Putin’s collapsing energy strategy

Keith Johnson writes about the energy markets and Russia, “President Vladimir Putin has been trying his own pivot to Asia, hoping that his country’s vast natural gas holdings could cement a new relationship with China while making it easier to bypass his quarrelsome neighbours in Europe. Unfortunately for the Russian strongman, things aren’t going so well.  Over the past year alone, Putin has inked a massive, $400 billion natural gas deal and a strategic partnership with Beijing. Russia also hoped to build a second Siberian pipeline to China that could give Moscow the ability to play off European energy customers against those in Asia”.

Johnson notes that “Putin also doubled down on Europe: When European Union officials blocked one $40 billion gas pipeline across the Black Sea, he simply dreamed up a new one through Turkey. That could be his key to finally bypassing troublesome Ukraine as a transit country for natural gas, tightening control over energy exports to Europe, and showering largesse on friends and allies. Case in point: When Greece came cap in hand to Moscow this summer, Putin promised to finance another $2 billion pipeline spur to tie into the Turkey project and cement ties with Greece’s left-wing government”.

Pointedly he goes on to mention “from Ankara to the Altai Mountains, Putin’s pipe dreams appear to be in disarray. China, realising it doesn’t need as much energy as it thought, has gotten cold feet on the second gas deal. Turkey and Russia still can’t reach an agreement on the so-called “Turkish Stream” project and have put off further talks until the fall. Other ambitious Russian projects, from liquefied natural gas terminals in the Far East to a gas line unifying Korea, are going nowhere, even as Russia keeps proposing more and more big energy projects. And in a telling about-face, Russia has now abruptly decided that it cannot simply bypass Ukraine and must keep pumping gas to Europe across the territory of its wary neighbour for decades to come”.

Oddly for Putin Johnson reports that “even as Russian projects move further and further away from apparent completion, more and more are announced. The latest is a planned expansion of the so-called Nord Stream pipeline that fuels Europe via the Baltic Sea. But that pipeline wouldn’t be necessary if Ukraine is still shipping gas, or if the Turkish project ever happens. “You get the feeling that the Russians have lost the plot a little bit, throwing up all these projects, some of which are of dubious economic value,” said Ed Chow, an energy expert at the Center for Strategic and International Studies who has recently written about Russia’s proliferating pipelines”.

The reasons behind these failures appear to be because Russia’s “grandiose visions are colliding with reality. Global energy markets have been transformed in just the past year: Demand for oil and natural gas is weak, and prices have collapsed. A huge buyer’s market is bad news for a country reliant on energy exports for half its budget; the IMF said this week that cheap oil and sanctions will shrink Russia’s economy by 3.4 percent this year. The economic straitjacket brought about by Western sanctions on many big Russian firms, especially in the energy sector, chokes off financing and makes hugely ambitious projects even tougher to pull off, especially in the unrealistically short time frames Russia keeps proposing. And Russia has to grapple with all those challenges while juggling not just bottom-line economics, like any energy-producing country, but also Putin’s ever-shifting strategic calculus”.

Naturally, “The changing energy markets have hit Russia hard. New sources of supply of natural gas, from the United States and other places, have been eroding Moscow’s market dominance. The U.S. natural gas boom has weakened Russia’s hold on the European market even though the United States has yet to export a molecule there, simply by adding more gas to a well-supplied market. U.S. officials, including President Barack Obama, Secretary of State John Kerry, and many Republican lawmakers, have sought to use prospective U.S. gas exports to Europe as a way to weaken Russia’s hold. The United States also seeks to bolster Europe’s own ability to get energy from places other than Russia. State Department officials declined to comment for this story”.

Interestingly he writes that Russia is also being beaten where it failed to sell gas where there is demand, “Other new energy suppliers, such as Australia, also have set their sights on the Asian market, which Russia was slow to tackle seriously, giving Russia’s prospective customers a lot more bargaining power. Due to those market changes, especially the ripple effects of the U.S. gas boom, Vassilev, the former ambassador, said he expects Russian gas exports to become more like plain old oil exports, which aren’t used as a geopolitical weapon because oil is such a large, liquid market”.

After the signing of the deal in May 2014 between Russia and China for gas now looks like lunacy, “a year later, the Chinese economy has slammed on the brakes. Growth has slipped, and more importantly the rebalancing of the Chinese economy away from energy-guzzling heavy industry to leaner service sectors has walloped the demand outlook there. Energy consumption is growing at the lowest levels of the century so far. If China was already driving a hard bargain on price with Russia before the slowdown, it is now in a position to simply walk away from unnecessary projects”.

This will only further pressure the Russian treasury and its reliance on energy and thus the credibility of Putin and his regime.

Johnson ends the piece “Russia’s natural gas behemoth, Gazprom, doesn’t seem to have the financial muscle to build all these huge projects on its own. Thanks to weak demand in Europe, the company’s main market, plus all the strife in Ukraine, Gazprom’s profits fell last year by almost 90 percent. Whether it’s Turkish Stream, or the Greek spur, or the Altai route from western Siberia into the far provinces of China, those energy projects require plenty of upfront spending with no immediate return on investment. That is where Putin’s strategic visions keep colliding with marketplace realities”.

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