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Russia, China Closer to Mammoth Energy Deal

Russia and China are closing in on a mammoth energy deal which could insure that Beijing has the fuel to run its factories and cities and Moscow has a vast new market for its natural gas empire.

Russian Prime Minister Vladimir Putin on Wednesday wrapped up a three-day visit to the Chinese capital, during which Russia signed dozens of commercial pacts worth $3.5 billion and set the framework for a separate, multibillion-dollar agreement to build two natural gas pipelines to China from gas fields in Russia's Far East.

Together, those pipelines would be capable of supplying China with 68 billion cubic meters of natural gas annually, representing a whopping 85 percent of the gas China currently consumes.

Once the energy partners agree on a final price and the pipelines are built, China could become Russia's single biggest customer for natural gas.

The agreement highlights the determination of both nations to diversify their economies and seek new customers and vendors. It also reflects a political desire by both to steer a course independent of Western powers and especially the United States.

But many experts say the deal doesn't necessarily signal that China and Russia are preparing to forge a major new strategic alliance.

"I don't buy this idea that China is Russia's future," said Chris Weafer, chief analyst at the Moscow-based Uralsib bank. "The key relationship always has been and will be Europe."

Lilit Gevorgyan, an analyst for London-based IHS Global Insight, said the Sino-Russian relationship, though closer in recent years, remains primarily based on economic needs.

"Of course the size of the deal will increase the importance of the relationship, but I wouldn't say that it's deliberately designed to shift the attention of Russia's foreign strategic goals from West to East," she said.

"Russia is reeling from the recession's impact. It's cash-strapped. Siberia has a very scarce population and lots of natural resources — something that's reversed in China. So it's only a logical marriage of two economic powers," she said.

Russia and China have a long history of mutual suspicion and tensions, and 50 years ago they split bitterly over interpretations of Communist ideology. In recent years, their relationship has warmed but they remain divided by geography, culture and a preference in both capitals for acting independently.

China has historically looked inward, although that is changing, while Russia has turned to Europe, with which it shares long-standing economic and cultural ties.

Still, Russia is the world's biggest energy producer and neighboring China is the world's second-largest energy consumer after the United States. Both see themselves as rivals to Washington and all three are permanent members of the U.N. Security Council. Political forces are clearly driving Beijing and Moscow closer.

"There's more than pragmatism here," said Gilbert Rozman, a Princeton University professor who has studied Sino-Russian relations. "There's national identity. They both want to change the world order... They have strong views about how they can pressure the U.S. and the West so I think there are very important motives driving the two together."

The energy agreement signed Tuesday between Russia's Gazprom and China National Petroleum Company sets a framework for final price negotiations. Russian officials have predicted they could sign a final pact next June, with the first gas deliveries possibly starting around 2014 or 2015.

China, however, may not be in a hurry to close the deal.

Alexander Nazarov, oil and gas analyst at the Metropol investment bank in Moscow, said there could be a lot more haggling ahead. "So far it's just a love letter, not a marriage contract," he said.

"Russia is keener to get on with this than China is," said Weafer.

He noted that China already produces about 76 billion cubic meters of natural gas each year, and only consumes about 80 billion cubic meters, with most of the rest coming from Australia as liquefied natural gas. So there are no gas shortages.

But Beijing is gradually replacing coal and other energy sources with cleaner-burning gas, Weafer said, meaning China can afford to take its time in negotiating gas deals.

In addition, China is building a 4,000-mile pipeline to bring 30 billion cubic meters of gas annually from Turkmenistan in Central Asia, undercutting Russia's near-lock on gas supplies in that former Soviet region.

That pipeline will ensure that China has some leverage with Russia's Gazprom.

"China is playing the long game," Weafer said.

Some experts say Moscow may feel pressure to lock up the Chinese market as long-term prospects for growth of Russian gas exports to the European Union nations look bleak, as the EU strives to diversify energy sources and supply routes.

Russian gas shipments to Europe have been interrupted several times in recent years due to financial disputes between Russia and Ukraine, which has pipelines that Russia needs to get its gas to Europe. Russia supplies about one quarter of the European Union's natural gas, and some officials have accused Moscow of using the threat of gas cutoffs as a diplomatic weapon. Last January, Russia ignited a Europe-wide uproar as it cut gas supplies for nearly two weeks.

With its economy hit hard by the global financial crisis and the government suffering from a liquidity crunch, Russia also badly needs Chinese investment to explore and develop prospective energy fields.

More than half of gas Russia has promised to supply to China is slated to come from yet-unexplored gas fields in eastern Siberia, which would require a multibillion dollar investment.

Russia, meanwhile, is not putting all its hopes into China. Moscow is also courting foreign energy companies from the U.S. and Europe as partners in development of the vast natural gas fields of the northern Yamal peninsula in Siberia.

"Ideally, for Russia, they would like to have energy and trade deals with both east and west," Weafer said. "And ultimately do deals with India as well. It's always been Russia's strategy not to over-rely on any one relationship."