Tuesday will be a big day in the world of geopolitics. That’s when Russian president Vladimir Putin touches down in Beijing for high-profile meetings with his eastern neighbor. Russia’s aggression in Europe has strained its relationship with the West, to say the least, giving this meeting between the two world powers additional import.It’s thought that the two countries might finally iron out the details of a massive natural gas deal. European leaders are agitating for new sources of energy imports to decrease their reliance on Russian supplies, which has Moscow eying new buyers. For its part, China is ever-eager to secure new sources of energy, but natural gas will be especially welcome in a country where coal-fired power plants are making toxic smog something of a permanent urban fixture. On principle, both sides have been up for signing this deal for more than a decade, but price has remained a big sticking point. That may no longer be the case after next week, but, as the WSJ reports, the terms of this gas deal may not be as favorable for Russia as the terms it is used to extracting from its neighbors to the West:
Until recently, market prices weren’t conducive to a deal. Russia charged its European customers about $12.5 per million British thermal units two years ago. China paid about $10 per mmBtu for Central Asian gas. Russia could afford to say no to matching the lower price, perhaps because it thought China needed gas badly, partly to combat pollution.In the past year, though, CNPC has gained the upper hand. Gazprom’s European price has fallen to about $10.8 per mmBtu as of April, as it offers discounts to compete against Norwegian and African supplies. Meanwhile, U.S. gas exports are set to grow on the back of its shale revolution, possible given added impetus by a desire to reduce Russia’s market power amid the Ukraine crisis. This gives China more options down the road. And as for China’s desperation to tackle pollution, a gas deal wouldn’t clear the skies overnight anyway.
For once, Moscow doesn’t seem to be holding most of the leverage in an energy negotiation, but as much as that may rankle the Kremlin, there has never been a better time—from both their perspectives—for the two countries to reach an agreement and ink this deal. This is big; we’ll be watching.