 Welcome to CSIS on a beautiful fall Monday morning. Thank you for joining us. We're going to be talking today about Russia's role in Asia energy markets. I'm Jeff Mankoff with the Russia and Eurasia program here at CSIS, and I have the joy of moderating our very distinguished panel here as we talk about this subject. Back in May, Russia and China signed a widely discussed $400 billion gas deal at a moment when the West was busy imposing sanctions on Russia, including on its energy industry. And this deal in this town certainly fed concerns about Russia's eastward pivot about how it was using its energy weapon potentially to deepen engagement with Asia, to put pressure on Europe, to look for an outlet from sanctions. There's a lot of breathless commentary in the press here in the United States about what this deal signified, what it meant for the development of a potential axis between Moscow and Beijing, and the possibility that in Asia Russia would be able to find a readout against the effect of sanctions that were being imposed by the West on its energy sector. So today I think we're going to try and separate some of the fact from the myth about Russia's engagement with Asia on energy. And we have, as I said, a very distinguished panel to help us work through some of the complexities of Russia's eastward energy engagement and Russia's Asian diplomacy. We're going to go in the order that we have seated here at the table. I'm pleased to be joined by Shuichi Ito, a senior analyst at the Institute for Energy Economics in Tokyo, and a former visiting fellow here at CSIS, who's going to give a slide presentation on Russia's role in Asia energy markets from his perspective. He'll be followed by Edward Chow, who's a senior fellow in the Energy and National Security Program here, who will provide a little more, a wider perspective on the energy aspects of Russia's pivot to the east. And then summing things up will be Andrew Cutchins, who's the director and senior fellow for the Russia and Eurasia Program, who's going to step back a little bit and provide more of a geopolitical lens on the developments in this part of the world. After that, we will open the floor up to questions from the audience. We have about 90 minutes, so hopefully we'll have about 45 minutes, at least, for questions. So without further ado, let me turn the floor over to Shuichi Ito. Thank you very much, Jeff. My name is Shuichi Ito. I'm a senior analyst at the Institute of Energy Economics in Japan. And so I'm happy to be back at home in Washington, DC. And I just see many of my friends sitting out on the air. And thank you very much for coming. Well, today, as everyone knows, international uncertainties are increasing. One of the topics, actually, is security. Nobody knows the future magnitude of the uncertainties surrounding the Middle East, Russia, et cetera. No one has the answer. One of the key questions everyone is trying to answer is the future of Russia's geopolitical positioning in Asia, which is quite new for many observers. Let's start with a very simple question. Where do you find Russia? For many people, especially in the US, find Russia. Usually through European lands or transatlantic lands over European continent. This is quite natural. And it is especially so when the Ukrainian crisis is escalating. But one of the facts we have to encounter is that Russia is trying to project its influence based upon its resources toward the Asia Pacific. And that fact brings us to the question, what we should do toward Russia's new positioning in the Asia Pacific based upon what they call trans-Pacific approach. This slide shows how the strategy is moving. OK, it's moving. Yes. Let me raise some main questions we should discuss today. First, why does Russia look east when they have the center of energy experts located in Europe when they have more than half of untapped resources in Siberia? Well, second, then we also have a question. How much political and economic resources Russia have in the east to use? Well, the major resources they have is actually energy. But the question is, how tangible it is to make the best of untapped resources to increase Russia's presence in the Pacific market? Third, although Russia is trying to accelerate, both geopolitical and economic presence in the Asia Pacific regions, does it really change geopolitical characters in Asia? Let's review three of main Russia's incentives. First, it is quite obvious the gravity of global energy market is shifting from Europe to Asia. I have a slide of following this one. Second, although Siberia accounted for more than 70% of crude oil production and more than 90% of just production of Russia traditionally, the potential productivity is actually declining. That means they have to hurry up the development of eastern regions, namely eastern Siberia and the far east in order to keep up or even to increase hydrocarbon production and exports if they reach in the east. Third, well, to the extent of Russia's relations with Ukraine and the rest of the whole is aggravating, they just find a way out to find new markets, especially to export oil and gas, although this is not an easy deal, as we'll see later. Well, I do today Asia as a whole accounted for less than 10% of Russia's gas exports. And within Northeastern energy market, including Japan, China, and the Republic of Korea, Russia accounted for only 7% of the total gas import for the region. Well, talking about future energy market opportunities, Asia will account for, Asia is projected to account for more than 30% of global gas demand towards 2040. According to the estimates conducted by the Institute of Energy Economics in Japan, we are going to have the latest vision in the month that actually. And out of Asia's growing gas market, China is expected to account for more than 40% of demand growth. Well, as for oil markets, well, Russia already account for about 20% of, well, sorry, the Russian account for only 5% of total import Northeastern Asia as of today. But for the Russians, the Northeastern Asia really account for roughly 20% of its total export. Once again, China will be the key factor to boost oil consumption in the decade to come. Just as the case with natural gas, actually, oil consumption is also peaking on the part of Japan and Republic of Korea. So when we talk about the future potential and trajectory of Russia's hydrocarbon resources, it's actually everything on what will happen with China. Well, for the past decade and a plus, actually, Russia has increased its total export to Northeastern Asia so dramatically that the question is, how long they can do that? In a word, well, they have that at most already. In order to increase all exports, crude exports to Asia market, they have to overcome a lot of hardships to open and tap the field in Siberia and which is extremely difficult, which needs extensive introduction of recent technologies and capital. Well, as regards natural gas, although Russia is trying to increase gas exports to Asia market, the best fact is that they have only one LNG project, namely the Saharan II in Asia, nothing else. And the Saharan II project is already exporting its maximum capacity. In other words, they have nothing else to export to Asia for many years to come. Well, we can debate on it. It will all, of course, depend upon the impact of the sanctions that may delay the future project. We can come back to this point. Well, we are all struck by the recent Russia's gas deal with China, including the 400 billion dollar investment to build the platform in Siberia, namely the power of Siberia. And developing the new gas field over there, they plan to ship the maximum export volumes of 38 PCM of gas to Chinese market for the next three decades. Although we still don't know whether this will be a start as early as 2019. That's what they see as of today. Well, it is quite obvious. China will provide the biggest gas market for Russia, but China has quite a few alternatives to the lion. Well, they have increased access to gas supply for the Central Asia, a little bit from Myanmar, and energy projects along the China's coast is increasing in number. Well, when we talk about the future and the essence of sign of Russian energy nexus, we also have to bear in mind what if the future volumes of hydrocarbon supplied from Russia to China is to be limited in scale. What would be the impact of China's hunting for new resources to meet its charging energy demand? It may increase the cost to be faced with on the path of Japan, the US, and other resonations in case China needs to find other resources other than Russia. Although, as I repeat, the future of sign of Russian energy passage is complicated enough and it's not that easy. Well, let me reveal some stumbling blocks and uncertainties over what Russia calls its Eastern energy vector. Well, no one knows the immediate and the future impact of the restructuring of the ongoing Ukrainian crisis. The second, although we know that Chinese energy market is a key to development of Russia's Eastern energy development, in addition to new supply sources from Central Asia and Myanmar and LNZ, as I already discussed, China is trying to hurry up its own unconventional gas production, including share and carpet methane. Well, through the end of this decade, most experts are rather pessimistic about massive scale of Chinese share gas production. And China has recently reduced its immediate target. Having said that, though, throughout the end of the next decade, 2030, I've reached that increasing number of experts are getting gradually optimistic about China's success in developing share gas. Plus, well, China's sustainable growth of economy is, in turn, a lot of uncertainties. Yes, the scale of economy is huge, but you never know how long they can keep up the current pace of economic growth that we have direct impact upon the future Chinese energy demand. And third, overall investment climate in Eastern Russia is so harsh, even before the beginning of the west sections after the Ukrainian crisis. Even if the Ukrainian crisis is to be solved out, hopefully, as soon as possible, even in this case, in recent climate, in Eastern Russia, just have a lot of corruption. The climate is, the weather is so harsh. Lots of energy resources are lying under parameters where they can spend only three to four months a year to do exploration, et cetera. And now we are living in the age of share revolution. Well, this is the point I'd like to bring your attention to once again. Well, now that Russia has to rely on China to hurry up Eastern regions of energy and economic development, this is such a robust fact that they had to accept long before the beginning of the Ukrainian crisis, before the western sanctions. Well, they have drafted a lot of development program over Eastern France. Every single program, they have drafted and published for about two decades or less than half-baked. They don't know what to do. Well, what kind of implications we can draw from what I have described today for the West? Well, first, the development of Eastern Siberia and the Far East is actually Russia's actless here when they have the energy sector accounting for more than 30% of its GDP, approximately 70% of its total exports, the more than 30% of foreign investment. Second, but there's no need for the consumers to hurry up to get into the development of a Russian Eastern France because of the factors, including the shared revolution and the other new supply sources of oil and gas flowing into Asia market in the atmosphere. Third, I have to say, sign a Russian energy partnership is not a threat to the rest of the world on the whole. To the extent of Russian export more oil and gas to the Asian market, that will stabilize energy prices and the balance of supplies in the global or in the market that will benefit both Asia and European countries in the end. Russia, I think this is a real high time for us to take into account the Russian faction from both economic and geopolitical point as a way to meet Chinese strategic energy demand in the long run that will also entail lots of geopolitical invocations on the global scale. Well, let's discuss whether we have hard choices or easy choices on this topic. Thank you very much for your kind attention. All right, thanks for that great overview, Shoichi. Now I'm going to turn to Ed Chow to provide a little context on the energy picture here. Thanks very much, Jeff. And thank you, Shoichi, for giving us a very good factual grounding on what this deal is about. We may just keep your takeaways up on the screen, because that's something we can debate a little bit on the panel and with the audience later. Yeah, keep your last slide up there. So I thought I would highlight a little bit more on the energy realities of the deal as well as some of the energy implications regionally and globally. I would say, first of all, to set the scene a little bit that both sides really wanted to sign this deal in May for political reasons, political timing reasons as much as anything. But I also have to say that the economics of this deal is really, really hard. And my deduction comes from the fact that they've been negotiating for 10 years. If the economics were easy, they would have done this deal a long, long time ago. The economics are really hard in the sense that you have a very, very long pipeline you're going to have to build. You have two very difficult gas fields that you have to develop in Chayanda and Convica in East Siberia. It may be that an export market is necessary in order to do the Power Siberia project, which economics were always rather dubious. Numbers that we've seen is north of $50 billion to do the whole thing. And usually by Russian standards, if it's $50 billion, it's the estimate chances are 70 or higher. And for $50 billion, you can really buy a pretty good Olympics. So we're talking about serious money here. It leads to very low netback to the field in eastern Siberia in terms of the economics. It leads to not that attractive a gas price at the Chinese border. And that's why the bargaining has taken so long because the economics were difficult for both sides. It's not a matter of one side wanting to take advantage of the other side. The economics were just very hard. Plus, we actually don't know the full details of this deal yet. I mean, negotiations that end at 4 o'clock in the morning in this pleasant place of Shanghai usually means that there were some unresolved issues. And things we don't know, for example, is the size of the Chinese loans. What are the terms of the Chinese loan? I hope for our Russian colleagues' sake that those terms were negotiated before the latest Western financial sanctions against Russia. Because if you were playing the Chinese hand, you'd say the price of poker just went up. Because whatever the terms were being negotiated in May, maybe the risk the Chinese side, the risk premium the Chinese side would demand might look a little different. To what extent are the Chinese trying to claw upstream into the gas field? I mean, one of the things that China had been trying to do for a number of years is to get equity position in major projects in Russia. And basically, have been rebuffed up until now. So if you were playing the Chinese hand, again, you would be wanting to claw upstream for equity interests in both Chayanda and Cavita. And it was the Chinese side that insisted the fields had to be named. That they were not prepared to take gas supply from a pool of gas that Russia would decide. Well, we have a hint of that when Ross Neft invited China to get into the Van Gogh project a week ago or so. That maybe that's one of the things that's being discussed. I hope Andy will enlighten us on whether there are some non-energy trading stock that may also be involved in an energy deal, such as exports of S-400s from Russia to China, anti-Russia's advance, anti-aircraft system that's been talked about for quite a long time. So we don't even know what all the elements of this deal is and whether it's all done at this point or not. So that's my first point. Economics were not easy for either side. My second point is that Russia is really late to the party for the Asian energy game. The center of gravity for the global oil market shifted to Asia about 10 years ago. And Russia's been late. Russia's been late primarily because of a number of missteps that Russia itself took. Remember Mr. Kodakovsky's project of West Siberian pipeline to Murmansk, which would have been the most sensible economic project if Russia wanted to convert itself from its role primarily as a regional energy player, highly dependent on European export markets, to a global energy player. Murmansk would have been the kind of project you would have done. But for whatever reason they didn't do that. They were late to the party on the East Siberian Pacific ocean pipeline. Japan and Prime Minister Koizumi had something to do with that. But that's an old story that we can get into if you like. But in any case, the Chinese build the Kazakhstan to China pipeline instead. Because Russia was so late to the Asian market in terms of oil. Similarly, some of us who have been in this business long enough will remember the equates to China gas pipeline, which was about 30 some years in the making. The Soviets talked about that. And again, under the Putin-Mitvedev period, we've gone through more than 10 years of negotiations on this pipeline deal to China, the result of which is China just last week announced that it broke ground on the fourth gas pipeline from Turkmenistan. This time going through Tajikistan and Kyrgyzstan rather than Uzbekistan and Kazakhstan. So Russia's really been late to this party. And it's getting competition from Central Asia for sure and elsewhere as well. And one, again, underscoring a previous point, one of the significant differences from the Chinese point of view is that the Central Asians have allowed equity investments and the Russians up until now have not allowed large-scale equity investments. And the last point, which is why I really want to keep Shoichi's takeaways up there, is that the idea, the second point, the idea that there's no need for consumer countries to compete, I think as an energy expert, I agree. Some of us were at a conference in Seoul in the beginning of July. And all energy experts agree that there's no reason for Korea, China, and Japan to compete for energy resources. The problem is that we agree at the expert level that politicians don't necessarily agree. And we've had a number of years now of annual ministerial meetings of Japan, China, and Korea for the last three, four years, which have led to nowhere in the discussion. So on the one hand, you've got, from a purely energy point of view, saying that more incremental supply onto the world market is always a good thing. As major consuming regions of the world, Asia should welcome that. Asia should welcome all sensible infrastructure to get that oil and gas to market. On the other hand, there is geopolitical competition in the region for the same resources at a different level and maybe at a policymaker's level that is more important than what we experts believe ought to happen. So with that question hanging in the air, let's turn it over to Andy. Thanks very much, Jeff. And Jeff, thanks so much for taking the initiative to organize this panel today. I think it's a terrific opportunity, and I'm delighted to be part of it with my old friends and colleagues, Shuichi and Ed and yourself. There's been a lot of comment here in Washington and over the past five, six months since the Ukrainian issue came to the fore that both here in Washington as well as in Moscow that Washington is to be aware that we are pushing Russia into the hands of China and Russia emphasizing that, well, OK, Europe and the United States, we have options and we are going to exercise them and we are going to go to China. I guess the main theme of my remarks is the China-Russia relationship is not all that. And if I'm thinking about the relationship, to emphasize a point that I think that Shuichi and Ed were making, from the standpoint of Beijing, the relationship reminds me of the title of the Rolling Stones' first big hit in this country, which someone in the audience can yell out. That's a good one. I like that one. I like that one, Joe. It's not their first hit in the United States, though. Their first hit. I knew somebody was going to come up with that. Head fake, no. Time is on my side. Time is on my side. Anybody who has seen the film, Get On Up, should actually have answered that question. And if you haven't seen the film, Get On Up, because the Rolling Stones were the final act at the Apollo Theater in 1964 in their first American tour in the tune they played was Time on My Side. Of course, they were preceded by James Brown just ripping the roof off the sucker before they came on. I don't need any rant. Time is on my side. Hope our viewers on the internet enjoyed that. Now, we heard about the reasons why Time is on their side from an energy standpoint, particularly on the gas deal. But more broadly, it's even more striking. I mean, the juxtaposition of the change in fortunes of economic powers is this is already a cliche. But you go back to the time when I was in college in 1980 where the Soviet economy was four to five times the size of the Chinese economy. And today, as we sit here, that's reversed. I don't think there's ever been in peacetime in modern history or maybe even all of history the juxtaposition of such a sharp change in fortunes of great powers in peacetime. It's just a short period of time. And the trends for the future are not very much in Russia's favor either. A year ago, Russian Minister of Finance announced that Russia's economic outlook to the year 2030, he was looking at about 2.5% annual growth, which is about 1% below the predictions for global growth at 3.5% for that time. And obviously, well, we don't know what Chinese economic growth is going to be. One thing we can bet on for sure, it's going to be a hell of a lot larger than 2.5% or the global average of 3.5%, at least as far as we can think about right now. And of course, even when we look at where the Russian economy was even before the military occupation and annexation of Crimea, basically the Russian economy was at zero growth. It was already in stagnation, Zastoy. And this is quite an achievement for Mr. Putin, given that when he became president again in 2012, Russian economic growth was around 3.5%, 4% growth. Within the space of two years, the Russian economy came to the point of stagnation. And it's possible that it's already in recession today. If we look at the demographic front, even though China is aging and its population is likely to peak by around 2030 or so to around 1.5 billion, well, the Russian population is facing a much more serious demographic challenges. So the population today, where China is a little bit less than 10 times the size. By 2030, it's going to be considerably more than 10 times the size of the Russian population. So all of these major trends are not going in Russia's favor in the standpoint of looking at who's got leverage in this relationship. Now, the second point, there won't be any more musical trivia questions. I was surprised nobody came up with the answer, though. Time is on my side. But I guess that's just the old DJ in me. Let's look at the strategic relationship. First of all, the first point I think to look at is that each of these countries are on each other's strategic rear. The first priority for China, of course, is looking east, and right now in the east China sea, the south China sea. And for Russia, of course, it is looking west into Europe. That's their first strategic priority. For the two of them, I think the most important aspect of the relationship strategically is to maintain security on the border. For now and into the future, and of course, given the demographic economic, and we can extrapolate this into military trends and into the future, that's going to be even more important for Russia as time goes by. So I think from Moscow's standpoint, the challenge with the China relationship is to try to create mutual vulnerabilities, or mutual interdependencies. So as a way to have some kind of leverage over Chinese behavior, and a way to mitigate the problem of advancing loss of leverage. I think there's much made about the China-Russia competition in Central Asia. Frankly, I think this is quite a bit overblown. One, for Central Asia, for both countries, I think is more of a tertiary security issue, not even a secondary security issue. And I think for both countries, they share the mutual interest of stability there, rather than instability. This is more clear cut for China, given their concerns about Xinjiang province and the weaker population there, and also the possibility of already the reality of increasing terrorist attacks. For the Russians, they are playing a more of a political game, a geopolitical game, in Central Asia. And certainly some countries such as Uzbekistan would claim that the Russians are actually trying to foment instability as a justification for continued Russian military presence in the region. So it's a little bit less clear with Russia. But I think that China and Russia are having this big competition there is just not there. And even from an economic standpoint, while, yes, certainly in an ideal world, the Russians would like to maintain the hegemony over the production of hydrocarbon resources, and even more so the transit of those resources, the fact of the matter is that they don't have the economic capacity to do so. And that's going to be even more true in the future. The third point, and I would get to one of Ed's questions, I think, is kind of looking at how the relationship is changing and kind of bringing in the Ukraine factor. Well, I think one issue of interest, I think, is that the Russians and the Chinese had basically a lot of there, certainly they look at the armsale relationship and something that they had shared as a common interest more globally, was in strategic denial. The kinds of weapons that the Russians have been providing to the Chinese, those kinds of capabilities, have been principally for the purposes of strategic denial. And denial, of course, to the United States Navy and to a lesser extent Air Force, US military, to raise the costs for the United States in interdicting in areas on the periphery of concern to China. And at a kind of an ideological level in the global system, the Chinese and the Russians had been sharing the sort of the status of the kind of conservative defenders of Westphalian norm of national sovereignty over the right to interdict or the right to intervene the United States. They're fairly conservative. Well, things are changing clearly. Russia is with Ukraine, one would say certainly before, with Georgia. Some would say you could take this that actually what we're seeing in Ukraine is not new at all. That this is the kind of Russian behavior that we saw going back to Pazia in Georgia in 1992 in Transnistria, et cetera. But rather than strategic, rather than access denial to simply access, access to territory. And of course, the Chinese are right now engaged in several territorial conflicts with key countries on the periphery that we're all aware of. And I think one of the things I've been concerned about, and this gets to Ed's question as to what could be the kind of the quid pro quo. What do the Chinese get from the Russians for consummating the gas deal for things that were not directly related to the gas deal? And maybe it's not even the gas deal doesn't even come to mind here. But I think for certain, China would like for Russia to move away from its position of a studied neutrality in Chinese territorial disputes. And with the, I wonder when, for example, President Xi was informed by Mr. Putin about the plan for Crimea. I wonder how much a consultation has gone on between Mr. Putin and Mr. Xi about Russian designs in Ukraine, possible Russian designs elsewhere. One concern that has been in the back of my mind has been the possibility of some kind of informal condominium between Russia and China about their various territorial disputes. This is something I just put out there. But I think there are real limitations to that. For example, there was a question on a list of that I belong to that came up about Kazakhstan. And the question was, well, what would prevent Russia from doing to Kazakhstan what it is doing to Ukraine? My immediate response was China. China would never tolerate, I think, what Russia's moved to try to make a territorial grab in Kazakhstan. This is a country in which China has much greater strategic interest. They've spent a lot of time and a lot of money cultivating this relationship. And I think that would be a no-go. Turkmenistan, I would also put in that category. But of course, it's not geographically contiguous with Russia, so some kind of military operation there would be much more complicated. So I think there are limitations on how far, certainly, if there were some kind of implicit condominium, there are definitely, I think, limitations on how far China would be prepared to see Mr. Putin go. But that is an area that I have questions about in the sort of quid pro quo in this relationship. You already partially answered the question yourself with mentioning the arm sale relationship. And I think there we have to kind of watch that are the Russians being, are they, rather than access denial weaponry, particularly for use in the Asian theater, are the Russians providing weapons and the research and development relationship is really the one that I think we have to look at. It's the hardest to look at because it's obviously classified. But are we going from access denial to simply access? And that gets to the question about China. Just how aggressive is China prepared to be in its territorial conflicts? I'm frankly surprised at how aggressive China's been for the last three years because getting back to the Rolling Stones maximum, time is on their side. Why don't they simply let the advance of economic power be the lead in basically being able to buy out so they can buy out their interests in these various places. But then you get to political leaders. Mr. Xi, for example, in China, there is pretty much of a norm for how long leaders are on power. It's 10 years. The clock is ticking. Maybe he wants to have more of a legacy in this area where he achieves something that may be contributing to what, at least for me, from a strategic standpoint, looks to be maybe just a little too forward-leaning, a little bit too aggressive. The last point I want to make, again, it gets back to, sorry, there's one other point about Ukraine, of course. Well, with Ukraine, Mr. Putin, if we didn't think that, I think we were under the impression the United States and Europe as well. The European security issues have been more or less resolved. Guess what? They're not. The Russians aren't satisfied with that. That's been made perfectly clear. And so who benefits? Well, clearly the Chinese benefit from this, because this, along with our ISIS friends in the Middle East and others, are compromising the so-called Asia pivot. And that certainly works to China's benefit. So there's an aspect of the strategic China-Russia relationship almost in kind of an indirect way where China benefits. The last point, again, because I don't think the China-Russia relationship really is where the action is at, but when I look at what the Ukraine story, and especially our effort, the West's effort to try to economically punish Russia, to economically isolate Russia, my concern is that this is accelerating a process that was already in motion. And it gets back to the point that Ed was making, and Shoichi from the outset, about this is not only the energy issues are shifting from Europe to Asia. It's the global economy. There's a power shift going on. And the economic locus of the center of gravity is moving back in an Asian direction, in an Eastern direction. And there are a couple data points I want to point out to that have happened in the past six months that have struck me even in the past few months, the summers. One of them was the BRICS meeting, the BRICS meeting that took place in Brazil in July. And last year, the BRICS, the desire was to establish the BRICS Development Bank when they met in Durban, South Africa. Well, they didn't come to an agreement about that because, principally, they couldn't come to an agreement about the voting rights for the bank. And at that time, the Chinese position was to hold that your contribution to the capitalization of the bank would be equated, would be correlated to your voting rights. So i.e. if the Chinese made a much larger contribution to the capitalization of the bank, then they would have much larger voting rights. China moved away from that position. And other countries came along, and they agreed to it. And the Development Bank has been established. We'll see how it goes in the future. And I have to think that the situation with Ukraine and the response in trying to economically isolate Russia has had an impact on the thinking of all of those BRICS countries about basically the United States in the West's capacity to do this, to inflict this kind of economic pain, it's based upon the dollarization of the global economy. That is eroding anyway. We are accelerating the erosion of it, I think, with this. And I think this data point suggests to that. The other one has to be with the Shanghai Cooperation Organization. And what there is interesting to me is that they're moving forward with the membership expansion. And the key member here really is India. And the Chinese have been opposed to the Indian membership. Now, India and Pakistan have to go in as a package deal to the SCO. That's understood for obvious reasons. But the Indians have been holding back on this. Well, they've changed their position on this apparently. And I was in India a few weeks ago. What I was told by economists and political folks there was that basically the Chinese are seeing the dramatic growth in the Indian economy. And in fact, China for India is India's number one trade partner already. And Chinese see the amount of infrastructure that needs to be built in India. They want to build a lot of it. So I think that the Chinese position on that has changed for economic reasons, I think, first and foremost. But if you have these new members of China, excuse me, India, Pakistan, Mongolia, eventually Iran, once UN sanctions are off Iran at some point in the future, even possibly Turkey in the future, you are going to the Shanghai Cooperation Organization. This is going to be an organization, I think, that is going to carry significant weight in the global system. And it will be to some extent an alternative to institutions that the United States had a hand in the formation of going back to the Bretton Woods system back right after World War II. So to me, it's not that the China-Russia relationship is going to be at the forefront of this sort of alternative institutional basis for the multipolar world that is emerging as we talk, but it's a part of it. And I'll leave it at that. Thanks. Okay, great. I've got a couple of questions I wanna ask, but since we're pushing on time a little bit, I think I'll save those for now. So let me open it up. If you have a question, please raise your hand. We have microphones in the back. Somebody will come give you a microphone. Please identify yourself and please be sure that you're asking a question and not making a speech. Thanks. Over here. I thank you for that. My name is Natalia Leota. I'm with IHS in their petroleum sector risk service. My question is about Russian companies' ability to raise capital for energy financing on Asian markets. Given the latest sanctions now, they're really limited from European financial markets. So if you could speak on that, the reality of borrowing from Asia and any limitations Russian companies may face? Well, maybe others can chime in on the corporate financing side of things and the appetite of banks in Asia to finance Russian companies. From my point of view, these energy deals have been loans secured by supply. So basically Russia's forward selling production. So it's really not financing in the classic sense of the term. You're providing a loan, interest rates agreed, and repayment is through the supply of oil and gas later. And to me, it seems to set up for the Chinese clawing upstream. I mean, and I would say that that's true whether you're talking about Turkmenistan or Russia. If your project gets into trouble, it's really too bad. You still owe us that $10 billion. How can we help you repay it? Maybe we can help you develop that field. Together we can cooperate. Wouldn't that be a good thing for us to do? So I think the idea that there's a lot of Asian capital floating around waiting to finance Russian companies on the basis of its own credit standing that's not secured by a project with real oil and gas flowing is a mirage. I just don't believe that that's that kind of money floating around. The only thing I would add to that is that because this has been part of the narrative you hear kind of coming out of the Kremlin, that okay, the West is trying to economically isolate as well, we have these options and Asians are ready to come in. I completely agree with Ed said and just let's remember that just with Europe itself, this is about 50% of the bilateral trade relationship for Russia and even somewhat, I think more than 50% for the investment relationship. And the idea that you can quickly replace magnitudes of capital investment like that is, even if the Russian investment environment were considerably more attractive than it is, I think you're one of the hard pressed to make that case. Yes, I just would like to add some comment. Although as we've already discussed today, the Russians, including Rosnets and Gershwam, they're trying to attract one investment from China right now, but the story is not that easy either from Chinese perspective. They are already raising concern that even they don't want to take excessive scale of investment risks as I explained already, long before the beginning of the Ukrainian classes, all energy experts know the tremendous scale of investment risks to do something in Eastern Siberia and therefore is the second China, Chinese oil companies have their own business and service series in the US and as well in the West. They are increasingly concerned, they can be affected as a result of getting too much involved in the Russian sector. Okay, great, here. Thank you, Nico Stafos, energy consultant. So Ichi, I wanted to ask you about Japan and you think about Japan and for the last few years, the Japanese have been generally lukewarm to trying to import additional gas from Russia and thinking of the Vladivostok project, but if you step back and you say someone else is gonna build this massive pipeline that brings you either to the coast or close to the coast, what I wanted to ask you is, are you seeing a change in the way that the Japanese are thinking about the feasibility of additional Russian exports? Once you do build the infrastructure, the incremental cost of sending additional gas to Japan will actually come down significantly. What is the thinking of the Japanese, both government and companies, in terms of what this deals makes possible for Japan's needs for gas? Thank you. Oh, thank you very much for the excellent question. I'm just answering completely on my personal capacity and the question is very difficult and sensitive in many ways. The first, let's put it this way. Well, almost everyone is happy about the recent Russian gas deal with China, including the future projects of the power of Siberia. If Russia ships more gas and even oil to Chinese market, it will establish the region and the market after which Japan will also benefit. And as I said today, there's no point to do any sort of competition over Russian resources. If Russian resources are not available, you can find the same amount or even more amount as well, including Alaska, Australia, as well. Second, having seated, though, up until the beginning of the Euclidean crisis, as you noted, Japan has tried to make more commitment in the Russian power use some projects. But, you know, we have modernity project over there competing around and everyone knows that cost is not low and they're going back and forth, which when we come out of that, especially in the aftermath of the increasingly optimistic projection of the US shell revolution, in terms of gas trade, Japan's trying to gradually shift the gravity of gas import toward the Pacific side. And third, therefore, the business industry, to the extent they have anticipated something until the eve of the Euclidean crisis, they cannot easily say, let's give up. They have their own stakes in investment. And the answer I have felt so far is they seem to know what to do. And for Japanese diplomacy, although this is something I haven't heard from anywhere, I'm just guessing. But, you know, any diplomacy needs both carrots and sticks, right, until the very end. And to the extent that we know that Russia's concerns about excessive expander, or what you call or Chinese influence of the Eastern regions is getting worse and worse, time is on our side, including Japan. They will need Japan anyhow, how many years it may take. If that's the case, it is such a big advantage for not only Japan, but for the US, as Japan's alive. We can have it as one of our diplomatic leverages. What we need to have is good combination of no, Russia strategy and China strategy as a set to have long-term constructive framework in which we could position the meaning of today's discussion. I'll stop here. Okay, yes, right here in the middle. Oh, did you? Teresa Sabonis-Half, National War College. I have a question about, several of you mentioned Turkmenistan and how that may, in some ways, undercut Russia. With the laying of the fourth pipeline that's now underway, and China increasingly being Turkmenistan's monopsony, my question is, isn't it more likely that China uses Russia as leverage to force the price down in Turkmenistan because Turkmenistan is much less of a political contender? Whoever wants it. Teresa, always keen to answer a centeration question from you. As it happens, the day the deal was signed in Shanghai, I was in Turkmenistan. And notice that Deputy Prime Minister, Dua Kovic, diverted his plane from Shanghai before the deal was even signed in Shanghai to Turkmenistan. I guess this was a convenient stopover to the St. Petersburg Economic Summit. And had a very long, long meeting with Turkmen officials. I suppose he had some news to bring to the Turkmen. The industry's scuttlebutt is that the Turkmen has been put under some pressure from the Chinese since the deal was signed in terms of future pricing terms. Turkmen hadn't been particularly happy with the pricing terms even up until recently. Notice again that the Turkmen president visited Beijing a week before the Shanghai meeting between Putin and Xi Jinping. I'm sure that timing was a pure coincidence on the part of the Chinese authorities to arrange. So I would say that again, speculating that if you had China's hand, you would use both sides as leverage on the other, telling the Russians your price that you asked is too high because look at the price that we're getting from Turkmenistan. And at the same time saying to the Turkmen that we just signed this deal that committed us to 38 BCM of gas supply, we don't need your gas as much as we thought. I think the price here is Galkhinesh, which for those of you who don't know is the largest onshore gas field in the world that is just being developed right now in Turkmenistan. And that's what the Chinese are really after is to secure the future supply of gas. And here are the elements, some of which that Andy referred to gets into the mix because Galkhinesh gas in theory can also go to India via the Turkmenistan, Afghanistan, Pakistan, a pipeline, India joining the SCO raises some questions. The question that raised in my mind is that the SCO now has to expand its number of official languages because right now the only two official languages for the SCO are Chinese and Russian. So if Pakistan and India were to join the only logical new language to add would be English, right? Which is some irony involved. I happened to be in New Delhi last week, Xi Jinping may think that I'm shadowing him. But the Indians were also thinking about if a TAPI like pipeline were built from Turkmenistan it would also open the possibility of Siberian gas to India. If you reverse the Soviet legacy, Central Asian center pipelines, you can start seeing that flowing. Now a lot of these may be pipe dreams in people's mind, but it gets to be a very, very complicated game. But I think what I would look at in Central Asian oil and gas is the Chinese interest in Khashogan, which as you know, they've just bought into the largest oil field discovered in the world in the last 30 years. And Galkhinesh, the largest onshore gas field, second only to self-poss by the way in the world. And that's what the Chinese are after. Well, I don't know if Ed is shadowing Xi Jinping, but he is shadowing me. I was in Delhi three weeks ago. Maybe we're both shadowing Xi Jinping. And Ed stole a fair amount of my thunder. I would just add to your question, Teresa, that here I think this is a, in looking at TAPI, I think actually this is a case where Russian and US interests are more in line. The Russians several years ago expressed an interest in being part of the consortium for the TAPI pipeline. If indeed it does become a reality. And certainly one of the key talking points, if not, I mean, one of the key talking points to the US government, to Turkman officials is, don't you wanna avoid exactly what you referred to, this monopsony relationship with China? And don't you think it would be strengthen your leverage if you had a major alternative in that being TAPI? Of course, we've talked to them about another major alternative in being the Southern Corridor. And that is clearly one in which Russian and European interests are completely at odds on. But the Indians, I was struck with the level of seriousness and optimism in which they were treating, I would just say broadly the question of Russian hydrocarbons coming south, oil and gas, respectively. Okay, great, more questions. Over here in the green. Hi, hi, hello, my name is, probably standing. Hi guys, my name is Xiao Ching. I am an intern at CSIS Energy and National Security Program. I have a question for Mr. Cochens and of course for other speakers. Could you elaborate more about the elements that might prevent India and Pakistan from joining the SCO and the elements that might help them to join the SCO? Thank you. Yeah, I think, you know, traditionally, I mean, Russia has been the key backer within the organization for India's membership and China's been the key backer for Pakistan's membership. But I mean, the principal obstacle in the past that I referred to was the Chinese position on India. And I think that the decision has been taken. So it's not a matter of whether, it's just a matter of when. And we could see the expansion of the membership as soon as 2015. I mean, as I look at things right now, I don't see any sort of imminent major obstacles to this happening. And I think it does behoove us to think hard both on economic issues in Eurasia as well as security issues in Eurasia about the implications of this development. Let me ask you a follow-up question on that, Cochens. It seems to me that Pakistan and India joining SCO would fundamentally change the nature of the organization. And I described the nature of the organization as a organization that allowed Chinese economic penetration of Central Asia with Russia's political concurrence. That's the way I've seen the SCO. I may be totally off base on that, but that's the way I see it. But when you start talking about other regional players, including Iran, including Turkey, there's some talk of that, it changes the nature of the organization to a pretty closely self-identified organization with common legacy, contiguous geography, to something much broader than that. I mean, I would liken it to ASEAN expansion from what was a pretty tight knit group of five countries in Southeast Asia into what it has grown to be in the last 40 years. How would SCO function with this broader expanded membership? Boy, is this next week's panel? Next week, soon we should get together and have this panel on the future of the SCO, because I think it is really, really interesting. What has been blocking the SCO, I think, from being more active on both the economic front and the security front, I think has been fundamentally Russian insecurities about the organization being dominated by China. Now, with the new members, just with the India and Pakistan, I mean, that goes a long way, I think, to diminishing that and opening the door for the SCO to become a real player on both economic and security issues in Eurasia. If we look on the security side, I mean, everybody in the region, the Central Asians, the Chinese, the Pax, the Indians are, well, the Indians certainly, are concerned about the post-2014 Afghanistan environment and what happens there. Traditionally, the Chinese have been reluctant to play more of a role in Afghanistan, but I think there, I think what's been blocking them has been the sense that, well, this is basically Washington's game, and so let Washington deal with it. Well, now we're making it pretty explicit that it's not gonna be Washington's game, and I would expect that there's, that the SCO seems to be the natural lead organization that would play more of a role there. Now, the question is whether the problem in the organization are the mutual animosities and distrust amongst the members of the organization itself. And starting with the China-Russia relationship, which is very ambivalent, the India-Pakistan relationship, which is not quite so ambivalent, not to speak of the Central Asians relations amongst themselves. So I think to get back to your question, I mean, it is the mutual, the distrust and problems in the bilateral relationships within, amongst the members of the organization that themselves are sort of the biggest obstacles that prevent the organization from being much more effective, but I see the increased membership helping to mitigate that to some extent. If I could actually just jump in on this really quickly. The SCO is an organization, is a big multilateral organization, but in a lot of ways, it's also an umbrella for bilateral relationships among its members. And I don't think that that's gonna change. In fact, if anything, if you have a much bigger, broader SCO that includes countries that have widely divergent strategic perspectives, in some ways, I think that bilateralism at the heart of it is just going to be reinforced. Now, what does that mean in terms of the effectiveness of the SCO as an organization? I think that's a question that is definitely out there. From the Chinese perspective, I think there are growing security concerns related to Afghanistan, but also related to Xinjiang, where there's been an upsurge in violence in the last year or so that is leading policymakers in Beijing to pay more attention to what this organization potentially can do, not only in terms of China's economic interests in Central Asia, but also in terms of these security interests. But whether it'll be able to manage these mutual rivalries, not only between Russia and China, but between India and China, between India and Pakistan, that's gonna be a big question. Let's get back to energy. Are there any more questions out there right now? Yeah, Anna. Wait for the mic. Yeah. No, I'm not Osloond. I'm a consultant called Osloond LLC. I'm just flying from Kiev, so security is on my mind. And you mentioned Russian insecurities regarding China. Mr. Ito said about paranoia. So I wonder, these cartoons that were popular after the signing of the agreement between Russia and China leaders, Krimnash Sibir Vash, it's like Crimea belongs to us, Siberia belongs to you. That's how Russians interpreted it. And I wonder how much substance is there or is just pure paranoia. How much of Chinese ambition of those really empty between us, territories of Eastern Siberia, given that the population is 10 times. Thanks, Anna. That's a great, great, great question. I think, you know, many, many, I mean, there is a, a traditional, my dissertation was on Sino-Soviet relations. So I've been studying this relationship for pretty much all of my life. Not to say, that doesn't mean that I actually learned anything useful. But I'll tell you what I mean. Hearing for 15 or 20 years, Russians express concern about the rising power of China. My response to that has been typically, well, I think actually what you have, you have more to fear than a rising China would be a weak China. You know, with a China, with a growing economy, strengthening China, you know, what is, you're not gonna see millions of Chinese come across the Russian border to Russia. I mean, the economic attraction is simply not gonna be there for those large numbers, which is the visceral fear. It's almost as though, you know, Genghis Khan is, you know, waiting there with his, you know, thousands, millions of horses ready to come across the border and rape and pillage. It's right there in the frontal lobe. I mean, it's a weak China where actually Russia would look more economically attractive and then China would be less able to control the border. To me, that would traditionally be a bigger concern. And secondly, there's the question of, well, okay, once China finishes, you know, with its territorial ambitions and with Taiwan and the East China Sea and the South China Sea, then it's gonna return back to the territories that were taken by the Russian Empire, especially in the 19th century, but not only, you know, via unfair treaties, which Russia took advantage of the Chinese Empire during a period of historical weakness and annexed, you know, huge amounts of territory. And my response to that is, well, that's why you keep nuclear weapons. It's not, but it's really not the, so it's not the military threat that I would be concerned about, but it would be the leveraged, the long-term leveraged buyout. And so the Chinese, and here, if you're, you know, I think it was the global financial crisis that the Russians started to wake up to some extent that, you know, maybe the unmitigated growth of the Chinese economy, but the Chinese were clearly the winners. It's not necessarily, I mean, a great thing for Russia necessarily, and that Russia's game should be to create a diversity of investment partners for Eastern Siberia and the Russian Far East. So they are less dependent from being over-leveraged to Chinese capital. But then that would require, and you know, Mr. Putin has talked about this, going back to when he first came into power that, when he was in Blagovish, and so I think in 2000, 2001, he made the reference that, well, you know, we have to be concerned about, you know, people speaking Chinese here. Well, if you're really concerned about that, then what you'd wanna do actually is to improve your investment environment so that more players are attracted to investing into the region, and so that you're not beholden to the possibility if China were to be the one buyer, so to speak. Okay, let me endorse what Anihar just explained in written details. Well, I'm the person who spent many three years in the Far East as a German while I survived. Well, I have to say, why they love Japanese because just because Japanese are not Chinese, I don't say good or bad, it's a different thing. This is just the comparison they have in mind, including the power in Russia in Moscow and the Far East. So China is the last place of country they could ever deepen partnership with in the end. So, Sino-Russian relationship is bound to be more of a rhetorical, although even if they could even develop economic dependence. Number two, poor Russia, China is a growing threat, but it is not a case for China at all while considering economic independence, US, Japan, other recent partners are far more important for China than Russia. This is a reality, but for Russia, China already runs the second as its trade partners. Just very quickly, I well understand Russian paranoia about China having been personal recipient of that from time to time. It takes a Russian brain at least 10 minutes to process an American who looks Chinese. But it seems to me the Chinese ambition, short of strategic denial to a hostile power like Japan, the Chinese ambitions in the Russian Asia is really very limited. I mean, what China would want to do is convert that part of Russia into Canada. No, a place where you import raw materials, it's a nice place to visit in the summertime, but why would you want to live there? So, right, so I think this is more hype and maybe quite sensational, but also successful hype in the case of given the Russian psyche. Anna, since you just came back from Kiev, I want to go back to one point that Andy made. I think the Chinese are quite concerned about what happened with the annexation of Crimea and what's going on in Donbass. The analogy to Tibet and Xinjiang is just a little too close for comfort for the Chinese. That the Westphalian system, which is supposed to govern state relationship, can break down in such a way. And Chinese memories are such that Russia attacked, some would say, Georgia on August 8th, 2008, in the opening ceremony of the Beijing Olympics. And it attacked Crimea and started the incidents in Donbass right after the ending of the Sochi Olympics. These things are worrisome to a Chinese leadership that's primarily concerned about stability, both domestically and internationally. Okay, I hate to say it, but I think we've reached our time limit for the day. So I want to thank you all again for coming and let's please give a round of applause to our panelists.