Russia-China gas deal and the Ukrainian crisis

Emre Tunç Sakaoğlu

The Ukrainian crisis played an implicit role in compelling Russia to conclude a deal with China as soon as possible. That is, the current crisis threatens the sustainability of the Russian energy trade with Europe in the future as EU countries have already started to seek alternative supply routes. Likewise, Russia also aims to elude mutual interdependence in energy trade with Europe, and circumvent economic sanctions to be implemented by the West as a result of the Ukrainian crisis by diversifying its export markets and reaching out to Asian horizons.

It is a fact that Russia’s diversification of its natural gas export markets cannot immediately change the overall picture. That is basically because Russia’s mid-term plans for diversifying its energy markets primarily look toward the post-2020 period. Europe is still the largest export market for Russian natural gas and it will probably remain so for years to come considering that around 30 percent of Europe’s natural gas consumption, an amount which corresponds to 170 bcm, was procured by European countries from Russia in 2013.

But Russian President Vladimir Putin is already threatening Europe with halting the flow of natural gas to Ukraine, through which 50 percent of European gas imports from Russia are transported westward. That is why the issue of diversifying trade partners in the energy field entails a high level of urgency for Moscow. Putin was evidently in a rush to conclude a deal with China in order to guarantee access to alternative markets.

It is also worth noting that after the annexation of Crimea by Russia, Moscow was subjected to several economic sanctions in addition to asset freezes and visa bans by the West. This situation poses a noteworthy challenge to Putin’s goal to modernize the Russian economy through FDI and integration to international value chains of manufactured consumer goods as Russia finds itself gradually more alienated from the West, i.e., Western capital and markets. Therefore, drawing itself closer to China through an energy deal that foresees the realization of the world’s largest construction project to date in Siberia, and entails increased Chinese investment in various other fields, was a shrewd commercial move just in time on Russia’s part.

Even as of today, Beijing is Moscow’s largest trading partner with the annual trade volume between the two countries reaching up to $90 billion, according to 2013 estimates; and this amount is projected to surpass $200 billion by 2023, especially thanks to the projected expansion of energy trade between the two.

Against a backdrop of intensified and smooth relations with China, it seems inevitable that Russia will grow further away from Europe in the aftermath of the Ukrainian crisis in terms of economic and energy cooperation. This reality becomes crystal clear considering that Russia will possibly be able to deliver a total of 68 bcm of natural gas on an annual basis to Asian markets (primarily to China) with additional pipeline projects to be completed in less than a decade. Indeed, a joint enterprise formed by Exxon Mobil, BP and Rosneft is already preparing to initiate a drilling and fracking operation in Siberia in order to reinforce Russian gas exports to China. Also today, Gazprom is planning to build an LNG plant together with a terminal on the Pacific coast near the city of Vladivostok. With these projects in mind, it is not hard to predict that Russia’s “Asian capital” will gradually become a processing and delivery hub of natural gas for China, while Russia’s strategic “pivot to Asia” will fuel the deterioration of its commercial relations with Europe.

Emre Tunç Sakaoğlu is a researcher at USAK in the Center for Asia-Pacific Studies.