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Gazprom goes to China, Russia's economy rejoices

CHINA-RUSSIA-ENERGY-DIPLOMACY

Russia's President Vladimir Putin (L) applauds during an agreement signing ceremony in Shanghai on May 21, 2014, with Gazprom CEO Alexei Miller (C) and Chinese state energy giant CNPC Chairman Zhou Jiping (R) attending the ceremony. China and Russia signed today a monumental, multi-decade gas supply contract in Shanghai, CNPC said, with reports saying it could be worth as much as $400 billion.

Russian President Vladimir Putin has been visiting China. The result? The two countries are reported to have struck a $400 billion deal in which the Russian gas company Gazprom will supply energy-hungry China.

Gazprom is a company. It has a CEO, Alexei Miller, and you can buy its stock. But ownership is a combination of private and public, and Keith Crane, director of the Rand Corporation’s environment, energy and economic development program, says a little over half the shares are owned by the state and the state calls the shots.

“Gazprom’s key asset is the fact that if you’re a gas producer in Russia, there’s only one company you can sell your gas to, and that’s Gazprom.”

The company, says Crane, has something of a reputation. "It’s highly corrupt, and a lot of money leaks out of the country into the hands of various officials and individuals so I would not invest in it,” he says.

That's one reason why, he notes, this deal with China is so important.

Then, there's the European problem. With the tension between Russia and Ukraine,  through which most Russian gas moves, European countries are looking for alternative sources. Andy Kuchins, director of the Russia and Eurasia program at the Center for Strategeic and International Studies, says the European market for Russian gas is growing a lot more slowly.

“China is the largest growth engine, it’s the fastest growing consumer, and importer of hydrocarbons, oil and gas,” he says.

And, Kuchin notes, while oil makes up a large part of Russia's revenue, keeping natural gas prices low, for production and heating costs, is critical for the country’s domestic economy.

"A good way to think about it is that for the Russians, they’ll say, 'That’s oil, that’s dengi, that’s money. But for gas, 'That’s khleb, that’s our bread,'" he says.

Kuchins says Gazprom probably has rights to over 15 percent of the gas reserves in the world. And since it shares a border with China, this deal for gas should be a win for both countries.

About the author

Sally Herships is a regular contributor to Marketplace.

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