China, Russia on verge of multibillion-dollar gas deal

May 16, 2014 | Asia, Budget & Investment

Beijing, China | – China plans to sign a multibillion-dollar deal to buy Russian gas during a visit by President Vladimir Putin next week despite US pressure to avoid undermining sanctions on Moscow over the Ukraine crisis.

Washington has appealed to Beijing to avoid making business deals with Russia, though American officials acknowledge the pressing energy needs of China, the world’s second-largest economy.

Negotiations that began more than a decade ago had stalled over price. But analysts say Moscow, isolated over its role in Ukraine, faces pressure to make concessions in exchange for an economic and political boost.

“We are still exchanging views with Moscow and we will try our best to ensure that this contract can be signed and witnessed by the two presidents during President Putin’s visit to China,” a deputy Chinese foreign minister, Cheng Guoping, told reporters on Thursday.

Putin’s visit to China is also likely to highlight the diverging fortunes of the two powers. China is on track to overtake the US as the world’s biggest economy in the next decade and is increasingly assertive in political relations with its neighbours. Russia’s economy is reeling from its dispute with the West over Ukraine’s tilt toward the European Union, a shift that inflamed Moscow’s insecurities about declining influence.

Putin is due to meet Chinese President Xi Jinping during a two-day conference on Asian security that starts Tuesday in Shanghai. Cheng noted they reached a preliminary agreement on gas sales when Xi attended the Winter Olympics in Sochi, Russia.

Companies from the two sides “have already reached an agreement on the majority of the contents of their cooperation,” said Cheng. “The main difference between them still lingers on the price of natural gas.”

Beijing has to weigh the economic benefits against possible strained ties with Washington and the European Union, but analysts say Chinese leaders are leaning toward a deal. China faces chronic gas shortages and talks on the proposed 30-year contract between Russia’s government-controlled Gazprom and state-owned China National Petroleum Corp. began long before the Ukraine crisis. Chinese leaders are also eager to get Russian gas to help curb pollution by reducing reliance on coal.

A tentative agreement signed in March 2013 calls for Gazprom to deliver 38 billion cubic meters of gas per year beginning in 2018, with an option to increase that to 60 billion cubic meters. Plans call for building a pipeline to link China’s northeast to a line that carries gas from western Siberia to the Pacific port of Vladivostok.

“It’s not something that can be switched off because the US is upset about a more recent development,” said analyst Rachel Calvert of consultancy IHS.

Analysts Leslie Palti-Guzman and Emily Stromquist of Eurasia Group put the likelihood of a gas deal finally being concluded this month at 80 percent.

The deal would be an “important strategic gain” at a time when the Ukraine crisis is fraying Russia’s political and economic tie with the West, they said in a report.

During a visit last week to Beijing, US Treasury Secretary Jacob Lew told Chinese leaders that Washington doesn’t want to see anyone undermine sanctions by making trade or investment deals with Russia.