In the Russia-China Gas Deal, Did Putin Win?

Russia may have done a major deal with China, but at a price. Russia has always feared China one day sweeping in across the plains for food as its population grows. Boosting China will not have sat easily with the Kremlin planners. But neither is subservience to America. Catch 22.

Agree with this read on what it means in the short-term for Russia-China, but it's a simplistic view. If several other Chinese suppliers take a similar approach to defining a base price in solid terms, i.e., litres/gram of Au for oil or grams/MJoule for gas, the demand for USD will start evaporating really quickly. I think the deal last week by Abu Dhabi is just the start. Kuwait and Qatar will be next, and I'd bet that the Saudis have already done it.

More likely that it will become an avalanche. The Arabs/Iraqis/Iranians won't jump fully into the water, but they'll wade in up to their knees. And that's going to add up to a lot less demand for petrodollars. They're shipping about 6M brls/day to China now and that's $600M/day in lower demand. It starts to add up in a real hurray. QE∝ will dry up quickly which means interest rates are going to rise, and all the bubbles from stock markets, to housing, to debt will be affected accordingly.

Frenemies Vladimir Putin and Xi Jinping. Photographer: Alexey Druzhinin/AFP/Getty Images

Bloomberg View
21 May 2014

So in striking a big new deal to supply natural gas to China, has Vladimir Putin outmaneuvered the U.S. and its European friends yet again? Much as Russia's president would like you to think so, not really.

Putin called today's accord an "epochal event." The governments' joint statement contained thinly veiled criticism of U.S. and European Union actions over Ukraine, inviting the world to view the deal in the context of that dispute. The timing is certainly no accident, and a closer relationship between Russia and China is hardly a matter of indifference to the rest of the world.

At the same time, this agreement to supply China with gas has been in the works for 10 years, and a deal had been widely expected this year. The two countries had been haggling mainly over price. The terms announced this week don't make the true price of the gas (including how much each will spend on the necessary pipeline infrastructure) explicit, but it appears that China will pay a bit less than Europe pays for Russian gas. If so, both sides have moved from their earlier positions in closing the deal.

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