Power games in Siberia: When Presidents Vladimir Putin and Xi Jinping shook hands in front of the cameras as they sealed the long-awaited $400bn gas contract in Shanghai last May, Russia’s message to the west was clear; you aren’t the only game in town. But what exactly did his Chinese counterpart want the world to make of the moment?
The signing ceremony took place just three months after Russia’s annexation of Crimea but now, nearly two years of sanctions and counter-sanctions later, China has emerged as the only clear winner out of the crisis so far. By Brussels’ own estimates, Russia’s ban on EU food imports could end up costing Europe’s agribusiness and agricultural sectors as much as €5bn a year. Russia, meanwhile, denied access to the global capital markets for anything except high-interest short-term financing, has been turning with increasing urgency to Asia and particularly China for the investment it needs to diversify and kick-start its hydrocarbon-dependent economy.
Past masters at long-term negotiations, Beijing can smell that urgency and knows full well that Russia’s hand has been seriously weakened – and will have factored that in to every move it makes in the never-ending game of realpolitik. The gas deal will certainly be no exception.
If Putin looked a little pleased with himself that day in Shanghai, it was perhaps understandable. Russia’s state-run energy conglomerate Gazprom had just won a contract to supply China National Petroleum Corporation (CNPC) with up to 38bn cubic metres of gas each year for 30 years to fuel China’s booming eastern coastal provinces via the 4,000 km Power of Siberia pipeline. Things seemed to have got even better for Putin and Gazprom six months later when CNPC agreed to a second deal, this time for the delivery of a further 30bn cubic metres of gas to its western Xinjiang province through the Altai pipeline, aka Power of Siberia 2.
Yet today the details of both contracts are mired in uncertainty. There was even talk that the first line might actually be ditched for the second option, and then that it was Power of Siberia 2 that had been postponed indefinitely. Although China has now started construction of its part of Power of Siberia 1, it is by no means clear that it will not now drive a much harder bargain with Russia than Putin might have anticipated last May.
One of the root causes of the problem has been the collapse in the oil price that is to be used to determine the rate China will pay for Russia’s gas. When Presidents Putin and Xi shook hands on the deal, a barrel of crude was trading at more than $109 a barrel compared to less than $50 today. In simple terms, this means that if oil prices remain this low, what Putin thought was a $400bn deal is in fact worth closer to $200bn.
To make matters worse, the rouble has slumped from 34 to 62 to the dollar over the same timeframe, meaning that the fixed costs of building the Power of Siberia pipeline through the mountains, swamps and earthquake-prone waste of its vast hinterland down to its border with China’s eastern Heilongjiang province could even rise if it needs to use roubles to import materials and equipment.
Under the circumstances, it was logical for Gazprom to suggest to the authorities in Beijing that it would be cheaper to go with the shorter 1,800 km Altai option that would mean it building an extension to the existing pipeline in Western Siberia through Russian territory between Mongolia and Kazakhstan, this time down to the border withe northwestern Xianjing where it would feed into China’s West-East gas pipeline.
The Chinese were less keen, initially because that West-East pipeline only has an annual capacity of 12bn cubic metres, and adopting the Power of Siberia 2 alternative would therefore require them to build a new 4,000km pipeline all the way to Shanghai. More recently, the country’s economic slowdown has also persuaded Beijing’s central planners to downgrade their five-year prediction for China’s annual energy consumption by 25% from 400 to 300bn cubic meters, making it all the harder to justify the cost of building a second line.
Yet however sound these arguments may seem, Moscow must be harbouring a lingering doubt that it is being strung along somehow. It is worth noting that neither Power of Siberia contracts is binding, and there must be a suspicion that Beijing is playing a very long game with Russia over the price it pays for its gas supplies.
So just exactly was the message that President Xi was sending to the world that fine spring day in Shanghai?