Russia Shoots Itself in the Foot by Concluding Gas Deal With China

Yulia Latynina

China didn’t have such an urgent need to sign the [gas supply] contract [signed on May 21]; but by signing it the Chinese got, as a bonus, access into those spheres of the Russian economy where previously they were denied such access.

In April Vladimir Putin wrote a letter to the heads of EU countries, in which he stated that: “Russia has subsidized the Ukrainian economy, at the expense of undercharging on gas prices, to the amount of 35.4 billion USD.” However, gas prices for Ukraine were between 410 and 430 USD per 1000 cubic meters, in 2012.
In May 2014, the same Vladimir Putin signed a contract with China, to supply Russian gas for a period of 30 years; with a total value of 400 billion USD. The contracted price is a trade secret; but we can easily calculate that it is around 350 USD per 1000 cubic meters.

The amount of supply is approximately the same [for both Ukraine and China]: 35 to 40 billion cubic meters per year. A question arises: for how many years is Russia obliged to subsidize the Chinese economy? At [the cost], to judge by Putin’s account, of 100 billion USD.

This is not the end. Russia supplies gas to Ukraine from developed fields, using existing gas pipelines. Gas to China will be supplied from the Irkutskiy and Chayandiskiy (undeveloped)  territories using the “Force of Siberia” gas pipeline – which hasn’t been built yet. Gazprom’s presentation to investors, in February, estimated the realizable value of the Eastern Program: this includes development of both the fields and gas pipeline construction; at a cost of 60 billion USD. So, to judge by Putin’s account, the total subsidy rises to 160 billion USD.

In fact, the price Putin negotiated with the Chinese is pretty good; higher than the average price on the Chinese market.

China buys liquefied gas from Australia and Qatar, at an average price of 145 USD per 1000 cubic meters. China also buys gas from Turkmenistan and Uzbekistan, at a price ranging from 100 to 140 USD per 1000 cubic meters. For this purpose, China has built the Turkmenistan – China gas pipeline, at a total length of 6,400 kilometers. In addition to this, China is dramatically increasing shale gas production; intending to produce 60 to 100 billion cubic meters by 2020. The cost of Chinese shale gas is unlikely to be higher than American gas, which costs 100 to 120 USD per 1000 cubic meters.

This raises a question: could Russians sell natural gas at such prices? The answer is no. The cost of their gas production has been constantly increasing over the last ten years, finally reaching a peak price of 38 USD per 1000 cubic meters. But the cost is only a fraction of the full price. As mentioned above, it is [first] necessary to develop two territories and construct a 4, 000-kilometer pipeline. The Turkmenistan – China gas pipeline cost the Chinese 6.5 billion USD; that is 1 million USD for each kilometer.

4,000 kilometers of the “Force of Siberia” will cost  Russia 30 billion USD; that is 7.5 million per kilometer. Obviously, this figure of 7.5 is not the top limit. In the process of construction it will rise; and only God knows where it might stop – for comparison, the Bovanenkovo – Ukhta gas pipeline cost Gazprom 18 million USD per kilometer.
But the farce is worsened by the fact that Russia had announced its willingness to begin the gas pipeline construction long before the contract with China. They have been led by the principle: “it is important to utilize funds; the rest is irrelevant.”
The overwhelming majority of Russia’s actions in the international arena since 2005 (when an agreement with Germany was reached regarding the construction of North Stream) can has been based on two postulates.

The first postulate is that Russian foreign policy is its gas policy. The second is that this gas policy has been formulated on absolutely fantastical perceptions of the world.

There is an impression that our gas policy has been building all these years based on brilliant ideas in the heads of the Kremlin’s masters. But there always have been problems with the fulfilment of these ideas; or they haven’t been accomplished at all.

The first idea concerns gas as an energy weapon. As soon as the North Stream agreement was signed, the Kremlin proudly announced its national idea – “Gas is our energy superweapon and Russia is an energy superpower. We will pressure everyone, with our pipelines.” Europe was terribly surprised because it lacked know-how in situations when economic tools are used as a weapon, in the modern world. It had only a defensive tool in answer to foreign aggression by a country – pariah status. Putin demonstrated his readiness to use gas as an offensive weapon, as payback for the Orange Revolution; by ceasing gas supplies. Very good. Europe learnt this lesson and Russia’s share in Europe’s gas supplies has dropped – from 39% to 25%.

The second idea concerns share in the European gas distribution system. I think it was born as follows. The Kremlin analyzed the price and said: ‘Wow, the price at the gas hub station in Baumgarten [Austria] is 250 USD per 1000 cubic meters and they sell to the end user at 500 USD. Who’s taking the margin?’ The distribution system. The distribution system is a constant cash generator. The Kremlin has always been attracted to whatever generates cash day after day. An idea appeared: to buy into the European distribution system. But will Europe let this happen? Then a further idea came up: if Europe would not let the Kremlin buy out distribution systems, then the Kremlin would not allow Europe to invest its money in Russian gas fields.

Putin pronounced a sacred formula at every meeting with European leaders, between 2005 and 2006: “You give us distribution systems; we give you fields.” The problem lay in the fact that Europeans did not understand what they were [supposed to be] frightened of. Because, as is usually the case, the boss is the person who invests rather than one who requests. And from the side of the country which has proved its readiness to use gas as an offensive weapon under any conditions, the formula ‘If you want to give us money, you should give us the distribution systems’ sounds very strange.

Thirdly, when this obsessive idea (“Distribution systems in exchange for gas fields”) eventually died, the idea of a “gas OPEC” appeared. The Russian media began to claim, with great pomp, that we would force the West to its knees – not by distribution system buy-outs, but by building a cartel of gas-exporting countries. So Putin solemnly left for Doha, the capital of Qatar – the biggest producer of liquefied natural gas in the world (though it’s likely the Kremlin were angry that the Qataris didn’t in due course kill the Chechen separatist Yandarbiyev, the personal guest of Qatar’s emir). Alas, the “gas OPEC” also came to nothing; unlike the Europeans – who directly said no – the polite Arabs said yes and did nothing.

And finally a fourth idea came to mind – replacing ideas like “bending Europe by buying its distribution systems” and “bending Europe by creating a gas OPEC.”  It sounds like this: “If damned Europe won’t stop reprimanding us when we sit at the table belching, we will punish this damned Europe by selling our gas to China”.
And they punished. But the question is: who?

Negotiations with China over the gas contract have been going on for ten years. Throughout these ten years, China hasn’t accepted the price offered by the Russians. The shale gas revolution occurred during this time; China built the gas pipeline from Turkmenistan; and Russia transformed from a raw materials appendage into a country which will be excluded from the European market. Russia wanted to sign the contract at any price; over the three days [of negotiations] China heavily pressed it, to the lowest point. Suffice to say that Putin – as a gesture of despair – removed the tax on natural resource production, in the fields being developed for China. Nothing will be paid directly into the Russian budget, from this gas. Gazprom and the contractors constructing the gas pipeline will get their profits.

To be direct, Russia signed a contract with China for 30 years simply in order to utilize funds on the construction of the gas pipeline. In exchange for this, Putin signed in China a pile of contracts which make Russia into a raw materials appendage for China; and transfer, to China, Russia’s latest know-how.
At the same time, China is a more dangerous partner than the West. Unlike the West – which is incapable of effective strategic planning and real geopolitical subordination of neighboring countries (replacing this planning by moralizing) – China has been building its policy using strategy and geopolitics. They have been thinking about this for over a millennium. But the Kremlin has been thinking only of money and imaginary offences.

If the West doesn’t buy the Russian [political] opposition – despite the  paranoia
prevailing at the Kremlin – then China will surely buy our bureaucrats. If the US doesn’t play tricky games in Ukraine and Georgia –again, despite paranoia prevailing over this at the Kremlin – China itself will exclude Russia from its spheres of influence. Recall the story of the detention of the Russian trawler “Oleh Naidenov”, off the coast of Senegal. It was nothing personal – the fact is just that China has made African waters its own fishpond: and they have been excluding from there – through corrupt ministers and useful ecological idiots – law-abiding Europeans and poaching Russians.

The Kremlin has always been in the know about this. And suspicions towards China have always prevailed. Allegations about the fight with the paper tiger, the USA, have been very loud; the secret embargo on any colonization of Russia by China were not spoken of – but no more absolute.

For example, Alisher Usmanov bought Udokan [copper mine] in 2008: obviously intending to re-sell it to the Chinese. The project would have operated only in partnership with China; as a source of copper ore to China. But the sale of shares was vetoed at the Kremlin. Now, during Putin’s trip [to China] this veto was unblocked – Udokan will be developed, and with Chinese participation.

To summarize. We sold gas to China – formally in order to “show Europe”; but in fact backed into a corner, at a price which we discarded ten years ago, and only so that contractors would utilize the funds made available for the gas pipeline construction. The price for this gas is much higher than on the market in China, and yielding low profits: but it indirectly testifies to the scale of robbery in Russia. Putin even removed the budget’s proceeds [in tax] from this gas production, decreasing the price. But the remaining commercial margin meant they were forced to allow to China to have some shares in projects which Russia has always, in fear, prohibited.

Translated by Anatoliy Shara, edited by Jon Barrow



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4 thoughts on “Russia Shoots Itself in the Foot by Concluding Gas Deal With China

  1. Pingback: Russia Shoots Itself in the Foot by Concluding Gas Deal With China - Israel Foreign Affairs News

  2. Putin just doesn’t have the intellect to negotiate fair and reasonable outcomes with his European neighbors and Ukraine. His only tool appears to be former soviet arrogance and military intimidation instead of promoting a level playing field and respecting international law. As this article implies, it will all eventually backfire for the Kremlin and create new motivations for soviet political manipulation and military aggression, as demonstrated by Putin’s invasion of Crimea when corrupt manipulation of Yanukovych failed.

  3. This author is weak: the purpose of the Russia-China deal was not the gas deal, it was the next stage in the dollar annihilation project of the two countries. As of 2013, only 33% of the world uses the dollar, & the $20 trillion GDP-PPP Russia-China market not using the dollar means the certain death of the dollar in the short term, & that was the main aim. They are building the next financial system where the bankrupt US & Europe are just accessories in the aftermath of the ravaged Western financial system. Novaya Gazeta is typical of the dumb Gorbachev thinking

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