Russia’s strategy of an energy pivot to Asia now includes a number of oil, gas and nuclear deals with India. In 2014, Russia has now signed huge oil and gas deals with China, India and Turkey - but will they be enough to prop up Russia’s struggling economy?
Indian Prime Minister Narendra Modi,right, and Russian President Vladimir Putin before a meeting New Delhi. Photo: Reuters
Russian President Vladimir Putin’s trip to India, a long-time ally, comes at a time when Moscow is struggling to find common ground with Western powers on virtually every issue of global significance, especially on Ukraine and Syria. Putin, however, came to visit India's Prime Minister Narenda Modi in New Delhi not for reassurance of strong friendship between Russia and India, but to ink a number of deals that may be vital for the Russian economy.
The fallout between Russia and the West over Ukraine forced Moscow to embark on a search for partners that would have a higher level of tolerance toward Putin’s assertive foreign policy and would be willing to buy Russia’s top selling commodity (energy) and invest in the Russian economy. In an attempt to channel vast reserves in Siberia to Asia, Moscow inked huge oil and gas deals with China in May, and with Turkey in early December. Russia is even making attempts to entice Japan into a liquefied natural gas (LNG) deal and a gas pipeline from Russia’s Far East.
Until now, India (the world’s 3rd largest oil importer and 4th largest oil consumer) remained the last untapped market for Russian energy companies among the largest Asian economies. The main reason for this is the fact that New Delhi has uneasy relations with both China and Pakistan, and any new Russian oil or gas pipeline would need to cross through one of them on its way to India.
During Putin’s visit to New Delhi, Rosneft, Russia’s largest oil company, signed a contract with India’s Essar Group to supply 10 million tons of crude oil annually by sea to India. The ten-year deal, which may be further extended, is worth approximately $10 billion and is expected to kick off in 2015. This is reportedly one of the biggest oil import deals that any Indian oil company has signed, for which Essar got a deep discount from Moscow, as well as a $1 billion credit line from Russian bank VTB.
Rosneft CEO Sechin also invited India’s state oil company ONGC to join the Rosneft-led Sakhalin-1 LNG project in the Far East, which is designed to produce 5 million tons of frozen gas starting in 2018. ONGC’s subsidiary OVL is also believed to be in talks with Rosneft to acquire an interest in two oilfields in East Siberia.
Rosneft, which lost 40 percent of its market capitalization in 2014, is going through tough times and is seeking over $37 billion in financial aid from the National Welfare Fund. It was no coincidence that Rosneft announced its decision to issue $15 billion in bonds on the Russian market a day before Putin’s trip. This may have served as an unofficial reassurance to India that Rosneft will stay afloat even during these turbulent times for the Russian economy.
Expansion of the Russian nuclear energy industry in India is also crucial to understanding the priority Moscow places on Asia. Modi and Putin agreed that Russia will construct 12 nuclear power units in India, including two at the Kudankulam nuclear power plant, which is currently being built by a Russian company. The deal is significant for Russia. Once nuclear units are commissioned, Russia becomes an exclusive provider of fuel for them, thereby securing a significant share of the Indian energy market.
Earlier in December, Putin traveled to Turkey where, unexpectedly for everybody, he announced the closure of the $45 billion South Stream project that had already turned into a financial burden for Moscow. It is estimated that in the last three years, around $9.5 billion was spent by Russia to build infrastructure necessary for the laying of the pipeline across the Black Sea to Europe.
With the project being blocked by the EU, Putin opted for Plan B, which is to channel the same amount of gas, approximately 63 billion cubic meters a year, through Turkey, but with a 6 percent gas discount for Ankara. In return for this favor, Turkey promised to invest in Russia at a time when major Western investors are leaving the country.
In January 2014, Rosneft increased oil supplies to China, meaning that China overtook Germany as Russia’s biggest customer for crude oil. In May, Russia and China signed a 30-year gas export contract. The value of the agreement is $400 billion. Once the first transfers begin in 2018, China will become equal to Germany in its consumption of Russian gas. Following the increased oil supplies to China and the “historic” gas deal, Russian PM Medvedev announced that the Russian government, which owns 69.5 percent of Rosneft, might sell 19.5 percent of its stake to China, as well as 10 percent in Russia’s Vankor oilfields in Siberia, Rosneft’s biggest production asset.
The energy pivot to Asia does not mean that Russia will cut off oil and gas supplies to Europe altogether overnight. Instead, Moscow has laid the groundwork to reduce its dependence on energy exports westwards and is a step closer to eliminating energy policy from being an effective pressure tool against Moscow. For now, China, India and Turkey are the biggest winners from these rushed energy deals, with each of them having received generous discounts on Russian oil and gas. But what Moscow got in return is their commitment to invest in the Russian market, something Vladimir Putin’s government has been desperately seeking.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.