Hammered by the West, Putin Turns East

ht as the West is tightening the screws on Russia’s energy sector, Vladimir Putin is accelerating his own pivot to the east, moving closer to another giant natural gas deal with China.

If consummated this fall, the multibillion-dollar deal would at least partially alleviate Russia’s fears about finding future markets for its gas exports and China’s worries over finding future energy supplies, especially natural gas, for its growing economy and population. By potentially boosting Russia’s leverage with respect to Europe while dealing a blow to other gas exporters’ hopes of leaping into the Chinese market, the deal’s knock-on effects could be felt from Brussels to British Columbia.

But as with another, $400 billion gas deal the two countries signed in May, plenty of questions remain, including whether the two sides can agree on a price for the gas, and whether sanctions-battered Russian firms will be able to finance the billions of dollars needed to build new gas-export infrastructure in western Siberia.

On Wednesday, Gazprom chief Alexei Miller told Putin that the gas giant is ready to sign a 30-year deal to supply China with 30 billion cubic meters of natural gas through the so-called western route, which would snake from western Siberia to sparsely populated areas in western China and then overland to the Chinese coast. The contract could be signed in November.

Miller added that, since talks with Beijing accelerated after the completion of the eastern Siberian gas deal in May, the two sides are considering increasing the western export route to as much as 100 billion cubic meters of gas per year. Today, Gazprom exports about 160 billion cubic meters of gas to all of Europe. But Europe is increasingly casting about for alternatives, especially after last week’s suspicious interruptions of Russian gas deliveries to eastern Europe.

To be sure, China drove a hard bargain on price for the last gas deal. The western route would deliver gas to remote parts of the country, making it even harder for Gazprom to charge a premium. That means that while the western route might be an alternate outlet for Russian gas, it wouldn’t necessarily be a lucrative one.

Russian officials including Putin started talking up the prospects of the western gas route, also known as the Altai route, even before the ink was dry on the other huge gas deal with China. And for an obvious reason: Linking gas fields in western Siberia, which today supply Europe, with China would give Moscow the ability to shift energy supplies west or east as it sees fit.

“This will give us big advantages in rechanneling gas flows, depending on the world market situation,” Putin said earlier this month at a groundbreaking ceremony in eastern Siberia.

So what’s changed? Two things: Russia’s energy sector is under greater pressure due to enhanced sanctions because of the Ukraine crisis, and China’s need for Russian gas appears greater now than it did just a few months ago.

The United States and the European Union have steadily increased the pressure on big Russian energy firms with the latest round of sanctions unveiled earlier in September. Those measures would restrict Russia’s ability to tap oil in challenging environments, such as deepwater offshore, the Arctic, and in shale. Congress is currently preparing even stiffer sanctions on Russia that would increase the pressure on its energy sector; legislation winding its way through the Senate this week would take particular aim at Gazprom if gas supplies to Europe are interrupted, for example. The Senate Foreign Relations Committee unanimously passed the bill Thursday.

via Hammered by the West, Putin Turns East.