Report

Eastward, Ho!

Eastward, Ho!

Russia’s invasion of Ukraine and annexation of the Crimean peninsula has clearly riled Europe and thrown into question the old continent’s energy strategy. But some of the biggest aftershocks of Russia’s land grab will be felt thousands of miles away, among Asia’s biggest economies.

At issue is Russia’s own energy pivot to Asia, part of its long-standing goal of diversifying away from excessive reliance on a slow-growing and increasingly testy European market for natural gas; Europe’s interest in Russian gas waxes and wanes with politics, environmental goals, and concerns about energy security. The crisis in Ukraine, which has stoked fears in Europe that Moscow will again use its energy weapon to bludgeon recalcitrant neighbors, is only accelerating Europe’s urge to find alternatives to Russian gas — and accelerating Russia’s desire to find new buyers. Many of them could come from Asia.

In a nutshell, Asia’s biggest economies think they are becoming even more of a buyer’s market for Russian energy, and hope to use Moscow’s current turmoil to buy more gas for lower prices. If they’re right, countries like China and South Korea would gain a longer-term, cheaper source of energy, while Moscow would be able to keep tapping its mineral wealth for decades to come. That would be a particularly big win for Tokyo, which buys so much expensive liquefied natural gas that it’s running a trade deficit for the first time in 30 years.

"The Ukraine crisis will make Russia rethink its gas export policy towards the saturated European gas market, and Putin has reason enough to pay special attention to the Asian market," said Keun-Wook Paik, an expert on Sino-Russian energy cooperation.

The biggest test will come this May, when Russia and China try to hash out the final pricing terms for a natural gas export deal that’s been in the works for more than a decade. Gazprom, Russia’s state-owned energy giant, has for years demanded a high price for gas exports to China; Beijing has long resisted, because it has alternative supplies in the short term and thinks time is on its side.

"The current situation has provided a beautiful opportunity to strike the long delayed gas price deal," Paik said. "Once it’s done, the U.S. and European Union strategy to isolate Russia with sanctions will become very ineffective."

The energy question explains, in part, the difference between Western countries and Asian countries in reacting to Russia’s annexation of the Crimean peninsula. While the United States and the E.U. have announced travel bans and targeted sanctions on Russian and Ukrainian officials, China and India have conspicuously taken a soft line toward Russia in the wake of the crisis. Japan and South Korea, staunch U.S. allies, were slow to condemn Russia’s invasion and largely unwilling to do much to reverse it.

Japan, which has been trying to forge closer relations with Russia, end territorial disputes left over from Soviet participation in World War II, and deepen energy ties with Moscow, has also been treading carefully so far. On Tuesday, Japan announced visa restrictions and a freeze on further investment talks with Russia, which officials in Moscow dismissed as a mild rebuke they chalk up to Japan’s desire to maintain and deepen its energy trade with Russia. Indeed, Igor Sechin, the head of Russian oil giant Rosneft, spoke Wednesday at a Japanese-Russian investment conference in Tokyo that went ahead despite the crisis.

"We offer a substantial expansion of investment possibilities to Japanese investors," Sechin said, according to Reuters. Russian media spoke of "hundreds of billions" of dollars of potential energy deals between the two countries. Sechin will also visit India and South Korea on this trip to talk up energy trade.

South Korea has taken an even softer line on Russia. Only on Wednesday did the foreign ministry "disavow" the Crimean annexation; no sanctions have yet been announced. Not coincidentally, one of South Korean President Park Geun-hye’s signature ideas is a "Eurasian initiative" that would deepen energy and infrastructure links between Russia, China, and South Korea.

Behind all the jockeying is a simple fact: Asian countries such as China, Japan, and South Korea will all need increasing amounts of natural gas in the future to power their industrial and residential needs. Japan and South Korea currently import huge amounts of LNG, a very pricey alternative. China also fears that its plans to use ever-increasing amounts of natural gas will collide with an expensive and competitive LNG market. Russia, an energy-rich country looking for new markets, seems a natural fit — and has for years.

Since the late 1990s, China and Russia have been trying to reach a deal to increase natural gas trade between the two countries. The stumbling blocks include Russia’s desire to ship gas from existing fields and pipelines in western Siberia to western China, whereas China wants gas shipped to its populous northeastern regions from virgin fields in Eastern Siberia. Russia also wants to replicate its tried-and-true pricing model from Europe, where the price of gas is linked to the (high) price of oil; China obviously doesn’t. The rapid breakdown of Russia’s relations with Europe provides an opening to finally close the deal on terms advantageous to Beijing.

Japan, for its part, has been trying to improve ties with Russia for several reasons. There’s hope of resolving a long-simmering territorial dispute over the Kuril Islands; there’s the chance to tap more affordable energy supplies, which the Japanese economy desperately needs; and Tokyo also hopes closer ties with Russia could serve as a counterweight in Asia to an increasingly aggressive China.

The Ukraine crisis probably means that the Japanese-Russian rapprochement is off the table for now, especially because Japan defends the rule of law in east Asia — and has its own dogfight brewing with China over disputed islands in the East China Sea. But that doesn’t mean that energy deals are dead by any means.

"Moscow will have no choice but to accelerate the deals with its Asian clients. It is unlikely that Russia would like to get entrapped in one-on-one negotiations with the hard-nosed Chinese" over the big gas deal, said Celine Pajon, a northeast Asia expert at the French Institute of International Relations. "Japan is thus quite confident that the prospect for expanded energy cooperation is not going to vanish overnight."

Japan and South Korea, as much as China, could end up benefitting if Beijing and Moscow finally ink the natural-gas deal this spring. Building new pipelines to carry large amounts of reasonably priced natural gas to northeastern China would create the first real alternative to expensive LNG in the region. Piped gas is almost always cheaper than LNG, which costs money to liquefy, transport, and turn back into gas; Asian LNG in particular is about the priciest in the world, in large part because of the lack of alternatives.

"Japan will be the biggest beneficiary of a Russia-China gas deal," Paik said, estimating it could shave about 15 percent off the current price of LNG. That would make life easier for Japan and South Korea, big gas importers, if a little tougher for countries such as Australia, Canada, and the U.S. who are already, or who hope to soon start, exporting LNG to the Asian market.

"The implications will be enormous for the region and the world," he said.