In The End of History, Francis Fukuyama depicts a liberal society as an end point in human progress, yet the world post the 2008 financial and pursuing economic crises sees a revival of state capitalism rather than any moves towards a less regulated economic structure in the world of international commerce.
The leviathans in this article refer to Russia and China, in particular Gazprom and China National Petroleum Corp (CNPC). The two gigantic state owned enterprises (SOEs) concluded a pipeline gas contract that lasts until 2048, with up to 38 billion cubic metres supplied annually underneath the Siberian permafrost.
Though Gazprom shares rose substantially on the news, its forecast for capital expenditure and investment will surely rise as it promises to invest $55bn on building a new pipeline and two supporting gas fields to supply the ever growing Chinese demand for hydrocarbons. Of course, this is necessary for the Russian Federation as a nation, not only for Gazprom as a company. With an economy neither as holistic as that of Western Europe’s nor as fast growing as that of China’s, Moscow relies on its energy exports to supply the national budget. Analysts at Thompson Reuters believe that world oil price below $110 per barrel would lead to a balance of payments deficit at current levels of expenditure for the 2014 fiscal year.
The deal is relatively favourable from a Russian perspective as European Union nations could become more hostile, exemplified by the sanctions in the ever unravelling Ukraine crisis; though the motives of Russia’s actions regarding Ukraine is matter for another article. It is important to keep in mind that Gazprom, and Russia as a whole, still profits far more from pipeline gas export to Europe than to Asia even after this recent mega-deal is taken into account. The short term reality is that Europe cannot do without Russian gas while Russian SOEs can survive via other export routes if Europe reduces its level of import.
The Kremlin is using its hydrocarbon exports to send a clear message to the European Union in the grand bargaining of hegemony over Eastern Europe.
The picture for China cannot be more different. The Chinese has other importing options, including existing and soon to be complete liquefied natural gas (LNG) terminals as well as Central Asian pipe lines stretching to Kazakhstan.
Once the American LNG fields become fully productive, the global supply will increase while making the United States a net energy exporter according to most analysts. This market has been heating up in 2014, as firms such as Blackstone Group buys up shale related assets from more conservative stakeholders. Therefore, Russia is understandably exploring its own LNG exporting options. Via Vladivostok, it can easily supply Asian destinations. A notable example is energy hungry Japan that is paying a premium on imported LNG after the shut down of its nuclear power plants. It is currently buying roughly a third of the global LNG exports.
In such an environment, CNPC enjoys a larger bargaining power than Gazprom since the former has wider purchasing possibilities at the present. Both SOEs however, suffer from the almost inevitable faults of inefficient governance and bureaucratic processes that come as part and parcel of being owned by a sovereign state. Perhaps it is time for Gazprom and CNPC to look at Statoil of Norway as an example of a well oiled SOE, it is lean and efficient even if it lacks the obvious potential that Gazprom and CNPC holds. In 2014, six years after the start of the financial meltdown, many SOEs are in a stronger position than before due to the protectionist instinct of many governments. Though Fukuyama will likely disagree, in 2014 we are presented with an unique opportunity for the SOEs to utilise their position in the commercial world to increase multilateral cooperation rather than grow increasingly inward-looking.
London, 18th August 2014
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