The Sochi Investment Forum gathered 9,700 participants (an almost 40% increase from last year) from 47 countries. Some interesting announcements and statements were made at the Summit and I thought I’d share/comment on some of them. First, Gazprom CEO Alexey Miller announced that his company still sees Europe as its main market. Miller noted that the share of Russia in EU gas consumption has increased from 23% to 30% in four years, but its share in EU gas imports has increased even more – from 47% to 64% in the same period. Miller said he believes Gazprom’s role in EU gas imports and consumption will grow further. However, he noted that Europe’s attitude regarding Gazprom is “shortsighted” – undoubtedly referring to the recent sanctions and barriers that Europe is trying to erect in order to weaken Gazprom’s position there. Miller also reflected on the recent announcement of a Russia-China 30-year gas deal, to be signed in November. He said he thinks Europe has “lost the battle for Asian LNG”.
As noted in a recent FP article, the contract that Miller is referring to may make it difficult for gas suppliers from the US, Canada, or Australia to penetrate the Chinese market. And, in spite of this being a buyer’s market, this agreement will help improve Russia’s financial situation in light of the ongoing recession exacerbated by the sanctions. Recently Miller announced that Gazprom would reduce this year’s gas production forecast by 7% to 463 bn m³. In mid-term China may help Gazprom get back to earlier production levels. And, of course, this is already a second gas contract between Russia and China this year. I think China is trying to kill three birds with one stone: it will obtain access to gas supplies at a good price, reduce its air pollution, and drag Russia into its sphere of influence. This contract, and the whole Russian situation, is a boon for China.
But a question remains: can Russia use the money from its fossil fuel exports to improve its long-term economic situation? Former Finance Minister Alexey Kudrin has a pessimistic view. He stated at the Forum that the Russian governance system is not conducive to economic growth. Specifically, he noted a lack of structural reforms in Russia; a limited role of Parliament that has limited opportunities to discuss economic policies; an unbalanced budget with increased defense and government expenditures but reduced social obligations; and low labour productivity coupled with growing wages. Kudrin estimated that structural reforms could add 1.5-2% to annual GDP. If I’m not mistaken, Kudrin has been making this point for years and so far, Putin hasn’t listened. And why would he, given the abundance of money from the oil and gas exports? After all, Gazprom is about to sign another deal with China, and the money will roll right in.
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