Elusive China gas deal

May 21, 2014

Vladimir Putin is well into his second and final day of a trip to China during which he was hoping to sign a long-sought gas deal with Beijing. There’s no sign of white smoke so far and if the Russian president leaves empty handed it would be a serious blow.

Gazprom has repeatedly said negotiations are in their final stages but it seems there has been no agreement yet on price and Moscow may have to lower its sights given the prospect of it losing business in Europe, which has been spooked into considering how to secure its energy needs elsewhere in future, has rather strengthened Beijing’s negotiating hand.

There has been a lot of talk in Russia about a pivot to the east but some analysts say that could never fully compensate for lost business with the West and if the China gas deal which could be worth $400 billion or more does not come to pass the strategy will look hollow. Late on Tuesday, a Putin spokesman said negotiators from both countries have been unable to bridge differences on price.

Expectations had run high that Putin’s China visit would seal a contract under which state-owned Gazprom would supply China National Petroleum Corp with 38 billion cubic meters of natural gas a year for 30 years.

It could be that something will be announced at Putin’s St. Petersburg economic forum later in the week but whether it is definitive remains to be seen.
How the deal, or lack of one, will shape Russia’s attitude to the West, particularly over Ukraine, is difficult to read. In the short-term, there are signs of conciliation with Putin saying he had ordered Russian forces massed on Ukraine’s border back to base and offering some rhetorical support to Sunday’s election of a new Ukrainian president.

Gas remains high on the EU’s agenda too. It is heavily dependent on Russia for its energy needs, much of which comes through Ukraine. Government and industry experts meet at the European Commission today to discuss options for improving energy security which will go to a summit of leaders to be held next month.

Minutes of the Bank of England’s last policy meeting may shed a little more light on the extent of alarm about soaring British house prices. BoE Governor Mark Carney said over the weekend that it posed the biggest risk to the economy and harboured deep structural problems.

There can now be little doubt that the Bank will use new powers to try and rein the market in, particularly in London, when its Financial Policy Committee meets next month.  The question is whether it will work. UK retail sales data are also due.

The British government appears to be on the move over Scotland in the hope of heading off a vote to secede in September. The minister responsible for Scotland will say later that the British government will start talks on granting Scotland more powers within a month of the independence referendum later if Scots choose to stay part of the United Kingdom, The Confederation of British Industry has also waded in, saying independence could hurt investment and jobs.

The “No” campaign is holding onto a lead of uncertain magnitude in the polls but a large part of the electorate says it doesn’t yet know which way it will vote, injecting a deal of uncertainty.

Bomb blasts killed at least 118 people and wounded 45 in the central Nigerian city of Jos, an attack that appeared to bear the hallmarks of the Boko Haram insurgents. There has been a lot of rhetoric in Nigeria and internationally about tackling Boko Haram since the snatching of more than 200 schoolgirls.

For the markets, most focus will be on the minutes of the last Federal Reserve policy meeting. The Fed stuck to its assessment that the economy would need near-zero interest rates for a considerable time after asset purchases are fully wound down by year-end. But there may have been discussion about a future exit strategy.

Earlier today, the Bank of Japan kept monetary policy steady and raised its assessment on capital expenditure, reassured by growing evidence the economy can withstand the pain from a sales tax hike without additional monetary stimulus.

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