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Special Bulletin
A Japanese Perspective on the International Energy Landscape (171）May 16, 2014

Ukraine Situation and Its Implications for Asian Energy Geopolitics
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanThe Ukraine situation is growing even tenser. On May 11, effective independence referendums
took place in the eastern Ukrainian provinces of Donetsk and Lugansk under the control ofpro-Russian separatists. While many reports pointed out fraudulent votes, nearly 90% of votersreportedly endorse their effective independence. The interim Ukraine government and Westerncountries criticized these forced referendums as threatening the unity of Ukraine and indicated theywould never recognize the referendum results. If the situation is left untouched, however,pro-Russian separatists may effectively establish and expand their control of eastern Ukraine,
leading the eastern part to be separated from Ukraine. Meanwhile, the interim government hasindicated a hardliner policy including its use of force against pro-Russian separatists to make abreakthrough. Depending on developments, however, domestic disputes and destabilization could
become even more serious. The Ukraine situation has thus destabilized further, deepening itsturmoil.
While the unity of Ukraine is threatened, the next focus of attention is a presidential election
planned for May 25. Originally, it had been expected that a legitimate government would beestablished through the presidential election to secure domestic governance and stabilization inUkraine. Amid the domestic turmoil, however, concerns have emerged about whether preparations
and arrangements could be made for implementing a clean, fair and transparent presidential election.
In eastern Ukraine where referendums have been implemented as mentioned above, moves to block
the presidential election are seen, making the election uncertain. U.S. State Secretary John Kerry
pointed to the importance of the Ukraine presidential election at his meeting with his British, French,
German and Italian counterparts in London on May 15. He then warned that sectoral economic
sanctions on Russia could be toughened if Russia and pro-Russian separatists in Ukraine muddle thepresidential election. Tensions over the presidential election are growing within Ukraine andbetween Western countries and Russia.
The Ukraine tensions have shaken Eurasian geopolitics and are imposing great impacts onAsian energy geopolitics. It may be needless to say that the key point in this regard is the Russianenergy problem. As Europe’s heavy dependence on energy imports from Russia is important forEurope, Russia’s heavy dependence on the European market is significant for Russia. Europe has1

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adopted a basic, general policy of reducing its dependence on Russian energy supply, even though
the reduction may be difficult. Russia earns about 70% of its total export revenues with oil and gas
exports mainly to Europe. Even before the Ukraine crisis, Russia had been affected by a European
demand slump and the U.S. shale revolution. Under the crisis, Russia is expected to face furtherdifficulties.
In order to reduce its dependence on Europe and diversify oil and gas export destinations,
Russia has had no choice but to look east to enhance its Asian market strategy. Due to the recent
Ukraine developments, it is unprecedentedly urgent for Russia to do so.
In this respect, the most attention-attracting problem may be Russian strategy toward China.
China has kept a distance from the Group of Seven Western industrial countries’ anti-Russia
sanctions and criticism and grown important for Russia. At the planned May 20-21 Summit
Conference on Interaction and Confidence Building Measures in Asia, Chinese President Xi Jinping
is expected to propose a new Asian security view calling for Asian problems to be solved at theinitiative of Asia. Russian President Vladimir Putin is scheduled to attend the conference and hold abilateral summit with Chinese President Xi. Their talks are attracting attention as a key toanticipating future China-Russia relations.
A key point in this respect is whether Russia and China could reach a final agreement on abilateral gas pipeline toward their summit meeting after long negotiations. As noted in my report
titled “Gazprom and CNPC Made Step forward to Final Gas Contract” (A Japanese Perspective on
the International Energy Landscape (143) on September 6, 2013), the two countries reached broadagreement on the deal excluding pricing last September, leaving the pricing as the last pending
problem.
The gap between China and Russia over the pricing has remained wide, serving as a factor
behind the difficult negotiations. Under the new situation, however, some people see the momentum
emerging for a final agreement. This means that Russia could take up a more flexible attitude as
securing the Chinese energy market has become unprecedentedly important for Russia in terms ofenergy exports and international relations in the wake of the Ukraine developments. China for its
part is urgently required to expand natural gas consumption in quick response to its air pollution
problem. It has grown more important for China to utilize Russian natural gas. If the final agreement
is achieved under such circumstances, it may represent a major Russian concession and allow China
to procure natural gas in a competitive manner, according to some observers. While natural gas
pipeline construction is expected to cost much, some observers point to possible Chinese financial
support as is the case with the Eastern Siberia-Pacific Ocean oil pipeline.
It would be significant for major powers China and Russia to reach a final agreement on alarge-scale pipeline gas contract after long, difficult negotiations. Given the major change in2

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Eurasian energy geopolitics as a factor behind the final agreement, the deal may have greatimplications. Its significance will have various meanings for not only the China-Russia problem but
also Asian energy supply and demand, energy security and Japan’s energy strategy. In this sense, theChina-Russia summit from May 20 is attracting great attention.

Contact: report@tky.ieej.or.jp
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