Amid an exodus of Western European and U.S. companies from Russia, Chinese businesses are seeking to take their place, Bloomberg reported this week, citing unnamed sources in the know.
It was only a matter of time, really. Nature abhors a vacuum, and so does business. Chinese business, in addition to this, is quite pragmatic, unlike its Western counterparts and competitors. So, once BP, Shell, and pretty much everyone but French TotalEnergies left Russia in the wake of the Ukraine crisis, Chinese energy firms owned by the government started considering moving in.
According to Bloomberg sources, the government in Beijing is talking to four state-owned entities about the acquisition of stakes in Russian oil and metals companies. The entities include China National Petroleum Corp, or CNPC, China Petrochemical Corp, or Sinopec, the country’s largest refiner, as well as Aluminum Corp and China Minmetals Group.
Talks, the report said, were also ongoing between Chinese and Russian companies, although it was too early to say whether they would end with deals. The chances of deals, however, are pretty good. It is one of the clearest examples of mutual benefits: China needs raw materials to grow; Russia has the raw materials and needs money.
It’s a win-win situation, and it has one potentially crucial bonus: it would further strengthen non-dollar transactions between the two countries, undermining the global dominance of the greenback, and, over time, immunizing the two countries from future sanction action.
Russia is already accepting payments in yuan for its exports to China, and Russian companies are in a rush to open Chinese bank accounts, Axios reported earlier this week. Several Russian banks are also considering a switch to China’s card payment system UnionPay after Visa and Mastercard left. An acquisition of stakes by Chinese companies in oil and metals companies would only strengthen this process.
Analysts have been writing about China’s yuan internationalization efforts for years. It is not a secret but rather an important aspect of China’s pretty visible global expansion plans that have worried Western governments. And yet it seems that what these governments are doing is facilitating China’s expansion.
The wave of sanctions against Russia was meant to punish the Kremlin—and the Russian population along with it—for the invasion of Ukraine. One very big unintended consequence of that punishment, however, was pushing Russia and China further into each other’s arms.
This is hardly something that sits well in Brussels, London, or Washington as both Europe and the U.S. struggle with higher energy costs, driving inflation higher and higher at a time when billions are planned to be spent on the energy transition. And yet it was something that Brussels, London, and Washington pretty much did single-handedly.
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China has a near-insatiable appetite for energy, and it does not shy away from using fossil fuels to satisfy this appetite. Unlike governments in Europe and the U.S., Beijing is in no frantic rush to reduce emissions. Its net-zero target year is 2060. And if Russia is, by force of sanction action, selling its oil at a discount, then all the better for Chinese buyers.
What would be even better is, for example, replacing BP as a shareholder in Rosneft. Some industry observers with a longer memory would remember that the Rosneft stake was the only thing that kept BP from slipping into a loss during the last oil downturn, thanks to the Russian tax regime and the ruble/dollar exchange rate.
Yet with the energy transition firmly underway, judging by statements being made on both sides of the Atlantic, metals are also center-stage alongside oil and gas. China already has dominance in critical minerals thanks to its massive rare earths processing capacity. It wouldn’t hurt to grow its presence in aluminum and, why not, nickel, too.
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All this would deepen an already significant disadvantage for the West. In fact, for some, the scenario of a Russia-China partnership falls in the “nightmare” category. Yet it has been the West that has been the most active in enabling this partnership by failing to consider the consequences of its actions. And as we all know, all actions have consequences, often unintended and sometimes harmful for the one doing the action.
By Irina Slav for Oilprice.com
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Furthermore, Russia is the largest recipient of Chinese investments under China’s Belt and Road Initiative (BRI). So it wouldn’t be surprising that China is interested in taking over Western oil companies’ investments and involvement in Russia’s oil industry. China already has 10% share in Russia’s highly successful LNG producer Novatek.
BP’s divestment of its almost 20% share in Russia’s oil giant Rosneft will cost it an estimated $25 bn according to the Wall Street Journal which either Russia or China will buy on the cheap. This will be reflected in BP's’ future announcements about its earnings. After all, BP’s stake in Rosneft is reported to have been the only thing that kept BP from slipping into a loss during the last oil downturn, thanks to the Russian tax regime and the ruble/dollar exchange rate.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London