Robin Mills: Russia keeps gas options open despite Chinese deal

Western countries should not panic over the Russia-China gas deal or consider it a geopolitical defeat.

On a map, Siberia looks quite close to China. It isn’t. A gas pipeline from East Siberia to Shanghai would run about 5,000 kilometres, almost as far as Alaska to New York or London to Dubai. But last Wednesday, Russia and China signed a gas export deal that has been a decade in the making.

Is this is a geopolitical master stroke that cements a Russo-Chinese alliance and undermines western attempts to isolate Russia over the Ukraine crisis? A move of desperation in conceding to Chinese demands? Or a straightforward commercial decision?

Russia has long been seeking to diversify its gas markets. The European market is lucrative and Russia’s existing gas export pipelines, long paid for, run west. But it is not sensible to rely solely on Europe – an anaemic economy, which is seeking both to find other gas suppliers, and to reduce its overall dependence on fossil fuels.

Two days after the China deal, Gazprom announced it would be buying liquefied natural gas (LNG) from the Yamal project in the Arctic, with India the intended market. It has also been seeking to build up its LNG markets in the Far East, such as Japan, and even to build a pipeline through North Korea to South Korea.

Russia, though, has for many years been coy over the Chinese gas agreement. It is not coincidental that it was finally signed during Vladimir Putin’s visit to China, amid the continuing dispute over Ukraine.

The Russians both denied that the Chinese deal was a warning to Europe and simultaneously hinted at it. “The eagle is looking in both directions,” said the prime minister – and former Gazprom chairman – Dmitry Medvedev, referring to the country’s coat of arms to indicate that Russia would sell gas both west and east.

The exact terms are unclear, but the quoted value – US$400 billion for 38 billion cubic metres annually over 30 years – implies a price very similar to what the Russians get in Europe. However, building $55bn of pipelines through the East Siberian forests and mountains means the Russian gas monopoly Gazprom will realise only about half the value of its European sales. But there is huge scope for Russian insiders to enrich themselves through contractual kickbacks and overpricing.

The gas will not start flowing until 2018 at the earliest, and represents just 10 per cent of estimated Chinese demand. By the time it reaches China’s heavily populated east coast, it will still be cheaper than LNG, but not dramatically so. Either the Russian supplies will displace imported LNG, which is then free to flow to Europe, or more likely the Chinese will take all the gas they can to reduce use of polluting coal. In either case, as long as the gas comes primarily from new fields, it will not reduce supplies to Europe.

Of course the two authoritarian giants have common political interests – which is a concern to the West. But Russia is very much the junior partner in its relationship with China. Its corrupt economy remains heavily dependent on commodity exports, and the Russian Far East contains only around 6 million people, a population shrinking even faster than that of the rest of the country.

The Kremlin, which has shown a tendency to hanker after Tsarist-era borders, might recall that large parts of its Far East, including modern Vladivostok, were surrendered by Beijing only in 1858-60, in what China still refers to as the “Unequal Treaties”.

Western countries should not panic over this deal or consider it a geopolitical defeat. It seems a good deal for China, and an excellent one for the Russian elite. But a future Russian government may yet recall that Moscow is much closer to Brussels than to Beijing.

Robin Mills is the head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis

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