The deal is done.
Russia and China reached an agreement Wednesday for Russia to supply China with about a quarter of its annual natural gas consumption over three decades starting in 2018. Russia plans to invest $55 billion and China will contribute about $25 billion, according to Russian President Vladimir Putin, to help build the necessary pipeline and infrastructure to develop gas fields in eastern Siberia and bring those supplies to population centers in northeast China. The total value of the deal, which will supply 38 billion cubic meters of gas annually, is estimated to be $400 billion.
"[T]his is indeed a historic event for Russia’s gas sector," Mr. Putin told reporters at a press conference in Shanghai, wrapping up a two-day state visit with Chinese President Xi Jinping. "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."
For decades, the expansion of the oil-and-gas empire that fuels Russia's economy has been hemmed in by its westward-oriented pipelines and flagging European growth. Russia has already built a major oil pipeline to China, and Wednesday's deal moves the ball forward on a parallel gas pipeline that physically and contractually binds together two of the world's largest economies. It is a powerful symbol of Eastern unity just as the Ukraine crisis dims Moscow's future in the West.
"[I]t gives both leaders something they can show to internal supporters and citizens, that they are capable of forging strategically important economic ties with foreign partners," Steven Lewis, a research fellow on China at Rice University’s Baker Institute for Public Policy in Houston, writes via e-mail. "This explains the haste to finally sign, as both leaders were facing criticism of their policies that are isolating them internationally, especially in the West."
The deal is a major step in a Russian pivot to Asia that would see European markets playing a smaller role in Moscow's plans for the future. To be sure, Europe remains by far Russia's largest gas customer, and that will not change anytime soon. Still, the Ukraine crisis is accelerating Europe's efforts to diversify its suppliers, and Russia's efforts to diversify its customers. The Russian-China gas deal further widens the expanding gulf between Brussels and Moscow.
It comes as Russia, Ukraine, and the European Union are negotiating a gas deal of their own. Ukraine owes Russia roughly $3.5 billion in unpaid gas bills, and Moscow has threatened a partial or complete shut-off of supplies if debts are not repaid by June 1. In a letter to Putin Wednesday, European Commission President José Manuel Barroso urged Russia to ensure gas supplies to European customers continue uninterrupted.
A deal with China might make Russia more aggressive in its dealings with the West, but the physical separation of the two gas sources means competition for resources might not be as intense. Russia is developing fields in eastern Siberia for gas consumers in China, whereas the gas for Europe comes from western Russia. That makes it difficult to draw a line between the Russia-China deal and Russia's ongoing relations with Ukraine, according to Dmytro Naumenko, an energy analyst at the Kiev-based Institute for Economic Research and Policy Consulting.
"I doubt that Russia will get a real instrument" of leverage over Ukraine in gas negotiations, Mr. Naumenko wrote via e-mail. "[T]he Chinese 'success' will be used only as a PR element by Russia."
In the US, it will put added pressure on the Obama administration to boost exports of liquefied natural gas (LNG). New drilling techniques have unlocked a boom in US natural gas production, and the US Department of Energy has already approved a significant quantity of natural gas exports. But it takes time and large amounts of capital to build out the necessary export infrastructure, and officials also have to consider the domestic environmental and economic implications. Still, many in Congress have criticized the president for not moving quickly enough, and the Russia-China deal suggests Putin isn't waiting to tap energy-hungry Asian markets.
"The US is doing everything it can at the moment to be an actor in the Asian markets, but it clearly can't ramp up supply as quickly as and in the volumes that Russia can, because of proximity and pipelines," Kristine Berzina, a program officer on energy and society in the German Marshall Fund’s Brussels office, says in a telephone interview. "Russia has an infrastructure advantage and a geographic advantage over the US."