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How China gained the upper hand in Russian gas talks

Isabel Gorst is central Asia correspondent at the Financial Times

Russia and China have failed to agree the terms of a long-awaited gas deal that both sides had hoped to sign this week.

"We will not sign anything this time," Alexander Medvedev, the deputy chief executive of Gazprom, told reporters on the sidelines of an economic forum in St Petersburg.

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Energy officials said, however, that the talks were continuing.

Russia announced plans in 2006 to build two pipelines to carry 68 billion cubic metres (bcm) a year of Siberian gas to China, but the two sides have battled to agree on the price of supplies.

The deal is critical to Gazprom's strategy to globalize its gas trade and diversify exports away from Europe towards growing energy markets in Asia and the Far East.

China is eager to import Russian gas to help meet its surging energy needs and reduce dependence on environmentally damaging coal.

However, during the five years that the Russian gas deal has been under negotiation, China has moved to secure alternative supplies, signing contracts with gas producers in the Middle East, Australia, Burma and central Asia. China has also discovered large reserves of shale gas that could eventually provide a large source of indigenous energy, easing the pressure to import gas.

Jonathan Stern, the director of gas research at the Oxford Institute for Energy Studies, said China was in less of a hurry than Russia to conclude the deal. "China is in the driving seat in the talks," he said. "They just don't have to make a decision quickly."

Gazprom and China National Petroleum Corporation have been locked in frenzied talks in Moscow for the past few days aimed at finalizing the deal during the visit of Hu Jintao, the Chinese president, this week.

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Vladimir Putin, the Russian prime minister, accompanied Mr. Hu on a visit to Gazprom's Moscow headquarters on Thursday, where the two men participated in the talks.

The Chinese president's visit had provided "a very good opportunity to sign the contract", Sergei Shmatko, the Russian energy minister, said on Friday. However, both sides needed to demonstrate "flexibility," he added.

Mr. Stern said Gazprom was reluctant to offer China favourable gas prices that might provoke gas buyers in Europe to demand better terms. "Russia knows Europe is looking at this for any sign that Gazprom will compromise," he said.

Mr. Hu said China was committed to increasing energy co-operation with Russia after a meeting with Dmitry Medvedev, his Russian counterpart in the Kremlin on Thursday.

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