Russia-China gas deal could ignite a shift in global trading

Russia-China gas deal could ignite a shift in global trading

“The unipolar model of the world is over”, declared Vladimir Putin last week.

“The global picture has completely changed”.

The St Petersburg International Economic Forum was less well-attended than usual. During previous visits to this annual “Russian Davos”, now in its 18th year, I’ve regularly been mown down by American and West European CEOs, as they’ve purposefully stomped down carpet-tiled corridors, their retinue of aides and cameras in tow.

This year, while plenty of Western executives did make the annual trek to Russia’s beautiful second city, keen to sell more cars, soap powder and financial services in Europe’s most valuable consumer market, the corridors were safer. Many of the top names stayed away.

The sanctions imposed on Russia in response to events in Ukraine put Western business leaders under pressure. Fearing unsavoury headlines, and often responding to specific government requests, some of our best-known corporate pole-climbers gave “Putin’s vanity summit” a miss.

Such absences, along with the UK’s local and European election shenanigans, meant the St Petersburg Forum generated less comment than usual. Yet I’d say this year’s event provided confirmation of one of the most important pieces of news to emerge from Russia since the Soviet Union was dissolved a quarter of a century ago.

I’m referring to the $400bn (£237bn) deal struck between Moscow and Beijing, under which Russia will supply 38bn cubic metres (bcm) of gas to China over 30 years from 2018. Before that happens, the two sides are to share the estimated $77bn cost of building the new “Power of Siberia” pipeline, stretching from Eastern Siberia to China’s populous north-east.

While that will already amount to the world’s biggest construction project, this joint initiative could yet see a second pipeline built to the Western Provinces of the People’s Republic, expanding Russia’s annual Chinese gas sale to 61bcm.

This deal has been a long time coming. Last spring, after a decade of negotiation, state-run energy giants Gazprom and CNPC signed a memorandum of understanding regarding the initial pipeline route. Putin’s visit to China last week, followed by events in St Petersburg, cemented the high politics of the tie-up.

Some say the Ukrainian crisis has forced an “isolated” Russia to do this China deal now, in a scramble for allies. Others judge that Beijing, showing its disapproval of Western adventurism and lingering Cold War attitudes, is deliberately standing next to Moscow in a joint display of strength. Whichever way you spin it, the outcome is the same. Russia, source of a third of all natural gas used in Western Europe, will soon have a major alternative market for its vast exports. And that can only put upward pressure on both wholesale and retail gas prices.

Enemies for much of the Cold War, Russia and China are now building serious commercial ties across their 2,700-mile border. Under-reported in the West, this fast-strengthening relationship will do much to shape the world economy in the years and decades to come.

As recently as 2003, cross-border trade between Russia and China amounted to just $12bn. Over the last decade, that’s expanded more than seven-fold, reaching $90bn last year. Both sides recognise the synergies between the world’s largest energy exporter and the world’s most populous nation and biggest manufacturer.

In 2009, Russia’s oil giant Rosneft secured a $25bn oil swap contract with China. Last year, that relationship deepened, after Rosneft agreed to double oil supplies to China in a deal valued at a colossal $270bn. This reflected Russia’s plan to shift its focus away from saturated and crisis-ridden European energy markets and towards Asia — a plan well in train years before recent events in Ukraine.

Under the latest oil agreement, Russia pumps an extra 300,000 barrels to China daily for the next 25 years, doubling the crude it already sells to the energy-hungry People’s Republic. The speed of change in the direction of Russia’s oil exports has been stark. Russia now sends about 750,000 barrels a day to Asia, a fifth of the oil it sells abroad, helped by the East Siberia Pacific Ocean crude pipeline, linking Russia to China, which opened in 2010....