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China, Russia sign huge gas deal

Russia's President Vladimir Putin, background left, and China's President Xi Jinping, background right, smile during signing ceremony in Shanghai, China on Wednesday, May 21, 2014 while Russian Gazprom CEO Alexei Miller, foreground left, and China's CNPC head Zhou Jiping, foreground right, signing the deal. Photo: AP

China signed a landmark $400 billion deal on Wednesday to buy natural gas from Russia, binding Moscow more closely to Beijing at a time when President Vladimir Putin's relations with the West have deteriorated to the lowest point ever.

The 30-year gas deal is a political triumph for Putin and gives Moscow an economic boost at a time when Washington and the European Union have imposed sanctions against Russia and Europe has threatened to cut its gas imports to punish the Kremlin over the crisis in Ukraine.

The agreement, which was announced after meetings in Shanghai between Putin and Chinese President Xi Jinping, allows Russia to diversify its gas exports at a time when the crisis in Ukraine has accelerated calls in Europe to rely less on energy supplies from Russia. Europe gets about 30 percent of its gas from Russia.

"This is the biggest contract in the history of the gas sector of the former USSR," said Putin, after the agreement was signed in Shanghai between state-controlled entities Gazprom and China National Petroleum Corp (CNPC).

"Through mutual compromise we managed to reach not only acceptable, but rather satisfactory, terms on this contract for both sides. Both sides were in the end pleased by the compromise reached on price and other terms," the president said.

Politically, the deal provides "breathing space for Russia," Keun-Wook Paik, senior research fellow at the Oxford Institute for Energy Studies, said. "Russia and Putin can demonstrate it's not completely isolated because of the Ukraine crisis. Russia has demonstrated that they have a very reliable strategic partnership with China."

For China, the world's second-largest economy, the deal will help ease gas shortages and curb its reliance on coal.

US Secretary of State John Kerry noted that Russia and China have been trying to work out an energy agreement for 10 years and said the deal "isn't a sudden response to what's been going on" in Ukraine.

"And if the world benefits as a result of that, that's fine," he said.

Similarly, State Department spokeswoman Jen Psaki said of the prospect of closer Russia-China relations: "It is not a surprise to us that countries that are neighbors communicating about how to work together, whether that's through an economic partnership or otherwise."

US Treasury Secretary Jack Lew appealed to China in a visit last week to avoid actions that might limit the impact of recent Western sanctions against Russia. But a US official, who was not authorized to speak by name, said the United States would distinguish between deals that have long been in the works — such as this one — and new agreements that seek to fill space left by US and European Union sanctions.

Missing price details

"This is a big deal that has been over a decade in the making," said Raffaello Pantucci, senior research fellow at the Royal United Services Institute for Defense and Security Studies, as reported by the French news agency AFP.

"The Russians in particular wanted to walk away from these meetings in China, highlighting that they have lots of other substantial options on the table in the face of tensions with the West over Ukraine," he said.

"Putin gets a big win and can go back home showing that he has also managed to finally conclude a discussion that had been going on for over a decade," he added.

The sticking point in negotiations between the two countries had been over the gas price.

Putin said that the gas prices in the deal were pegged to the price of oil and petroleum products. That represents a win for Russia, analysts said, since oil prices are expected to remain high. European customers have been fighting for years to have natural gas prices float, based on market demand.

But the missing price details raised the suspicions of some Russians, who suspect Putin dropped the price of gas significantly for China in a desperate maneuver to ensure a steady cash flow for Gazprom in the face of sinking revenue and Western sanctions.

Gazprom CEO Alexei Miller declined to say at what price the deal was struck, but sources at the companies involved said Gazprom refused to go below $350 per thousand cubic meters.

An online notice posted on CNPC's Web site said that under the deal, Russia would begin supplying China with 38 billion cubic meters of natural gas a year beginning in 2018.

Russia will be responsible for building processing plants, doing field development and constructing pipelines on its side, and China will be responsible for the pipeline construction within its own borders.

Increased gas imports will also help Beijing in its declared "war on pollution" aimed at reducing its reliance on coal which contributes to the harmful smog shrouding major cities.

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