The standoff between the U.S. and the EU on one hand, and Russia on the other,
intensified pretty quickly late last week. The U.S. quickly slapped heavier
sanctions on Russia after its annexation of Crimea, leading to a mutual escalation
of retaliatory measures. However, it appears that the West gained a bit of
leverage at the moment, as the Russian economy has shown some cracks amid uncertainty
over how bad this is going to get.
The Russian stock exchange MICEX dropped 3% on March 21, after news that President
Obama was considering widening sanctions to include broad sectors of the Russian
economy, including the strategically and economically vital energy sector.
Although it is unlikely to reach that level, the mere consideration of such
a dramatic move has spooked some investors, who are beginning to pull their
money out of the Russian economy. Visa and Mastercard reported that they will
stop providing payment services for Bank Rossiya, a Russian bank, raising fears
that more banks could be caught in Washington's sanctions net.
As of March 21, it was unclear how Moscow would respond. Days earlier, top
Russian officials had scoffed at the initial round of U.S. and EU sanctions.
But by the end of the week, the Kremlin appeared to be trying to downplay the
conflict, using a more measured and conciliatory tone. Vladimir Putin didn't
seem to want the standoff to worsen. "I think we need to refrain from taking
any retaliatory countermeasures for now," he said, according to the Wall
Street Journal. And Fyodor Lukyanov, a top Russian foreign policy official
was quoted as saying, "[e]verything has happened so unexpectedly and so quickly.
There's reason to end here."
More intriguing is the prospect that the more or less severing of relations
between Russia and Europe will accelerate a Russian pivot towards China. After
all, one of the largest consumers of energy in the world sits adjacent to one
of the largest producers of energy in the world - their marriage makes sense.
Lukyanov hinted at such a shift in strategic thinking, "[t]he relationship
with the West isn't a top priority anymore."
Russia had probably hoped for a much more supportive response from China on
the issue of Crimea, as both countries' interests often align in pushing back
against U.S. meddling. However, that priority cuts both ways, prompting China
to remain neutral - it sees Russia's annexation as flying in the face of China's
policy of non-interference.
Nevertheless, the Russian-Chinese relationship could grow as a result of the
brewing conflict between Russia and the West. For years, Russia and China have
been unable to seal a natural gas deal that would benefit both. But the two
sides are reportedly close to finally agreeing to terms, and with Putin scheduled
to visit China in May, there is an added incentive there to finalizing
a deal before then. It wouldn't be surprising that with Russia much more eager
to reach a deal, China may get its way in terms of pricing - China is hoping
for a lower price for natural gas than what Europe receives, which is around
$10.54 per million Btu in 2013. That had been a sticking point for years. Now,
with Russia a little uneasy, they may bend on the pricing issue. China would
stand to gain even more leverage if the U.S. moves towards sanctioning Russia's
energy sector.
Gazprom has plans to export as much as 38
billion cubic meters of natural gas to China beginning in 2018. This
would require the construction of a $23 billion pipeline in the east. In
fact, there are four
planned connection points that would tie the two countries intimately
together.
Several market
analysts had already predicted before the Crimean crisis that a deal
would be finalized this year. The latest freeze in Russian-European relations
is accelerating Russia's pivot towards China, and an imminent natural gas
deal could be a centerpiece of that strategic shift.
Source: http://oilprice.com/Energy/Energy-General/Rus...eteriorate.html
By Nicholas Cunningham of target="_blank" Oilprice.com