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The Jamestown Foundation

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Putin Aims To Profit From China’s Silk Road Initiative

Russia oil

Russian state-owned oil giant Rosneft continues to think big and strike major deals on the global stage. It recently announced a program to sell bonds worth 1.3 trillion rubles ($22.53 billion) (Vedomosti, October 26). This gargantuan bond sale will not be used merely for domestic purchases but to help ensure Rosneft’s financial capability to be one of the most visible and prominent Russian foreign policy instruments globally. Rosneft is making these moves despite the fact that Western—especially United States—sanctions are hurting it along with other Russian energy firms. In fact, Rosneft has had to stop its operations in the Black Sea partly due to those sanctions and has suspended its license for exploration and oil and natural gas production there through 2022 (TASS, October 27).

Nevertheless, and as the bond issue shows, Rosneft is not willing to take such setbacks lying down—and neither will President Vladimir Putin. The company’s CEO, Igor Sechin, publicly stated his view that, while oil and gas consumption might slowly decrease globally over the next 30 years, fossil fuels will, nonetheless, remain primary sources of energy worldwide during this time frame. The implication is, therefore, that Russia and companies like Rosneft can continue to place their reliance upon extracting hydrocarbons as a principal source of income, wealth and power (Rosneft.com, October 19). Over the last year, Rosneft and Chinese oil companies Sinopec and CEFC China Energy have engaged in a complex series of deals whose consequences are only now becoming clear. These deals also involve Gulf firms and obscure holding companies like Glencore Plc. They clearly highlight major state policies for China and Russia as well as prospective benefits for key elites, like Rosneft’s Sechin and presumably other well-connected Russian and Chinese businessmen and officials.

In September, Glencore and the Qatar Investment Fund sold 14.16 percent of shares of Rosneft to China’s CEFC for $9.1 billion (TASS, October 24). Under this deal, Rosneft will be selling about 220,000–260,000 barrels of oil per day to China starting in 2018. But it is expected that the ultimate size of the deal could quadruple to 840,000 barrels per day. This transaction replaces the 2016 agreement with the Qatari fund and Glencore for 19.5 percent of Rosneft’s shares and effectively transfers most of them to CEFC China Energy. The latter is formally a private company but it clearly enjoys state support (China Daily, September 9; Reuters, October 17; Osw.waaw.pl, September 13). Related: Oil Pulls Back After U.S. Rig Count Sees Significant Increase

It is clear from the statements of the players involved here and the fact that Sechin controls Rosneft that these deals enjoyed state backing from both the Russian and Chinese governments (Vedomosti, September 3). And the fact that Rosneft and CEFC will now be partners greatly facilitates Russian oil sales to China through the One Belt, One Road (OBOR) initiative (Vedomosti, September 11; Reuters, October 3). From China’s side, it is not hard to see the reasons for its support. It extends its linkages to and influence over Rosneft and obtains reliable oil supplies (shipped overland) that cannot be interdicted by foreign maritime powers. It also strengthens the OBOR as a credible program and ties Rosneft more to China since the east-bound oil will now be subtracted from what would have been sales to Europe. Less transparently, China presumably will now have a functional (and opaque) way to essentially “bribe” high-level Russian officials with cash that Moscow desperately needs.

From Russia’s point of view, meanwhile, these complex deals with Glencore, the Qatari Investment Fund (QIF) and China all allow Moscow to achieve other key goals. Already in 2016, Russian media reported that Putin was looking to sell the same amount of Rosneft shares—19.5 percent—to China and India that eventually came directly through the sale of Rosneft to Glencore and QIF (Gazeta.ru, June 21, 2016). And in order to buy the Rosneft shares, CEFC China Energy will pay $9.1 billion—$4 billion of its own cash and $5.1 billion from a loan extended by Russia’s government-run VTB Bank—which will help pad the Russian budget, struggling due to chronically low oil prices (Kommersant, October 24). Meanwhile, before the original sale to Glencore and QIF in 2016, Rosneft issued $10 billion in bonds to VTB; now it is getting a large part of its money back, and presumably the rest will follow and go to Rosneft and Moscow’s state budget as well (Kommersant, January 17).

Moreover, by selling oil to China through Kazakhstani territory, Moscow coopts Astana, whose own oil production is increasing, and prevents it from replacing Russian producers on the Chinese market. Instead, Kazakhstani oil will probably go to Russia’s domestic market or Europe (via Russian pipelines), so either way Moscow profits (Regnum, September 8; The Diplomat, March 10). Related: Are Oil Markets Immune To U.S. Shale?

Taken together, the recent Rosneft deal amounts to Moscow looking for ways to finance its budget. And for the Russian oil giant—through shady privatization schemes and what essentially amounts to a sophisticated version of money laundering via VTB—it creates cozy relationships with opaque business entities that enjoy state support in the Gulf and China. These deals are also part of a larger process by which Rosneft has taken the lead in creating what Dmitri Butrin calls “Corporatist Government 2.0.” It should be noted that Butrin rightly associates the term “corporatism” with its progenitor, Fascist Italy’s Benito Mussolini, and links Rosneft’s ongoing processes to the establishment of a comparable state in Russia (Newtimes.ru, November 21, 2016). These machinations also allow Rosneft to expand upon its strategy of investing in risky areas on behalf of Russian state interests, secure in the knowledge that it will be probably be bailed out and—while selling energy goods and/or services—will also be advancing Moscow’s foreign policy agenda. This framework helps explain Rosneft’s $13 billion investment, last year, in the Indian company Essar Oil (The Indian Express, October 15, 2016).

But Sechin’s ambitions go further. He also has been Moscow’s point man for its Latin America policy, and he is now angling to buy Argentina’s Santa Cruz oil and gas projects from Sinopec—another example of Russia’s drive for leverage and for expanding its energy and business alliance with China (Kommersant, October 18; Vedomosti, October 9). But despite the personal and corporate benefits accruing to Russian and Chinese partners here, a closer look at this alliance highlights the fact that China is already the third-largest shareholder of Rosneft and a major creditor. All of which prompts the question: Who is the horse and who is the rider in this economic partnership?

By The Jamestown Foundation

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  • Bob on November 11 2017 said:
    I fail to understand what is illegal about Russia's sale of Rosneft shares to a Chinese firm, or what is subversive about Rosneft raising oil exports to China. Aren't all the major international oil companies selling oil products to China?

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