Maxim Shemetov/Reuters
People attend a rally called 'We are together' to support the annexation of Ukraine's Crimea to Russia in Red Square in central Moscow, March 18, 2014.

Western sanctions could propel Russia's own pivot to Asia

If sanctions related to Russia's annexation of Crimea intensify, Russia may speed efforts to boost its industrial and energy ties in Asia.

As the crisis in Ukraine intensifies, Russia is bracing for the possibility that Western sanctions, thus far of a wrist-slapping nature, might deepen into a severe economic embargo.

President Vladimir Putin has warned that any effort to hurt Russia would "boomerang," and most Russian experts agree that the European Union, at least, can no better afford a cutoff in Russian gas exports than Moscow can.

A draft law being prepared in Russia's parliament would simplify procedures for freezing foreign-owned assets and bank accounts in Russia, a measure that the bill's author, Andrei Klishas, told journalists would help to ensure that "any sanctions will be mutual."

If Western sanctions do toughen, experts say, Russia is likely simply to speed efforts to pivot its industrial and energy focus toward customers in Asia, such as China, who tend to be far less critical of Moscow on human rights and geopolitical issues than those in the West.

"Our Asian energy markets are already expanding nicely," says Grigory Birg, an analyst with Investcafe, a Moscow investment consultancy. "Both Gazprom and Transneft are building new pipelines to China, and there is talk of extending our network of gas pipelines all the way to South Korea. This is where the big future markets for Russia are in any case."

But any embargo imposed on Russia by the West could nevertheless bite deeply, analysts say.

"Should serious sanctions be imposed by Europe, especially on our gas and oil sector, it would really hurt in the long term," says Alexei Devyatov, chief economist at UralSib, a Moscow-based financial services corporation.

"But it's not realistic. Putin is right to point out that we are interdependent. It's not just hydrocarbons; Russia imports a lot of consumer goods from Europe, and many big European companies would suffer greatly from losing the Russian market," he says.

But he adds that a selective embargo on high technology and capital goods imports might badly hamper the long-term modernization plans for Russian industry. On the other hand, a cutoff in Western consumer goods might actually stimulate Russian light industry, which would rush to fill the gap in lost imports.

The United States, the country talking the most forcefully about sanctions, imports little Russian gas or oil and, in general, doesn't have much trade with Russia at all. But, analysts say, if it comes to exchanging economic blows, the US stands to lose meat and poultry sales to Russia that were valued at about $800 million in 2013.

Even before the current crisis, analysts say, Russia was rushing to finish the South Stream pipeline in hopes of locking in the dependency of Southern European markets on Russian gas.

"South Stream has been going fast anyway, mainly because we've long understood that Ukraine is unstable and we need pipelines that will bypass it," says Mikhail Krutikhin, a partner at RusEnergy, a leading Russian energy consultancy.

"Unfortunately, we haven't managed to finish South Stream before Ukraine collapsed. But, in any case, gas is only about 10 percent of Russia's energy exports, and its importance has been declining for some time. It's not nearly as important to Russia as people think it is. We're mainly an oil-exporting country," he says.

"The world is not about Europe anymore. There are alternatives. If things turn bad, it will not be pleasant for anyone, but it will accelerate Russia's turn to the East, which is already well under way."

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