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Russia-China gas deal could ignite a shift in global trading
Russia is increasingly looking east to China as a trading partner — and that could mean an end to the dollar’s dominance as a petrocurrency
If Russia’s “pivot to Asia” results in Moscow and Beijing trading oil between them in a currency other than the dollar, that will represent a major change in how the global economy operates
By Liam Halligan
9:00PM BST 24 May 2014
61 Comments
'The unipolar model of the world is over,” declared Vladimir Putin last week.
“The global picture has completely changed”.
The St Petersburg International Economic Forum was less well-attended than usual. During previous visits to this annual “Russian Davos”, now in its 18th year, I’ve regularly been mown down by American and West European CEOs, as they’ve purposefully stomped down carpet-tiled corridors, their retinue of aides and cameras in tow.
This year, while plenty of Western executives did make the annual trek to Russia’s beautiful second city, keen to sell more cars, soap powder and financial services in Europe’s most valuable consumer market, the corridors were safer. Many of the top names stayed away.
The sanctions imposed on Russia in response to events in Ukraine put Western business leaders under pressure. Fearing unsavoury headlines, and often responding to specific government requests, some of our best-known corporate pole-climbers gave “Putin’s vanity summit” a miss.
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Such absences, along with the UK’s local and European election shenanigans, meant the St Petersburg Forum generated less comment than usual. Yet I’d say this year’s event provided confirmation of one of the most important pieces of news to emerge from Russia since the Soviet Union was dissolved a quarter of a century ago.
I’m referring to the $400bn (£237bn) deal struck between Moscow and Beijing, under which Russia will supply 38bn cubic metres (bcm) of gas to China over 30 years from 2018. Before that happens, the two sides are to share the estimated $77bn cost of building the new “Power of Siberia” pipeline, stretching from Eastern Siberia to China’s populous north-east.
While that will already amount to the world’s biggest construction project, this joint initiative could yet see a second pipeline built to the Western Provinces of the People’s Republic, expanding Russia’s annual Chinese gas sale to 61bcm.
This deal has been a long time coming. Last spring, after a decade of negotiation, state-run energy giants Gazprom and CNPC signed a memorandum of understanding regarding the initial pipeline route. Putin’s visit to China last week, followed by events in St Petersburg, cemented the high politics of the tie-up.
Some say the Ukrainian crisis has forced an “isolated” Russia to do this China deal now, in a scramble for allies. Others judge that Beijing, showing its disapproval of Western adventurism and lingering Cold War attitudes, is deliberately standing next to Moscow in a joint display of strength. Whichever way you spin it, the outcome is the same. Russia, source of a third of all natural gas used in Western Europe, will soon have a major alternative market for its vast exports. And that can only put upward pressure on both wholesale and retail gas prices.
Enemies for much of the Cold War, Russia and China are now building serious commercial ties across their 2,700-mile border. Under-reported in the West, this fast-strengthening relationship will do much to shape the world economy in the years and decades to come.
As recently as 2003, cross-border trade between Russia and China amounted to just $12bn. Over the last decade, that’s expanded more than seven-fold, reaching $90bn last year. Both sides recognise the synergies between the world’s largest energy exporter and the world’s most populous nation and biggest manufacturer.
In 2009, Russia’s oil giant Rosneft secured a $25bn oil swap contract with China. Last year, that relationship deepened, after Rosneft agreed to double oil supplies to China in a deal valued at a colossal $270bn. This reflected Russia’s plan to shift its focus away from saturated and crisis-ridden European energy markets and towards Asia — a plan well in train years before recent events in Ukraine.
Under the latest oil agreement, Russia pumps an extra 300,000 barrels to China daily for the next 25 years, doubling the crude it already sells to the energy-hungry People’s Republic. The speed of change in the direction of Russia’s oil exports has been stark. Russia now sends about 750,000 barrels a day to Asia, a fifth of the oil it sells abroad, helped by the East Siberia Pacific Ocean crude pipeline, linking Russia to China, which opened in 2010.
This new gas announcement is a logical next step. Russia continues its diversification away from Europe while China gets to temper its nagging energy paranoia. The world’s second-largest economy is dangerously dependent on dirty coal-fired power and oil and liquefied natural gas (LNG) shipped through the Malacca Strait and across the South and East China seas. In the event of a bust-up with America, China’s navy can’t guarantee to keep these vital sea lanes open.
The precise gas price agreed between Beijing and Moscow is currently secret. Well-informed insiders, examining the scale of the promised exports, and the headline size of the deal, suggest a range of $350-$370 per thousand cubic meters. If true, this works well for both sides. Russia sells gas to Belarus for about $180 while Ukraine, until recently, was paying $268. So $350, while less than most West European countries pay, isn’t bad from a Russian perspective. Yet it’s still less than it costs China to import LNG from Qatar and elsewhere — and with much less geo-strategic risk.
While this agreement will increase Russia’s price leverage, I don’t think it threatens Western energy security. Over the past four years, Russia has exported an annual average of no less than 160bcm to Europe, more than two and a half times what will go to China, even under the enhanced double-pipeline version of this last Sino-Russia gas deal. Russia needs the European gas market — and that should be borne in mind, whatever is said by sabre-rattling Western politicians and domestic fracking lobbyists.
The geographic reality is that existing and future gas supplies from western Siberia and the Yamal peninsula only make commercial sense if they travel west to Europe. Getting them to China would involve a pipeline so long and complex as to be prohibitively expensive. Eastern Siberian gas, similarly, is only viable if it goes east. The two distinct areas of Russian gas production are each located for their respective markets. It makes perfect sense for Moscow to pursue and maintain good export relationships with both Western Europe and China.
The real danger, in my view, is rather more abstract — but deadly important nevertheless. If Russia’s “pivot to Asia” results in Moscow and Beijing trading oil between them in a currency other than the dollar, that will represent a major change in how the global economy operates and a marked loss of power for the US and its allies.
With the dollar as the world’s petrocurrency, it also remains the reserve currency of choice for central banks globally. As such, the US is currently able to borrow with “exorbitant privilege”, as it has for decades, simply printing money to pay off foreign creditors.
With China now the world’s biggest oil importer and the US increasingly stressing domestic production, the days of dollar-priced energy, and therefore dollar-dominance, look numbered. Beijing has recently struck numerous agreements with major trading partners such as Brazil that bypass the dollar. Moscow and Beijing have also set up rouble-yuan swap facilities that push the greenback out of the picture.
If Russia and China now decide to drop dollar energy pricing totally, America’s reserve currency status could unravel fast, seriously undermining the US Treasury market and causing a world of pain for the West. This won’t happen tomorrow or next year. It’s unlikely even by 2020. But by announcing this deal, Russia and China turned the screw half a twist more.
Russia is increasingly looking east to China as a trading partner — and that could mean an end to the dollar’s dominance as a petrocurrency
If Russia’s “pivot to Asia” results in Moscow and Beijing trading oil between them in a currency other than the dollar, that will represent a major change in how the global economy operates By Liam Halligan
9:00PM BST 24 May 2014
61 Comments 'The unipolar model of the world is over,” declared Vladimir Putin last week.
“The global picture has completely changed”.
The St Petersburg International Economic Forum was less well-attended than usual. During previous visits to this annual “Russian Davos”, now in its 18th year, I’ve regularly been mown down by American and West European CEOs, as they’ve purposefully stomped down carpet-tiled corridors, their retinue of aides and cameras in tow.
This year, while plenty of Western executives did make the annual trek to Russia’s beautiful second city, keen to sell more cars, soap powder and financial services in Europe’s most valuable consumer market, the corridors were safer. Many of the top names stayed away.
The sanctions imposed on Russia in response to events in Ukraine put Western business leaders under pressure. Fearing unsavoury headlines, and often responding to specific government requests, some of our best-known corporate pole-climbers gave “Putin’s vanity summit” a miss.
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Such absences, along with the UK’s local and European election shenanigans, meant the St Petersburg Forum generated less comment than usual. Yet I’d say this year’s event provided confirmation of one of the most important pieces of news to emerge from Russia since the Soviet Union was dissolved a quarter of a century ago.
I’m referring to the $400bn (£237bn) deal struck between Moscow and Beijing, under which Russia will supply 38bn cubic metres (bcm) of gas to China over 30 years from 2018. Before that happens, the two sides are to share the estimated $77bn cost of building the new “Power of Siberia” pipeline, stretching from Eastern Siberia to China’s populous north-east.
While that will already amount to the world’s biggest construction project, this joint initiative could yet see a second pipeline built to the Western Provinces of the People’s Republic, expanding Russia’s annual Chinese gas sale to 61bcm.
This deal has been a long time coming. Last spring, after a decade of negotiation, state-run energy giants Gazprom and CNPC signed a memorandum of understanding regarding the initial pipeline route. Putin’s visit to China last week, followed by events in St Petersburg, cemented the high politics of the tie-up.
Some say the Ukrainian crisis has forced an “isolated” Russia to do this China deal now, in a scramble for allies. Others judge that Beijing, showing its disapproval of Western adventurism and lingering Cold War attitudes, is deliberately standing next to Moscow in a joint display of strength. Whichever way you spin it, the outcome is the same. Russia, source of a third of all natural gas used in Western Europe, will soon have a major alternative market for its vast exports. And that can only put upward pressure on both wholesale and retail gas prices.
Enemies for much of the Cold War, Russia and China are now building serious commercial ties across their 2,700-mile border. Under-reported in the West, this fast-strengthening relationship will do much to shape the world economy in the years and decades to come.
As recently as 2003, cross-border trade between Russia and China amounted to just $12bn. Over the last decade, that’s expanded more than seven-fold, reaching $90bn last year. Both sides recognise the synergies between the world’s largest energy exporter and the world’s most populous nation and biggest manufacturer.
In 2009, Russia’s oil giant Rosneft secured a $25bn oil swap contract with China. Last year, that relationship deepened, after Rosneft agreed to double oil supplies to China in a deal valued at a colossal $270bn. This reflected Russia’s plan to shift its focus away from saturated and crisis-ridden European energy markets and towards Asia — a plan well in train years before recent events in Ukraine.
Under the latest oil agreement, Russia pumps an extra 300,000 barrels to China daily for the next 25 years, doubling the crude it already sells to the energy-hungry People’s Republic. The speed of change in the direction of Russia’s oil exports has been stark. Russia now sends about 750,000 barrels a day to Asia, a fifth of the oil it sells abroad, helped by the East Siberia Pacific Ocean crude pipeline, linking Russia to China, which opened in 2010.
This new gas announcement is a logical next step. Russia continues its diversification away from Europe while China gets to temper its nagging energy paranoia. The world’s second-largest economy is dangerously dependent on dirty coal-fired power and oil and liquefied natural gas (LNG) shipped through the Malacca Strait and across the South and East China seas. In the event of a bust-up with America, China’s navy can’t guarantee to keep these vital sea lanes open.
The precise gas price agreed between Beijing and Moscow is currently secret. Well-informed insiders, examining the scale of the promised exports, and the headline size of the deal, suggest a range of $350-$370 per thousand cubic meters. If true, this works well for both sides. Russia sells gas to Belarus for about $180 while Ukraine, until recently, was paying $268. So $350, while less than most West European countries pay, isn’t bad from a Russian perspective. Yet it’s still less than it costs China to import LNG from Qatar and elsewhere — and with much less geo-strategic risk.
While this agreement will increase Russia’s price leverage, I don’t think it threatens Western energy security. Over the past four years, Russia has exported an annual average of no less than 160bcm to Europe, more than two and a half times what will go to China, even under the enhanced double-pipeline version of this last Sino-Russia gas deal. Russia needs the European gas market — and that should be borne in mind, whatever is said by sabre-rattling Western politicians and domestic fracking lobbyists.
The geographic reality is that existing and future gas supplies from western Siberia and the Yamal peninsula only make commercial sense if they travel west to Europe. Getting them to China would involve a pipeline so long and complex as to be prohibitively expensive. Eastern Siberian gas, similarly, is only viable if it goes east. The two distinct areas of Russian gas production are each located for their respective markets. It makes perfect sense for Moscow to pursue and maintain good export relationships with both Western Europe and China.
The real danger, in my view, is rather more abstract — but deadly important nevertheless. If Russia’s “pivot to Asia” results in Moscow and Beijing trading oil between them in a currency other than the dollar, that will represent a major change in how the global economy operates and a marked loss of power for the US and its allies.
With the dollar as the world’s petrocurrency, it also remains the reserve currency of choice for central banks globally. As such, the US is currently able to borrow with “exorbitant privilege”, as it has for decades, simply printing money to pay off foreign creditors.
With China now the world’s biggest oil importer and the US increasingly stressing domestic production, the days of dollar-priced energy, and therefore dollar-dominance, look numbered. Beijing has recently struck numerous agreements with major trading partners such as Brazil that bypass the dollar. Moscow and Beijing have also set up rouble-yuan swap facilities that push the greenback out of the picture.
If Russia and China now decide to drop dollar energy pricing totally, America’s reserve currency status could unravel fast, seriously undermining the US Treasury market and causing a world of pain for the West. This won’t happen tomorrow or next year. It’s unlikely even by 2020. But by announcing this deal, Russia and China turned the screw half a twist more.