Ian Ivory of Goltsblat BLP -

Anyone reading the Western business press relating to Russia recently will be left with the distinct impression that global trading relations with this part of the world are undergoing a momentous and irreversible shift east. Russian business ties with the West are severed, sanctioned and broken. Asian players, most prominently the Chinese corporations, are set to step in and fill the gaps left by retreating Western investment.

Certainly the recent fanfare of political handshaking ceremonies and deal signings would support such a proposition. The APEC Summit in Beijing in November saw Moscow and Beijing conclude an agreement between state-backed companies Gazprom and China National Petroleum Corporation (CNPC) to supply gas from Western Siberia to China, from gasfields currently piped to Europe. This follows hot on the heels of the “Power of Siberia” project agreement between these companies signed in May with a purported $400bn deal value. If both projects are completed, overall volumes of gas supplies to China could exceed those supplied to Europe over the medium term.

CNPC is also apparently planning to acquire a 10% stake in Vankorneft, a subsidiary of Russian state energy giant Rosneft. China Development Bank has signed a memorandum of understanding with the sanctioned Vnesheconombank with a view to investing “billions of dollars” in Russian real estate construction; meanwhile, senior officials at VTB bank have hinted that they may consider delisting from the London Stock Exchange and look for a listing in China instead. China is now Russia’s single largest trading partner and trade between the two countries has more than doubled in the past five years, reportedly reaching $89.2bn in 2013.

Can we still be friends?

Nonetheless, there remains a high level of scepticism in many business circles, including many Russian ones, as to how real or achievable this pivot east really is, at least in the short to medium term. The reality is that Europe will remain by far Russia’s largest export market for gas and as a bloc its largest overall trading partner for years to come. US trade with Russia is much lower, but even so the US remains Russia’s single largest foreign direct investor for infrastructure and power projects.

The Gazprom-CNPC deals are still just broad framework agreements, the latest milestones in years of protracted negotiations, with much planning and negotiation of the underlying contracts still to come. When speaking to bankers and professional advisers in Moscow, Beijing and Shanghai, there is a large element of wait-and-see about the realistic levels of deal flow that might emanate from Russian-Asian business cooperation over the next few years, as compared to those relating to Russian-Western trade and investment.

What does Russia want?

Cutting through the political rhetoric, Russia’s motivations are easy to understand. Recent geopolitical events have brought into sharp focus the inherent risks in Russia’s current energy trading set-up. Europe (and particularly Germany) are fearful that Russia will turn off the gas, but likewise Russia is all too aware that Europe could turn off the money. Realistically, Russia is not looking to replace Europe as a trade partner and energy consumer, but to diversify and de-risk her customer and supply base. In addition, sanctions are markedly squeezing the availability of financing and capital and the need to obtain this from alternative sources is real and pressing.

As might be expected, China has not adhered to the Western sanctions programmes, whilst Japan’s sanctions have been lighter than those of the EU or US (to which Russia has not retaliated). South Korea, keen to build relations with Russia and perhaps hoping to benefit from a proposed Russian rail link to run through North Korea (in return for Russian forgiveness of North Korean debt obligations), has declined to impose sanctions at all. Japanese, Chinese and South Korean companies have been active in Russia for many years, in sectors ranging from banking and telecommunications to agriculture and construction.

Where does this leave the West?

Political relations between Russia and the West look set to remain strained for years to come, but big business is far more dispassionate and financially motivated. Russia remains an important market for many Western companies; likewise, there is little desire to make Russia dependent only on Chinese/Asian trade and investment and there is a broad recognition of the importance of achieving a competitive balance.

The final critical point is that Russia does not just need capital investment, but also technical support, equipment and expertise in order to diversify her economy, enable newly promoted “import substitutions” and boost development – and, at the moment, this assistance will mostly be available from Western companies, subject as always to mutually acceptable terms as well as now, of course, the impact of sanctions. As in the past, this assistance is most likely to come via joint ventures and joint collaboration on projects. This extends well beyond just oil and gas, for example to healthcare and pharmaceuticals, IT, financial services, outsourcing, renewable energy and recycling, transport infrastructure, hi-tech manufacturing and so on.

The significance to Russia of this technical assistance has not gone unnoticed by Western politicians, who have also imposed sanctions on exports of state-of-the-art technology, including for offshore extraction of hydrocarbons, civil aircraft production and dual-use (civil and military) technology. This cooperation and expertise remains vital for economic development and diversification and is not so easily replaced by a pivot east – at least for the time being. With sanctions seemingly set to stay in place for some time to come, it remains to be seen how this part of the economic equation will play out.

Ian Ivory is an English qualified solicitor and Partner at Goltsblat BLP, the Russian Practice of Berwin Leighton Paisner (BLP), an award-winning international law firm. Ian is a fluent Russian speaker and regularly represents both Russian and international corporations on a range of business transactions. He is a published author on M&A in Russia and has appeared as an expert on English law and international legal matters in the Russian courts and at the Russian State Duma.