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Russia's President Vladimir Putin, left, and China's President Xi Jinping shake hands after signing an agreement during a bilateral meeting at the Xijiao State Guesthouse ahead of the fourth Conference on Interaction and Confidence Building Measures in Asia (CICA) summit, in Shanghai, China Tuesday, May 20, 2014.

Carlos Barria/AP

The two sides were, Russia had said, a single digit away from striking a long-sought deal to sell vast quantities of East Siberian natural gas to China. With every expectation of success, the top of the Russian energy establishment joined President Vladimir Putin in Shanghai Tuesday, including the leaders of OAO Gazprom and OAO Rosneft.

But even a meeting between Mr. Putin and Chinese President Xi Jinping was not enough to conclude an agreement that could be worth $400-billion (U.S.) over 30 years.

Negotiators were unable to reach agreement on the price of natural gas, with China pushing for the cheapest possible cost – and using as competitive leverage a series of recent deals it has signed to import gas from Kyrgyzstan and through a port in Myanmar.

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Instead, the two sides merely agreed to push toward a "comprehensive energy co-operation partnership," underscoring the lopsided power China holds over the relationship. Thirty-five years ago, as it sought to spark a market economy, China turned to powerful Russia for help. Today, with the tables turned, China is flexing its own power, with an economic might that dwarfs that of Russia and gives Beijing a new ability to exact demanding terms from Russia.

"Despite all the talk out of Russia, despite their desperation, China has the upper hand," Gordon Kwan, regional head of oil and gas research at Nomura Holdings, told Reuters. "China really wants to squeeze the price lower."

Russia badly wants the deal, some 10 years in the making, as part of a pivot east following its annexation of Crimea from Ukraine. Russia today sells the great bulk of its exported natural gas to Europe, but fears sanctions and international disapproval will limit energy sales that are a linchpin of its economy.

The gas deal would see a massive pipeline draw energy from large untapped Russian gas fields down to China. In doing so, it would substantially redraw the global energy map, and bring together Moscow and Beijing at a time when Russia fears isolation from the Western world.

The failure to secure the deal suggests China, with its own heavy economic reliance on the West, is unwilling to unequivocally align itself with Russia against other nations.

As if to underscore the imbalance, Russia enthusiastically said Tuesday talks were ongoing, and a deal could still be struck "absolutely any moment." Mr. Putin said "significant progress" had been made, according to the Xinhua news agency.

China offered a cooler assessment: "We hope that the two sides can meet each other halfway, and reach a deal at an early date," Foreign Ministry spokesman Hong Lei said.

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It remains possible for the details to be finalized Wednesday, the second day of the Chinese-led Summit of the Conference on Interaction and Confidence Building Measures in Asia.

Still, with the gas deal failed on Tuesday, what remained were a series of lesser agreements. Russian and Chinese state-owned companies will jointly work to build a long-distance airliner and the Russian Direct Investment Fund will build a border-spanning railway bridge.

The two countries pledged joint efforts to increase renminbi-ruble currency settlement, jointly build Russian coal mines, consider building power plants in Russia to supply electricity to China and increase cross-border trade to $200-billion by 2020, more than double last year's $90-billion tally.

Those agreements highlight China's eagerness to tap the vast reserves of underground wealth Russia holds just north of the Chinese border, so long as its own companies can participate.

China also wants Russia's backing against Japan, whose efforts to revive military capability have been met with anger across Asia. The Xinhua agency on Tuesday said complicated "political and security challenges are still haunting the world, which demands that the two global heavyweights work more closely to safeguard the international order and world stability."

Russia, meanwhile, has sought China's support in Ukraine, and the two sides on Tuesday called for "peaceful, political ways to resolve existing problems."

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About the Author
Asia Bureau Chief

Nathan VanderKlippe is the Asia correspondent for The Globe and Mail. He was previously a print and television correspondent in Western Canada based in Calgary, Vancouver and Yellowknife, where he covered the energy industry, aboriginal issues and Canada’s north.He is the recipient of a National Magazine Award and a Best in Business award from the Society of American Business Editors and Writers. More


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