Asia cannot save Russia’s energy sector – diplomat

Russia’s reckless and bloody invasion of Ukraine in February set off a cascade of events for which it was ill-prepared. Europe began the divorce process with Russian fossil fuels, the US coordinated with Asian partners wide-ranging export controls on key resources such as semiconductors, and the Russian military fell far short of expectations, forcing Moscow into a longer war of attrition than it planned.

All Russia can do is exacerbate the damage done to the West by inflation and intimidate its Eurasian partners in order to maintain the image of a strong country. Gazprom is cutting supplies to importers from the EU and Turkey, and at the end of June, the export of Kazakh oil through the port of Novorossiysk was suspended. The suspension was said to be temporary to allow demining, but came just days after Kazakh President Kassym-Jomart Tokayev said the Kazakh government would not recognize the Luhansk and Donetsk People’s Republics as legitimate states while sitting next to Russian President Vladimir Putin. scene on st. Petersburg International Economic Forum.

The Russian regime seemed to assume that China, and to a lesser extent India and other non-Western partners, would effectively bail them out by buying up all the energy exports that the West did not have and providing export control equipment lost due to sanctions. , and self-authorization. While China and India have done much so far to soften the blow in terms of export volumes, their Russian counterparts are in a quandary as commodity flows realign and energy markets adjust. The prospects for Russia’s oil, gas and coal industries are bleak, if not downright bleak. But there is little reason for a complete “pivot towards Asia” that would solve the problems facing Russia.

Natural gas

Six months before the invasion of Ukraine, Gazprom began playing chicken with the EU by refusing to sell natural gas on the spot markets. As contracts expired and European importers insisted they would not sign long-term deals linked to oil or LNG prices, natural gas exports from Russia have dwindled and fueled a global scramble for gas supplies that continues to rock markets. However, Russia’s ability to increase exports to Asia is severely limited by existing export infrastructure and sanctions. Instead, Gazprom seems to have focused on raising prices so far.

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Gazprom has not noticeably increased deliveries of natural gas to China via the Power of Siberia gas pipeline with a capacity of 38 billion m3 per year, despite the loss of market share in Europe. The Chayandinskoye field, which is currently fed by the pipeline, is not connected by any infrastructure to the gas fields of Western Siberia. The current increases remain in line with the supply contract, which should reach maximum capacity utilization by 2025. is still happening for Power of Siberia-2, a pipeline that will run through Mongolia to China with a capacity of up to 50 billion cubic meters. Now the third project “Power of Siberia” is being discussed. Both are years away from implementation.

Net natural gas exports from Russia amounted to down 27.6 percent for January-May. Pipeline construction takes a long time, especially given that public procurement – about one-third of Russia’s GDP – is under significant pressure from inflation, while the Ministry of Finance increased use of tools designed to hide information about firms from foreign financial authorities. Russia also cannot increase exports using LNG. Although he works on the Novatek LNG project Arctic-2. Continue, sanctions begin to increase costs and delay the implementation of projects for the company as a whole. Gazprom now sees European partners in the Baltic LNG project pledgeby questioning. These problems also raise concerns about the expansion of production after the launch of the first line.

In short, China and the larger Asia-Pacific are of little help when it comes to new export markets. Russia is betting on a short-term strategy focused on high prices with many unforeseen consequences.


Explicit sanctions restricting oil exports to Europe did not exist until the EU passed its sixth round of sanctions and effectively set a goal of cutting oil imports from Russia by 90 percent by the end of the year. The decision to ban the insurance and reinsurance of marine cargo with Russian oil has further increased the costs of Russian companies in need of transportation and Asian buyers who did not know who to turn to for insurance. At the same time, these developments have also increased discounts given to Asian buyers in exchange for taking the risk of buying Russian crude. Exports of Urals blend and ESPO blend regularly trade at a $30-$35 per barrel discount to Brent crude, the international benchmark price.

Since the invasion, Russian oil supplies to China have been drastically reduced. rose to a record high by about 2 million barrels per day, equivalent to a 55% year-on-year increase in May. Importantly, Russia has surpassed Saudi Arabia as China’s top supplier. All of this happened despite a decline in net crude oil production of around 1 million barrels per day, with production expected to continue to decline, if not immediately.

The main surprise was India, which sharply increased its purchases of Russian oil to about 800,000 barrels per day in May. Within a month, Russia supplied 18% of India’s imports compared to 2017. 1 percent, which he regularly supplied before the invasion. Russia has taken the place of Saudi Arabia as the second largest supplier of crude oil to India due to its lack of export capacity.

In general, the loss of European markets is by no means fatal for Russian oil exports in the short term. However, a structural shift to the east comes with rising costs and limited opportunities. Nearly all – 97 percent – of the offshore crude oil tankers are from Russia. went to India in April-May were insured by firms in the UK, Norway and Sweden, all parties to the enacted insurance/reinsurance ban. The loss of these suppliers will support the discounts Russian firms will have to offer to buyers.

Worse, the reduction in European imports will eventually lead to a reduction in purchases of Russian diesel fuel. There are few opportunities to export diesel fuel to Asian markets. Near one third China’s refineries are currently idle, and refineries across Asia chasing huge margins for diesel. Reduced exports of Russian products will force Russian refineries to close, further reducing Russia’s crude oil production. Asian consumers are not saving the day.


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Russian coal miners are doing their best to ship more products to Asia in response to EU coal import bans. In January-May, railroad exports from Kuzbass, the main coal-mining basin of Russia, were observed. 8.7 percent decline due to the lack of eastern export capacity on the railway network.

China imports coal increased by 51 percent in May to 3.3 million tons, but were lower than in May 2021. At the end of April, the State Council of China pledged to increase domestic thermal coal production. for 300 million tons this year to reduce reliance on imports following Beijing’s ongoing ban on Australian coal imports and sanctions risks for shipments from Russia. Russian mining companies are offering significant discounts to attract Chinese buyers and are focusing on exporting coking coal used to make steel, while facing a structural decline in exports to China. Thermal coal is by far the main driver of Russian exports to the Chinese market.

India increased purchases sixfold year-over-year and used political pressure on Russian firms to get traders in Singapore to offer 25-30 percent discounts on Russian coal supplies, especially coking coal. The data is fuzzy and sensitive given political concerns about Washington’s response, but India currently imports the same volumes of coal as China, assuming about 1 million tons were imported in March, assuming a monthly increase.

Given higher demand in Asia, Russian firms beg the government to subsidize and accelerate the expansion of railway capacity for export in Eastern Siberia and the Far East, as well as the construction of barges for use on the Amur River. Businessman Albert Avdolyan, the owner of the new Elga coal deposit in Yakutia, is so fed up with the sluggish pace of construction being carried out by Russian Railways and government contractors that he moving forward with construction its railway to the Sea of ​​Okhotsk, despite labor shortages, high construction costs and a general creeping crisis in the Russian economy.

Future exports are facing logistical constraints and a narrowing window to gain market share, while also facing a sharp decline in westward deliveries and the need to lower shipping prices to win over buyers.

Less turning, more tripping

In general, Russia is reorienting its energy exports to the markets of China, India and the Asia-Pacific region at a rapid pace due to sanctions, import bans and business self-sanctions. But it quickly reaches the logistical limits of what the existing infrastructure can support, and does so in an unsystematic and uncoordinated way.

For example, the decline in natural gas exports to Europe last year contributed to the rise in coal prices. This, in turn, prompted the Chinese authorities to commit to increasing coal production this year, which will significantly lower the ceiling on potential coal exports from Russia to China in the coming years. Crude oil exports will face difficult conditions later this year as European purchases of Russian diesel fuel decline, which will inevitably affect companies’ ability to maintain production for Asian consumers as domestic refinery throughput falls.

Russia softened the initial blow of the sanctions with a huge influx of energy revenues, supported by demand in Asia. These new trade flows ultimately depend on below-market sales made elsewhere. It works when prices are high. They won’t stay high forever as recession risks rise in the US and Europe and China’s growth weakens over the year. Unfortunately, Asia is the only Plan B Moscow has, and buyers know it.