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With sanctions, Putin looks east

Moscow seeks to boost energy sales in China, Japan as ties with U.S., Europe fray

Reuters

When President Vladimir Putin signed a treaty last week annexing Crimea, to great fanfare in the Kremlin and anger in the West, a trusted lieutenant was making his way to Asia to shore up ties with Russia’s eastern allies.

Forcing home the symbolism of his trip, Igor Sechin gathered reporters in Tokyo the next day to warn Western governments that more sanctions over Moscow’s seizure of the Black Sea peninsula from Ukraine would be counterproductive.

The underlying message from the head of Russia’s biggest oil company, Rosneft, was clear. If Europe and the United States isolate Russia, Moscow will look east for new business, energy deals, military contracts and political alliances.

The Holy Grail for Moscow is a natural-gas supply deal with China that is apparently now close after years of negotiations. If it can be signed when Putin visits China in May, he will be able to hold it up to show that global power has shifted eastward and he does not need the West.

“The worse Russia’s relations are with the West, the closer Russia will want to be to China. If China supports you, no one can say you’re isolated,” said Vasily Kashin, a China expert at the Analysis of Strategies and Technologies (CAST) think thank.

Some of the signs are encouraging for Putin. On March 15, China abstained in a U.N. Security Council vote on a draft resolution declaring invalid the next day’s referendum in Crimea, in which voters backed union with Russia.

Although China is nervous about referendums in restive regions of other countries that might serve as a precedent for Tibet and Taiwan, it has refused to criticize Moscow.

The support of Beijing is vital for Putin. Not only is China a fellow permanent member of the U.N. Security Council with whom Russia thinks alike, it is also the world’s second-biggest economy and opposes the spread of Western-style democracy.

Little wonder, then, that Putin thanked China for its understanding over Ukraine in a Kremlin speech on Tuesday before signing the treaty claiming back Crimea 60 years after it was handed to Ukraine by Soviet leader Nikita Khrushchev.

But despite the positive signs from Beijing, Putin may find China’s embrace is not quite the bear hug he would like.

There is still some wariness between Beijing and Moscow, which almost went to war over a border dispute in the 1960s, when Russia was part of the communist Soviet Union.

State-owned Russian gas firm Gazprom hopes to pump 38 billion cubic meters (1.3 trillion cubic feet) of natural gas per year to China from 2018 via the first pipeline between the world’s largest producer of conventional gas to the largest consumer.

A company source added, “It would be logical to expect the deal during Putin’s visit to China.”

But the two sides are still wrangling over pricing, and Russia’s cooling relations with the West could make China toughen its stance. Russian industry sources say Beijing wants a lower price than paid in Europe, where Gazprom generates around half of its revenues.

Russia meets almost a third of Europe’s gas needs, and supplies to the European Union and Turkey last year exceeded 162 billion cu. meters (5.7 trillion cu. feet), a record high.

However, China overtook Germany as Russia’s biggest buyer of crude oil this year thanks to Rosneft securing deals to boost eastward oil supplies via the East Siberia-Pacific Ocean pipeline and another crossing Kazakhstan.

If Russia is isolated by a new round of Western sanctions — those so far affect only a few officials’ assets abroad and have not been aimed at companies — Russia and China could also step up cooperation in areas apart from energy.

Kashin said the prospects of Russia delivering Sukhoi SU-35 fighter jets to China, which has been under discussion since 2010, will grow.

China is very interested in investing in infrastructure, energy and commodities in Russia, and a decline in business with the West could force Moscow to drop some of its reservations about Chinese investment in strategic industries.

“With Western sanctions, the atmosphere could change quickly in favor of China,” said Brian Zimbler, a managing partner of Morgan Lewis international law firm’s Moscow office.

Russia-China trade turnover grew by 8.2 percent in 2013 to $8.1 billion, but Russia was still only China’s seventh-largest export partner in 2013 and was not in the top 10 countries for imported goods. The EU is Russia’s biggest trade partner, accounting for almost half of all its trade.

Sechin, whose visit also included India, Vietnam and South Korea, is a close Putin ally who worked with him in the St. Petersburg city authority and then the Kremlin administration before serving as a deputy prime minister.

In Tokyo, he offered Japanese investors more cooperation in the development of Russian oil and gas. Rosneft already has some joint projects with companies from Japan, the world’s largest consumer of LNG, and Tokyo has been working hard under Prime Minister Shinzo Abe to improve ties with Moscow despite a territorial dispute dating from World War II. However, Japan faces a dilemma over Crimea because it is under pressure to impose sanctions on Moscow as a member of the Group of Seven advanced economies. It does not recognize the referendum on Crimea’s union with Russia and has threatened to suspend talks on an investment pact and relaxation of visa requirements as part of sanctions.

Closer ties are being driven by mutual energy interests. Russia plans to at least double oil and gas flows to Asia in the next 20 years, and Japan imports huge volumes of fossil fuel to replace lost energy from its nuclear power industry, shut down after the 2011 Fukushima nuclear power plant disaster. Oil imports from Russia rose almost 45 percent in 2013 and accounted for about 7 percent of supplies.

But if the dilemma is a tough one for Japan, it is unlikely to cause Putin much lost sleep.

“I don’t think Putin is worried much by about what is said in Japan or even in Europe. He worries only about China,” said Alexei Vlasov, head of the Information and Analytical Center on Social and Political Processes in the Post-Soviet Space.