Moscow Faces Challenge of Keeping China, Asia and Europe in Tune with Gas Policy

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--At the beginning of the fourth quarter of 2012, the Russian Purchasing Managers' Index (PMI) showed a continued strengthening of business conditions, as new orders and output both increased at the fastest rates in more than 18 months. But this upbeat message was tempered by survey findings that showed a dip in export demand and only a marginal gain in manufacturing employment. Inflationary pressures eased during the month and remained much weaker than the long-run survey trend.

Russia's PMI figure rose for the second month running in October to 52.9. The figure is a composite indicator and gives a snapshot of operating conditions in the manufacturing economy. Above 50.0 indicates an overall improvement in business conditions, and below 50.0 indicates an overall deterioration.

The October figure signaled the best overall operating conditions in five months. It reflected stronger growth of both output and new orders, but was tempered by a slower rate of job creation.

But just at a time when Russia's output level exceeded 2008 pre-crisis highs, the economy appeared to be starting on a course of low-growth due to rising inflation, weakening domestic demand and sluggish external demand.

A significant share of the good news in the first half of the year was tied to high oil prices and boosted by supply constraints, rather than strong global demand. The price of Urals crude averaged more than $113 a barrel in the first half of 2012, which was slightly below Brent. High oil prices have translated into strong export receipts, buoyant fiscal revenues and fast credit expansion.

Despite a modest rise in oil prices, the World Bank projects growth in Russia to decline from 4.3% in 2011 to 3.5% in 2012. In 2013, the bank projects that it will stay at 3.6%. This shows a downward revision of 0.5% for 2013. The International Monetary Fund's (IMF) October forecast had 2012 growth at 3.7% and 2013 at 3.8%.

In the key area of the Russian metals market, experts in the sector say that it is practically impossible to make an accurate forecast of metal supply, demand and prices for more than two to three months in advance. This makes a technical economical assessment for investments in new projects difficult. A collective analysis performed by specialists will be undertaken to crack this problem at the Russian Metal and Steel Market this month.

Some excitement and some confusion has been created with President Putin's endorsement of the $40 billion eastern project, which will see investment in the Siberian Chayandinskoye gas field in Yakutia and the development of a 3,200-kilometer pipeline to a 10 million-ton-per-year liquefied natural gas (LNG) plant at Vladivostok on the Pacific coast. Known as "Putin's tilt to the East," it targets Japan, Asia and China, which are all hungry for gas and will pay three times the price offered by European customers. The confusion comes with the existing pipeline project to the east and China, and the North and South Stream pipeline projects to Europe. Will the latter be scrapped or modified? Moscow says no. Russia will continue to support them, but the eastern supply tendency may give Putin some leverage when the cold European winter sets in.

Meanwhile, China has contracted to buy gas from the Middle East, Australia and central Asia, and is insisting that national gas utility Gazprom lower the price before China commits to Russian supplies. The new Siberia-to-Vladivostock project could also put pressure on the Chinese, as it could give Moscow the option of walking away from the current Chinese pipeline. Critics of the new project say that as China is the anchor customer for gas, spending $40 billion on a second option is not justified. This will continue to play out through 2013.

After a strong run on oil prices and gas supplies to the domestic market and for export, Russia could find 2013 a difficult year, following a bad agricultural season this year, and as U.S. gas and shale gas exports reshaped the global gas supply chain. Pricing and the length of contracts are going to be crucial. Both will need negotiations rather than a take-it-or-leave-it approach. The outcome will affect domestic industrial inputs, and the export markets for Russian-manufactured goods may not trend upward for some time.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.