Russia and China’s gas deal: ignore the hype


François Godement, Chi Kong Chyong

Given President Putin and China's need for mutual support (because of the recent unpopular manoeuvres in Ukraine and South China Sea) they are hyping up their good relations as never before. It seems a move of folly for China to plunk down as much as $20-25 billion dollars as prepayment for years of Russian gas, but in exchange it is getting a long term price lower than Europe's. How secure are these contracts? It is, after all, impossible to predict future prices. France was previously trapped in contracts with Algeria and Russia that locked in prices – costing France plenty when prices fell.

But the move's strategic significance is more hype than substance. In the end, gas consumers, including Europeans,  might be the winners in this situation: a pipeline deal between Russia and China increases competition between piped gas and global LNG (liquefied natural gas) in Asia. By the time Russian gas flows to China through a new pipeline (2018 or even 2020) the LNG capacity from Australia and US will essentially be flooding the market. Gas that China doesn’t use will be simply diverted to Europe. Increased competition in Asia means that Europe is more attractive to LNG suppliers (including the US). From an economic and geopolitical standpoint, Europe should encourage the Russians to do energy business with China more, and who knows, one day we might witness a united Europe from the Atlantic to the Urals.

There is, however, a short-term geopolitical downside. Even if Chinese gas purchases do not hurt EU energy consumption directly, it still means that Putin has found a replacement for the billions that EU sanctions would seek to deprive him of. And again we see China making a half-baked (or half-hearted) economic sanction response ineffectual. As often, what matters in these cases of reverse alliances is the joint capacity to say no, not the capacity to build a positive strategy.

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