As Russia’s economic situation continues to languish because of sanctions and the new energy abundance, Putin is likely to continue to seek alternative ways of gaining legitimacy and maintaining popularity at home. So far, this approach has served him well; even as the Russian economy contracted, his popularity ratings stayed above 80 percent. As the average Russian increasingly feels the pinch of budget cuts to social services, Putin will continue to seek to project strength in the face of events that challenge Russian power and make him look weak. Harkening back to the glories of the Soviet Empire, or confounding the ambitions of the United States, allows Putin to compensate for his inability to deliver the sort of economic growth that characterized the previous decade. With Putin no longer expecting the West to provide the key to Russian prosperity, as he and others did during earlier foreign policy affronts, we should expect Russia’s impulse to meddle abroad to continue.
Two regions in particular will attract extra attention from Russia. First, Putin will likely take advantage of opportunities to interfere in bordering countries with significant Russian populations or in the former Soviet sphere of influence. Second, the Middle East will remain an area of particular concern. While Moscow’s influence in that region has many drivers, policymakers from other parts of the world should not overlook the energy dimension of that interest.
Like other powers, Russia has to balance its economic and energy interests with its strategic and security ones in the Middle East. Doing so is not always straightforward. At one level, continued instability in the region boosts the price of oil, which is firmly in Moscow’s favor. According to Yegor Gaidar’s book, in 1974, then-chairman of the KGB Yuri Andropov wrote to Leonid Brezhnev, recommending the Politburo act to support the plans of Palestinian terrorist groups to disrupt oil infrastructure and storage in the region. Putin may not resort to such measures today, but he and his inner circle are clearly aware that the quickest path to economic relief is a higher oil price. This reality is not the only factor in shaping Russian attitudes toward the region. Russia’s generally constructive approach in the P5+1 negotiations with Iran demonstrates that it will sometimes opt for strategies to stabilize the region. Yet, the desire for a robust geopolitical premium on the price of oil will unquestionably factor in to Russia’s willingness to help defuse crises from Iraq to Syria to Libya. Libya, in particular, will be a place where Russia’s economic and strategic objectives are at odds. Although Moscow may want to take credit with Europe for resolving a stubborn conflict that feeds directly into European insecurity, a stable, unified Libya could precipitate a large drop in oil prices as the North African country brings more oil quickly to market; one study by the Oxford Institute for Energy Studies suggests that a full recovery of Libyan oil production to pre-conflict levels could drive the price of oil down to $38 per barrel by the end of 2017.
In weighing energy factors in its overall foreign policy strategy toward the Middle East, Russia will not only think about shoring up prices, but also thwarting potential competitors. Ongoing turmoil in the Middle East will keep Iraq and Iran from realizing their full oil production potential and limit the competition to natural gas suppliers that could emerge in a more stable political environment. Both Iran and Iraq have ambitions to export significant quantities of natural gas to Europe through the proposed “Friendship” or “Islamic” Pipeline running from the world’s largest gas field in Iran, through Iraq and Syria, to Europe. With the removal of many sanctions on Iran, the Syrian civil war now seems to be the biggest obstacle to that project. Russia worked hard to ensure that Nabucco—another large pipeline intended to bring natural gas west to Europe—never got off the ground. Helping an alternative east–west pipeline to succeed is clearly not high on Moscow’s agenda.
Finally, Russian interest in cooperation with the big oil producers of the world—Saudi Arabia in particular—will continue. Russia’s participation in, and general adherence to, the 2016 agreement reached between non-OPEC and OPEC members was striking given Russia’s past record on this front. But Moscow sees a new opportunity for a grand coalition with Riyadh, as two of the three most important oil producers in the world (the third being America). While Saudi Arabia does not necessarily show this enthusiasm, it will seek to keep its options open with Moscow.
Figure 9.3: Middle East Pipelines
Source: Steve Austin, “Russian gas pipelines,” Oil.Price.net, January 17, 2017.
Hastening Russia’s Desire to Pivot East
In 2012, long before Russia’s confrontation with the West over Ukraine, Putin spoke to a group of Russian energy officials and urged them to look east. Like American policymakers, Russians increasingly see the future unfolding in Asia, where populations and markets—not to mention demand for energy—are booming. Moscow looked at a stagnating Europe that was growing more suspicious and hostile toward Russian ambitions even before Crimea, and sensed the need to turn eastward. Russia has good standing to be a significant Asian power. After all, three-quarters of Russia’s landmass is in Asia, where it borders China, Japan (maritime-boundary), North Korea, Mongolia, and Kazakhstan and therefore directly abuts one-fifth of the world’s population. Similar to how Soviet planners saw the industrialization of Siberia as key to the prosperity of the empire, contemporary Russian leaders have focused on the Russian Far East as a gateway for progress. Russia’s strengths in many ways seem complementary to Asia’s needs and vice versa. Countries such as China, Japan, and South Korea are thirsty for energy, whereas Russia needs capital and technology.
Russia sees not just opportunity in a “Eurasian” identity, but also a need to bolster a flagging population. A great power should not be so unbalanced, with “a massive elephant head in the west, and a mouse’s body in the east” as one Russian analyst described it to me. Even the mouse’s corpus seems to be withering, with the inhabitants of the sparsely populated Russian Far East dropping by 13 percent since the dissolution of the Soviet Union. Yevgenii Nazdratenko, the recalcitrant former governor of a Far Eastern federal region named Primoskii Krai, called for a “repopulation program” in 2000. He envisioned five million “European” Russians moving to the Far East, in a quest to nearly double the Russian population there.
To make matters worse from Moscow’s perspective, while Russian populations dwindle, ethnic Chinese are moving in, according to Alexander Shaikin, the man in charge of the Russian-Chinese border. Shaikin likely exaggerates when he claims that 1.5 million people from China illegally entered the Russian Far East in the year and a half preceding the summer of 2013. But the Russian Federal Migration Service has forecast that in two to three decades, ethnic Chinese will be in the majority in the Russian Far East. Such trends reinforce the reality that, with a seven-hour time difference from Moscow and nearly four thousand miles separating Moscow and Vladivostok, Russia’s Far East is much closer to Beijing than to Russia’s capital.
This population shift rekindles Russian concerns about a possible Chinese demographic conquest; significant parts of today’s Russian Far East were deemed to be Chinese territory for more than a century following the 1689 signing of the first treaty between Russia and China. It is perhaps no surprise that when, at the St. Petersburg International Economic Forum in May 2014, Chinese vice president Li Yuanchao called for combining “the program for the development of Russia’s Far East and the strategy for the development of Northeast China into an integrated concept,” his Russian hosts chose not to comment. More recently, a 2015 deal in which a Chinese company was to lease 280,000 acres of Siberian land to grow crops and raise cattle caused a firestorm over social media in Russia. Russians declared, “China’s creeping expansion in Russia has begun” and “the Motherland is being sold out piece by piece.”
If domestic politics, visions of untapped prosperity, a fraught history, and fears of Chinese encroachment were not enough to inspire Putin’s pursuit of Asian power status, two more recent developments spurred additional moves in that direction. First, the crisis over Ukraine and Crim
ea intensified the sense of Russia’s leaders that they needed to expedite this transition to the east, in part to demonstrate to the world that Russia was not isolated. Second, the new energy abundance itself provided a jolt. Ten years ago, Russia had the luxury of seeming to be able to sell as much gas as it could produce. Moscow’s primary concern at the time centered around producing enough natural gas to meet internal needs and export commitments. Today, Russia is desperately searching for markets for its natural gas; the unconventional boom has curbed the prospects for non-Asian markets that Moscow once thought looked more promising. As we have seen in the previous chapter, while Russia is unlikely to lose its significant foothold in the European natural gas market, it can no longer look to that market for growth.
Even more dramatically, the unconventional boom has eliminated other markets upon which Russia was counting. In 2007, with great fanfare, Gazprom announced plans to develop Shtokman, a massive natural gas field in the Barents Sea containing an estimated 138 trillion cubic feet of gas reserves—more gas than is believed to be in the entire Norwegian shelf. Taking on the challenges of developing these resources—six hundred kilometers north of Russia’s northern coastline, one thousand feet below floating icebergs, and in an area in darkness half the year—was justified given the expected robust growth of U.S. LNG imports. In 2009, Gazprom anticipated that it would supply up to 10 percent of the North American market for LNG in ten years’ time. These grandiose plans were put on hold in 2012, as Gazprom and its partners faced the reality of spiraling costs and a rapidly disappearing market for gas exports to the United States because of the booming shale gas production there. According to Gazprom’s spokesman, Sergei Kupriyanov, Shtokman will only be revisited “when conditions on the market change: either prices should rise, or costs should go down.” With Europe and America offering no prospect for export growth, Moscow’s pivot to the burgeoning economies of Asia is more critical than ever to Russia’s future.
At the same time that the energy boom is heightening the Russian desire to pivot east, it is also making that objective much more difficult to achieve. As we will see, the unconventional boom has narrowed the time frame in which Russia needs to capture eastern markets, has prevented it from reaching deals on the terms it has sought for decades, and has potentially undermined the commercial viability of projects that once were seen as critical to Russia’s strategy to go east.
The Dragon and the Bear
The room in Shanghai seemed far too large for the occasion. The applause of the small number of observers echoed off the ceiling, which was painted with the same pattern that adorned the large brown carpet. Looking distinctly more nervous than his counterpart, Gazprom CEO Alexei Miller signed the agreement and handed it to China National Petroleum Corporation (CNPC) chairman Zhou Jiping. Only after the two stood up from the table, shook hands, and exchanged copies did the cameras home in on Russian president Vladimir Putin and Chinese president Xi Jinping, who had been standing in the background. A woman appeared, offering each leader a tiny glass. In a moment captured on film and tweeted around the world, Putin and Xi looked each other in the eye, clinked their petite glasses, and threw back the drink, sealing what many were calling “the gas deal of the century.”
The Sino-Russia gas deal signed on May 21, 2014, was more than a decade in the making. Chinese and Russian negotiators met, haggled over details, and signed promising memoranda of understanding that rarely seemed to lead anywhere. Over the years, the officials disagreed about pipeline route, price, and whether China could acquire equity stakes in Russia’s energy fields. The deal centered on the development of greenfield natural gas fields in remote Eastern Siberia and the construction of a nearly two thousand mile pipeline and gas transmission system, coined the Power of Siberia, to the centers of greatest energy demand in heavily industrialized northeast China. Under the thirty-year arrangement, beginning in 2019, Russia agreed to deliver 1.3 trillion cubic feet of natural gas a year to China—a volume that represented about a fifth of Chinese gas consumption in 2014 and could constitute roughly a tenth of it in 2020. Building on the momentum of this deal, the two countries signed an additional memorandum of understanding for a second natural gas deal in November 2014. Although this agreement, in contrast to the May one, was not binding, it signaled Russian intent to ship another 1.1 trillion cubic feet of natural gas to China, this time from already developed Siberian fields via the Altai route entering China in its northwest corner.
Undoubtedly, the global political environment—and Xi’s close relationship with Putin—played a role in making this spring visit successful when other efforts had fallen short. Several experts with whom I spoke while in Beijing a few months after the deal was sealed suggested that Xi, sensitive to how a failure to close the deal would damage Putin at a time when he was seeking to project strength in the crisis with the West over Ukraine, tapped his hard-driving negotiators on their shoulders and told them now was the time to sign on the dotted line. However, a look beyond the politics of the moment also reveals the central role of the shale gas boom in heightening Russia’s sense of urgency and convincing Moscow to make key concessions that would have been hard to imagine a couple of years earlier.
Time was once on Moscow’s side, but the shale gas boom shifted that advantage to Beijing. For a decade, Moscow had been content to let negotiations drag on, in the hopes that China’s crushing demand for energy would drive its eastern neighbor to cut a deal on terms more favorable to Russia. During this time, China’s demand for natural gas increased nearly one-fifth every year—and China moved from being self-sufficient in natural gas to importing a third of its consumption in 2013. In 2012, CNPC estimated that Beijing’s plans to spur growth and to bring millions more Chinese out of poverty would require the annual use of more than 18 trillion cubic feet of gas by 2030—or just somewhat short of the amount consumed by all of Asia in 2010. For most of the past decade, Russia seemed to be the most logical and cheapest way to secure these critical natural gas resources. Not only did China prefer piped gas over LNG (whose delivery comes via waterways patrolled by the U.S. Navy), but China had not yet begun piping natural gas from other markets.
At the turn of this decade, however, China’s prospects for meeting its future natural gas demands improved in a fundamental way. Suddenly, China had more choices for how it might meet its gas needs. Piped gas began to flow from Turkmenistan in 2010, and from Myanmar and Kazakhstan in 2012. China—intrigued by the 2011 U.S. EIA report positing that China held the largest reserves of shale gas in the world—began planning to produce more of its own resources. Talk began of how the United States could become an exporter of LNG in the years ahead thanks to its booming shale gas production. More natural gas of both the conventional and unconventional varieties was being discovered and developed in places such as Australia.
“Whether Gazprom slept through the shale revolution or not, it’s a difficult question. There is no answer to it yet.” These words of President Putin, uttered in April 2013, must have rankled Gazprom officials and made them determined not to miss the narrowing window for a natural gas deal with China. In the run-up to the signing of the first gas pipeline deal in May 2014, Gazprom and Russian government negotiators made some critical concessions, such as abandoning their desired Altai route in favor of the more eastern route preferred by the Chinese. In the final hours, Russia conceded on price as well; although the exact numbers are not public, what is available suggests Russia settled for a price comparable to what it gets for its gas in Europe. This figure is lower than Russia had hoped to achieve, but high enough for outside commentators to value the deal at $400 billion. Moreover, because sanctions have made it difficult to finance the development of new fields, Russia has allowed for Chinese equity investment in Russian oil and gas companies and projects—something that Moscow had long resisted due to the fiercely held belief that Russian resources are the patrimony of the Russian people only.
While Chinese comments about the Power of Siber
ia gas agreement were subdued, Russian officials were quick to herald it as a harbinger of future strategic cooperation. The comments of Alexei Pushkov, the head of the foreign affairs committee of Russia’s lower parliament and an ally of Putin, were representative. He was quick to tweet, “The 30-year gas contract with China is of strategic significance. Obama should give up the policy of isolating Russia: It will not work.” Pushkov’s counterpart in Russia’s upper house, Mikhail Margelov, similarly called the deal a “major step toward a strategic partnership of the two nations.”
International reaction to the May gas deal ranged from nervousness to alarm. One commentator asked, “Is anyone else scared to death about this week’s announcement out of Beijing that China and Russia have agreed to a 30-year natural-gas deal?” He later likened the deal to a basketball dream team: “when LeBron James and Kevin Durant sign with the same team, you’d better start doing an urgent talent upgrade, or prepare to get buried.” Others saw no occasion for levity, with one claiming that Russia and China were “changing the world by shaking the foundations of an order that has ensured the absence of major conflict and paved the way for unprecedented prosperity.” The size of the deal heightened fears of an emerging strategic partnership that could challenge the American-led international system. One newspaper subsequently asked if the natural gas agreement was part of a “new superpower axis?” in a not-so-veiled reference to Germany, Japan, and Italy during World War II. Predictions that “the U.S. could find itself facing a formidable Sino-Russian alliance in another multi-decade geopolitical struggle” were frequent.
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