At the Eastern Economic Forum in Vladivostok this week, energy company executives and government officials outlined the opportunities and challenges involved in building an “energy bridge” between the Russian Far East and Asia Pacific.

The Eastern Economic Forum is held in Vladivostok, Russia this week. Photo:

This week Russia welcomed numerous representatives of major Asia Pacific countries interested in exploring new opportunities to launch or extend mutually beneficial investment projects. The Eastern Economic Forum, held in the Russian city of Vladivostok, brought together key policymakers, economists and businessmen from all over the region, with the biggest delegations from China, Japan, Singapore and Malaysia.

President Vladimir Putin delivered a speech as part of the grand opening of the forum and said that the government would support all investment initiatives in all sectors of the economy of the Far East.

As a result of the first day of the forum, 40 agreements were signed worth 190 billion rubles ($2.8 billion). Aimed at becoming a platform for showcasing development opportunities available in the Far East as well attracting new partners, the forum will be held annually as part of Russia’s attempt to pivot to the East

 Also read: "How Ukrainian crisis will facilitate Russia's Asian pivot." 

Energy opportunities for Russia in Asia Pacific

One of the major topics discussed by the participants of the forum was energy. As Russia’s Minister of Energy Alexander Novak argues, “The Far Eastern regions of Russia have the most potential in the energy sector and its abundant natural resources can satisfy the demands of the Asia Pacific states and Russia.” 

Indeed, the majority of experts agreed with him about the region’s potential growing role in Asia Pacific. The competitive advantage of the Russian Far East is its vast reserves of oil, gas, coal, and other mineral resources, enough to ensure long-term supplies.

Another factor that puts Russia ahead of its competitors as an energy exporter to the region (and ahead of Australia and the U.S.) is its geographical proximity, says Fumiya Kokubu, president and CEO of the Japanese Marubeni corporation, which already works with Rosneft on LNG project implementation in the Russian Far East and joint oil and gas field exploration and development.

Partners from other Asian countries also seem to welcome the opportunity to work with Russian energy giants.

While acknowledging the fact that the implementation of long-term joint projects in the energy field requires strong commitment and mutual trust, speakers expressed their enthusiasm towards contributing to the development of the Far Eastern energy sector and invited Russia to work in their countries. 

 Recommended: Russia Direct Report: "Russian Energy Sector: Beyond Sanctions." 

Not only Chinese and Japanese partners, but also energy companies in India pointed out the importance of such collaboration.

Ravi Ruia, chairman of the board of directors of ESSAR Group, an energy corporation working with Rosneft, said that, as India is progressing to become the third-largest energy consumer, Russian energy companies are welcome to work in India.

In the macroeconomic sense, the countries of the Asia Pacific region represent a huge market for Russian energy exports. Daisuke Kotegawa, research director of the Canon Institute for Global Studies and former executive director for Japan of the International Monetary Fund, said that currently the population of the ASEAN states already exceeds that of the EU (600 million compared to 500 million) and this gap will only grow. 

This trend might become a good incentive for Russian energy exporters to develop and expand their businesses.

The potential is huge, but necessary steps should be made to build an efficient energy sector in the Far Eastern regions.

According to Minister Novak, all necessary legislation and mechanisms have been put in place and a business-friendly tax system has been created, so in the future we should expect the sector to be actively growing, hopefully, boosted by investment from Asia Pacific nations. As he said, the government strives to create a balance between state and private businesses, supporting those who are eager to invest in Russia’s energy projects.

Energy challenges for Russia in the Far East

However, at the moment, the situation might not be ideal. 

One of the biggest challenges is the current economic crisis spurred by volatility in oil prices and Western sanctions against Russia’s energy giants Gazprom and Rosneft.

Both companies suffered a great deal: Rosneft lost access to Western capital and high-tech technology and postponed some its promising projects in Siberia and the Arctic, while Russia’s larges gas company Gazprom is also facing economic woes.

In early August, sanctions imposed by the U.S. on Gazprom’s biggest gas field Yuzhno-Kirinskoye on Sakhalin Island in the Pacific (a project known as Sakhalin-3) aggravated the company’s plight. 

 Also read: "Why the Kremlin is not very concerned with energy sanctions." 

The U.S. government warned against transferring technology and equipment to the Yuzhno-Kirinskoye field. This might put at risk the agreement between Gazprom and Royal Dutch Shell, an Anglo–Dutch multinational energy giant, which was signed during the 2015 St. Petersburg International Economic Forum

Likewise, the economic challenges resulting from any decrease in demand from China as well as recent financial market volatility could hamper Gazprom’s project in the Asia Pacific and, particularly, the Power of Siberia pipeline connecting Russia to China.

Experts warn that there might be not enough investment and budget during a period of low energy prices and increasingly low energy demand from China.  

Experts at the Vladivostok Eastern Economic Forum give examples of other challenges. One of them is the misbalance between supply and demand. 

Even though there are numerous new facilities being built around the region, the demand does not always keep up with supply. As Roman Berdnikov of Rosseti, an operator of energy grids in Russia, said, now only 30 percent of all newly built facilities have guaranteed payments and there is no guaranteed return on investment in the field.

It is a problem that the government should take into account by bringing the instruments of state support into practice. 

Yet Igor Sechin, head of the Russian company Rosneft, seems to be more bullish. According to his information, the return on investment in Russian oil production projects is better and is more than 50 percent higher than other energy producers. 

“The energy bridge between Russia and the Asia Pacific is feasible. It’s a matter of investment and adequate oil prices,” he said at the forum.

His company plans to start commissioning new fields and introduce new oil pipelines in the coming years.

Another issue that experts believe should be addressed at the state level is the problem of high quality human capital. Although for now the situation in the region is satisfactory, risks exist and are mostly caused by the demographic trend of aging in the area, said Arkadiy Zamoskovniy from the All-Russian Electric Union.

 Recommended: Russia Direct Report: "From Brain Drain to Brain Gain." 

The problem of attracting employees from other regions of the country is a challenging one and the programs that are already working to attract people from Central Russia are by and large ineffective. There is no incentive for people to come and for companies to become more efficient in terms of human resources.

Other problems named at the forum in Vladivostok concerned finding ways to raise energy efficiency, building infrastructure and ensuring all necessary instruments exist to ensure a stable supply and demand chain.

“What is needed above all to ensure sustainable development is a systematic approach and high quality manpower,” said Vyacheslav Kravchenko, Russia’s vice minister of energy. “There has to be a balance between supply and demand.”

The authorities believe that the new investment environment will promote further inflow of foreign investors, and the new economic policy will make the removal of current boundaries easier while providing for the steady growth of the energy sector.