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Russia-China gas deal may influence U.S. strategy on Ukraine

May 22, 2014 at 6:45 PM EST
China and Russia struck a $400 billion gas deal amid mounting tension between the United States and both countries. Jeffrey Brown talks to Geoff Dyer of Financial Times and Julia Nanay of IHS about why China and Russia chose this moment to reach an agreement and its potential geopolitical sway on the U.S.
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JEFFREY BROWN: And we look in depth at the massive energy deal now with Geoff Dyer, U.S. diplomatic correspondent for The Financial Times, past Beijing bureau chief for the newspaper, and author of “The Contest of the Century: The New Era of Competition with China and How America Can Win,” and Julia Nanay, director of the Russian and Caspian Energy Practice at IHS, a global consulting firm.

Welcome to both of you.

GEOFF DYER, The Financial Times: Thanks for having me.

JEFFREY BROWN: Geoff Dyer, first, starting with you, start with the economic side of this. Why is it such a big deal?

GEOFF DYER: It’s a big deal for China because it is looking to diversify its energy supplies. It doesn’t want to be reliant on any one market. It has a voracious demand for energy and it’s looking to get it from as many places as possible.

It likes the idea of pipelines coming across land because it is very worried about all the oil it has to export on ship — import on ships. And they’re worried that eventually in some conflict the U.S. might want to block off those supply lines that would bring the oil in.

And there’s an environmental aspect as well for China. This is gas. It’s much cleaner than some of the other types of energy it has, including coal-fired power plants. So more gas in the Chinese energy combination will be in the long term a benefit for pollution in China.

JEFFREY BROWN: All right.

And why don’t — Julia, tell us about the Russian side of it, or how much energy gas does it have, what does it need to do?

JULIA NANAY, IHS: Well, Russia is one of the world’s largest gas reserve holders. It’s a large producer of gas.

And, ultimately, Asia is a growing market for gas. Russia is already in Europe. It’s entrenched in the European economies. It supplies, you know, a sizable amount of gas in Europe. But if it’s going to grow its gas supplies, it needs to diversify to Asia.

And China is one of the growing markets in Asia. And Russia has been negotiating this deal for nearly a decade. And I think what’s interesting is, in that space of time, Turkmenistan in Central Asia has moved in to become a major supplier to China. And so, in the end, Turkmenistan has captured a sizable market already in China.

And I think Russia was looking to finally come to the table and make a deal. And it didn’t happen until 4:00 a.m., virtually before, you know, Putin was leaving Shanghai. This deal was concluded at the very last minute.

JEFFREY BROWN: Well, and it also — and, Geoff Dyer, it also didn’t happen until this moment that — this geopolitical moment we’re in, right, with Russia and the U.S. and the West.

GEOFF DYER: Exactly. They have been haggling over this deal for 10 years.

It’s probable the reason it happened now is because Putin very much wanted this deal to happen now.

JEFFREY BROWN: Explain why.

JEFFREY BROWN: Put it into the context now.

GEOFF DYER: If you think of the Ukraine crisis, what the U.S. is trying to do, its strategy is to work with Western Europe to isolate Russia diplomatically and economically through sanctions and other type of diplomatic pressure.

Through this deal, Putin goes to Shanghai, he is on the stage with Xi Jinping. This is his way of showing the world that he isn’t isolated, that he has big and important, powerful friends, and that he is not going to be pushed around by the U.S. in the way that they think, want to be able to do.

JEFFREY BROWN: Does that sound right to you, the impetus for why this finally came…

JULIA NANAY: Yes, definitely.

But you have to understand that this is also something if you — you can’t look at it as only, oh, this happened because Ukraine or other crises. I think what’s critical for the world energy scene is that this deal is going to actually develop new resources.

So it’s — Russia is going to develop new gas fields in east Siberia. It’s going to build a new pipeline. And I think this in the end is going to add to the world’s resources, something that I think is also good overall for world energy.

JEFFREY BROWN: Because why?

JULIA NANAY: Because we’re going to need increasing amounts of energy.

And so with this deal, Russia is not taking gas away from Europe. It’s creating new sources of gas for Asia.

JEFFREY BROWN: Is that…

GEOFF DYER: Absolutely. Yes, it does seem that the Chinese were very insistent that this be new gas fields that be opened up for this deal.

JEFFREY BROWN: Yes.

GEOFF DYER: So, they — the Chinese would worry that they might be caught in some conflict in some — if any brittle conflict, Russia could decide to divert gas one way towards Europe or one way towards China. The Chinese very much wanted to have that sort of captive supply.

JEFFREY BROWN: The larger geopolitical question, at least in this country, of course, is what does it say about Russia and China coming together and its impact on the U.S.?

GEOFF DYER: Well, clearly, they have lots of things in common.

These are two countries that have moved together quite a lot in the last few years. The biggest thing they have in common is, they — they both want a world that is not dominated by the United States. And that is a very powerful motivation.

But, also, there’s lots of things that — there’s lots of reasons why China and Russia will end up as rivals as well in the long run. Russia is very — Russia wants to be closer to China as a way of pushing back into the U.S., but it doesn’t want to be China’s junior partner. So, at the same time as it’s been playing nice with China, it’s also been actively hedging all around Asia with some of China’s rivals, as a way of pushing back and making sure that China doesn’t become the dominant country in Asia.

JEFFREY BROWN: So you see the — and you are covering the U.S., Washington now. How do you see the U.S. responding to this?

GEOFF DYER: Well, the U.S. has to make a difficult decision as to whether they think there is something really real politically here.

And if they do, then they are going to have to subtly change their strategy. So, for instance, in the Ukraine crisis, the U.S. would have to think about trying to play nice with China in some ways. But if they decide that there isn’t really a substantial alliance here or there’s no real partnership, there’s no real substance to this new rapprochement between Russia and China, then they can just stand back and let the sort of natural tensions, the natural rivalry develop over the coming years, and it doesn’t necessarily need to try and play them off against each other.

JEFFREY BROWN: Julia Nanay, there is still a lot of questions here, right, details to be worked out, including price. We don’t really know what China’s going to pay.

JULIA NANAY: Well, I think there’s been various reports of what the price could be, but I think the intergovernmental agreement needs to be signed. There’s elements to this deal that haven’t been made public. And I think we will see how it develops. I don’t know exactly when they will sign that deal.

But one other thing to remember is that China and Russia share a long border, and that China is very active in countries that Russia is also very active in, in Central Asia. So these are two countries — two countries that have to work together in a way. It’s in their interest. They live in the same neighborhood.

So I think this is just something that was bound to happen.

JEFFREY BROWN: Even though there are a lot of tensions that Geoff Dyer was talking about?

JULIA NANAY: Yes.

JEFFREY BROWN: We were talking about the geopolitical implications for the U.S. What about — are there any energy implications for the U.S.?

JULIA NANAY: Oh, I think this is very positive, because, like I said, it’s not taking resources away. It’s actually adding to resources.

And I think the more resources you have and the more gas you put out there, potentially, it impacts price in an interesting way, because the more oil and gas you have, the more supply to feed the demand, I think it also has an effect that lowers prices.

JEFFREY BROWN: But, just to finish up, you also raise some environmental concerns.

GEOFF DYER: Well, there are very good environmental concerns, in the sense that the more gas that China has in its energy, that is going to be good for China’s pollution in the long run.

China, its most dominant form of power comes from coal-fired power plants, and they are some of the dirtiest types of energy you can have. So if it does import more and more gas from people, that is one way that China can slightly try to reduce its really, really desperate pollution problem.

JEFFREY BROWN: All right, Geoff Dyer and Julia Nanay, thank you both very much.

JULIA NANAY: Thank you.

GEOFF DYER: Pleasure.