Saturday, June 14, 2014

Russia's Smart Move to Asia

In this post, professor Tatiana Yugay, of the Moscow State University of economics, reports  from Saint Petersburg about the recent Russia-China deal. See also a previous post on the subject.

By Tatiana Yugay

In my previous post at Ugo Bardi's blog, I suggested that “Russia but not the U.S. has been pivoting to Asia just now”. Since then several landmark events happened in the Asian arena, such as, Vladimir Putin's successful visit to China and the conclusion of a $400 billion gas mega-deal between Russia's Gazprom and China's CNPC along with other important 50 agreements, the Russian-Chinese navy drills in the East-China Sea and Obama's visit to East Asia in order to alert his Asian allies. Last but not least, signing the Treaty on the Foundation of the Eurasian Economic Union took place in Astana at the end of May.

On May 23-24, I had a chance to participate in the Forum of Russia's and China's Leading Economists which was hosted by the St. Petersburg State University of Economics. By a happy coincidence, the Forum took place right after the conclusion of the millennium gas deal between the two countries and, moreover, contemporaneously with the St. Petersburg International Economic Forum. Though our event was a much more modest one, all the participants felt their involvement with mainstream geopolitical developments. The atmosphere was very vibrant, friendly and a sort of triumphant. In fact, we felt ourselves as if we were participating in the St. Petersburg International Economic Forum since the agenda of both forums were somehow overlapping, including a key topic of the Russian-Chinese strategic economic partnership. 
It is needless to say that the gas deal was on everyone's lips. I was pleasantly surprised that the attitude of the Chinese speakers was very similar to my own vision. It is clear that the scientific communities of both countries are more free to express their views than the political leadership. Recently, Russian policymakers do not hesitate to express their opinions in strong and sarcastic terms and the general public enjoy this fact. On the other hand, the Chinese leadership is rather careful in its wording and expresses its position rather indirectly. On the contrary, the Chinese speakers at our Forum were even more tough while expressing their attitudes towards the U.S. policy than their Russian counterparts. They accused the U.S. of the “new regionalism” aimed at excluding China and Russia from shaping new international trade rules in the framework of Trans-Pacific Partnership Agreement (TPP) and Transatlantic Trade and Investment Partnership (TTIP). Both Russian and Chinese participants agreed that the US domination destabilizes the world and exerts direct threats to national security of our countries. 
In my presentation, I presumed that Russia and China should give asymmetric geoeconomic responses to the latest geopolitical threats, avoiding direct confrontation. Since the U.S. is still stronger economically, politically and militarily than China and Russia and, mainly, because all three countries are the members of the nuke club and the world is already dangerously balancing on the brink of the world war. 
In my opinion, soft asymmetric responses should not be directed straightforward at a potential adversary but represent elaborate strategies aimed at creating international configurations or alternative ways out of a crisis situation. In these latter days, Russia has been masterminding such kind of long-term solutions. Instead of involving itself in a fruitless tit for tat sanctions game, Russia has been forging its Asian-Pacific pivot. 
Ahead of striking the mega-gas deal and in the aftermath, there was no shortage of speculations about its geopolitical significance. A repeating key-note was that China had an upper hand because of Western sanctions against Russia. The commentators presumed that Putin was going to China as a suppliant and would be forced to submit to Chinese tough conditions. Frankly speaking, I was seriously concerned when at the end of the first day of his visit the contract wasn't yet signed and I saw Putin's sober face. The tension continued on the next day and only in the afternoon it was announced that the deal was struck. However, there was still remaining a sort of ambiguity about the price of the gas that could serve as the main indicator of whose hand was the upper one. Gazprom regards the price as a commercial secret and didnn't reveal it. So the analytical community both in the West and in Russia made a lot of guesswork. A simple math supposes that if the total price ($400 billion) and the quantity (38 billion cubic meters) are known then the average price can be $350 per 1,000 cubic meters. 

The Western commentators hurried up to admit that Given the costs announced so far, this project will yield a subpar return for Gazprom under today’s assumptions—maybe high single digits or low double digits. This will not be Gazprom’s most profitable endeavor”. However, the head of the Gazprom export arm Alexander Medvedev said the gas price would be well above $350 per 1,000 cubic meters. At that, Gazprom and China have preliminary agreed on a $25 billion advance payment for gas supplies. Konstantin Simonov, director general of the National Energy Security Foundation, thinks that the widely reported sticker price of $350 per 1,000 cubic meters is a simple oversimplification. He explained that under the contract, supplies of Russian gas via the Eastern route will reach the full capacity of 38 bcm a year only after the fifth year of supplies. During the first five years deliveries will be only 16 bcm annually. This means that the total gas supply will exceed a trillion cubic meters and the price will come closer to $390.  

Important for Russia, the agreement includes a base price formula with reference to oil prices. Russia was determined to protect this price formula notwithstanding China's tough resistance. The pricing of Russia's gas sales to Europe is based on an oil price reference formula. Given the high oil prices, the oil-based price formula for natural gas allows Russia to sell its gas at a higher price than if it were based on spot-market natural gas prices. On the other hand, RBC Capital Markets analysts said implied terms will give China a steady supply of piped-in Russian gas at a price about 25-40 percent lower than the current cost of importing liquefied natural gas from overseas. So the deal is beneficial for both parties.

Gazprom expects that the contract with China will affect gas prices in the European market, Aleksey Miller, head of Gazprom said at the St. Petersburg International Economic Forum. "Firstly we assume that the signing of this contract will impact European gas prices. Secondly, the competition for Russian gas resources has begun yesterday,” Miller said. “The Asia-Pacific is not only the largest and dominant market, but it is the Asia-Pacific market that is influencing the European and North American markets”.

A greater geopolitical vision of the gas deal is expressed by Ulson Gunnar, “Finally, Russia and China’s constructive energy partnership, concluded without territorial, economic, or legal integration, will lend further credibility toward a future multipolar global order, while simultaneously exposing the shortcomings, even follies, of the West’s unipolar system of pursuing hegemony through costly and ultimately unsustainable global integration».

Immediately after striking the deal which was long in advance nicknamed by the Western media as Putin's Holy Graal, it was labeled as Russia's Asian pivot. As Patrick L Young puts it, “Placed in perspective, while a massive deal it is only expected to be around 10 percent of Chinese demand by 2020 (according to Nomura). That means there is much more scope for Russia to increase its supply in due course. Russia’s pivot to the growing markets of the east is in full swing”.

Properly speaking, inking a gas deal wasn't the beginning but a spectacular display of a very careful and thoroughly adjusted process of Russia's return to the Pacific. The deal was just an ultimate piece of smalt which made the whole mosaic visible to the general public. In fact, the Western analytical community has been alerting their governments about potential Russia's shift to the East long ahead of the Ukrainian crisis and even before Putin's re-election.

Gazprom and CNPC had been negotiating the gas deal during a whole decade, and when it was finally finalized Russia has succeeded in concluding a bulk of trade agreements with other north-eastern states. As well. Another landmark project is to double connect North and South Koreas by means of pipelines and railways. On June 5, Russia’s Minister for Far East Development Aleksander Galushka announced the plan to extend the Trans-Siberian Railroad in order to provide a link between the Korean peninsula and Europe. The link will extend the world’s longest railroad and make Russia a major transit route between Europe and Asia. Shipping by rail is nearly 3 times faster than via the Suez Canal, Russian Railways CEO Vladimir Bakunin said.

Cooperation between the two Koreas on the railway could lead to compromise on a long-delayed plan to build gas pipelines and connect both Koreas with Russian gas. Russia's Gazprom and the DPRK's Ministry of Energy have reached an understanding to build a natural gas pipeline that would enter the DPRK at the Khasan crossing of the Tumen River on the Russia-DPRK border. The pipeline would then extend through the DPRK to the Republic of Korea (Korean Gas Co). South Korea is the 10th largest consumer of energy worldwide and the second largest importer of LNG. Russia first agreed to export LNG to South Korea in 2005, and agreements this year include South Korean support for modernizing the LNG fleet and investing in Russian Far East development. Seoul is especially interested in partnering with Russia as an alternative to nearby China and Japan. Russia is ideally positioned to export to South Korea because of the proximity of the two.

In order to boost the deals, Vladimir Putin recently signed into law an agreement that will write off much of DPRK Soviet-era loans. Russia will forgive 90 percent of North Korea’s debt from the Soviet era, leaving $1 billion to be repaid interest free in the next 20-40 years. At that, North Korea will grant Russian firms access to its natural resources in exchange for imports and investments. In January, a UK-based private equity firm SRE Minerals Limited said North Korea had the largest rare earth oxides deposits in the world, an amount of approximately 216 million tons. Rare earth elements (REE) can be used in many sophisticated technologies, from cell phones to guided missiles.

During his four-day visit to Vietnam and South Korea in November 2013, Putin signed a series of documents to enhance Russia's cooperation with Hanoi and Seoul in the economic, energy, military and humanitarian sectors. Thus, Russia will help Vietnam with hydrocarbon extraction, and possibly sell LNG to Vietnam, along with its ongoing support for the Vietnamese navy and nuclear power. Vietnam’s coast is accessible from ports in Russia’s Far East. For that reason, Russia sees Vietnam as an attractive energy partner not only in its own right but also as a gateway for Russian exports to other Southeast Asian nations. Using Vietnam as a corridor to Southeast Asia would allow Russia to diversify its energy trade and avoid excessive dependance on Chinese exports.

India is an ancient trade partner and loyal political ally which has openly supported Russia amidst the Ukraine crisis. The countries are involved in high-tech military cooperation and Russia is a top arms provider to India. Surprisingly enough, their energy cooperation has got a random character. One of the major barriers to greater energy partnership between India and Russia — particularly for crude oil — is the lack of infrastructure to transport the crude. Currently, Russia and India are negotiating the construction of a $30 billion oil pipeline—the most expensive ever—to connect Russia’s Altai mountain region to the Xinjiang province in northwest China and then to northern India. India also can be interested in buying LNG from Gazprom's Sakhalin-2 terminal. At the time being, the main beneficiary of Sakhalin-2 is Japan. A new LNG plant in Vladivostok aims to ship 10 million tons from 2018 and will be connected to the continental gas production centres such as Yakutia and Irkutsk oblast. Novatek, Russia’s largest non-state gas producer, initiated another LNG Project on Yamal peninsula. It will start producing LNG in 2016 and supply 16.5 million tons per year of the tanker-shipped fuel by 2018.
Naturally, Russia's beginning pivot to Asia was not at all welcome in the West. Gal Luft in a characteristic article “Can America Stop Russia's Energy "Pivot" To Asia?” gives the US leadership advises how to stop Russia. They are so outdated that I can't deprive myself of pleasure to cite them. 1) “as guarantor of South Korean security, Washington should publicly take a strong position against the Russia-Korea pipeline”. 2) “Washington should convince its Asian allies that it is committed to becoming a leading energy-exporting country and a major player in the global energy-trade system”. 3) the U.S. “should enhance cooperation with Asia on unconventional gas. China owns the world’s largest shale reserve. Japan is a global leader in the development of methane hydrates”. 4) the U.S. “should support measures aimed at reducing LNG prices in the Asia-Pacific to make LNG more competitive with Russian pipeline gas”. In fact, items 2-4 can be reduced to a single one or shale, shale and shale! 

The U.S. made all this mess in the Ukraine in order to promote its shale gas to the EU and, supposedly, to extract it in the eastern Ukraine. That is why the US military advisers are so relentless towards the rebellious eastern provinces. It's hard to believe that they offer to sell the futures of this same gas not only to Europe but to Asia as well. In Russia, we say “to sell the bear's skin before one has caught the bear”. In my previous post I cited Gail Tverberg's article “The Absurdity of US Natural Gas Exports” , were she explains why America's gas crusade to Europe is ill-intentioned not only against Russia but for Europe, as well. On June 5 after the G7 meeting in Brussels, European Commission President José Manuel Barroso made it clear that the EU cannot create “the illusion that gas from the US is going to solve our problems.” In fact, instead of containing Russia's pivot, the U.S. and the EU have been doing their best to push it forward. A ridiculous sanction's campaign is still in play. The latest EU suicide attempt was to cancel the construction of the South Stream pipeline bypassing Ukraine. 

During the last few years, Russia has been striving to strengthen the European energy security and to diminish dependency of Southern European markets from the vicissitudes of gas transit through the unstable Ukraine. According to its fuzzy logic, the European Commission told Bulgaria to suspend preparatory work on South Stream, as it could damage EU energy security. Ironically, all this fuss takes place right at the moment when the EU, Russia and Ukraine are trying hard to resolve a $3.5 bn debt crisis since Ukraine haven't paid for Russian gas for months. Putin has sent two letters to EU leaders warning them that in case of continuing non-payments, Gazprom would be forced to suspend deliveries to Ukraine. A recent history teaches us that in such a case the latter simply begin stealing gas from a transit pipe. After tough talks, Ukraine has paid a third of the debt. What makes me laugh - that same EU Energy Commissioner Guenther Oettinger who has been the main arbiter in the debt case, has announced about blocking the South Stream. After trilateral gas talks in Brussels, Gazprom Chairman Miller has stated, “The EC cannot stop the construction. No one can stop us building it. Our answer is very simple. In December 2015 the first gas along the marine section under the Black Sea will arrive in Bulgaria and the European Union”.

Credit: Pool photo by Alexey Druginyn

While the West understands that it cannot reverse Russia's shift to the East, it is deeply concerned by another Putin's “dream” which has been turning into reality these days. After the collapse of the USSR, Russia has been seeking to restore gradually the economic and political relations in the post-Soviet territory in the framework of the Eurasian Economic Union and the Customs Union. At the end of 2011, Vladimir Putin, then being the Russia's Prime Minister, published an article "A new integration project for Eurasia: The future in the making" ("Izvestia", 3 October 2011). He revealed his vision of further developing of the Eurasion cooperation. An angry reaction from the other side of the Atlantic was not long in coming. Former US Secretary of State Hillary Clinton referred to the project as a “move to re-Sovietise the region.” While acknowledging that the Eurasian Union will not be called “the Soviet Union,” she also stressed “let’s make no mistake about it. We know what the goal is and we are trying to figure out effective ways to slow down or prevent it”. Did her ominous threat ever come true? 
On May 29, Presidents of Russia, Belarus and Kazakhstan has signed the Treaty on the Creation of the Eurasian Economic Union in Astana, which comes into effect in January 2015. The goal is to create a common market between three countries with a total population of over 170 million, with free movement of capital, goods, services and labour. Kyrgyzstan and Armenia are ready to join the Treaty in the nearest future. Meanwhile, Vietnam and Turkey are negotiating about joining the Customs Union. After the signing ceremony, President of Kazakhstan Nursultan Nazarbayev who hosted the event, said “a new 21st century geopolitical reality is being born”. 

It isn't at all surprising that comments on establishing the Eurasian Economic Union, were rather aggressive. They labeled the EEC as a “New Russian Empire” or a “New Soviet Union.” They predicted its failure, mainly, because of Ukraine's absence. Neil MacFarquharmay wrote a post titled sarcastically Russia and 2 Neighbors Form Economic Union That Has a Ukraine-Size Hole». He writes, “Some analysts suggest that the loss of Ukraine as a potential member was the death knell for the Eurasian Economic Union. On a purely economic scale, losing Ukraine meant losing a market of more than 40 million people. Ukraine also provided economic diversity when paired with the two energy exporters».

Is Ukraine so crucial for the Eurasian project? In order to understand the rationale behind Western reaction on Ukrainian developments, let's turn to “The Grand Chessboard: American Primacy And Its Geostrategic Imperatives, a textbook for American presidents written by Zbigniew Brzezinski. Four key statements are, as follows, 1) “For America, the chief geopolitical prize is Eurasia”, 2) “A power that dominates Eurasia would control two of the world's three most advanced and economically productive regions”. 3) “the new world order under the hegemony of the United States is created against Russia and on the fragments of Russia. 4) “without Ukraine Russia ceases to be empire, while with Ukraine – bought off first and subdued afterwards, it automatically turns into empire”. Following these clear instructions, the U.S. leadership has started a campaign of tearing Ukraine away from Russia and incidentally selling the idea of shale gas.

In my opinion, Brzezinski and his adepts have been over-estimating Ukraine's significance for a success of the Eurasian integration. Though Ukraine is very emotionally important for Russians, from the political and economic points of view, it was clear long ago that it was drifting to the West. If we look at the chart, we can see that Ukraine didn't take part in the Customs Union and exited from the Common Economic Space on the early stage. Initially, Russia was not so strong economically in order to give the country considerable support or to compete with the US NGOs in bribing the local elite. When Russia began doing well and started investing in Ukraine, the latter corrupted and got accustomed to milk two cows. Meanwhile, a fatal West-East divide has been gradually corroding the country from within. While maintaining old cooperation relations with the east-Ukrainian industrial regions, Russia was developing little by little its own industries to substitute Ukrainian import. Finally, the construction of North and South Stream pipelines were aimed to decrease gas transit through Ukraine. However, Ukraine will always stay a source of political, security and humanitarian preoccupation for Russian leadership.


I can't respond better to those who talks about Putin's imperial ambitions, than Mark Adomanis, who says, «Without lapsing into cartoonish Kremlinology, I do think it’s noteworthy and important that Putin is so publicly and forcefully going on the record advancing a broad program of technocratic neoliberalism: harmonizing regulations, lowering barriers to trade, reducing tariffs, eliminating unnecessary border controls, driving efficiency, and generally fostering the free movement of people and goods. Even if not fully sincere, an embrace of these policies is healthy». 

Last but not least, an important by-product of the Asian pivot is further undermining dollar domination, since according to the gas megadeal and other Russian-Chinese deals roubles or yuans will be used in mutual payments. Trade turnover inside the EEC will be also carried out in roubles, as well as, North-Korean deals.


Ugo Bardi is a member of the Club of Rome, faculty member of the University of Florence, and the author of "Extracted" (Chelsea Green 2014), "The Seneca Effect" (Springer 2017), and Before the Collapse (Springer 2019)