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Russia is finally making headway in its pivot East

Russia’s long planned pivot east found itself unexpectedly wrong-footed in early 2014, following the Crimean referendum and subsequent western rebuke.

Russia is finally making headway in its pivot East

Russia’s long planned pivot east found itself unexpectedly wrong-footed in early 2014, following the Crimean referendum and subsequent western rebuke. The global collapse of oil prices – and that of the ruble – later that same year further eroded Russia’s leverage in Asia.

Fast forward to the present and we’ve seen substantially more bark than bite. That said, the fundamentals have not changed, and – with increasing uncertainty in the U.S. – Russian sights are still firmly set on the east as it seeks long-term energy investment and political relevance.

Previously, those goals largely started and ended with China, and in that regard the pivot has been a marginal success to date, though hamstrung by substantial reluctance on both sides. The much heralded $400 billion gas deal between the two countries is still on, but Gazprom has cut spending on the Power of Siberia pipeline and initial deliveries are expected to be lower than originally planned.

China’s commitment to Russia’s Yamal LNG is promising and will allow the project to move forward fully financed, but Russian companies have not seen the show of solidarity that was anticipated amid western sanctions.

In fact, no Russian company has raised debt or equity on Chinese capital markets in the last two years.

Further – and perhaps with the realization that oil and gas from Russia’s Far East has nowhere else to go – Chinese equity investments in upstream oil and gas activities in those critical regions has been slow to develop.

As the pivot evolves however, China’s position – while still central – gives way to the field. Indeed, India and Southeast Asia are rapidly growing, hydrocarbon poor, and politically receptive to Russia’s advances.

Russia and India in particular have had a constructive arms relationship for several decades, but Moscow has yet to leverage that into a significant energy bond, until recently.

With energy currently at the forefront of strategic talks between the two nations, a Russia-India energy bridge is gaining traction. Early discussions for the bridge have been far from humble, and include piped gas trade and substantial nuclear expansion.

To be clear, any pipeline between the two nations is as unlikely as it would be long. Gazprom and Russia frankly aren’t in a position to overinvest in land-based transport infrastructure, whether that’s through the resurrection and extension of the Altai pipeline, or via an extension of the Power of Siberia project. Still, other avenues for cooperation are quite viable, and have been prosperous in the early stages.

Capitalizing on already strong nuclear ties, Russia’s Rosatom State Nuclear Energy Corporation recently opened a regional office in Mumbai to facilitate project expansion in India and Southeast Asia.

At Kudankulam nuclear power plant, Russia and India’s largest energy project, construction is ready to begin on the third and fourth reactors and an agreement is nearing completion on an additional two units. New sites for as many as six reactors across the country are forthcoming.

Within Russia’s borders, India remains active as an upstream investor. In October, India’s ONGC Videsh purchased an additional 11 percent stake in Russia’s Vankor oil fields, bringing their share up to 26 percent. Indian companies have now invested $5.5 billion in Russia’s east Siberian fields.

Rosneft’s purchase of Essar Oil’s Vadinar refinery and roughly 2,700 filling stations in cooperation with Transfigura and United Capital Partners is the clear highlight of Russia’s push into emerging markets. The move challenges Middle Eastern exporters, secures Russia’s equity crude supply in Venezuela, and provides significant inroads for further market penetration in what is forecast to be the fastest-growing oil consuming nation in the world.

As the pivot develops, the number of interesting subplots in the Asia Pacific region and at home have grown too great to count.

Russia’s nuclear and LNG courtships of the likes of Vietnam, Cambodia, and Thailand to name a few are something to watch. As is Russia and Japan’s ongoing territorial dispute over the Kuril Islands.

Relations between the two countries are warming and a resolution may only be an energy deal or two away. And back in Russia, the partial privatization of Rosneft – and the Asian buyers that it hopes to attract – deserves more scrutiny following the detainment of Russia’s Minister of Economic Development Alexey Ulyukayev on allegations of corruption in Rosneft’s acquisition of Bashneft, which itself was seized by the state from oligarch Vladimir Yevtushenko in late 2014.

As China demonstrates its willingness to wait, Russia is still seeking to define what has been a meandering, hardly predictable, though moderately successful path east.

Author: Colin Chilcoat

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