- The Washington Times - Sunday, May 25, 2014

In the tit-for-tat economic war between the United States and Russia this year, Moscow has scored a significant victory with its monumental deal to provide natural gas to China, directly challenging U.S. attempts to isolate Russia with economic sanctions.

By securing a major new customer for Russia’s gas outside Europe, President Vladimir Putin has accomplished several top strategic goals.

The most obvious is to stoke fears among Europeans that they will have to compete with China for Russian energy supplies.

Another goal was to lay down the gauntlet for U.S. and Canadian ambitions to export liquefied natural gas to lucrative Asian markets. The deal establishes Russia’s presence in the heart of the biggest Asian market.

But the geopolitical triumphs have been bittersweet. Russia’s economy is widely believed to have sunk into recession as a result of Western sanctions imposed in response to Mr. Putin’s takeover of Crimea and the investor stampede out of Russia caused by his Ukrainian land grab.

Mr. Putin may have given a final push to clinch the long-stalled gas deal with an eye on the Russian economy. Russian energy giant Gazprom plans to spend $55 billion and hire 11,700 people to build the pipelines, gas processing plants and other infrastructure needed to make good on what Mr. Putin said would be the world’s largest infrastructure project.

“I guess China never got the sanctions memo,” said Max Keiser, a former Wall Street trader and British broadcaster.

He said the $400 billion, 30-year deal will further the strategic goals of Moscow and Beijing to diminish the status of the U.S. dollar by conducting world trade in critical commodities such as oil and gas using other currencies.

Russia is the world’s biggest producer of commodities such as crude oil, gold and titanium. China is the world’s biggest consumer of these commodities.

Both countries have chafed for years at having to conduct purchases and sales in dollars, as is customary worldwide. The gas deal announced in Beijing on Wednesday would be the first major commodities contract to be settled in Russian rubles and Chinese yuan rather than dollars.

“This means the U.S. dollar’s days as the world reserve currency are numbered,” said Mr. Keiser, noting that Russia and China have been investing heavily in gold.

Many analysts question whether Moscow and Beijing can succeed in displacing the dollar as the world’s reserve currency. If that happens, however, it likely would usher in a period of global financial instability and force Americans to pay much more for the massive amounts of imported energy, Mr. Keiser said.

Some reports said Russia had to accept a lower price for gas, $360 per 1,000 cubic meters, than the $380 originally sought from China. Mr. Keiser said the strategic gains for Russia were well worth any short-term financial sacrifice.

Strategic competitor

Constantin Gurdgiev, an analyst at True Economics, said the deal was a mutual win for energy-rich Russia and its energy-hungry neighbor while posing significant strategic competition for the U.S. and its allies.

“All across, this should be a very good deal for Russia and China,” he said.

The deal settles on a way to build a pipeline network from western Siberia, northeastern China and Russia’s east coast, and will carry 38 billion cubic meters of gas a year to China. Russia has needed such a structure for years to sell its gas in the Far East.

The project, which will be built jointly, will make Russia’s gas available for the first time to China and carry it most of the way to Russia’s Pacific ports, where it can be liquefied and sold to Japan, South Korea and other lucrative Asian markets.

Russia has been searching for decades for ways to finance and build links to the Far East. Once the pipelines to China are in place, Gazprom plans to expand the network and use it to exploit and transport what energy analysts say is a vast untapped pool of oil and gas in mostly unexplored eastern Siberia.

“The new pipeline holds the promise of bringing exploration and production further east from existing centers of production” in western Siberia and unlocking potentially large oil and gas fields in the Russian Far East, Mr. Gurdgiev said.

Gazprom envisions a steady flow of gas that would feed a liquefied natural gas plant in Vladivostok on Russia’s eastern coast, which would funnel liquefied gas to the rest of Asia, including major port cities in China.

“The core threat here is to the U.S. exports of LNG to the Asia-Pacific, where U.S. producers are collecting huge margins compared to European markets,” Mr. Gurdgiev said. “But this threat is still some years, if not decades, off from becoming a significant pressure point” because the Russian pipeline network and most U.S. liquefied gas terminals are years from being completed.

Moody’s Investors Service Vice President Julia Pribytkova said Gazprom will have to take on a lot of debt to complete the project, but it should be worth it in the end. “The deal will provide a launchpad for Gazprom’s full-scale diversification into the Asia-Pacific region,” the biggest and fastest-growing market for natural gas worldwide, she said.

The Ukraine link

Tyler Durden, an analyst at Zero Hedge, said the Russian-Chinese deal represents a big strategic loss for the U.S., despite efforts by the Obama administration to minimize its importance.

Secretary of State John F. Kerry insisted last week that the deal was not linked to the standoff in Ukraine, but Mr. Durden said the U.S. and Europe, in attempts to isolate Moscow, virtually “forced Russia into China’s embrace.”

“This is merely the beginning of what will be a far closer commercial and political relationship between China and Russia,” Mr. Durden said.

China used the announcement of the deal as an occasion to call for a security alliance of Russia, China and Iran — arguably the West’s three most formidable opponents.

While the U.S. and Europe were “furiously scrambling” for ways to punish Russia for day-to-day developments in Ukraine, Mr. Durden said, the deal with China showed how Mr. Putin “once again was thinking three steps ahead and quite a few steps to the east.”

Russia’s “holy grail” deal with China will “send geopolitical shock waves around the world and bind the two nations in a commodity-backed axis,” he said, while “laying the groundwork for a new joint, commodity-backed reserve currency that bypasses the dollar.”

Although Mr. Putin is reaping some long-term economic gains, the Russian economy has been a short-term loser in its standoff with the West.

Economic analysts say Russia’s economy likely sank into recession this spring as a result of the exodus of investment funds in response to its invasion of Ukraine.

Mr. Putin seemed to acknowledge the dangers of cutting off all economic ties to the West, sparking a mild market rally after telling a gathering of corporate CEOs in St. Petersburg on Friday that Russia would not contest the weekend presidential vote in Ukraine. He also acknowledged that Western sanctions had cooled the business climate but said any effort to isolate Russia from the global economy would have a “boomerang effect.”

With the Chinese deal fresh in the business executives’ minds, Mr. Putin said “the world is rapidly changing, and we are witnessing colossal geopolitical, technological and structural shifts.” He said the United States is behind the curve in recognizing new global economic realities.

But Russia’s gas deal with China promises to provide a substantial stimulus for the economy, especially in Russia’s poorer regions in Siberia and the Far East where it is needed the most.

“An extensive gas infrastructure network will be set up in Russia’s east, which will drive the local economy forward,” said Alexey Miller, Gazprom’s chairman, emphasizing that nearly all the steel pipe and other components will be manufactured in Russia. “Great impetus will be given to entire economic sectors, namely metallurgy, pipe and machine building.”

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