The Sino-Russian Gas Agreement: Political Implications for an Asian Rebalance

30 May, 2014    ·   4478

Rheanna Mathews asks whether the Russians and Chinese are forming an axis to shift the balance of power

Rheanna Mathews
Rheanna Mathews
Research Intern

The recently concluded Sino-Russian contract has caught the attention of the world and there is no dearth of theories as to what it all means. The foremost questions this show of deepening Sino-Russian friendship raises are: how big a deal is this contract and what political implications does it hold?

The Deal
The US$400 billion gas deal that was concluded in Shanghai between Gazprom, Russia’s largest natural gas producer and the State-owned China National Petroleum Corporation (CNPC) on 21 May was claimed by President Vladimir Putin to be “the biggest contract in the gas sector in the history of the former USSR,” and compared by analysts to the Molotov-Ribbentrop Pact and the Sino-Soviet entente of the Cold War era. According to the agreement, Russia will pipe 38bcm (billion cubic metre) of liquefied natural gas (LNG) per year to China for thirty years. Although the signatories claim that delivery of the LNG from Russia’s eastern gas fields shall begin in 2018, experts are of the opinion that Russia lacks the infrastructure for this, and with its economy close to recession due to the sanctions against it, the transfer of gas may be delayed till 2020. China has agreed to advance a loan of US$25 billion and Russia is expected to pool in US$55 billion of its own resources to develop the required infrastructure.

A Big Deal?
Economically, despite what Putin said, the deal does not appear to be very significant. It will bring Russia an added income of only an approximate US$13 billion a year. Russia’s European market is significantly larger than this. Moreover, the operationalisation of the deal is likely to run into problems due to the lack of sufficient infrastructure in the Eastern Siberian gas fields. Kovykta and Chayanda, the largest gas fields in the region, are not producing yet, despite the negotiations having gone on for a long time.

However, since the agreement also ramped up Chinese investment in Russia, it might imply that the two countries have decided to grow closer on other platforms. The summit meeting between the Russian and Chinese presidents also focused on regional security with Putin claiming that Russia-China ties are at the highest point in history and President Xi Jinping calling for the strengthening of the Shanghai Cooperation Organisation (SCO) and a new regional security arrangement with Russia and Iran. Putin’s two-day visit to Shanghai also coincided with a joint naval exercise between the Russian and Chinese navies, the Joint Sea 2014, in the East China Sea.

The coincidence of these events and the rhetoric used by both the states indicate that Russia and China are willing to look away from existing irritants to theirs bilateral ties, focus on areas where their interests coincide, and explore newer avenues of cooperation, making the gas agreement between the two giants a big deal politically.

What Does It Imply?
This gas deal has been in the works for a whole decade, with negotiations beginning in 2004. The two parties could not reach a consensus on price. The successful finalisation of the agreement now could be a result of a new urgency that both Russia and China are labouring under. Russia has been suffering from economic sanctions by the US and the EU due to its actions in Ukraine. China is experiencing an economic slowdown and is looking to rejuvenate its economy. Also, since the coal-fired power plants that it currently uses are environmentally damaging, it is seeking cleaner sources of energy to feed its industrialised eastern regions.

Russia is also seeking to expand the market for its immense fossil fuel reserves into Asia, in order to decrease its unhealthy dependence on the European markets that are ‘weaning’ themselves off Russian gas. It has also been stated that China will increase its investments in Russia if sanctions against the country are increased.

It is possible that the two States are forming a tag-team in light of the recent events in Ukraine and the South China Sea (SCS). Russia recently annexed the Crimean Peninsula and China deployed an oil rig to disputed waters in the SCS. Having incurred international displeasure for these acts of (extreme) assertiveness, the two states might be lending support to each other; a show of presence in each other’s corners.

These actions have a number of international entities worried. It could be that the Russians and Chinese are forming an axis to shift the balance of power, centering it in Asia. For States like Japan, Vietnam and others involved in conflicts with China, the prospect of China gaining Russia as an ally is to be feared, especially given doubts that the US will honour its security arrangements. For India, it is not yet time to worry. It has enjoyed a long friendship with Russia, who has not yet indicated that it is ready to take sides where India and China are concerned. It might even be a positive note, opening up a new possibility for LNG trade between Russia and India via China.