
5. Impact of Infrastructure on Energy Exports
To date, the vast majority of Russian exports to the Asia-Pacific region have been of natural resources. In particular, the country’s exports to China, Japan and South Korea are dominated by hydrocarbons (much as are its exports to the EU). Hydrocarbons account for around 75 per cent of imports from Russia in all three of these Asian countries.108
It should therefore be no surprise that the infrastructure that supports the export of hydrocarbons is more highly developed than that associated with other sectors. Trade data reflect this difference. For example, following the construction of the first phase of the Eastern Siberia–Pacific Ocean (ESPO) oil pipeline in 2009, Russian hydrocarbon exports to China grew sharply.109 Indeed, supplemented by deliveries of crude oil by sea, pipeline exports of Russian oil to China increased so quickly that by 2016 Russia had displaced Saudi Arabia as China’s most important supplier of crude oil. Russian oil exports look set to rise further, as construction of further capacity for the ESPO pipeline is under way.110
The construction of gas export infrastructure has proceeded more slowly. However, in May 2014 a 30-year pipeline construction deal, estimated to be worth $400 billion, was signed by President Putin and President Xi Jinping of China. The deal committed Russia to building the ‘Power of Siberia’ (Sila Sibiri) pipeline for the delivery of 38 billion cubic metres (bcm) of gas each year to China;111 the first deliveries were scheduled for 2020. Additional gas is likely to reach China and the wider East Asia region from the giant Yamal LNG facility in the Arctic.
Nevertheless, while it is true that significant progress has been made in building infrastructure for the export of energy to East Asia (primarily China), this progress can be placed in a less flattering context. Russia is the second-largest exporter of crude oil in the world, the largest exporter of natural gas, and the fourth-largest exporter of coal. At the same time, the three largest East Asian economies all import huge volumes of energy. This symmetry of supply and demand, and Russia’s geographic proximity to the region, would suggest that Russia should be playing an even more active role in East Asian energy markets.
In this context, Russia’s energy export footprint in the region has been relatively modest to date, at least compared to its energy footprint in Europe. China, Japan and South Korea accounted for around 28 per cent of Russian crude oil exports in 2018, whereas shipments to Europe made up 66 per cent of the total. In the same year, only 8.9 per cent of Russia’s shipments of refined petroleum, 15 per cent of its natural gas exports and 35 per cent of its coal exports were sold into these three East Asian markets. (In contrast, Europe was the destination for the bulk of Russia’s exports of refined petroleum and natural gas, accounting for 57 per cent and 80 per cent of the total respectively.)
This untapped potential is perhaps even more vividly illustrated when viewed from an importer’s side. China is the world’s largest importer of oil, yet just 14 per cent of its crude oil imports come from Russia. Angola (12 per cent) and Saudi Arabia (13 per cent) both account for similar shares of China’s oil imports, despite Russia’s natural advantage in terms of proximity as a supplier. Equally, the Chinese government is making considerable efforts to import more natural gas to help shift towards a less carbon-intensive model of economic development.112 However, Russia currently accounts for less than 1 per cent of Chinese gas imports, far below the shares for Turkmenistan (which supplies 19 per cent of China’s gas imports), Australia (also 19 per cent) and Qatar (14 per cent).113
The picture of unfulfilled potential is replicated when it comes to trade with Japan and South Korea.114 In 2018, Russia supplied just 4 per cent of Japan’s imported crude oil, and 6 per cent of South Korea’s crude oil imports. As for natural gas, Russia supplies just 6.5 per cent of Japan’s natural gas imports, an astonishingly small share considering that Japan is the world’s largest importer of natural gas. South Korea, another major market, received just 3.4 per cent of its natural gas imports from Russia in 2018. Again, efforts to expand Russian LNG exports to East Asia should cause the Russian share to rise over time. However, there is a long way to go before Russia can be considered a major player in the East Asian oil and gas markets. For now, Russia is punching well below its weight.
Even after the capacity expansion of the ESPO pipeline (due for completion in 2020) and the construction of the Power of Siberia pipeline (with full deliveries of 38 bcm per year scheduled to be achieved in 2025), there will remain considerable scope for increasing oil and gas exports to East Asia. In 2018, China imported around 125 bcm of gas (both LNG and pipeline gas), with Russia supplying only a nominal volume.115 Projections from the International Energy Agency suggest that China will need to import 242 bcm per year by 2025.116 Even on the assumption that the Power of Siberia pipeline is operating at full capacity by 2025 (by no means assured), and even if Russia ships around 10 bcm of LNG to China each year, this will account for only around a fifth of projected Chinese gas imports. In a tacit admission that existing supply infrastructure needs to be expanded significantly, the Russian government’s Energy Strategy to 2035, approved in April 2020, targets the construction of energy transportation infrastructure so that Russia can become a ‘major player’ in the Asia-Pacific market.117 This is defined as increasing energy shipments to the region from 27 per cent of Russia’s total energy exports in 2018 to at least 50 per cent by 2035.118
Thus, even in the sector in which RFE infrastructure is at its most well developed, capacity constraints will limit the extent to which Russia can achieve greater integration with Asian economies. The export of large volumes of oil and gas requires huge investment in energy deposits, on-site equipment, and transportation infrastructure such as pipelines and gas terminals. Such facilities take a long time to build. Only once these are in place will the minimum requirements exist for Russia’s role in Asia-Pacific energy markets to match the leadership’s ambitions, and it should not be forgotten that favourable and enduring geopolitical conditions will also be needed.
Moreover, even if Russia does successfully expand the volume of its energy exports to East Asia over the next decade, this will only accentuate the country’s position as a supplier of raw materials to the region. As with its trade with advanced economies in the West, Russia does not enjoy a comparative advantage in higher-value-added production relative to most Asian economies. These fundamental challenges need to be addressed if the Russian economy is to become more diverse and resilient, and its growth prospects more sustainable. Merely selling basic commodities to more competitive trading partners is not what Russian policymakers have in mind when they speak of using economic integration with Asia to boost the dynamism of the Russian economy.