The Chinese Takeover of Russian Oil

The economic crisis and drop in oil prices has really brought forward some interesting and contrasting views on Russia – from those who think this regime and their ways of doing things are toast, to those who believe the Kremlin will come out on the either side stronger than ever. Judging by the wide range of loans, energy/pipeline deals, and political cooperation agreements recently signed between Moscow and Beijing, it would appear that China has situated itself in the latter camp – giving a vote of confidence in the survival of Russia’s petrostate authoritarianism, despite recent divisions. But is this a sound judgment and a reliable prediction for future relations between the two countries, or just a hasty moment of mutually colliding interests?

First let’s review what China is throwing into Russia, and what they expect to receive in return. Under significant pressure to refinance company debt, state-owned oil company Rosneft has managed to negotiate a possible export-backed loan from China in the range of $20-25 billion, which could account for about two billion barrels of oil to be sent to China over the next 20 years (4% of the country’s demand).This is significant in that Rosneft and China’s state-owned CNPC has been quietly bickering for years over an agreeable price for oil – as the Russians would prefer to sell both its oil and gas at European rates to Asia, something that the Chinese have long resisted as an economy of scale. It appears that a combination of Russia’s debt crisis and the sudden plunge in oil prices have forced the Kremlin to accept the Chinese terms.The “considerable” loan deal may also help speed up the long-awaited construction of the East Siberia-Pacific Ocean (ESPO) pipeline, a project which has been talked about for many years (even Mikhail Khodorkovsky at one point was trying to push for it) yet very little in terms of progress has been achieved. Oil and Gas Journal is reporting that a deal has been signed between Transneft and CNPC to build an additional 67-km, 300,000 b/d pipeline spur coming off the ESPO from Skovorodino, Russia to Daqing, China at a cost of $800 million.It should come as no surprise that the one man in charge of negotiating all these political, investment, loan, energy, pipeline, and credit deals with the Chinese is none other Deputy Prime Minister Igor Sechin, who also happens to be the CEO of Rosneft.Vladimir Putin has capitalized on the visit of Prime Minister Wen Jiabao to Moscow yesterday by taking a couple shots at the West and the predominant financial architecture, recommending to his Chinese counterpart that they begin handling all their trade transactions in yuan and rubles instead of dollars. “At the moment the world which is based on the dollar is suffering serious problems … The situation on the global financial markets remains difficult. (…) In such conditions, we need to think about improving the payments system for bilateral trade, including the use of the national currencies,” he said.But dollars are definitely one thing that the Chinese have in surplus, with a $1.9 trillion currency reserve by far making them the largest holders of liquidity in the world right now. In this spate of deals, most analysts appear to be viewing the Russians as the party desperate for liquidity (Rosneft has about $21 billion in debt to creditors demanding early repayment), while Beijing is enjoying a good deal of leverage to staple down much needed energy supplies to feed their growing (if slowing a bit) industry.I have some colleagues working in the finance sector who have been eagerly awaiting a decision like this from the Chinese, who after patiently waiting throughout this crisis and keeping their chips off the table (despite bargain basement deals on U.S. investment banks) have finally revealed where they still have confidence – the long term value of oil.The global economy certainly needs this long awaited shot of liquidity, which will eventually in theory pass through Rosneft into the system, but one has to question whether Beijing can trust the Russian government to hold up their end of the deal once oil prices rise again and become irresistible to the bureaucrats – a lesson learned the hard way by everyone from Yukos to BP. But on the other hand, the Chinese have gotten burned badly from their past attempts to get into the United States through investment bank stakes, making it understandable why they have avoided helping in the bailout effort as though it were the plague. But they would be mistaken to think that this investment in the Russian regime isn’t without its own risks.I view this embarrassing deal as a very important event, which illustrates how poorly the Russian authorities have managed the country’s development during the oil boom. There is no reason why Russia should find itself in such a terrible position, down on one knee, where they have to ask the Chinese for +$20 billion in exchange for disadvantageous oil deals. It strikes me as more than slightly ironic that these very leaders which have fought so hard to resist and confront the abuses of their relations with Europe and the West should so easily hand the country’s future over to Beijing.Photo: China’s Premier Wen Jiabao (L-R), Russia’s Prime Minister Vladimir Putin and Vice Premier Alexander Zhukov attend the Russian-Chinese Economical Forum in Moscow October 28, 2008. (Reuters Pictures)