Crimea Crisis May Sway China Gas Deal

An analysis by Michael Lelyveld
china-putin-gazprom-jan-2014.jpg Russian President Vladimir Putin (2nd L) and Gazprom CEO, Alexei Miller (L) look over a scale model before a ceremony to launch the construction of a gas pipeline in Anapa, Dec. 7, 2012.

Western pressure on Russia over its annexation of Crimea has raised expectations that it will offer China better terms on a long-delayed gas deal in time for President Vladimir Putin's planned visit in May.

The takeover of the region from Ukraine has heightened the risk that European countries will reduce their reliance on Russia for energy, increasing the importance of exporting its resources to China instead.

The threat of European sanctions is seen as driving Russia's Gazprom to reach an agreement in its decade-old talks with China National Petroleum Corp. (CNPC) for Siberian gas supplies by offering lower prices.

"With Western sanctions, the atmosphere could change quickly in favor of China," said Brian Zimbler, managing partner in the Moscow office of Morgan Lewis, an international law firm, in comments cited by Reuters.

Western nations have made clear that they are considering energy penalties as a next step.

At a press conference in The Hague on March 25, President Barack Obama warned that Washington could join Brussels in imposing sanctions to "include areas potentially like energy, or finance, or arms sales, or trade that exists between Europe and the United States and Russia."

The energy option would strike at the heart of a critical source of Russian income, as well as European interests.

Last year, Europe imported 167.2 billion cubic meters (5.9 trillion cubic feet) of gas from Russia, valued at some U.S. $57 billion, Platts energy news service reported.

Russia supplied one-third of Europe's gas demand and 36 percent of its crude oil imports, Platts said.

But Europe may now be seeking ways to ease its dependence, giving it a freer hand in responding to Russian expansion moves.

Energy leverage

Speaking in Brussels on March 26, Obama said Washington is exploring ways to weaken Russia's energy leverage.

"I think energy is obviously a central focus of our efforts and we have to consider very strongly. This entire event I think has pointed to the need for Europe to look at how it can further diversify its energy sources," he said.

Russian analysts see Gazprom's steady revenue stream from Europe as a casualty of the Crimea conflict, spurring the search for an Asian alternative.

"Now that it's clear that we will not have big projects with Europe ... it is probable that we will soon sign major agreements with the Chinese," said Vasily Kachin at the Moscow-based Center for Analysis of Strategies and Technology, according to the Russian daily Vechernyaya Moskva.

"Of course, the prices will not be as high as deliveries to Europe, but you can't say that it will be a loss-making project," Kachin said in remarks reported by The New York Times.

Gazprom's ambitious plans for exports to China have been hung up for years over Russia's insistence on European-level earnings from exports to the east. But China has resisted, even though it has been paying even higher prices for imports of liquefied petroleum gas (LNG).

Instead of agreeing to Russia's demands, CNPC has developed an extensive Central Asian Gas Pipeline (CAGP) system for supplies mainly from Turkmenistan, which it expects to account for 40 percent of its imports by 2020, apparently with or without Gazprom.

Under its revised plan, Gazprom hopes to build an eastern pipeline from Siberia that would deliver 38 billion cubic meters (1.3 trillion cubic feet) of gas per year to industrialized northeast China with an advance payment from CNPC to cover the costs.

But analysts warn that Gazprom is running out of time after missing two announced deadlines for the deal so far this year.

At a conference in Seoul, University of Oxford energy expert Jonathan Stern said Gazprom must reach an agreement "or will risk losing the chance forever," Platts said in a separate report.

Putin's scheduled visit in May has again raised expectations, but Gazprom has played down reports of an imminent breakthrough.

"The gas price is still being debated," deputy CEO Valery Golubev said on March 27, according to the Itar-Tass news agency. Golubev held out hope for "certain agreements" in "one or two months."

Crimea effect

Edward Chow, senior fellow in the energy and national security program at the Center for Strategic and International Studies in Washington, said the Crimea crisis has magnified the significance of Putin's trip to China.

"He needs to demonstrate when he shows up in China that he's not internationally isolated, so the trip itself is important, whether there's a gas deal or not," said Chow.

But if Putin comes away empty-handed, it will be harder for Russia to portray its Crimea policy as a success.

Chow said the Crimea conflict may raise pressure on Gazprom for a price break on at least two counts.

First, the risk to Russia's main energy markets in Europe may be seen as increasing Moscow's motivation to strike a deal with China, even if it has to soften its terms.

"They need the Chinese money now more than they ever did," said Chow, since Gazprom's sources of international financing from Western markets are likely to dry up.

Second, Russia might have to offer China a greater price incentive to overcome the political implications of Moscow's actions, given Beijing's commitment to principles of territorial integrity and non-interference.

"The whole Crimea thing causes enough concern in China for its own secession issues, whether it's Tibet or Xinjiang or Taiwan," said Chow. "They're not inclined to be politically sympathetic to Putin, but they may be inclined to extract some economic gain out of it."

The combination of factors may strengthen China's position in holding out for a better bargain.

"If I were playing the Chinese hand, I would think that whatever my negotiation stands were before, I would be likely to hold pretty tough," Chow said.

Central Asia

Overcoming the misgivings about sovereignty and non-interference could prove costly.

Beijing is likely to be shocked not only by implications of Russia's moves against Ukraine, where China has significant trade and investment interests, but also recent statements by a leading Russian political figure that suggest designs on Central Asia, as well.

In February, Liberal Democratic Party of Russia (LDPR) leader Vladimir Zhirinovsky said Russia should incorporate and "hold in its fist" not only Ukraine but also the republics of Central Asia, according to Interfax.

The remarks drew strong objections from Kazakhstan and Kyrgyzstan, which is in the process of joining the Russian-led Customs Union.

In a statement, the Kyrgyz Foreign Ministry called the comments "unacceptable" and humiliating, Russian news agencies reported.

Zhirinovsky's remarks are often dismissed in both the West and Russia as nationalistic ravings, but they may have an effect in China, which has invested heavily in Central Asian resources.

"I think they listen pretty closely," Chow said.

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