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Gas Deal Could Complicate Sanctions Threat Against Russia

Gas Deal Could Complicate Sanctions Threat Against Russia

China just signed a 30-year, $400 billion natural gas deal with Russia, handing a big win to Russian energy companies desperate to find new export markets. But the pact may have delivered Russian President Vladimir Putin an equally important win in his ongoing standoff with the Obama administration and its European allies over the ongoing crisis in Ukraine. Put simply, the deal may deal a death blow to the foundering Western efforts to punish Putin for his meddling in Ukraine and annexation of the country’s Crimean peninsula.

The new pact strengthens an emerging Moscow-Beijing economic alliance that’s out of the reach of Western influence — and financial pressure. The deal, which capped years of tense negotiations, was inked in Shanghai on the sidelines of an Asian economic and security conference that included 40 countries, including Iran and Kazakhstan. Though it will be years before the gas starts flowing to China, the deal raises doubts about how effectively Western countries will be able to use sanctions as a weapon against Putin’s Russia.

Former Treasury Department sanctions official Elizabeth Rosenberg, who is now a senior fellow at the Center for a New American Security, said the deal was Russia’s "attempt to build up commercial opportunities outside of Europe where it’s vulnerable and losing friends."

Sanctions — Western leaders’ weapon of choice in the battle over Ukraine – may have less bite now that Russia has proved it can find other foreign customers for its main export, natural gas. U.S. and European leaders have threatened broad sanctions against whole swaths of the Russian economy, including its finance or energy sectors, if Moscow meddles in Ukraine’s presidential election this weekend. But the China deal gives those threats less teeth in the years to come because Russia would have Beijing’s gas contract to fall back on, if the West decided to go after the country’s crucial energy sector.

"I don’t think this inhibits the ability of the U.S. and its partners to impose sanctions in the short term, but I do think it could affect the ultimate price those sanctions would exact in the medium term," said Zachary Goldman, a former Treasury Department sanctions official who now heads the Center on Law and Security at the New York University.

Though Europe still accounts for roughly 75 percent of Russia’s gas export market, developing countries could make up a larger proportion over time. The gas going to China wouldn’t take away from Europe’s portion immediately because the gas is being extracted from different fields, but by increasing the number of buyers, Russia would be less dependent on the European market.

China is also an ideal economic ally for Putin because Beijing — unlike Europe — is unlikely to ever agree to sanctioning Moscow over the Ukraine crisis or to try to intentionally reduce its oil imports from Russia because of the unrest there. Chinese leaders have historically been averse to getting involved in other countries’ political squabbles.

"The government in Beijing isn’t interested in coming out and supporting this volatile political issue in terms of the Russia-Ukraine situation," said Nicholas Consonery, an Asia analyst with political risk consultancy Eurasia Group.

So far, Washington has frozen the assets of 45 people, including some of the Russian president’s closest allies, and 19 banks and companies in an attempt to pressure Putin to reverse his annexation of Crimea and abandon his threats of invading eastern Ukraine. Tuesday, the Treasury Department added 12 more names to list in connection with unrelated alleged human rights abuses.

Some of the moves have been literally laughed off by Putin, who has given no indication whatsoever that they are making him even think of reversing his annexation of Crimea. Still, they go further than what Europe has been willing to do, highlighting the lack of unity over whether to sanction Russia and, if so, how harshly. Outside of the West, few countries have express support for the use of financial tools that could affect the global economy. The big emerging market nations — Brazil, Russia, India, and China, collectively nicknamed the BRIC countries — have already registered their clear dissatisfaction with the idea. Foreign ministers for Brazil, India and China joined Russia in criticizing sanctions in March after the initial rounds of tit-for-tat visa bans and asset freezes between the U.S. and Russia.

"The escalation of hostile language, sanctions and counter-sanctions, and force does not contribute to a sustainable and peaceful solution," the four foreign ministers said in a statement after a meeting at The Hague on March 24.

Some developing countries are likely to seek natural gas deals with Russia in the years ahead, and their unwillingness to go along with even modest sanctions today suggest they’d be even less likely to do so while they’re in an active energy and economic partnership with Moscow. Energy experts who’ve followed years of fits and starts over the new natural gas deal also caution that the long-term implications of the contract will only be clear when more details are revealed  — as long as it doesn’t fall through.

"Anyone who’s been watching this for the last decade is ready to take this news with a heavy dose of salt," said Rosenberg.