Friday, June 8, 2012

Gas price agreement eludes Putin in China...

Gas price agreement eludes Putin in China...
By Robert M Cutler

MONTREAL - Moscow and Beijing again failed to bridge their difference over the selling price for Siberian gas during Russian President Vladimir Putin's just concluded visit to China, but the two sides compensated for this failure by signing a raft of other accords for economic cooperation and by confirming agreement on a series of anti-US realpolitik policy positions (for example, Syria).

The two countries' boilerplate anti-Americanism papers over their increasingly cut-throat competition for hydrocarbon resources in Asia and the financial means to develop them. The "great game" between them centers on Siberia and Central Asia.

In the run-up to the summit, the Russian side once again expressed hopes of reaching a price agreement for the 68 billion cubic meters per year (bcm/y) of natural gas that it wishes to sell to China from both Eastern and Western Siberia through two different pipeline systems still to be constructed. The Russian leader, who resumed the presidency for a third term earlier this month, took with him to Beijing the heads of gas giant Gazprom and other energy companies as well as six cabinet ministers.

Such a contract estimated at roughly US$1 trillion threatens to disappear like vapor. This contract has been under discussion between the two sides since the signature of a Gazprom-China National Petroleum Corporation (CNPC) memorandum of understanding in 2004. A route from Western Siberia would carry 30 bcm/y, while another from Eastern Siberia would carry 38 bcm/y. However, the two sides seem never even to have agreed which should be built first.

Negotiations since then have also foundered over price, and in the meantime Beijing has diversified its energy suppliers to decrease its dependence on Russia. Last December, Turkmenistan agreed to increase its gas exports to China from the 40 bcm/y already planned to 65 bcm/y; China will also soon be importing 10 bcm/y from Kazakhstan. Those amounts are in addition to increasing liquefied natural gas imports from Middle East sources.

For the Siberian gas, the Moscow business newspaper Kommersant cited sources late last year to the effect that the Kremlin was insisting on a price of $400 per thousand cubic meters (tcm) to China. However, the price of Turkmenistan's gas to China was then reported to be about $250/tcm, and the Russian press agency RIA-Novosti this month cited the latter figure as the price that China was offering to Russia for the gas from Siberia.

It is becoming apparent that Russia's interest in selling the Siberian gas to China is more vital than China's interest in buying it, especially as the price of oil, upon revenue from which the Russian state budget is highly dependent, continues to fall.

Moscow pretends to Beijing that it can sell the gas for more than that to Europe. However, Putin is complicating matters for himself by telling European Union leaders in Brussels early this month, just before he left for the Beijing meetings, that they should negotiate with his planned Eurasian Economic Union (EEU), which is intended to include several Central Asian states, since Russia has supposedly surrendered national competence to the EEU's "Common Economic Space".

The EU and Russia have been negotiating a new basic agreement for their relationship for four years, but uncertainties about Russia's World Trade Organization (WTO) status have stymied them since the beginning of last year. Russia could become a World Trade Organization (WTO) member this year, but Moscow's creation of a customs union with Belarus and Kazakhstan has put question marks over the entry into force of its WTO agreement.

In Putin's view expressed earlier this month in Brussels, however, the EU's European Commission "can and should" obtain a mandate to negotiate with the EEU and "take into account" Belarus's and Kazakhstan's commitment to the customs union, while the idea of the EEU could promote trade and cooperation "if based on WTO rules".

The qualification is necessary because the EEU does not really exist yet, and is planned only for 2015, since its terms are still to be drawn up by the newly established Eurasian Economic Commission, not all members of which have yet been identified.

How the EEU should dovetail with the Shanghai Cooperation Organization (SCO), a summit of which Putin was officially in Beijing to attend, is never explained. But then, the current SCO members have still not even agreed on rules for admitting new members. Its multilateralism seems mainly a shell, and any international juridical personality is largely passive.

The continuing failure to establish a multilateral SCO development bank illustrates the dynamic at work. It is fairly clear that Russia and China, representing the two largest national economies in the SCO, would be the principal contributors of capital to any such bank.

However, Russia has no reason to promote such an institution because it can work through the Russia Direct Investment Fund if it wishes to promote investment in Russia and can always rely on its bilateral relations for a framework for its own investments in such other SCO countries as Kazakhstan and Uzbekistan.

China's Xinhua news agency, on the other hand, headlined a promise by the country's President Hu Jintao to offer a loan of $10 billion "to support economic cooperation within the Shanghai Cooperation Organization". Nevertheless, the fine print makes clear that this is not the long talked-about multilateral institutional mechanism but merely a subsidy for its own people to study abroad, for scholarships in SCO countries, and for sponsoring foreigners to attend Confucius Institute language and cultural centers and other expert-level training.

China's principal motive in the rhetorical push for the creation of an SCO development bank would merely be to help make the case for the yuan as an international currency. As Chen Yuan, chairman of China Development Bank (CDB) said in the margin of the SCO meeting, "We are trying to promote local currency settlements."

Thus the CDB, which opened an office in India in 2007, has already lent $4.4 billion to Indian companies for projects for building roads, telecommunications, and other infrastructure, the Times of India reports. Chen, who is also a member of the Communist Party of China's central committee, noted: "We look forward to increasing our role in India".

China does not need an SCO bank. The CDB was created in 1994. It focuses on financing mid- and long-term infrastructure and energy projects and claims to be the world's largest development banking institution. It is financing the East Siberia - Pacific Ocean oil pipeline in Russia, which includes a spur delivering 300,000 barrels per day to China, as well as the Turkmenistan-China gas pipeline and hydroelectric projects in Kazakhstan.

The CDB's investing arm, CDB Capital, was established in August 2009 and is the only Chinese bank subsidiary licensed to invest in yuan. Last December, offshore investment firm CDB International Holdings was inaugurated in Hong Kong, tasked with running CDB Capital's overseas investment operations, particularly direct investment and asset management.

Nevertheless, the CDB has not participated in the China-Russia Investment Fund (CRIF), announced last year with a capital of between $2 billion and $4 billion. It is now formalized that both the Chinese and the Russian side will contribute only $1 billion each from state sources, with the other $2 billion to be sought from private Chinese investors, although why the latter should avail themselves of the CRIF remains to be seen.

In the event, the Chinese and Russian leaderships saved the day by promising to increase trade turnover from $84 billion last year to $100 billion in 2015 and $200 billion in 2020. Towards this end, they signed no fewer than 20 agreements, accords, and memoranda of understanding in a variety of fields including energy efficiency, nuclear power production, transport machine building, and research and development in high-tech industries including information technology. An agreement on a joint venture to develop and build long-haul aircraft apparently eluded negotiators.

Dr Robert M Cutler (, educated at the Massachusetts Institute of Technology and The University of Michigan, has researched and taught at universities in the United States, Canada, France, Switzerland, and Russia. Now senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada, he also consults privately in a variety of fields.

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