Russia’s Energy Game in Asia

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Russia’s Energy Game in Asia

The consistency and reliability of Asian buyers of Russian oil, LNG, and coal are the most important factor granting Moscow strategic space in the face of Western mobilization.

Russia’s Energy Game in Asia

Russian President Vladimir Putin, left, and Chinese President Xi Jinping walk together during the Shanghai Cooperation Organization (SCO) summit in Samarkand, Uzbekistan, Friday, Sept. 16, 2022.

Credit: Sergei Bobylev, Sputnik, Kremlin Pool Photo via AP

In September, the annual Eastern Economic Forum (EEF) in Vladivostok, Russia, and the Shanghai Cooperation Organization (SCO) Summit in Samarkand, Uzbekistan, once again drew attention to Russia’s attempts to break away from its over-dependency on the West. Russia’s so-called Pivot to Asia, an as-yet largely unfulfilled quest for the Kremlin, has been accelerated by initiatives within these forums.

For Russian President Vladimir Putin, “Asia-Pacific countries emerged as new centers of economic and technological growth” and it is necessary for Russia to follow the Asia-Pacific trend, generating a new domestic economic drive and a palpable alternative to Russia’s subordination to Europe and the United States in several fields. Simultaneously, Asia has become the cradle “of new centers of power” in the world, where Moscow seeks respects for its sovereignty, national values, and interests.

To fully transform the country into a full-fledged Eurasian power and support Moscow’s current strategic goals, Russian energy resources have a critical role to play.

Sanctions Bite the Russian Economy

Now over seven months into an exhausting war in Ukraine, Russia has suffered severe strategic setbacks. These brought the Kremlin to hastily announce a “partial mobilization” in defense of the occupied territories in Ukraine, for which Moscow has organized annexation “referendums.” This marks a major escalation of the conflict, which could hastily slip into a formal declaration of war against Ukraine. These developments make the Russian engagement of Asia even more urgent.

Pivoting to the East is far from a brand-new strategy. Its origins might be found in the Soviet Union’s last years and Gorbachev’s leadership. But the deterioration of Russia’s relationship with the West, emphasized by the invasion of Ukraine, is at the root of the pivot’s current acceleration. While the West’s sanctioning strategy apparently is not breaking down the Kremlin’s determination in Ukraine, it has started to cripple the Russian budget surplus, the result of high energy prices.

Even if Putin slammed the Western “economic blitzkrieg” as a failure, it is plainly evident that the authorities have been called upon to preserve domestic stability by keeping the economy functioning. That is even more urgent now, given the rallies in opposition to the “partial mobilization,” young men fleeing the country to escape the ongoing draft, and the fast-forward radicalization of Russia society along existing divisions. All are key issues to be managed – now and looking ahead to the 2024 presidential elections.

Against this background, the Russian energy industry is called upon to play a leading role in stabilizing the economy. The hydrocarbon sector still represents between 30 percent and 40 percent of the Russian budget while other sectors struggle in the face of the sanction regime. Although the trade surplus has set several records since March 2022, the margin has shrunk this summer. In August, the revenues from hydrocarbons recorded their worst performance in the last 14 months. The negative result, also influenced by Russia’s fiscal rules, was revealing of distressing trends working in the background to restrict the financial resources available to the Kremlin.

It is no coincidence that the Russian government is planning to introduce new levies on the production and export of oil and gas. The aim is to collect 1.4 trillion rubles (about $23 billion) from commodity exporters in 2023 in what appears to be a clear-cut war-funding energy tax to be paid by the Russian energy giants.

The Russian Energy Pivot to Asia

On a positive note, Moscow has been able to reduce the discount applied to Urals crude oil compared to Brent from $30-40 during the spring of 2022 to around $18-25. This is a crucial element for detaching Russia’s oil exports from Europe before the implementation of a disruptive embargo in the next months and its unpredictable ramifications kick off.

At this moment, the consistency and reliability of Asian buyers of Russian oil, LNG, and coal are the most important element allowing Moscow strategic space against the Western mobilization. China and India are unparalleled partners for Russia and the data are unequivocal: These countries are ensuring a continuous flow of revenues because of their reliance on imported and convenient energy resources.

Energy was a central topic during the last SCO Summit in Samarkand. Putin pledged to assist other SCO members in dealing with “energy and food problems” resulting from errors by the “world’s leading economies.” Even with soaring energy prices deeply affecting India’s commercial balance, however, Indian Prime Minister Narendra Modi surprisingly rebuked Putin in public, telling him, “Today’s era is not an era of war.” To be more specific, this is not an era for a dangerous energy war in Asia.

Even though India will be increasingly important, for now China has no match in Russia’s eastward energy pivot. Since the beginning of 2022, Beijing has reassured Moscow with continuous purchases of oil, gas, coal, and electricity worth a total amount of $43.68 billion. China’s imports of oil, gas, and coal increased respectively by 17 percent, 52 percent, and 6 percent between April and June 2022 from the same period a year ago. The growth might be even bigger, considering that Russian shippers are increasingly able to divert energy volumes to Asia with ship-to-ship transfers, concealing the origin of the cargo and thus preventing the possibility of secondary sanctions against parties involved in the trade of Siberian oil and petroleum products.

On the trade of pipeline gas, much has been said in the last months and greater clarity would be desirable on such an important geopolitical issue. Russia is now the second largest supplier of piped gas to China and for 2022 total shipments are expected to reach up to 17 billion cubic meters (bcm), or 60 percent more than the last year. This is possible through the Power of Siberia pipeline, put into operation in 2019, especially after Gazprom and CNPC agreed to settle payments for Power of Siberia shipments in rubles and renminbi during the EEF.

Just a few weeks before the Ukraine invasion and during the Winter Olympics in Beijing, Putin and Xi signed a 10 bcm a year (bcm/y) supply contract, bringing gas for 30 years from the Russian Far East to the northeastern provinces of China through the construction of a new pipeline, the so-called Far Eastern Route. In Vladivostok, Putin announced that Russia’s Gazprom and China’s CNPC had agreed on “all main parameters” related to the 50 bcm/y Power of Siberia 2 project, which would transit through Mongolia to reach the monumental Chinese gas market. The gas will be sourced from the same fields Gazprom developed to sustain gas exports to the EU in the next decades, and the volumes heading to China are nearly one-third of what Gazprom exported to Europe in 2021.

Toward a Total Energy War?

The current energy war between Russia and Europe has certainly accelerated these trends. As happened in the past with the invasion of Crimea and the trade war between China and the United States, geopolitical instability is associated with a flurry of announcements regarding the rising Sino-Russian gas interdependence. Yet some skepticism is required.

Delays in the development of Sakhalin offshore gas fields, essential for realizing the Far Eastern Route, are weighing on the possibility of supplying China with 50 bcm of gas by 2025.

Meanwhile, the absence of a commercial deal between Gazprom and CNPC makes the Power of Siberia 2 project still an ambition, rather than a reality of Russia’s pivot to Asia. In Samarkand, Putin, Xi and Mongolia’s President Khurelsukh Ukhnaa agreed to move forward the Mongolian section of the project, but no other agreements were concluded. The construction of the Power of Siberia 2 pipeline would require a long time and enormous economic and financial resources – and thus will need relentless political support from all parties.

Finally, the outstanding politicization of natural gas trade in today’s global geopolitics is having far from negligible consequences on major gas importers’ strategy and policies. China’s LNG imports are sinking, and this is largely caused by steep prices. How this might affect China’s long-term gas strategy has to be further analyzed.

Time is running out as the winter in the Northern Hemisphere approaches and governments brace for the impact of the unfolding energy war between Russia and the West. Putin directly addressed those policymakers contemplating a price cap by stating that in the case of political decisions contradicting the existing contracts Moscow “not supply anything at all,” which is another sign pointing toward re-routing energy exports to Asia.

Although capping the price of Russian gas imports in Europe seems a forgotten idea, the discussion over capping oil imports is proceeding and a decision should be taken before the beginning of the December embargo. To maximize the pressure on Moscow, China and India must be part of the system, but their participation is far from certain. Why would both Beijing and New Delhi participate in a scheme that foresees a large discount on Russia’s oil but at restricted volumes as Urals crude becomes the cheapest commodity in a possible market frenzy?

Russia is feeding on the current market volatility and political uncertainty, and the Kremlin has many ways to influence the reordering of the global energy order. It could choose to allocate scarce volumes only to those “friendly countries” and companies willing to pay hefty prices – which would still represent a discount compared to the prices of a global market deserted by Russian oil and without sufficient spare capacity to balance demand.

On the other hand, the OPEC-plus alliance with Saudi Arabia offers high political incentives to Moscow for coordinate its policy choices with other producers. By scolding the Biden administration and reducing October oil production to maintain higher prices, the alliance displayed a telling political unity, which the West should deal with if it is serious about implementing the oil price cap. Otherwise, a unilateral Western decision would trigger higher oil prices on a global scale.

The consequences of an energy war are largely unpredictable. An expansion of the boundaries of the economic war between the West and the Russian Federation would likely involve other countries, including those in Asia interested in Russia’s pivot. At that stage, sailing by sight would not be possible for many, forcing them to choose which side better suits their interests.