Putin Courts China to Bridge Divide on Gas

Prime Minister Vladimir Putin said Russia is nearing an agreement with China to supply natural gas to the world’s biggest energy consumer

“Those who sell always want to sell at a higher price, while those who buy want to buy at a lower price,” Putin said today at the start of a meeting with Chinese Prime Minister Wen Jiabao in Beijing. “We need to reach a compromise that will satisfy both sides.”

The Russian premier, who is making his first foreign trip since announcing plans to return to the presidency next year, is seeking to overcome a stalemate in talks on natural gas deliveries to China. Russia, the world’s largest energy exporter, has delayed plans to build gas pipelines to the Asian country for more than a decade because of wrangling over how much China will pay for the fuel.

Russian gas export monopoly OAO Gazprom plans to ship Siberian gas through two pipelines from as early as 2015, with total annual deliveries to reach 68 billion cubic meters, more than 60 percent of China’s 2010 consumption, according to BP Plc’s Statistical Review of World Energy.

China bypassed Germany as Russia’s biggest trade partner last year and annual turnover may exceed $70 billion in 2011 and reach $200 billion in 2020, from $59 billion in 2010, Putin said today.

The Russian prime minister, who will also meet Chinese President Hu Jintao during his two-day trip to Beijing, said the nations have reached “unprecedented levels of cooperation” in the political sphere.

Russia shares a determination with its neighbor to counter U.S. global influence, signaled by them teaming up on Oct. 4 to veto a Western-backed United Nations resolution targeted at the crackdown on protests in Syria, a Soviet-era ally of Russia.

Putin, who will take full control of foreign policy again next May after four years marked by improving ties with the U.S. under outgoing President Dmitry Medvedev, may give Asia more weight in Russian foreign policy when he returns to the presidency.

“In the 1990s, Russia focused on the West while leaving Asia behind, which was a mistake,” said Dmitry Mosyakov, head of the Southeast Asia, Australia and Oceania Center of the Moscow-based Institute of Far East Studies. “Now we see Russia turning to the East for new markets, new partners and capital.”

The gas deal has been held up because China has pushed for lower rates similar to those charged on its domestic energy market while Russia wants to get a price closer to that paid by European customers.

The countries made “progress” in their talks on gas shipments, Deputy Prime Minister Igor Sechin told reporters in Beijing today, declining to elaborate. China is a “very important partner” and potentially “one of the biggest consumers” of gas, he said.

Gazprom Deputy Chief Executive Officer Alexander Medvedev said last month that negotiations may be concluded by year-end.

“It’s a price issue. It’s just negotiations, I believe in the end we will see an agreement reached, since both parties are interested in a deal,” Alexander Morozov, chief economist for Russia at HSBC Holdings Plc, said in an interview with Bloomberg Television today.

Russia, which supplies 25 percent of the European Union’s gas, is under pressure to cut its European pricing formulas. Gazprom’s contracts are the focus of a European antitrust investigator’s raids across central and eastern Europe.

“If the China contract is soon agreed, then the Kremlin’s negotiating position in Europe will be improved, that is if you don’t want more of our gas, then we have a customer with a big appetite in the east,” said Chris Weafer, chief strategist at Troika Dialog, Russia’s oldest investment bank.

Russia, which is also seeking to diversify trade with China away from natural resources and weapons, reached an agreement today that the two countries will each invest $1 billion into a joint fund for seven years.

Russia wants to lure foreign capital with a fund to co- finance international investment and has targeted innovative industries to wean the economy off its dependence on energy exports. Energy accounts for more than half of its exports to China, Yury Ushakov, Putin’s deputy chief of staff, told reporters in Moscow yesterday.

“China has become our first trade partner, bypassing Germany, and this is quite symbolic,” Ushakov said. “The task for the visit is not only to expand trade and economic contacts but also to diversify the structure of our relations as the structure itself does not satisfy us.”

In China, Putin was joined by Agriculture Minister Elena Skrynnik and Communications Minister Igor Shchegolev. Also attending are Sergei Kiriyenko, head of Russia’s state-owned nuclear energy holding company Rosatom Corp. and Vladimir Dmitriev, chairman of VEB, Russia’s state development bank.

A total of 17 agreements may be reached during Putin’s visit including the deal between state development bank VEB and the Russian Direct Investment Fund with China Investment Corp. to create a joint investment fund. ZAO Sibur Holding, eastern Europe’s biggest petrochemical producer, will sign a cooperation accord with China Petrochemical Corp., the nation’s biggest refiner, according to Ushakov.

Following the “reset” in relations with America spearheaded by President Barack Obama and Medvedev, Putin is now seeking to re-balance foreign policy, said Alexander Rahr, a Russia expert at the German Council on Foreign Relations.

“There is a huge neighbor and everyone is talking about China’s might,” Rahr said. “For Russia it is more important than for Europeans to understand where China is heading and how you can build relations.”

--Ilya Arkhipov, Henry Meyer and Lyubov Pronina, with assistance from Michael Forsythe in Beijing. Editors: Paul Abelsky, Balazs Penz, Hellmuth Tromm.

To contact the reporters on this story: Ilya Arkhipov in Beijing at [email protected] Michael Forsythe in Beijing at [email protected]

To contact the editors responsible for this story: Balazs Penz at [email protected]. Peter Hirschberg at [email protected]