Russia’s energy policy can benefit from Eurasian energy trading as global trade networks shift eastward.
Reason number 01: Russia has many opportunities open to it. There are many opportunities for Russian energy companies.
Reason number 02: Russia can expand its oil and gas networks with European oil importing countries.
Reason number 03.) The exist other alternatives. Russia can develop trade networks with economically strong East Asian countries.
1. Russia’s history shapes its current energy policy
The history of Russia determines the country’s energy policy to this day. Due to its location in the European plain, Russia is exposed to strong nations in the West. Geopolitically, it has relatively secure borders in the south, east and especially in the north. Geography determines a nation’s energy policy. There are large energy reserves in the north and east of the country, some of which have not yet been fully recovered, to be refined and sold in domestic and international markets. Permafrost has frozen the oil and gas deposits in northern Siberia, but Russia’s true wealth of raw materials and commodities of various sorts is only slowly coming to light.
We should note that Russia actually uses its energy reserves strategically. Until recently, Russia was able to use its energy networks to make strategic pricing agreements. The enormous amount of Russia’s vast oil and gas reserves contributed to this strategic leverage in contracting and making arrangements. This may not always have been economically advantageous for Russia. Nevertheless, gas transit allowed countries like Ukraine to collect transit fees that provided a good income. Moreover, transit fees contributed to the state budget and ensured the regional integration of energy networks from Russia to Germany.
2. Nord Stream 2 is a major Russian-German energy project.
The construction of NordStream 2 through the Baltic Sea and the commissioning of the new natural gas pipeline, which will transport natural gas from the Leningrad region to Lubmin on the island of Rügen, could eliminate a large part of the transit fees.
At this stage, it is difficult to say what impact Nord Stream 2 will have on the overall demand for natural gas in Central Europe. We have to bear in mind that oil and gas reserves in the North Sea are diminishing. The returns from new exploration projects in the North Sea basin are diminishing as well.
However, the contractors have indicated that the commissioning of NordStream 2 will not lead to a reduction in natural gas supplies for gas deliveries send through Ukraine and Poland. For the transit countries, the elimination of transit fees is a bitter loss. There are plans to continue the transit of natural gas through Ukraine and Central Europe to Germany, which will mitigate some of the negative impacts expected from Nord Stream 2.
3. China is becoming increasingly important as a buyer of Russia’s oil and gas
We foresee that due to China’s growing economic influence in East Asia, an ever larger share of fossil fuels will find buyers in the Chinese market, if only because of China’s increasing purchasing power. There are some indications that Russian energy producers have not made a good deal with the Chinese gas importers on the supply of natural gas to China for the next 30 years. There are some indications that the price negotiated by Russian energy companies is far below price expectations. This could affect other projects such as Power of Siberia. It is possible that the new Power of Siberia pipeline will not be as profitable for Russian energy producers and distributors.
Russian energy producers may see lower revenues from natural gas exports. Some of the gains help maintain government spending. So for now, Europe remains the most important market for Russian oil and gas, but that may well change in the long run. We went into more detail on Russia’s energy policy vis-à-vis Europe in another article. But that doesn’t make a dent in the overall plot: China has become the energy hub of Eurasia and everything in between. And energy commodities are now pivoting to East Asia.
The Russian bear likes honey very much, let’s not sugarcoat it, but the Russian bear has much more oil, and is picky about who he does business with.