Why Eurasia is the center of world powerEurasia
Eurasia is one of the most important geopolitical concepts. As Zbigniew Brzezinski, the Polish American political scientist who served as United States National Security Advisor to President Jimmy Carter from 1977–1981, said:
“Ever since the continents started interacting politically, some 500 years ago, Eurasia has been the center of world power. A power that dominates Eurasia would control two of the world’s three most advanced and economically productive regions. About 75% of the world’s people live in Eurasia, and most of the world’s physical wealth is there as well, both in its enterprises and underneath its soil. Eurasia accounts for about three-fourths of the world’s known energy resources.”
The economies in Europe and Asia, popularly known as Eurasia, have had alliances for many purposes in the past. They have come together:
- For mutual cooperation, avoidance of double taxation, and international cooperation within the BRICS (Brazil, Russia, India, China, and South Africa) group
- As the Shanghai Cooperation Organization for security, military, economic, and cultural cooperation
- Within the G-20 which provides a platform for discussing the key issues in the economy
- Through the 120-member Non-Aligned Movement to espouse policies and practices of cooperation
Investors continue to flock to secure their funds in exchange-traded funds (or ETFs) tracking Asian securities like the Market Vectors Russia ETF (RSX). For investors seeking to make gains from the developed markets in Asia, the Vanguard Pacific ETF (VPL) offers an attractive avenue with stocks of companies located in Japan, Australia, South Korea, Hong Kong, Singapore, and New Zealand forming its portfolio. Investors seeking exposure to emerging market securities may prefer the iShares MSCI All Country Asia ex-Japan Index ETF (AAXJ) which measures the performance of 11 developed and emerging equity markets.
Continue reading the next section of this series to learn why the Asian economies are not isolating Russia amid the Ukrainian crises and how companies like General Motors (GM) and Ford (F) could gain in the future.
Must-know: Why Asian economies aren’t willing to isolate RussiaAsian economies won’t isolate Russia
Russia is being increasingly isolated by Europe and the United States for its annexation of Crimea and the continuing unrest in eastern Ukraine.
A major part of Russia’s gross domestic product (or GDP) comes from oil and gas sales, as does much of its leverage in the Ukraine crisis. Russia supplies a quarter of the European Union’s (or EU’s) gas consumption, mainly via transit through Ukraine and Belarus. The main export markets of Russian natural gas are Europe and the Commonwealth of Independent States (or CIS), with its main importer being Germany. Russia accounts for 30% of Germany’s natural gas supplies.
A number of U.S. exchange-traded funds (or ETFs) like the Market Vectors Russia ETF (RSX) and the SPDR S&P Russia ETF (RBL) invest in the Russian markets to gain from its growth.
However, the U.S. has recently been pushing the EU to be stricter with Russia in its future energy relationships because its politically imperative. The White House has already imposed additional trade sanctions on Russia for annexing Crimea, which caused unrest in eastern Ukraine.
With the imposition of more sanctions, Russia is surely not going to count the U.S. among its well-wishers.
Under the aegis of the United States, the EU is using its third energy package law as a roadblock to Russian gas major Gazprom’s (OGZPY) 16 billion euro South Stream Pipeline—a major gas pipeline that would run from the Black Sea to Austria in Europe. They’re considering the use of law to limit the volumes of gas that Russia’s Gazprom can export via the pipeline.
Given this backdrop, why are Asian nations like China, India, and Pakistan not taking sides with the White House and the United Nations (or UN) against Russia? How do companies like General Motors (GM) and Ford (F) stand a chance to gain in the future?
The reason is “Pipelineistan.” Continue reading the next section of this series to learn about Pipelineistan.
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Overview: What is Pipelineistan?What is Pipelineistan?
Pipelineistan refers to all those crucial oil and gas pipelines crisscrossing Eurasia that make up the true circulatory system for the life of the region.
As percentages of the worlds’ total reserves, Russia holds 45% of the gas, 23% of the coal, 14% of the uranium, and 13% of the oil. Currently, Russia is the world’s largest energy supplier. Russia isn’t a member of the Organization of Petroleum Exporting Countries (or OPEC) and repeatedly presents itself as an alternative to middle-eastern energy resources. Within Russia, Gazprom (OGZPY) has a monopoly for the natural gas pipelines and has exclusive right to export natural gas.
It also has control over all gas pipelines leading out of Central Asia. As a result, it controls their access to the European market.
Exchange-traded funds (or ETFs) like the Market Vectors Russia ETF (RSX) which has 8.63% of its holdings in Gazprom, seek to take advantage of the company’s growth trajectory.
In what could be termed the biggest Pipelineistan deal so far, Russia has entered an agreement with China to supply hundreds of billions of dollars worth of natural gas via a pipeline from Siberia.
“This is the biggest contract in the history of the gas sector of the former USSR,” said Russian President Vladimir Putin, after the agreement was signed in Shanghai between Gazprom and China National Petroleum Corp. (CNPC), the parent company of PetroChina (PTR).
According to the agreement, the state-controlled Russian energy giant Gazprom will supply the state-controlled CNPC with 3.75 billion cubic feet (or bcf) of liquefied natural gas a day for no less than 30 years, starting in 2018. That equals a quarter of Russia’s gas exports to all of Europe. Over the life of the 30-year contract, one trillion cubic meters would be delivered.
With increasing threats from the European Union (or EU), Russia’s symbiosis with the Asian markets is only accelerating. For China especially, the Gazprom-CNPC deal is a win-win situation. After all, between energy supplied across seas policed and controlled by the U.S. Navy and steady, versus that supplied across the stable land routes out of Siberia—it’s no contest. India, on the other hand, is also eyeing Russia as a cheaper source of gas than its existing sourcing from Qatar.
This one deal could cause realignment of global relationships based on resources. Continue reading the next section of this series to understand how the Pipelineistan deal could cause the geopolitical center of gravity to shift to the east, and how companies like General Motors (GM) and Ford (F) stand a chance to gain in the future.
Can Russia, India, and China unite to shift geopolitical gravity?Russia and China
China’s current daily gas demand is around 16 billion cubic feet (or bcf). Imports account for 31.6% of China’s total consumption.
China is the world’s largest energy consumer and Russia is the world’s largest energy supplier. In the past, both countries have entered into a number of deals that have proved advantageous to both sides—considering their relationship in terms of being the largest consumer and producer of energy, respectively, and the fact that they share a border.
With China’s rapid economic growth in recent years being largely fueled by oil from the middle-eastern nations, China has been eager to diversify its energy sources, both in terms of geography and commodity. Getting its gas supplies from Russia, with which its shares its border, would definitely bode well for China.
The current Gazprom (OGZPY)-China National Petroleum Corporation (or CNPC) deal is as important for Russia as it is for China. Europe has been the primary gas consumer market for Russia. Having strained its relations with Europe in the recent months over its tensions with Ukraine, Russia is now eyeing the east where it intends to send a third of its gas exports by 2035.
If the European Union (or EU) stops purchasing gas from Russia, China would prove to be a bigger consumer of gas than the whole of the EU.
The deal will help the Russian gas giant Gazprom diversify its revenue sources. In 2013, gas sales to Europe and Turkey accounted for 32% of Gazprom’s total revenue. Europe continues to look for alternative sources to meet its energy needs, while the shale boom in the U.S. is changing the dynamics of the global energy market. Consequently, it’s become important for Gazprom to cut its dependence on Europe. China, Japan, and India could be crucial markets for the company as it looks to diversify.
Exchange-traded funds (or ETFs) like the Market Vectors Russia ETF (RSX) which has 8.63% of its holdings in Gazprom, and the WisdomTree Emerging Markets Equity Income Fund (DEM) which is invested 5.65% in Gazprom, seek to take advantage of the company’s growth trajectory.
Russia and Japan
Given the opposition to nuclear energy in the country, Japan relies heavily on imported natural gas to meet its power generation needs. Using the more expensive LNG (liquefied natural gas) over nuclear energy has had a negative impact on Japan’s trade figures. As a result, the country is looking to Russia to lower its energy bills. According to Bloomberg, after the Gazprom-CNPC deal, the government in Japan is reviving efforts for a $5.9 billion natural gas pipeline from Russia.
Continue reading the next section of this series to learn how India stands to gain from the development of a new Eurasian economy, and how companies like General Motors (GM) and Ford (F) stand a chance to gain in the future.
Russia, China, and India—a new Eurasian economy in the makingRussia and India
The Gazprom (OGZPY)-China National Petroleum Corporation (or CNPC) natural gas trade deal has been under the spotlight for many reasons. Apart from it being beneficial for both Russia and China, it’s also gained attention from neighboring nations including India.
According to the U.S. Energy Information Administration (or EIA), India is the fourth largest energy consumer in the world. Currently, 35% of the gas consumed in India is imported.
India has been paying a very high price for its gas imports. India was purchasing liquefied natural gas (or LNG) from Qatar at $12 per million British thermal units (or MMBtu) when the U.S. was paying just $3 for LNG from Qatar at the same time.
Although Russia’s price to supply gas hasn’t been disclosed, there are reasons to believe it could be in the range of $8-9 per MMBtu. India will benefit if it’s able to get gas at this price. In fact, India could be a strong proponent to build a gas pipeline from Russia to India with the pipeline going through China. It will help reduce India’s dependence on Qatar and the West.
Exchange-traded funds (or ETFs) like the iShares MSCI BRIC Index Fund (BKF) and the iShares MSCI Emerging Markets (EEM) invest in the market performance of emerging markets like China and India.
Other reasons calling for a Eurasian economy
Besides their need for gas from Russia, both India and China may have other interests as well. They would both like to strengthen their alliance with their ruble-spending neighbor.
China has been industrializing at a very past pace. Industrialization requires the commitment of a lot of resources, the most important, being water. China’s need for this basic necessity is only going to increase. Given the density of its population, the amount of water that China has at its disposal isn’t going to be sufficient. As a result, China may look at sourcing water in the future.
China will have to look no further than its neighbor, Russia, which has the world’s largest water reserves compared to land mass. Russia also happens to have the world’s second largest land mass—almost twice that of China or U.S.
India serves as a good example. India’s population density is 2.8x that of China (according to World Bank, 2013). In return for better priced gas, India has a chance to offer its abundant manpower for the development of Russian mines, telecommunications, and other infrastructure.
Also, India and China are the largest consumers of gold, which Russia has in abundance. This is another reason for India and China to forge closer trade ties with Russia. There seems to be a definite calling for a China, India, and Russia alliance on more than just the gas front.
The availability of gas at lower prices will have a very positive impact on the investment climate in these Asian countries. Continue reading the next section of this series to learn how companies like General Motors (GM) and Ford (F) stand a chance to gain in the future.
Russia-China gas deal could impact China and India’s investmentsRussia-China gas deal
The availability of gas at lower prices could boost investments in Asian nations.
Currently, these nations source a major part of their oil and gas needs from the middle-eastern countries. So far, the Organization of Petroleum Exporting Countries (OPEC) operating in the middle-east has enjoyed a near monopolistic power over oil and gas prices. It’s the largest supplier of oil and gas to these nations—especially India and China.
With the Russian pipeline reaching China very soon, China will have access to cheaper gas beginning in 2018. Also, India wants to get Russia to extend it gas supply. India may also be added to the beneficiary list of cheaper Russian gas.
The availability of more gas at cheaper prices will boost industrialization in India. It will also help Chinese industrialization get back on track.
Power generation is the key resource for each of these nations to develop at an accelerated rate. Greater availability of gas will be a benefit for all of them. This is significant because the share of gas-fired power plants in these countries is growing. It will tackle coal supply issues and promote cleaner energy sources. Coal has been the preferred energy source in developing countries due to its low cost and availability. With more availability of gas and at cheaper rates, these nations have a chance to shift more towards cleaner gas-based power generation.
Exchange-traded funds (or ETFs) like the iShares MSCI BRIC Index Fund (BKF) and the SPDR S&P BRIC 40 ETF (BIK) invest in the market performance in Brazil, Russia, India, and China.
In the long-term, there could also be a possibility of the OPEC decreasing the price at which it supplies oil and gas to these nations because of competition from Russia. Lower gas prices from Russia as well as from the OPEC, could give a long-term boost to the automobile industry.
Companies like General Motors (GM) and Ford Motor Company (F), that have an established market for their cars in China and India, stand to gain in such a scenario.