Bloomberg View: New China-Russia Gas Pact Is No Big Deal
he latest China-Russia gas deal, declared on the arrival of Russian President Vladimir Putin in Beijing this week, got far more attention than it deserved. Eager to add fuel to the narrative of an emerging strategic relationship between Beijing and Moscow, commentators pronounced the deal as a game-changer, a symbol of a new partnership between long-estranged countries. Yet, a look beyond the words of Russian gas executives (always a good idea) suggests that there is much more hype than substance here. The deal seems to be little more than an effort to ensure that Putin did not leave China empty-handed, particularly in the wake of a big U.S.-China declaration on climate.
What, in fact, did Putin and Chinese President Xi Jinping agree to? The memorandum of understanding they signed differs in some significant ways from the previous, major gas deal inked in May. In that deal, Moscow and Beijing agreed on the terms to deliver 38 billion cubic meters of natural gas a year from Russia’s as-yet-undeveloped gas fields in eastern Siberia to the heavily populated eastern corridor of China. The new deal, in contrast, is not binding and lacks agreement on key elements, most notably price. The decade-long negotiations that preceded the May deal produced a handful of similar memorandums over the years, which became somewhat routine and merely suggestive of a continued intent to pursue the contours of a deal. It was not until Gazprom and the Chinese National Petroleum Corporation successfully tackled the issue of price that the May deal, worth $400 billion at the time, was finalized.
With the issue of price outstanding, this week's agreement seems more like a political statement. Some might -- wrongly -- think it will be much easier for Gazprom and CNPC to agree on a price for the second pipeline, having just agreed on a price for the first one in May. Future negotiations, however, may prove even more difficult, given the recent dip in oil prices, which will drive down the cost of natural gas, since many gas contracts in Asia are indexed to the price of oil. Moreover, in the May deal, Russia, under pressure after its intervention in Crimea, is believed to have accepted a price akin to what it gets for its gas in Europe -- and significantly less than it was hoping for, given the higher cost of gas in Asia. China will undoubtedly demand an even lower price for Russian gas coming in this second pipeline, which will enter China in its northwest, very far from population centers and in the heart of Xinjiang, China’s most restive region.