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Wednesday, May 21, 2014

Does Russia’s gas deal with China change things for the EU?

News just out is that Russia and China have finally signed a gas deal, the negotiations of which have been going-on for a decade. (As the picture above, taken from a Gazprom investor presentation showed, this is something Gazprom has been targeting).

This is a pretty surprising turnaround given that every news outlet was reporting overnight that Russian President Vladimir Putin had failed in his attempts to finalise the deal in his current trip to China which ends tonight.

The key points of the deal are follows:
  • The contract will be over 30 years and is unofficially estimated to be worth $400bn (19% of Russian GDP).
  • It will see Gazprom supply up to 38 billion cubic meters (bcm) of gas to China per year from 2018. Once further pipelines are complete, this could be expanded to 61 bcm per year. As a comparison, over the past four years Gazprom has exported an average of 157 bcm per year to Europe (including Turkey).
  • No official price has been revealed but the biggest sticking point has been that China believed Russia’s price demands were too high. It will be interesting to see if Russia gave in on this point.
  • This deal has proved increasingly important for Russia as it looks to shift it’s away from relying on European demand for its energy exports.
What does this deal mean for the EU?
  • In the short term, not too much. The economic links between Russia and Europe will continue to be significant and they will continue to be reliant on each other when it comes to energy (the former to sell the latter to buy).
  • The deal will not be in place until 2018 and even then will only see Russia selling a fraction of its gas exports to China every year, exports to the EU could still well be two to four times the size.
  • For these reasons, it is unlikely to change the potential impact which EU sanctions would have on Russia. Although of course Russia remains relatively unconcerned by such threats when it knows of the huge divides within the EU on the issue.
  • All that said, it is symbolically important and could have longer term impacts. It highlights Russia’s desire to move away from links with Europe. Combine this with Europe’s desire to increase energy security and the relations between the two sides could become increasingly cold and distant. Although, some countries due to geographical proximity (Bulgaria/Hungary) or due to long standing economic links (Germany) will surely continue to have good relationships with Russia.
  • It also raises questions over future tie ups between Russia and China. Areas such as payments systems, broader financial markets, transportation and machinery have all been touted as sectors for potential cooperation between the two countries. Again while a long term issue, such ties up may concern the West since Russia and China are currently reliant on their exports in many of these areas. Both the EU and US will need to figure a clearer policy for how to deal with such changes, with the EU in particular in need of updating its policy towards its eastern neighbourhood.

3 comments:

Jesper said...

Maybe it isn't the Russians driving the deal, maybe it is the Chinese?
http://www.cnbc.com/id/101450365

Look at what the dangerous foreign countries are doing? Seems xenophobic and isolationist ;-)

So to protect against the foreigners lets centralise (the term used is co-ordinate) power to ward off the threat of these foreign nations? And while taking actions to protect against the threat of foreign nations, lets make national borders obsolete and anyone opposed is to be labeled a xenophobic nationalist populist fear-monger...

& just for the fun of it, lets introduce a mechanism whereby national interest is less worth than corporate profits (ISDS). Surely no company in any of the countries that we're to fear (Russia, China etc) would ever (ab)use the ISDS? Right? Gazprom would never sue?

Rik said...

Not this deal as such, but this whole crisis has simply made Europe look like a considerably more unreliable partner than previously thought.
Some of the stuff done by countries like the UK, Germany and a lot of the EU East are simply hostile towards Russia and will be seen as such.
It might be bad for Russia as well, but the main question is what does it do for Europe. As said before winning a conflicts in my world means being better of than before not being kicked one times less between the legs than the other party.

The blunder that Europe made is that it didnot have its strategic priorities right (effectively never properly considered them. At this stage and in the foreseeable future as said many times that main thing is a stable Ukraine not who owns the manuregap.
And re Russia may be not friendly relations but also not relations spoilt like now. Both on security as energy supply.

All 3 of the top priorities have taken a heavy hit by this. With in return a lot of costs on top of it.

Ukraine hardly looks stable. The 2groups that found it nearly impossible to live next to each other have now a period of violence on top of all the already available issues.

For energy the country is in fact only important for transport. With a split country and all the economic problems caused by it, it simply has become considerably more unreliable.
For future pipelines it is also a difficult one. This is Europe's Nigeria. You rather donot have your pipelines there. Turkey looks a far better bet.
From energy transport pov who owns the country doesnot matter as long as it is stable.

Europe spends very little on defence. But basically when Russia would cover their flank East and South East it doesnot need to spend a lot. Only if it wants to be involved in all sort of foreign adventures (which look for the bigger ones on popular opinion simply a complete no go).
However that would require a stable relation with Russia. Which is spoilt or close to that.
The East EU already was constantly making a mess of it and could and still can get away with that also within the EU. Same btw for the UK one of the most active countrie pre coup as well as Germany with a moronic attempt to become an international player.

Russia looked longer term a much stabler source of energy than the ME. Archaic governments will very likely be overthrown at one point.
The Israel issue.
And most important shorter term Iran nukes which would highly destabilise the whole area (as a few others would want those as well if Iran gets them).
Anyway nobody really likes anybody else there and like to show that in an armed way.
Simply a highly unstable neighbourhood.

Rik said...

From there Russia looks best served by splitting risks. Say to 30-40% China (most reliable partner), 20-30% other East Asia (pay better prices). India 10-20%, Europe 20-25%. A huge drop for Europe from now.
It is a sellers market so it can.
For gas effectively having to move to ME or US (latter possibly as still has to materialise).
As LNG which will rubbish any climate targets as it is say 30% less efficient.

The US will asap be replaced as financial centre for both Russia and more important China. Which will create opportunities for the UK, but also dangers when it is seen as too close to the US.
Combine with NSA industrial espionage and a few other recent things likely most of the rest will spread risk away from the US.

Airplane industry likely another one that will see a new Airbus-like venture between these 2.

Countrywise similar issues can be expected with India. These are the 3 main powers that will see themselves potentially under fire by the US.

Problem the US has is that it has be advertising now several times that it will be close to outright hostile to competitors. Logical move for these is coalition and cut the US out as much as possible (simply risk limitation).

There is where the huge conflict of interest is between the EU and the US. The US policies as such are already not all to clever. The general idea might be good but it simply looks like the costs and dangers are way outweighting the benefits.
Anyway Europe basically requires a stable relation with Russia and China.
Forming a coalition (or better stepping up the current one) with the US likely will create close to a similar reaction as the one towards the US.

A lesson from the past. In post Middle Age Europe every time a dominating country arose. Coalitions were formed between the others. Spain 16th, Holland 17th, France 17th, France around 1800, WW1 Germany, WW2 Germany.
All these at the end of the day had their backsides kicked. The only succesful one was the UK, but mainly as it looked oversea.
It is so much more difficult to fight a long term conflict on sombodyelse's home turf than on your own. Most of these went wrong by going abroad (on the enemy's turf).

Europe will have to answer a few questions.
-How will it gets its energy longer term. And has to think stategicly on that (not like a complete idiot like now).
-Position Baltics/Poland and alike. Hardly useful to get away with the natural conflict between France and Germany in Europe but replace it by a new one between the EUs East and Russia. Stability in Europe simply requires a stable relation with Russia. Which was borderline for Western Europe imho. Already lousy because of East EU and now further deteriorated.
-Relation with the US.

Anyway the EU seems simply on the outlook for new troublkes and internal PR disasters.
This is simply another exercise with which another group of its people will be alienated from the EU (and traditional politics in a lot of countries as well).
Amateurishly handled.