Just as President Barack Obama landed in China to try to salvage his vision of an American-led trading order in Asia, Russia and China took a giant step toward closer economic and political ties with an agreement on another massive energy deal that promises to tighten the bear hug between Moscow and Beijing for decades to come.
The preliminary accord, which comes just months after China and Russia inked a landmark, $400 billion natural gas deal, is a reflection of the shifting balance of power in Asia. It's a marriage based on needs: Russia's to break out of the isolation imposed by the West in the wake of its annexation of Crimea and China's for reliable and affordable sources of energy.
Coupled with China's economic offensive in Asia -- which includes everything from new trade pacts with U.S. partners such as Australia and South Korea, to a push for Chinese-led development banks that can wrest financing muscle from the West -- the latest gas deal shows what kind of challenges await the U.S. economic and diplomatic pivot to Asia.
"Whatever changes occur on the world arena, we will consider enhancing our cooperation as a priority area in our foreign policy," Chinese President Xi Jinping said in announcing the deal. Russian President Vladimir Putin said that the two countries acting in concert helps make the world "more stable and predictable."
At a time when the United States is pushing back against China on a host of fronts, "China would like to show openly that Sino-Russian energy cooperation is no longer driven by necessity but forms a core part of strengthened, strategic-level cooperation between the two countries," said Keun-Wook Paik, an associate fellow at Chatham House and an expert on China-Russia energy dealings.
On Sunday, Nov. 9, Russia and China signed a memorandum of understanding on a second gas-export route from western Siberia to China's western provinces. The 30-year accord, if consummated, would see Russia ship 30 billion cubic meters of gas to China starting in 2018 and would see Russia gain a big new customer right as it is feeling the squeeze from Western financial sanctions. Together with the deal signed in May, Russia could supply at least 68 billion cubic meters of gas annually to China, or about one-fifth of that country's expected gas demand in 2020.
The deal is far from complete. The two sides laid the groundwork over the weekend, but a host of unresolved issues remain, especially regarding the price China will pay for the gas. The first deal took more than a decade to hammer out and involved substantial concessions by Moscow on pricing.
This time, Moscow fears it will have to make even more concessions. Crude oil prices are falling; the Chinese gas contracts are linked to the price of oil, meaning they're already worth less to Russia than just a few months ago. The prices paid under oil-linked contracts vary as crude oil's value fluctuates: As oil gets cheaper, so too will Russia's gas. Of course the inverse is also true.
At the same time, the new deal was always expected to be less lucrative than the eastern Power of Siberia pipeline because Russia will be shipping gas to China's sparsely populated west. From there, China will have to ship the gas thousands of miles overland.
"Russian gas supplied by the western route should be cheaper than gas shipped by the Power of Siberia pipeline," said Mikhail Korchemkin, head of East European Gas Analysis, an energy consultancy. "The eastern pipeline delivers gas close to Harbin and other major consuming centers of northeastern China, while the western route crosses the border in the middle of nowhere."
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