Outlook on the Implications of Putin's Master 'Strategic' Stroke With Energy Deal Between Russia and China

29th May 2014

Like him or loathe him, as Prince Charles clearly does, Vladimir Putin is a grand master of 'I want, does get'. Whether it be the territorial windfall of Crimea or destabilising Ukraine so it becomes untenable for it to join the European Union or NATO, the result was intended from the outset. But perhaps we will look back in years to come and say last week represented Putin's master 'strategic' stroke with an energy deal between Russia and China finally sealed, after ten years of negotiation. On the surface it's just another trade deal between the second and sixth largest global economies. However, the potential long term ramifications warrant review and western leaders would be wise to take note. The deal represented a $400 billion deal to supply natural gas to China through a new pipeline over 30 years, a milestone in relations between the world's largest energy producer and the world's largest consumer.

The agreement is for 38 billion cubic meters of gas annually, is the largest ever contract for the Russian state owned Gazprom and supplies are due to start in four to six years. The deal makes absolute sense for both countries. Gazprom has been searching for a diversifier away from Europe for both macro and political reasons. For China, the issue has been a rising dependence on gas imports and therefore a deal with Russia would not only help fill any supply gaps, but also dilute its dependence on any one gas supplier. It also helps in the aim of decreasing reliance on environmentally 'unfriendly' coal.

On the surface, Russia and China are very different, but on closer inspection the mutual benefits of closer ties are complementary from a macro perspective. Russia has excess resources, but a shortage of manpower; China is the opposite. Russia is a global leader in software, aeronautics and advanced military technology but is significantly weak in mass production of consumer goods and electronic hardware, a natural strength of the Chinese. China is a rising superpower and Russia is a declining one, but the common fight is against the West, particularly the US, and its allies in Europe. A long term strategic alliance between the two is a symbiotic relationship that aids both in this confrontation. This is occurring under a period of a weak US administration and as the US public support for the American Dream on foreign territories is waning.

It's essentially a trade deal between two large countries, but the significance of the deal and whether it actually was Putin's masterstroke and an 'epochal event' as he articulated it, will only become apparent in years to come.

- Heartwood Investment Management