- The Washington Times - Saturday, August 21, 2004

Russia’s energy exports to East Asia may drive the Eurasian country’s reintegration with the region and enhance the security and stability of an area marked by long-standing rivalries and growing energy demands, observers said at a recent conference in Washington.

“Energy will drive Russia’s role of influence and integration in northeast Asia” after Russia disengaged from the region for more than a decade after the Soviet Union’s demise, said John Fetter, president of FSI Energy, a Pennsylvania-based organization specializing in energy and environmental projects. Mr. Fetter made his remarks at a July 22-23 conference on Russia-Asia relations at the Woodrow Wilson International Center for Scholars.

In possession of the world’s largest natural-gas reserves and eighth-largest oil reserves amidst substantially growing Asian energy demand, Russia could use its energy trade to improve bilateral relations with Asian countries, some scholars say. The building of pipelines crossing through Siberia and Sakhalin Island to China, Japan and the Korean peninsula would bring the region closer together, they say.

The industrialized societies of Japan, South Korea and Taiwan lack natural energy resources and heavily depend on foreign oil imports. China, largely self-sufficient in providing for its energy needs until 1993, when it became a net oil importer, replaced Japan last year as the second-largest petroleum consumer, trailing only the United States.

China’s demand for oil will continue to surge as the country puts millions of new cars on the road, said James Dorian, a Washington-based international energy economist. Mr. Dorian noted that passenger car sales increased 75 percent in 2003.

Asian oil demand is predicted to outpace that of Western industrialized nations two- to threefold, according to the Energy Information Agency (EIA) of the U.S. Department of Energy.

Most Asian oil imports come from the Middle East, but the looming crisis in Iraq and terrorism have generated fears of a disruption in oil supply.

Diversifying oil sources is a common strategy, and Russia’s energy market is an attractive alternative. Pipeline gas would be cheaper than oil imported from the Middle East and would reduce northeast Asia’s foreign exchange burdens, some scholars say.

Russian President Vladimir Putin, who has made energy trade and developing the Russian Far East’s economy among the main priorities for his second administration, is deciding whether to construct pipelines connecting the Russian city of Angarsk in eastern Siberia to Daqing, China, where there’s an oil pipeline network, and another one to Nakhodka, Japan. Transneft, Russia’s state-owned pipeline monopoly, is said to favor the Angarsk-Nakhodka option.

Natural gas is expected to be sent to Japan through a proposed pipeline, called Sakhalin I. Gas exports are scheduled to begin in 2008. Japanese companies Mitsubishi and Mitsui are partners with Shell in another project, Sakhalin II, to develop Russia’s first liquefied natural gas (LNG) facility.

Russia’s gross domestic product (GDP) grew by 7.3 percent in 2003, with petroleum, petroleum products and natural gas its main exports, according to the EIA, which says it has proven 60 billion barrels of oil reserves.

The Russian Far East, remote and largely economically isolated from the rest of the country, has considerable natural resources.However, much of the Russian Far East’s vast volumes of untapped gas, condensate and oil reserves lack critical infrastructure and require foreign technology and investment to become profitable. The natural gas industry, in particular, is underdeveloped.

For Russia, which hasn’t worked out a comprehensive policy for Asia, geopolitics may trump geoeconomics on energy issues. The Turkey-Russia oil pipeline has taught Russia it’s risky to depend solely on a country to buy its major exports, said Michael Bradshaw, professor of human geography at the University of Leicester in Britain.

Proposed pipelines, such as the Angarsk-Nakhodka option, appeal to Russian leaders because they skirt China and won’t make Russian dependent on China, with which it had turbulent times in its relations, as an outlet for its energy sources, Mr. Bradshaw said.

Russia and its Asian neighbors lack a solid track record of multilateral cooperation, and the relationship is characterized by “competition and conflicts of interest,” Mr. Bradshaw said. Russia likely will opt for bilateral agreements, he said.

Though China is Russia’s fourth-largest trading partner, Russia’s trade relationship with China is the fastest growing among its trade partners. Last year, Sino-Russian trade reached a record high of $15.76 billion, according to China’s General Administration of Customs.

Russian-Japanese trade reached $5 billion in 2003, an increase of 40 percent. Russian trade with South Korea increased by 27.3 percent to $4.18 billion last year.

The possibility that Russia will fail to provide supplies, due in part to the dominance of the Russian government in its energy industries, manifested recently with the controversy over Yukos, a private Russian oil company that the Kremlin accused of tax evasion. In late July, Yukos, the country’s largest petroleum producer, was ordered to stop production, causing crude oil prices to jump to record-high levels.

Nevertheless, Russia could become a positive player in East Asia, with a potentially more significant role in security than in economics and trade, said Robert Sutter, professor in Asian Studies at Georgetown University. Regional rivalries dampen prospects for East Asian cooperation and create an uncertain security environment, Mr. Sutter said. As a result, nations start “hedging for security,” he said.

“This pervasive hedging, which I think arises from these uncertain security situations in East Asia, provides, I think, the most important opportunity for Russia in the region,” Mr. Sutter said. “They are a power that can be used in this hedging game that’s very active in East Asia.”

The rivalry between China and Japan has evolved from the Japanese military conquest of China and is now accentuated by the rise of China and the relative decline of Japan as economic and political leaders in Asia. China’s economic and military modernization plus tensions over Taiwan make the Taiwan Strait a dangerous flash point of military conflict.

Japan generally has uneasy relations with its neighbors in East Asia and Southeast Asia, because of a history of Japanese colonialism and militarism, and North Korea’s nuclear program has kept other countries on edge.

Historic mistrust has been exacerbated by a traditional view among Asian nations that energy resources are scarce, said Joseph Ferguson, director of Northeast Asia Studies at the National Bureau of Asia Research in Seattle.

“Very much in Asia, still, you have a mind-set of a zero-sum outcome to things and a mercantilist bent to economic and energy strategy,” Mr. Ferguson said. “There’s the perception that if we don’t get these supplies, someone else is going to get them.”

Asian governments continue to view energy in strategic terms, and the market plays a significant, though often subordinate, role to resolve energy questions. “There’s less of a tendency to rely on markets to help resolve these issues,” Mr. Ferguson said.

Asian governments are deeply involved in the energy sector. China National Petroleum Corp, a state-owned oil company, dominates energy production, price subsidies, imports and exports. However, Robert Manning, senior counselor of energy, technology and science policy in the U.S. State Department, said he doesn’t agree with a zero-sum game to energy.

“There’s plenty of oil and gas. The only problem is politics. The more oil and gas there is, the more everyone benefits in terms of supply and prices,” Mr. Manning said. “There is more to be gained on a cooperative basis.”

Energy is critical to the economic and industrial development of North Korea and thus constitutes a critical element of South Korea’s unification plans, said Mr. Fetter of FSI Energy. Seoul has expressed a desire to reintegrate with North Korea economically and industrially, such as employing low-wage North Korea workers to remain economically competitive with Asian countries, Mr. Fetter said.

The geopolitical implications include economic growth, jobs and social stability. A gas industry in North Korea would enable massive employment of North Korean workers, Mr. Fetter said.

Mr. Fetter said he believes energy could prove useful in defusing the tensions on the Korean peninsula, especially in light of the North Korean nuclear crisis. “If North Korea is depending on gas and depending on their neighbors for their industrial and economic survival, the likelihood of them being in conflict with their neighbors is hugely diminished,” Mr. Fetter said.

The Russians want to participate in the Korean energy situation, seeing that a decade of ceasing assistance to Pyongyang has created “a detrimental effect” on North Korea and on Russia’s role and influence in the area, Mr. Fetter said. However, the Bush administration opposes pipelines running through North Korea to South Korea.

“The Russians are basically saying, ‘Whether or not the U.S. is on board, we plan to reintegrate with our neighbors in northeast Asia. It’s going to happen,’” Mr. Fetter said.

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