow depends on Europe for the money it makes – if one of the two sides is able to diversify, it gains a leverage over the other. Ms. Paul told us that the deal will be “a significant blow” for the West because “it puts Putin in a more comfortable position,” following its annexation of Crimea.
The fact that tensions between the EU and the United States on one side and Russia on the other are at an all-time high since the Cold War is an important factor, as the Ukrainian crisis may have played a role in pushing the Sino-Russian deal. Could it be just a case, otherwise, that talks about the possibility of this ‘historic’ deal had been around for 10 years, but the agreement materialized only now, when relations with the West are close to breaking down? “Talk of tougher sanctions because of the Ukraine crisis have no doubt motivated President Putin to shift up a gear, and get the deal hammered out and signed as quickly as possible,” pointed out Ms. Paul.
Similarly, Yuriko Koike, a former Japanese Defense Minister and National Security Adviser, wrote on Project Syndicate that, “Putin had viewed China as his backup option should the West seek to isolate Russia following its annexation of Crimea. Putin’s idea was that he could pivot Russia’s economy into a partnership with China.”
Whether the deal will be a real breakthrough, however, is unclear. Last year, Russia exported 160 billion cubic meters of gas to European customers, over four times the amount which will reach China. “To an extent, Russia can shifts its production towards the Asian market,” argued Fredrik Erixon, the director of the European Centre for International Political Economy, in an email interview with the Asian Correspondent, “but Russia cannot substitute Europe with Asian markets and most Asian governments are very skeptical about teaming up with the Kremlin when it has behaved so manifestly disrespectful of its clients and allowed gas exports to become a chief parts of its geo-strategic policy. ”
That the current Russian government is willing to use its vast energy resources as a political tool has been apparent for some time. In the winter of 2009, because of unpaid bills, Russia decided to reduce the amount of gas it delivered to Ukraine, a decision which impacted various countries in the region.
Faced with a supplier that, to borrow Washington’s terminology, is at the very least trying to ‘pivot to Asia’, what will Europe do? “I think there is a strategic rational to move away from Russian gas,” told us Mr. Fredrik, “ but the best way to do it is to fast-pedal its current policy, to build a single market for gas in Europe, and to apply basic competition policies to kick out cartels from the market.”
Diversifying supplies would be paramount, but it is easier said than done. The process “will take many years and will require connecting up its [Europe’s] energy infrastructure so that no ‘isolated islands’ remain,” argued Ms. Paul, who also mentioned that the current international situation could push Azerbaijan to the forefront. The country, which will provide 10 billion cubic meters of gas as of 2018 and possibly another 10 billion in 2025, is “of crucial importance for EU energy security now.”
Prices, too, are an issue, for there are worries that they may be pushed higher by Chinese demand. On Friday, Gazprom chief executive Alexei Miller openly said that “it can be assumed that the signing of the contract will affect gas prices on the European market.” Spooky words for European governments, but not everyone is pessimistic. Asked by Asian Correspondent, Mr. Erixon said he does not think that the new pipeline will have “a substantial effect on global gas prices.” “Supply capacity,” he remarked, “is growing fast across the world.”