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Russia’s Reliable Friend

 4 min read / 

That man Vladimir Putin, keeping the world press very busy at the moment. He has embarked on a short visit to China, in the hope of striking a lucrative gas deal worth approximately $400 billion and would send some 38 billion cubic metres (bcm) of gas to China through pipelines. However the deal is still yet to be finalised.

Why?

With the far east of Russia being so close to China, Putin sees an opportunity to develop the fledgling area with the help of the Chinese. Vladisvostok, which  is one of the largest cities in the Far East Russia within the federal subject of Primorsky Krai, has a GDP per capita of $12,574 which compared to the federal subject of Moscow, with a GDP per capita of $40,805 shows the vast inequality. Russia can use its position as the world’s largest natural gas exporter as well as oil to strike a deal with the Chinese. In the last few years China has produced some dazzling statistics. A new skyscraper every 5 days is erected, metros in 25 cities, 30 airports, the world’s 3 largest bridges, 6000 miles of railway lines, 26000 miles of motorway and the list goes on. China needs resources to fund this rapid rate of growth with their needs estimated to double from 2014 to 2020, and Russia gains development aid from the Chinese who have great proximity to the Far East regions of the country. Keeping on China’s good side is also a plus for Putin as Russia could be facing sanctions from Europe hence he can turn to China. In a recent interview he called China ‘Russia’s reliable friend’. China came under fire for refusing to move an oil rig in the South China Sea in water claimed by Hanoi which sparked protests in Vietnam. The deal provides them with a stable inflow of natural resources despite unrest elsewhere.

The Deal

Russia’s state owned gas company Gazprom will supply China National Petroleum Corp (CNPC) with 38 billion cubic metres of natural gas for the next 30 years. If it is signed, construction of pipelines would start In 2014 and gas would be flowing through them by 2018. China is Russia’s single largest trade partner, trade between the two nations was $90 billion in 2013 and they want to increase that to $200 billion by 2020. Naturally, the Chinese are trying to push the price down, and with Gazprom’s shares falling 2-3% recently on the Moscow Stock Exchange, it does seem that China have the upper hand in negotiations. Gazprom were pushing for a price of $10-$11 per million British thermal units (mmBtu) but China are holding out for $9 it is believed. Beijing are also giving Moscow relief on import duties of Russian gas it is believed. In return Putin offered to scrap a mineral extraction tax for gasfields supplying China. Putin can show that he does not need the west as much as we think for exports and this is the weakness which China can capitalise on and try to drive the price of gas down. This deal could also kick-start more joint ventures. Joint military exercises in the East China Sea have already commenced with 14 ships, 2 submarines and 15 aircraft. These two nations can become very dominant as a joint power.

Where does Europe fit in?

Europe gets 24% of its gas from Russia, but with recent conflicts, most notably in Crimea, they are wanting to wean themselves of Russian gas and look for alternatives with Algerian gas becoming more prominent. The Chinese were not supportive of the Crimea invasion, but they have to keep their own interests at heart so they do not want to anger a strong ally. Europe still needs Russian gas and they cannot cut themselves off immediately in the short term as demand is too great. Europe would lose some bargaining power and leverage in the gas market as Russia can turn to China for gas trade which could lead to price hikes. The threat of sanctions from the EU will also fall upon less attentive ears as Putin can turn to his ‘reliable friend’ China. If Xi and Putin do reach an agreement which is very possible, then it cannot spell good news for Europe.

 

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