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2015-08-24 18:20:00

RUSSIA & CHINA DEAL

RUSSIA & CHINA DEAL

Russia's energy pivot toward Asia faces its sternest test early next month when President Vladimir Putin visits Beijing amid slumping oil prices and concerns over China's economic slowdown.

While Gazprom PJSC said on Aug. 18 that talks over a second natural gas supply contract with China are "showing good dynamics," the Beijing government damped Russian hopes that a deal will be signed on Putin's two-day trip starting Sept. 2.

China and Russia aren't targeting a deal during the visit as the more than 50 percent slump in crude over the past year complicates talks, Interfax news service reported Friday, citing Ling Ji, director of the Department of Eurasian Affairs at the Chinese Ministry of Commerce. While an accord would make China Gazprom's largest client, the country's economy is grappling with industrial overcapacity, the fallout from a downturn in property investment and a volatile stock market.

"It is not a favorable environment to sign off another gas deal" for China, said Keun-Wook Paik, a senior research fellow at the Oxford Institute for Energy Studies in London.

Putin seeks to agree on at least one large energy deal during his visit, with the Russian delegation specifically targeting the gas accord, a government official said last week, asking not to be identified as the information isn't public. The second gas deal could be signed during the September visit depending on talks, Dmitry Peskov, a Kremlin spokesman, said last month.

China's Ministry of Commerce on Monday declined to comment on the September meeting.

First Deal

Last year, Putin reached his first deal to supply gas to China from East Siberia after almost a decade of talks, marking a milestone in relations between the world's largest energy exporter and the biggest importer. The accord followed a deterioration of Russia's relations with the U.S. and Europe over the conflict in Ukraine.

In November, Russia and China signed a framework agreement for a second 30-year gas contract, which would involve building a pipeline from West Siberia. It would deliver as much as 30 billion cubic meters of gas a year (1.1 trillion cubic feet), adding to the 38 billion cubic meters from the first contract and making China Gazprom's largest customer.

Putin valued the first deal, with supplies starting around 2019 and a price formula linked to oil, at $400 billion. Since that deal was signed, Brent crude, the benchmark for half of the world's oil, has dropped to less than $45 per barrel from more than $100.

Management Changes

The changes among the top managers of China's energy giants and the government's anti-corruption drive are also slowing down talks with Russia, according to Alexander Gabuev, senior associate at Carnegie Moscow Center.

"New officials are unwilling to approve risky deals," he said in an e-mail. "And Russian deals are risky now due to the sanctions, ruble devaluation and constant changes in the tax regime."

While maintaining good political relations with Russia is important for China, President Xi Jinping won't sacrifice the economy for politics, Gabuev said.

Any new accord signed during Putin's visit would be "some sort of a gift," the state-run Tass news service reported Thursday, citing Russian ambassador to China Andrey Denisov. Otherwise, the countries will continue negotiations, he said.

bloomberg.com

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