China and Russia failed to sign a $400 billion gas supply agreement on Tuesday, despite growing urgency for the Kremlin to seal a deal as it faces economic and political isolation in the West over the crisis in Ukraine.
Negotiators from both countries have been unable to bridge differences on price, a spokesman for Russian President Vladimir Putin said in Shanghai, meaning that the contract was not signed on Tuesday as many in the industry had predicted.
But there is still a chance that the two sides could agree before Putin leaves China on Wednesday, or, more likely, in time for an economic forum in the Russian city of St. Petersburg later this week.
Despite disappointment so far over an energy deal seen as vital to both countries’ long-term economic interests, Putin did receive a rare nod of support from Chinese President Xi Jinping over the Ukraine crisis.
In a statement issued after the two leaders met, Russia and China called for the de-escalation of tensions in Ukraine and for “peaceful, political ways to resolve existing problems.” The countries also referred to the crisis as “domestic”.
Across much of the rest of the world, Putin stands accused of fomenting pro-Russian sentiment in neighboring Ukraine, which has already lost the peninsula of Crimea after it was annexed by Moscow.
In more recent conciliatory steps, Putin ordered Russian forces massed on the Ukraine border to return to bases and welcomed what the Kremlin called initial contacts between the Ukraine government and those calling for more power for largely Russian-speaking regions in the east.
China’s Xi has underscored the importance of ties with Russia, and Moscow was the first capital he visited after assuming the presidency last year. Xi also attended the Winter Olympics in Sochi at Putin’s invitation.
While observing a joint naval exercise conducted outside of Shanghai, Xi and Putin said the two neighbors would cooperate to maintain stability in the region.
But, while the two see eye-to-eye on many diplomatic issues including the conflict in Syria, and generally vote as one on the United Nations Security Council, China has been less willing to support Russia openly on Ukraine.
China “has upper hand”
Expectations had run high that Putin’s China visit would provide the setting for both parties to ink a contract under which state-owned Gazprom (GAZP.MM) would supply China National Petroleum Corp (CNPC)CNPET.UL with 38 billion cubic meters (bcm) of natural gas a year for 30 years.
After more than a decade of false starts, there has been a convergence of interests as European countries look to reduce dependency on Russian natural gas supplies amid the Ukraine crisis and Beijing seeks to switch from coal to cleaner fuels.
China’s gas consumption is forecast to more than double between 2014 and 2020, while Beijing’s move to curb coal use led to a severe gas supply shortage last winter.
The failure to reach a deal so far, despite talk of a narrowing price gap, suggests China is driving a hard bargain.
“Despite all the talk out of Russia, despite their desperation, China has the upper hand,” said Gordon Kwan, regional head of oil and gas research at Nomura Research.
“China wants to really squeeze the price lower. China has other options such as the gas project in Sichuan and North American liquefied natural gas. I think it will be a mistake by Russia if they couldn’t agree on a deal just because of the price.”
Gazprom’s shares were down 2.3 percent at 1105 GMT on Tuesday, underperforming a flat Moscow stock market .
But Russia said there was still a chance a deal could be reached in China.
“The visit is not over yet. Talks will continue … substantial progress is reached but there is still work to do on price,” Putin’s spokesman, Dmitry Peskov, told reporters. “Talks are going on today, it can happen absolutely any moment.”
Analysts said other issues, such as details over pipeline construction, upstream equity participation for Chinese firms and pre-payment, may have also contributed to the delay.
Chinese state media on Monday quoted Putin as saying that preparations for a gas deal had entered “the final phase”, while Gazprom said at the weekend that it was “only one digit” away from a deal.
But sources close to Gazprom and in the gas industry said the Russian company wanted China to pay $25 billion up front to secure future gas supplies, which should start in 2018.
China has so far not been willing to commit, concerned that other suppliers would seek similar deals.
Russia and China said in the joint statement that they would strengthen cooperation in energy and infrastructure in Russia, and would also step up financial cooperation and look to increase trade in the ruble and the yuan currencies.