Thursday, October 13, 2011

Russia misses $ 1 Trillion key China Gas deal....

Russia misses $ 1 Trillion key China Gas deal....
By Robert M Cutler

MONTREAL - Vladimir Putin this week made probably his last trip to China as Russian prime minister (he will likely be president next year), signing no fewer than 16 new accords on bilateral cooperation, including US$7 billion in new investment agreements.
A $1.5 billion deal for a Russian aluminum smelter in Taishet, the Russian town where the Baikal-Amur Mainline track branches off from the Trans-Siberian Railway, was highlighted by Russian media. Other sectors for cooperation include energy conservation, fast-neutron nuclear reactors (the next stage of the previous agreement for Russian construction of the nuclear power plant at Tianwan), high-speed rail, nanotechnology, and pharmaceuticals.

In the run-up to the trip, Russian spokesmen made much of the

"symbolic" fact that China has overtaken Germany as Russia's largest trading partner, as the $59 billion turnover in 2010 may rise to $70 billion this year. By the time of Putin's final press conference in Beijing, the estimate had risen to $80 billion for 2011, $100 billion by 2015 and $200 billion by 2020. China is this year the fifth-largest foreign investor in the Russian economy and the third-top destination for Russian tourists.

A disagreement over the price of oil from Skovorodino in Siberia to the northeastern Chinese city of Daqing was reportedly settled. Russia began pumping 300,000 barrels per year, possibly more in the future, for 20 years through the Skovorodino-Daqing pipeline in January. The pipeline is a branch of the Eastern Siberia-Pacific Ocean (ESPO) project. China lent Russia $25 billion for Skovordino-Daqing's construction in early 2009, in exchange for the export contract.

A $1 trillion contract for Siberian natural gas exports, however, continued to evade the Kremlin's grasp. That contract has been under discussion for the better part of a decade, on the basis of a 2004 Gazprom-China National Petroleum Corporation memorandum of understanding (MoU), followed two years later by a MoU identifying two routes, one from Western Siberia to carry 30 billion cubic meters per year (bcm/y) and the one from Eastern Siberia to carry 38 bcm/y.

Negotiations have since foundered over price, as Beijing has driven a hard bargain and diversified its energy suppliers to decrease its dependence on Russia. According to a year-old Chinese press leak, the two sides were at that time separated by as much as $100 per thousand cubic meters.

Russia wants to charge China the prices it charges to Europe. Gazprom's partners in central and eastern Europe were raided last month by the European Commission's anti-trust investigator, concerned about anti-competitive practices that would artificially increase those very prices.

The raids, according to some commentary, represent political pressure on Gazprom in connection with the Russia-sponsored South Stream gas pipeline project under the Black Sea from Russia to Europe. However, they only implement the provisions of the third energy liberalization package first put forward by the European Commission in September 2007.

China prefers that the first stage of the prospective Siberian gas project concentrate on construction of the western route, which runs through Russia's federal Altai region in western Siberia. However, last month Russia opened the Sakhalin-Khabarovsk-Vladivostok gas pipeline in eastern Siberia and would like expand it later for Chinese exports, either overland or by liquefaction and sea transport.

A recent research report by the Stockholm International Peace Research Institute (SIPRI) has uncovered decreased Chinese reliance on Russia for arms imports as well as energy. Arms purchases were a main direction for cooperation outlined in the 2001 bilateral "Treaty on Good-Neighborly Relations, Friendship and Cooperation".

However, China has since developed its domestic military production industries, while Russian companies both inside and outside the armaments sector hesitate to export their most sophisticated technologies, discouraged by China's reputation for failing to respect intellectual property rights. Industries as diverse as American software producers have been aware of that reputation, and German high-speed rail developers have recently discovered it.

Meanwhile, China's main partners for oil imports have become Saudi Arabia, Angola, Iran and Oman; and its gas imports come increasingly from Central Asia. The SIPRI report concludes that China's successful search for alternative energy suppliers means that "China has taken the upper hand in the relationship".

A potentially significant move for increased Chinese investment in Russia, on the other hand, is the agreement by the sovereign wealth fund China Investment Corp (CIC) to invest $1 billion in a newly established Russian private equity fund, the Russia Direct Investment Fund (RDIF). Beijing established the CIC in 2007 with $200 billion in initial capital; at the end of last year, it had grown to become the world's fifth-largest such fund with $410 billion.

RDIF is designed to co-finance international investment and decrease Russia's dependence on energy exports (17% of gross domestic product) for access to capital. Its head, Kiril Dmitriev, said last month that Russia would contribute $10 billion to the fund over the next five years out of what is hoped to be a total of $60 billion from all sources. The rest would come from sovereign wealth funds, foreign buyout firms and companies seeking to increase their presence in Russia.

In this first round, Russia is itself contributing $1 billion and is looking for another $1-2 billion from contributors other than China, for a total of up to $4 billion. The creation of the RDIF appears to be Russia's response to the CIC's request, made in October 2010, to participate in that privatization program.

The RDIF looks to be a vehicle for the prospective implementation of the privatization program announced in 2009 by now-former finance minister Alexei Kudrin. The contours of that program have been more and more modified since its first announcement, and two years later it continues to be formulated in its specifics. It has still not yet been adopted as law and formally enacted. ...

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