Oil and gas in the capitals

In just six months, relations between the U.S., the European Union and Russia have soured considerably. Certainly, they were not very good before this period, but some compromises were found, and fences were mended.

However, given Ukraine’s dramatically evolving situation, things have been mostly out of control. The Malaysian Airlines flight MH17 crash did not improve things, even though some people inside the intelligence community had tried to warn the U.S. not to jump to conclusions from shaky evidence. To some extent, we could speak of Cold War 2.0. But actually, this also would be a mistaken view.

Despite the game of sanctions and counter-sanctions, Russia remains a major partner for the EU and the U.S., not only for energy but also in fighting Islamic fanaticism. This could explain the French position on the “Mistral” ship contract. Actually, France could not have launched the Sangaris operation in the Central African Republic without the support of heavyweight Russian transport planes. The Sangaris and Serval (Mali) operational logistics still depend heavily on these assets and on informal cooperation with Russia.

Sanctions taken or announced by the U.S. government and the EU target the energy sector, as well as banking and armaments. But, there are few signs that the U.S. or Western companies are breaking away from Russia. Furthermore, Russian oil and gas companies are too large and globalized to be hurt significantly. They can use third-party companies or countries not implementing these sanctions.

Rosneft’s recent acquisition of 30% of shares in Norway’s North Atlantic Drilling (NADL), through an asset swap, shows that Russia’s business community remains undeterred by sanctions. Declarations made by NADL CEO Alf Ragnar Lovdal are a stone in the sanction-mongers garden: “We’re very pleased with the execution of this important transaction, and welcome Rosneft as an equity partner and to our board of directors,” said Lovdal.

The CFO of Seadrill, which owns 70% of NADL, also downgraded the relevance of sanctions: “We’re not very worried,” Rune Magus Lundetrae told Bloomberg. “Rosneft is a very good and constructive partner for us.” We should remind ourselves of former President Ronald Reagan’s embargo against the-then USSR in 1983, a much more severe and extensive measure than present-day sanctions, which went on to be turned many ways.

We also have to think about the future of Russia’s development model in such a context. It will certainly not be autarkic. Already, Russia is establishing strong economic and trade links with East-Asian countries. Yet, neither will it rely too much on the fruits of globalization. We could even see an emerging trend toward de-globalization of Russia’s economy. Recent sanctions, imposed by the U.S. government and the EU, have taught Moscow the hard way that these fruits can sour suddenly.

This gives weight to the “statist” approach, still present in Russia’s economy. It is clear that Russia will dramatically diversify its suppliers and engage in “import substitution” industrialization, promoting domestic agricultural production. The embargo taken against European and U.S. food products is not just a response to sanctions, but also a protectionist measure taken toward developing a Russian food industry.

Russia also seeks to create financial autonomy and to progressively free itself from the U.S. dollar. Recent agreements between the Russian and Chinese central banks should lead to much greater use of national currencies in the fast-growing trade between these two countries. Already, the Chinese yuan is traded on the Moscow stock exchange, and the Russian ruble is used as a payment and transaction tool between non-Russian resident operators. The ominous warning of an exit from the dollar arena has been written on the wall. By the same token, sanctions could backfire quickly. Germany’s industrial sector, is already feeling the pinch as exports to Russia were down 15% in the last several months.

Globally, Moscow seeks to build alliances with some non-Western countries and to try to diminish U.S. power globally. China stands out as a premier partner, as shown by huge energy contracts signed last June, including the development of infrastructure. Russia will supply China with more energy, and with more advanced military technology. Chinese officials seek cash and investment, which they will use to develop and modernize their own manufacturing sector.

Other countries, including India, Brazil, Argentina, Egypt, Iran, Israel, Turkey and the UAE, are also being eyed by Moscow. As a result, Russia is joining forces with the non-West. It will not seek, however, to undercut the U.S. in areas where U.S. actions do not harm Russian interests, or are even fully compatible with them. Afghanistan and Iraq stand out here. Some coordination could be found between both countries, as it is found between France and Russia in western Africa. Still, Moscow—while having no sympathy, whatsoever, for Islamist extremists—will point its finger at U.S. policies as the main reason for regional instability, stretching from Libya to Iraq.

Thus, sanctions could have decisively accelerated a trend that could be seen for years. Russia will turn toward Asia, not just for political reason but also because it thinks that economic growth will be much more buoyant there than in Europe, still plagued by the Eurozone crisis. 

REFERENCES

1.  Sapir, J., “Future of mistral contract,’’ Russia in Global Affairs, electronic edition, Aug. 18, 2014, http://eng.globalaffairs.ru/book/Future-of-the-Mistral-Contract-16876

2. “Rosneft to take 30 percent in Norwegian driller,” RT Business, Aug. 22, 2014, http://rt.com/business/182188-rosneft-nadl-deal-stake

3. Trenin, D., Russia’s New National Strategy, http://carnegieeurope.eu/strategiceurope/?fa=56442