Russia-China mega gas deal: Is it a pipeline too far for Moscow?

Russian President Vladimir Putin heads to China Tuesday hoping to nail down a mammoth gas deal, along with some high-tech contracts, that he can hold up as proof that Russia cannot be isolated or bullied into submission by Western sanctions over Ukraine.

But some warn that the Kremlin's political imperatives may be running ahead of economic logic and that Russia's state energy company, Gazprom, may not be able to meet China's demand for years without shortchanging its existing customers – or the Russian taxpayer.

Negotiations for what will be the largest natural gas sale in history have run for over a decade, with both sides haggling over the unit price and how to finance the needed pipelines. But Putin told Chinese journalists Monday that an agreement – a 30-year contract to supply 38 billion cubic meters of Russian gas to China annually from 2018 – is "nearly finalized."

Russian minds have been focused lately by what they regard as the growing political risks involved in doing business with the West. Experts in Moscow argue that the US in particular has revealed itself as an unreliable business partner by displaying a hair-trigger approach to imposing sanctions over political disputes that Moscow insists ought to be resolved by political means.

Though the disruptions inflicted on Russia's economy by Western sanctions over Ukraine have so far been minimal, they say, the lesson that contracts can be broken, supplies interrupted, and assets seized over a political disagreement has not been lost on the Kremlin.

"Obviously what's happening in our relations with the West is an impetus to look for new partners, and strengthen our ties with people who are more trustworthy partners," says Andrei Klimov, deputy chair of the international affairs committee of the Federation Council, Russia's upper house of parliament. "It's not about revenge or something. It's purely practical."

Kremlin-linked liberals, who have successfully argued in the past that Russia must not burn its bridges with the West because it needs "modernizing alliances" with the world's most advanced countries in order to complete its transition to a post-industrial power, are now completely on the defensive.

"If this contract on gas supply is indeed signed with China, it will be of great political importance as well as economically. We may take some losses in terms of price, but Russia needs this," says Vladimir Portyakov, deputy director of the official Institute of Far Eastern Studies in Moscow. "Those Russians who argue for maintaining a pro-Western balance have already lost much influence. With this deal, Russia will feel much freer in its relations with the West."

'Strategic energy alliance'

China, which is involved in escalating territorial disputes with several neighbors, may also be coming around to the idea that it's better to commit to dedicated supplies from a politically reliable partner than to play global markets for the best price, Mr. Portyakov says.

"It's an issue of national security for China. Sea routes for oil and liquified natural gas [LNG] are vulnerable. Much better to have it directly delivered in pipelines from a neighboring state" with whom you have a long-standing political and strategic understanding, he adds.

Russian media reports a breakthrough in the gas price negotiations, which will see China pay roughly the same amount for Russian gas that western Europe currently does. But huge as that deal may be, it will comprise just part of an emerging "strategic energy alliance," including expanded oil sales between Russia and China, which will help to propel bilateral trade turnover from its current $90 billion annually to over $200 billion by 2020, Putin said.

Putin and Chinese leader Xi Jinping may also agree to set up a joint venture to develop helicopters and a new wide-bodied, long-range airliner that might eventually break the Western monopoly on such aircraft, the Moscow daily Kommersant reported Monday.

Further, Mr. Putin's two-day visit to China will be accompanied by joint war games between the Chinese Navy and a squadron of Russian warships in the East China Sea.

A pipeline too far?

The crisis in Ukraine and threatened Western sanctions may have added immediacy to the Russian economic "pivot to Asia" that will be on display this week, but the idea has been in the air since Putin returned to the Kremlin for a third term two years ago. In 2012, Putin ordered Gazprom to concentrate its resources on developing eastern gas fields at the expense of western ones because European demand was already being limited by fears of dependence on Russia, and the US shale gas revolution was introducing a whole new level of competition.

However, some experts warn that after the political declarations are made this week, and even if Putin comes home waving a huge new gas deal with China, Gazprom may prove unable to deliver the goods.

"The Chinese will have to wait until Gazprom has enough gas to ship across the border, and that doesn't look to be before 2020 at the earliest," says Mikhail Krutikhin, a partner at RusEnergy, a Moscow-based energy consultancy.

He says the Kirinskoye fields, which are part of Russia's Pacific Sakhalin-III project, are running far behind schedule. Any diversion of existing supplies to serve the expanding Chinese market risks disrupting ties with another priority customer, Japan, he adds.

Alternatively, Gazprom could pipe gas from faraway sources, such as the Arctic republic of Yakutia, but that might not be profitable.

"Putin seems determined to sell gas to China, and he wants to seal that deal now," says Mr. Krutikhin. "Maybe he would even be prepared to disregard some economic factors to do so. But that would mean that Russian taxpayers are committed to subsidizing Chinese consumers well into the future. Where's the sense in that?"