BOFIT, Bank of Finland,
During the last years Russian Gazprom has invested heavily into construction of new major gas export pipelines, all of which are now nearing completion. Huge investments into both pipelines and Novatek’s gas liquefaction facilities have boosted fixed investments especially in Urals and Far East. The construction of two new large gas fields designed to fill the Eastern pipelines will continue to support investment volumes in the Russian Far East still at least in 2020-2024. But will new export connections also lead to increased export volumes and thereby increased budget revenue and higher GDP growth?
Given that the Russian GDP grew by less than 1.5 % annually in 2014-2019, faster growth would be more than welcome. Most experts, Russian Accounting Chamber included, estimate Russian potential growth rate to be only around 1.5 % annually. This implies that with current economic structures Russia is stuck being a middle-income country with growth rates of a high-income one. Could new and improved export options help the situation and have a positive effect on the economy?
New and existing pipelines towards the EU market
Russia’s natural gas exports to customers outside of the former Soviet Union averaged 175 bcm annually in 2014-2018. Close to 80 bcm of these flows transited via Ukrainian transit corridors annually. The rest goes via Belarus-Poland (Yamal-Europe), NordStream and Blue Stream pipelines, plus the small volumes sold directly to Baltics and Finland.
The option of bypassing Ukrainian transit routes has raised concern in many EU member states as well as in the US. As a response to these concerns, and to support its own LNG exports, the US Congress decided to sanction vessels constructing the NordStream2 (the new pipeline under the Baltic Sea). As a consequence, the fate of the pipeline is currently unclear and close to 1100 km of gas pipes lay idle in the Baltic seabed. While NordStream2 stuck in sanctions row, transit via Ukraine will continue. The new 5-year agreement concluded on Dec 31, 2019 foresees a minimum of 65 bcm of gas transit in 2020 and 40 bcm in 2021-2024.
TurkStream, the new pipeline from Russia to Turkey, however, was officially opened on Jan 8, 2020. It consists of two pipelines of 15.5 bcm each, one of which could serve the Turkish market while the capacity of the other would be available to serve markets in South East Europe, like Bulgaria and Serbia. If the necessary interconnecting pipelines are finalized, gas could potentially flow via Turkey also to Central Europe or even Italy.
Neither of these new export routes will help increasing Russia’s gas export volumes. Gazprom could significantly increase exports if only there was increased demand for natural gas in the EU. At least in the short term the only economic benefit from the new pipelines is likely to come via increased efficiency and potential reductions in transit costs. These are highly unlikely to have any significant macroeconomic effect.
Power of Siberia or power of China?
On the contrary, the new gas export route to China, the Power of Siberia pipeline, will open a fully new export market for Russia. The planned capacity of 38 bcm should be reached in 2025, when exports to China could equal 15%-20% of total pipeline exports. The stepwise commissioning of the pipeline may increase Russia’s gas exports by some 3 % annually in 2020-2025.
This should support volume growth in total goods exports, but precariously little information on export prices and total costs of the additional exports is available. Given that the agreement with China was concluded in summer 2014, when Russia’s negotiating position vis-à-vis foreign powers was not particularly high, the profitability of the huge investments has been questioned. Even the full capacity will not make Russia a key import source for China. In 2018 Central Asian countries (mainly Turkmenistan) exported close to 50 bcm natural gas to China. Europe will remain by far the most important export destination for Russia.
New pipelines will make export routes more diversified and therefore decrease risks associated with any single actor. The western pipelines, however, will not increase export volumes and when completed will no longer boost GDP growth. The pipeline to China will increase export but with uncertain profitability.
On top of new gas pipelines, the commissioning of Novatek’s Yamal LNG more than doubled Russian LNG exports in 2017-2019. The project has benefitted from various tax breaks, government funded investments and continues to enjoy exemption from export taxes. It is impossible to know if public funds invested in gas production and exports generate higher benefits than any alternative use of public funds. We only know that to support economic growth in the long term Russia would undeniably need more investment in e.g. education or health care.
Expert article 2673