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Friday, May 23, 2014

Russia’s Shift to the East and It’s Potential Impact on September’s Caspian 5 Summit

On Wednesday May 21st Russia and China agreed to a 30-year natural gas deal worth $400 Billion. This agreement serves as a clear indication that Moscow recognizes Russia’s need to diversify its client base. Though all of the terms of the deal are unclear it would appear that the Chinese were able to get the pricing that they wanted (a factor which had delayed this deal for a decade). Moscow would not have agreed to China’s price if it were not in Russia’s interest. In the past this price was not beneficial for Russia but recently a variety of factors such as Iranian-American détente, the situation in Ukraine, and the reality that Russia will be facing demographic challenges in the coming years has changed the equation. The deal will allow Russia to demonstrate that it has options other than European market as well as affording Moscow the opportunity to focus its attention on other areas where its interests are threatened. The Caspian is once such place.

On September 29th the Caspian 5 (Russia, Azerbaijan, Turkmenistan, Kazakhstan and Iran) will meet in the Russian city of Astrakhan to discuss the management of the Caspian Sea. This summit could serve as a starting point for Russia to ensure that Russian companies have a stake in any potential agreement which would see oil and natural gas pipelines running through Iranian or Turkish territory. Such a move would give Russia a degree of control over energy resources that bypass Russian territory and would presumably be lucrative. In the past it was in Russia’s interest to hinder the development of transit routes which did not pass through Russian territory. Now Moscow’s ability to interfere could be weakened especially if Turkey, Iran, Azerbaijan and Georgia cooperate. If the infrastructure is going to be built and Russia is less dependent on European markets Moscow could have a financial interest in aiding the exploitation of energy resources rather than hindering projects. It is also possible that Russia could have a degree of control over the operations of key infrastructure. Pipelines that bypass Russian territory are by no means an ideal development for Russia but if this outcome is inevitable Moscow will ensure that the situation evolves in the manner that is most beneficial to Russian interests. The fact that Russia is a significant regional player means that it has leverage. Even in a weakened state Moscow can project power. For example, in 1993 Russia demanded that Lukoil be awarded a 10% stake in a consortium to develop Azerbaijan’s offshore oil fields. Baku consented. Given that China will have a 19% stake in Rosneft means that Beijing might also become a player in the region as well if Rosneft is involved in any deals (a likely scenario). This would add an additional dimension to the geopolitical situation in the Caspian.

Wednesday’s deal allows Russia to demonstrate that in the coming years it will have alternatives to the European market. The reality is that Europe has an interest in diversifying its energy supplies while Iran, Azerbaijan and Turkey appear to be coming to some sort of agreement which could potentially see the development of transit corridors which link Caspian energy resources to the Mediterranean and the Persian Gulf. The United States also has a variety of interests in undermining Russia’s energy exports. Essentially, this shift is inevitable.  Moscow clearly understands this and is now making the best arrangements that it can. The terms of the China-Russia gas deal seem to favor Beijing. That said, Moscow is powerful enough to presumably force agreements in the Caspian that will favor Russia. September’s summit will provide insight into how this story will progress.   

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