To Survive, Putin Is Mortgaging Russia's Energy Assets To China
As a result of his limited memory of the past, Putin’s Russia is in a position very similar to that ofMikhail Gorbachev in 1987 when decades of insupportable Russian military spending and a failed Afghanistan adventure enabled Ronald Reagan to make his famous “Tear down this wall” demand at the Brandenburg Gate.
Putin’s nightmare will pose larger challenges to the oil and gas industry both in Russia and globally as the combination of western sanctions, low oil prices, and military costs place Putin’s economy and the future of the Russian oil & gas industry on a course for chaos.
Increased nationalistic bluster can’t paper over the reality that credit rating cuts and spreading domestic deprivation are leaving Putin with little choice but to become dependent on the only lender left, China, trading away his country’s oil and natural gas resources for hard currency in order to keep his banks, currency and companies afloat.
Putin’s nightmare is that he’s been put in a corner, and his options are becoming fewer and far less appealing, if not more dangerous.
For the global oil industry, as China adds control of the world’s third-largest petroleum producer to its already large ownership positions on every other producing continent, a major new uncertainty is introduced into many supply, demand, investment and strategy calculations.
China’s transactions with Russia provide the long-term geographically favorable reserves necessary to fuel China’s continued growth.
U.S. strategists must cite oil prices rather than their credit, currency, diplomatic and military moves for having caused Putin’s situation.
President Putin, a devotee of the western game of chess, now finds himself embroiled in the eastern game of Go, in which the objective is to surround ones’ opponent and eliminate his options.
This is a game for which he is ill-prepared.
Oil & gas industry implications
Oil market participants from national oil companies to majors must come to grips with the reality that they must prepare to compete with expanding Chinese interests that have significant new cost and political advantages, shelter from many market forces, and a strong position from which to drive negotiating terms.
Among the implications of Russian energy decline and Chinese consolidation for Western partnerships and projects are:
There is no indication that Russian responses ranging from project cancellations and austerity programs to currency swaps are changing Putin’s prospects.
As Petersen Institute senior fellow and former Russian and Ukrainian economic advisor Anders Aslund predicts, with a yearly capital outflow of $125 billion, liquid foreign currency reserves of only $200 billion, and total foreign debts of $600 billion, Russia could run out of dollars and be bankrupted in as little as two years.
China’s completion of financial dominance over Russia and locked-in access to Russian petroleum assets appears to be more a question of how soon rather than whether.
What it will mean in terms of international alignments, the spread of China’s influence throughout Asia, South America, and Africa, and its competitive implications for other oil and gas industry players is yet to be determined.
It is clear that Putin’s nightmare has left him with having to mortgage the very political tool that his kept Russia relevant in the global economy, Russia’s energy resources.
It is unclear how Putin will fare in his new game of Go with China.
What is clear is that China will not allow nationalizations or seizures to separate them from their newly purchased energy reserves.
It may be time for U.S. and Western policymakers and corporate strategists to take a lesson from Putin’s experience for their dealing with China in the future.