How Russia is fuelling Asia

As Australia looks to develop a robust energy export strategy in the Asia-Pacific, it must keep a wary eye on Russia, Elizabeth Buchanan writes in this chapter from Securing our Energy, the new publication from the ANU College of Asia & the Pacific.

Russia holds the world’s largest known reserves of natural gas. Much of these reserves are located in Russia’s Far East, out of reach for the existing European market given the sheer distance.

Enter Asia.

On the doorstep of vast reserves, the Asia Pacific will account for the majority of growth in terms of future energy demand. For Moscow, this is a welcome reorientation of economic growth and energy demand. Russia’s energy sphere accounts for more than a quarter of its gross domestic product (GDP), almost two-thirds of the Russian export market and roughly 30 per cent of the Kremlin budget.

Gone are the days of Putin’s pipeline politics towards Russian vassals abroad and Yeltsin’s resolve to siphon gas supply from unruly former Soviet states. Despite this historical ‘energy weapon’ sentiment that Russia attracts, the reality is that Russian foreign energy strategy is shifting to become increasingly interdependent.

Future proofing foreign energy strategy

Moscow’s recent re-evaluation of its foreign energy strategy illustrates this shift. However, global preoccupation with Russian action on the Crimean Peninsula since 2014 means many missed the Kremlin’s redraft of its foreign energy strategy.

Still in draft form, the Energy Strategy of Russia for the period up to 2035 (ES-2035) is geared at transitioning Russia away from resource-dependency and toward resource-innovation. This is an attempt by the Kremlin to future-proof Russia’s energy sector and reshape its development plans for the next 17 years.

The strategy earmarks Eastern Siberia and the Far East as paramount to Russia’s energy policy in the future. Ambitiously, Moscow is planning for the Far East to account for 40 per cent of Russia’s oil and gas exports. Russian liquefied natural gas (LNG) exports to Asia are expected to rise from six per cent to 30 per cent by 2035.

For Prime Minister Medvedev, Russia’s ability to increase its presence in the Asia-Pacific market while executing existing commitments to Europe is of central importance to the new foreign energy strategy. And it is this balance that Moscow needs to work on.

Included in the redrafted ES-2035 are responses to external pressures – associated with Western sanctions stemming from a plethora of assertive activities by Russia since 2014. These pressures include increasingly difficult methods of securing credit to fund new energy projects in the Far East as well as the Western technology to explore new energy fields in the region.

A broader pressure is the shifting international energy sector with developing nations set to overtake developed nations in terms of resource demand. Not only is the global pole of power moving to the East, the future of global energy demand is also to be found in the Asia Pacific.

Further, new energy sources are emerging, particularly in the renewables sector, and export competition is leaving some energy chains in a supply glut. As a key global energy power, Russia’s future prosperity relies largely on how it mitigates this range of external pressures.

It’s geography, stupid

Russia is looking East for the answers.

As Matthew Sussex’s 2015 Lowy Institute Analysis points out, Russia is not doing so by choice. This is a crucial fact that rejects much of the Western rhetoric surrounding Putin’s pivot to the East.

First, the concept of Russia not already belonging in Asia strips Moscow of its centuries-old Eurasian identity. Second, to argue Russia’s pivot East is a reflexive strategic choice to counter the United States’ pivot to Asia conveniently writes off numerous historical attempts by Stalin, Gorbachev and even Yeltsin to revive Russia’s Far East.

Under Putin, we have seen a clear reorientation of Russia’s foreign energy strategy to rectify Moscow’s marginal share of the Asian energy market. This is increasingly evident in the use of the Northern Sea Route (NSR) to link Russian Arctic LNG to the North East Asian markets in particular, despite a closer Western market to the High North field.

In any case, the notion of Russia seeking a complete pivot to Asia is entirely misguided.

European energy imports from Russia have increased and new energy projects are underway. Examples are the Nord Stream-2 and TurkStream pipelines. When considering the ongoing commercial dealings undertaken in Europe, it is evident that Russia is unable to completely pivot away from the West.

What is occurring is a fundamental rebalance of Russian foreign energy strategy – facilitating Moscow to act as a Eurasian power fuelling both the East and West. Russia’s energy interest in the Asia Pacific is an unsurprising development, no more than the ‘revenge’ of geography. A resource-rich state borders the region set to account for the majority of global energy demand – what follows is more or less a marriage of convenience shaped into a strategic relationship.

A common misperception of Sino-Russian energy relations is that there is an emerging partnership to thwart United States power in the region.

Beyond centuries of mistrust and competition, Russia and China are still far from strategic bedfellows. This is illustrated in the energy pillar of their relationship, where straightforward commercial discussions are protracted and increasingly complex. Negotiations of the natural gas pipeline, Power of Siberia, stalled for decades before a 30-year partnership was struck in 2014.

Slated for completion in 2019, the route appears ahead of schedule and there are now discussions to construct a brother pipeline to increase Russian export capacity to China. On face value, the commercial partnership is a win-win for all involved. Yet in reality, Beijing was able to beat down the natural gas price and dictate the orientation of the pipeline – it meets the Chinese border in the Far East and not in the West, as Moscow had envisioned.

A western route would have allowed Moscow access to further markets in Central Asia, further diversifying its customer base.

A balancing act

For a nation with energy superpower ambitions, it is perplexing that Russia’s energy sphere only accounts for one quarter of total state investment. However, it becomes apparent that Moscow has found a solution – albeit a short-term one.

Beijing has agreed to fund a variety of oil, natural gas and coal projects in Russia’s Far East.

Despite the Russian Far East accounting for 40 per cent of Russian territory, the region has remained no more than an afterthought. This is down to a range of factors, including slow development of the economy after what Putin described as the “greatest geopolitical tragedy of the 20th Century” in his 2005 State of the Nation Address – the collapse of the Soviet Union less than 30 years ago.

The lack of modern technology and investment to improve the sector or branch out into renewables is also a roadblock to Russian strategy. Low growth in terms of global demand for Russian hydrocarbons and the increasingly competitive international energy market have also curtailed Russian progress.

Seizing on Russia’s domestic structural issues, China is diversifying its energy import potential by also focusing on Russia’s Far East region.

The Russian Far East population is only about seven million, yet shares a border with roughly 70 million people in China’s North East. The Far East is a resource-rich region with plenty of space for population growth, something no doubt Beijing has an interest in.

Despite centuries of border disputes in the region, of late all has been relatively quiet on this front. Nonetheless, Russia’s Far East is certainly a potential flashpoint of conflict. Here, Russia is attempting to mitigate overreliance on the Chinese export market by diversifying its energy customer base within the Asia Pacific. Japan and South Korea are set to receive LNG from Russia’s Yamal and Sakhalin regions via the NSR.

Discussions are ongoing with North and South Korea to extend Russia’s Far East pipeline network to include a trans-Korea route. Further, Russia’s efforts to insert itself into the South East Asian energy chain are highlighted by various energy projects in Vietnam.

Moscow’s new fuel corridors have the potential to place Russia at the helm of Asia’s energy architecture. The priority for Russia is to control, as much as possible, Beijing’s influence over its resource potential. This is a central challenge for the Kremlin given the sheer access to capital Beijing affords. Yet, we have witnessed attempts to limit Chinese influence in Russian Arctic energy projects. Avoiding overreliance on Chinese capital for new projects, Moscow has invited India and Japan to join various joint ventures.

Implications for Australia

There are clear corresponding implications for the Australian energy export market. The most pressing: we are set on a potential collision course with Russia when it comes to fuelling the Asia Pacific.

The Australian Government should watch Russia’s NSR development closely, as a key component of the ES-2035 is the creation of a new global energy corridor for Asia. This has substantial implications for Australia.

The Asia Pacific currently relies on the Malacca Strait corridor to receive goods, and the majority of our energy needs. This corridor is congested, poorly secured and has long lead times – all of which factor into increasing transportation costs. These costs are carried over to the consumer.

Russia’s NSR, which can currently operate 3–4 months of the year for Asia (year-round for Europe), offers a viable alternative to fuel the Asian market in terms of LNG.

Thanks to climate change, in the coming years the NSR will be passable year-round. Of course, there is also the question of how competitive North American and Australian LNG can actually be for the Asian market, compared with pipeline gas from Russia’s Far East.

The reorientation of global energy corridors provided by the NSR will ultimately make Australia an extremely expensive import and export market. Not only does this mean higher fuel prices for Australians, it will put our transit-heavy economy under stress. Our fuel insecurity, currently at about 20 days’ supply despite our International Energy Agency obligation to hold 90 days, will be further exposed. The Kremlin fired a warning shot when it stated its resolve for energy to serve to ensure Russia’s security in full. Recent history has indicated how serious the Kremlin takes matters of security.

On the horizon, it is evident that Australia’s energy interests in Asia places us in direct competition with Russia. It is crucial to develop a robust energy strategy to meet the looming challenge Australia’s energy exports will face in the region. Just as critical is planning for Russia’s potential to secure its interests by weaponising energy in the Asia Pacific.

Here, the East has much to learn from the Western experience of entering into energy partnerships with Russia.

This is a piece from Securing our Energy, a collection of expert essays from the ANU College of Asia & the Pacific on the challenges and opportunities of energy security, energy access and climate change. You can read the essays for free here.