It pays to keep an eye on events in the East

UK car sales are now the second-highest in Europe. I know that’s true because I repeatedly heard it on a variety of national news bulletins last week and read it on the front page of several respected business newspapers. Yet it’s only true up to a point.

No-one is denying that 2.3m new cars were sold in Britain in 2013, according to the Society of Motor Manufacturers and Traders. That compares to 2.9m cars bought in Germany and marks a 10.8pc increase on UK car sales the year before.

Car purchases in Britain are now higher than at any time since the 2007/08 crash. That’s good news. I wouldn’t describe these SMMT figures as marking a turning point in our economic fortunes, though, or heralding the start of a sustainable consumer boom. The bulk of these new cars were bought on credit or financed by one-off compensation relating to the Payment Protection Insurance scandal. But let’s be happy, at least, the “animal spirits” so crucial in securing any economic recovery are now stirring.

The shaky economics behind these higher car sales, or the sad reality that we still import 6 out of every 7 cars sold here, isn’t my quibble – at least not this week. The point I want to make is that we shouldn’t forget that 2.7m cars were sold in Russia in 2013, not far behind Germany and ahead of the UK.

The last time I checked the map, Russia was in Europe. What’s more, while British household credit is stretched, Russian consumers are sitting on vast housing equity, while shouldering barely any personal debt. And with just 260 cars for every thousand Russians, compared to around 540 cars per thousand in both German and Britain, this massive Eastern market of 145m people is far from saturated, pointing to hefty future growth. That’s why leading automakers such as Ford, VW, Renault and Peugeot-Citroen have invested heavily in Russia.

This isn’t a column about car-making, but about the importance of raising our eyes and, at least occasionally, looking East. Failing to do that can give us a false impression – thinking, for instance, that we’re Europe’s second-largest car market, when weren’t not. We may also miss out on opportunities – given that Russia, already Europe’s biggest market for food, telecoms and white goods, will soon pass Germany to become Europe’s largest retail market overall.

Russia has been in the news a lot lately – and not for its car market. President Putin has been pulling out the stops to improve the country’s reputation before next month’s Winter Olympics in Sochi. We’ve seen an amnesty for around 20,000 prisoners, with the Kremlin using the opportunity to clear several high-profile cases, including those involving Greenpeace activists and two members of the girl punk-band Pussy Riot. Putin also issued a Presidential pardon for former oil tycoon Mikhail Khodorkovsky, who has spent 10 years in jail. There is much to be welcomed here.

We must also hope that government efforts to beef-up security at Sochi, following last month’s suicide bombings in the southern Russian city of Volgograd, less than 450 miles from the Olympic resort, will prove effective. Moscow’s most wanted man, the Chechen insurgent leader Doku Umarov, has urged militants seeking an Islamic state in Russia’s south to use “maximum force” to disrupt the Games – which start on 7th February.

While all this pardoning and positioning has driven numerous headlines, I’d like to highlight some crucial recent events happening below the radar, developments of far greater historic importance. I’m talking about Russia’s relationship with its huge Eastern neighbor China – now, of course, the world’s second-largest economy. Enemies for much of the Cold War, these two regional giants are now building serious commercial ties across their 2,700-mile border. Among the most under-reported major trends in the world, this emerging economic and diplomatic Sino-Russian link-up will do a great deal to shape the world economy in the years and decades to come.

As recently as 2003, cross-border trade between Russia and China amounted to just $12bn. Over the last decade, that total has risen 7-fold, reaching $88bn last year. While suspicions remain, both sides are increasingly recognizing the natural economic synergies between the world’s largest energy exporter and the world’s most populous nation and biggest manufacturer. These are trends us Westerners cannot ignore – as they have major implications for us.

Back in 2009, Rosneft and Transneft, Russia’s state-owned oil major and oil pipeline operator secured a $25bn oil-swap deal with the Chinese, marking a major advance in Sino-Russian cooperation. Less than 3 months ago, this relation was deepened significantly, with Rosneft agreeing to double oil supplies to China, in a deal valued at a colossal $270bn – as part of the Kremlin’s plan to shift its focus away from saturated and crisis-hit European energy markets and towards Asia.

Under the terms of the deal, Rosneft will supply China with an extra 300,000 barrels of crude daily over 25 years, doubling the oil it already sells to the energy-hungry People’s Republic. The speed of change in the direction of Russia’s crude exports has been stark, with huge volumes switched away from Europe over the last five years – helped by the recently-opened ESPO (East Siberia Pacific Ocean) pipeline, which links Russian fields directly to the Chinese markets. Russia now sells around 750,000 barrels a day to Asia, representing almost a fifth of its total exports.

Russia wants to diversify away from the West when selling its abundant oil and the same applies to natural gas – only moreso. Moscow and Beijing have talked for years about building a gas pipeline between their two countries and signing a long-term supply contract, but agreement has remained elusive.

Over the last week, though, news has emerged that negotiations are nearing completion and a deal may very soon be clinched – with the idea being to pump Russian gas into four, staggered Chinese stations along a new 2,500-mile pipeline to be known as the Power of Siberia.

Helping to shift China away from coal-fired power, which this deal would achieve, would be of major significance. With guaranteed Russian gas, priced at a fixed rate, Beijing may temper its energy paranoia and cut back on its long-standing coal dependence, so cutting the country’s huge greenhouse gas emissions.

Closer to home, any Russia-China gas deal would transform Europe’s energy politics, and probably not in our favour. Back in 2009, the Russian gas giant Gazprom cut-off supplies to Ukraine, during a dispute over unpaid bills. Many West European homes and businesses suffered, given that Russia provides around a quarter of Europe’s gas, much of it pumped through Ukraine – a reality which does much to explain the on-going struggle for influence in the country between Russia and the European Union.

While Western Europe has gas of its own, is exploring shale reserves and also imports LNG on tankers from elsewhere, Russia remains crucial to our energy mix. That’s why this deal with China is so important – as it diversifies Russia’s gas export markets too, providing Moscow with more leverage.

Moscow is keen to reach agreement with Beijing ahead of the EU-Russia summit at the end of this month. If that happens, or if a deal looks imminent, the Kremlin’s hand will be strengthened in a whole range of other EU-Russian disputes. Both Chinese and Russian sources say a satisfactory pricing arrangement is close and an announcement could be made in the run-up to Sochi. As I said, it often pays to keep an eye on what’s happening to the East.


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