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China Drives a Hard Energy Bargain on Russia

The other day the Financial Times had a good editorial on Vladimir Putin’s visit to China to sign a plethora of business and energy deals, and naturally, the holy grail of all such diplomacy:  becoming a bigger supplier of natural gas to China’s thirsty industrial capacity from the Kovykta field.  The FT made the point that we’ve argued around here for a long time, that the Sino-Russian friendship is meant to look bigger than it is:  “Certainly, the new Great Game in central Asia does not appear to be going Washington’s way. Yet talk of a confluence of Chinese and Russian interests is overdone.

In addition to the rivalry trumping the friendship, Russia’s biggest obstacle to scaring the Europeans over sending its gas to the east is the problem of pricing (let’s not forget the foibles of Sechin’s incomprehensible oil deal with the Chinese).  Streetwise Professor has an interesting post breaking down the negotiating points which makes China a pretty tough gas customer:

For an interesting contrast, watch Putin and Russia deal with China. Putin traveled to China to announce big energy deals with great fanfare.  Everything is agreed!  Uhm, except the price.  Details, details.

China has shown no interest whatsoever in agreeing to the sameoil-based pricing formula as Gazprom employs in its European salescontracts.  Given the bilateral monopoly condition that wouldcharacterize any Gazprom/Russia-China deal, the same sorts of issuesthat I addressed in my take-or-pay post will make any Russia-Chinaagreement very hard to negotiate and enforce.  So, I wouldn’t hold mybreath in expectation of such a deal any time soon.

It is very interesting to note, though, how much more difficult itis for Putin and Russia to deal with China than the Europeans.  The oldstandby divide-and-conquer gambits that routinely work with the Eurosare not an option in dealing with China.  Putin doesn’t look quite sosmart or powerful in dealing with a single, hardheaded negotiatingpartner as he does in rolling divided, squabbling, and politicallyvulnerable Europeans.  If the Euros were smart they would watch, learn,and imitate.  Note that this is a conditional statement, not aprediction.  I doubt that they will.