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The Russia-China Energy Marriage And The Multipolar World

Russia China Gazprom

Trade between Russia and China in the first quarter of the year grew 3.6 percent on the year, to $14.2 billion. A senior CNPC official has confirmed that the company is interested in buying a stake in Russia’s biggest oil company, Rosneft. Gazprom Neft, another energy giant, has been selling its crude to China in exchange for yuan rather than dollars since last year.

These are all instances of a strategy pursued by Moscow and Beijing that has been gathering pace since oil prices collapsed and the West hit Russia with a series of economic sanctions for its military involvement in Ukraine.

China has clearly demonstrated its ambition to expand its international influence by transforming its economic model into one that is less reliant on heavy industrial production and turning its currency into a rival for the greenback. The yuan is already in the currency basket of the IMF, the Special Drawing Right, and international trade in yuan is growing fast. Related: Russian Oil Executives Not Optimistic About Oil Prices

Russia, on the other hand, needs cash to prop up its sluggish economy that is still over-reliant on oil, and it doesn’t mind getting yuan instead of dollars. Diversifying the economy is difficult and will take time, so the Kremlin is looking to do the most it can with what it has, and what it has is an abundance of oil and gas (metals and minerals, too—but that’s another story). Supporting China in its quest for more international weight seems to be another thing that Moscow doesn’t mind.

So, China is the most natural market for Russia’s oil and gas, and if this means letting the Chinese in by selling them a stake in Rosneft, the Kremlin appears willing to take that once unthinkable step.

On the other hand, the perceived sanctity of state control of Russia’s oil and gas sector is not as complete as one might believe. After all, none other than BP holds 19.75 percent in Rosneft, a stake almost equal to the one that is now being put up for sale. Related: What OPEC Has To Fear From The New Saudi Oil Minister

Rosneft is working on becoming a truly global company. However, low oil prices are taking their toll and Rosneft needs cash. A stake sale would help, along with its long-term crude oil supply contract with CNPC, which closed in 2013.

CNPC, for its part, is suffering the fallout of the oil price rout as well, plus some problems unique to China. The company cannot downsize because jobs will be lost, so instead of investing into loss-making E&P activities, it can shore up its finances by becoming a shareholder in the Russian company, which, it’s worth noting, is still profitable despite challenges.

Russia and China have similar political priorities, which basically boil down to a greater international influence that would support economic sustainability. Related: Why Oil Prices Will Likely Drop Below $40 Soon

It’s no coincidence that China introduced last month its new, gold-backed yuan. It’s no coincidence that both China and Russia have been buying gold—a lot of it.

The CNPC-Rosneft deal is a milestone along the road to what some analysts see as a new world order. The U.S. dollar is still firmly in control of its top status, but struggling under the weight of a $19-trillion national debt, that may not last forever.

By Irina Slav for Oilprice.com

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