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Key Russian Ministry Urges Diverting Energy Flows to China

Russian elite opinion lining up behind full-scale pivot to China. Long term, Europe's economy will suffer while US benefits
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This post first appeared on Russia Insider

Russia's leading economic policy making authority has released a report which urges Russia to divert energy flows to Asia, away from Europe where risks of a deflationary spiral and stagnation remain high. 

Amid growing tensions with Europe over the US-initiated sanctions war, the growing consensus among Russian elites to develop markets in the east is likely to be painful for Europe, particularly for Germany.

<figcaption>Putin opening the Russian section of a Russian-Chinese pipeline</figcaption>
Putin opening the Russian section of a Russian-Chinese pipeline

According to the report, by the ministry of economic development, the world economic slowdown has hit bottom and a rebound is likely to take place in the next 3 years. World economic growth will increase from 3.3% in 2014 to 4.0% in 2017.  China will be at the forefront (see graphic below). Russia may profit from the rebound if it develops strong ties with Asia; particularly China.


From the Russian economics ministry. Europe will lag behind everyone else.


Among developed countries, the ministry expects growth to be strongest in the US – at 2% in 2014 increasing to 3.1% in 2017.  However trade between Russia and the US is minimal, leaving Russia with few opportunities to capitalize on the improvement in the US’s economic outlook.

By contrast the ministry’s forecasts for the Euro-zone are grim, with a projected 0.9% growth in 2014 increasing to an unimpressive 1.6%. What this means for Russia is that Europe is unlikely to be a driver for growth of Russia’s energy exports.

Russian policymakers identify falling energy prices as a potential risk factor to the viability of their forecasts.  Whilst acknowledging that any fall in oil prices will be painful for Russia, they nonetheless consider that OPEC nations will likely act to rein in supply to keep their own budgets balanced.  For Saudi Arabia, the break-even point is $90 per barrel.  For the UAE, Iran, Kuwait, and Iraq the hovers around $100 to $120 per barrel. 

Meanwhile the Centre for Development at Russia’s Higher School of Economics, another influential policy body, advises, in light of sanctions pressure, that in order to avoid putting key energy projects are at risk, Russia should diversify technology imports for state-owned companies away from European suppliers towards suppliers in the Asia-Pacific region. 

The pain from the Russian pivot away from Europe is likely to be felt most strongly by Germany, dampening its appetite for sanctions. Following the Fukushima disaster, Germany has shut down 8 of its 17 nuclear power plants and has pledged to close down the remainder by 2022. Germany depends heavily on Russian oil and gas.  Russia also serves as a key market for Germany’s machine tool and car industries. Some 300,000 German jobs depend on economic exchange with Russia.

Germany’s move away from nuclear energy and now potentially from Russian natural gas means Germany must rely on coal to meet energy needs. This has led to a second consecutive year of worsening greenhouse gas emissions.

Back in July, the Russian foreign ministry warned that "by going on a sanctions spree, Brussels, by its own will, is creating barriers for further cooperation with Russia in such a key sphere as energy. This is a thoughtless and irresponsible step. It will inevitably lead to an increase in prices on the European market”. 

This is turning out true.  While the US initiated the sanctions war, it is Europe which is paying the price.

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