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Global Risk Insights

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Chinese Loans Keep Russian Energy Sector Afloat

Since the introduction of Western sanctions in 2014, Russia has increased its efforts to lure China to participate in large energy projects, primarily in the Russian Arctic and Far East territories. The Kremlin is hoping that the new energy alliance between two largest Eurasian powers will help the cash-starved Russian energy industry to complete large infrastructural projects and compensate for lack of Western capital and technology.

Eastern help for energy giants Gazprom and Rosneft

Gazprom is the latest in a line of Russian companies that negotiated a financial deal with Chinese financial institutions. Although the loan is relatively small considering Gazprom’s financial needs, it is nevertheless important, because it represents the biggest loan to date from a Chinese lender. It will help the embattled Russian gas giant ease its financial troubles that came with the historically low gas prices. It will also aid in financing its large infrastructural pipeline projects, including the Power of Siberia and potentially the Northern and Turkish Stream.

In 2014 and 2015, the two countries negotiated multi-billion deals to build the Power of Siberia and Altay natural gas pipelines. At the same time, Russian oil giant Rosneft plans to pursue with deals worth $500 billion with China over the next 20 years. As a result, Russia might surpass Saudi Arabia as China’s largest oil supplier.

Related: Have Oil Markets Grown Numb To Supply Disruptions?

(Click to enlarge)

The pipeline deals are the most prominent examples of Sino-Russian cooperation. But there are other equally important projects that have already been given the green light or are currently being negotiated.

Rosneft is in talks to allow Chinese companies to participate in its offshore Arctic operations that were cancelled in 2014 after Exxon Mobile pulled out due to the sanctions regime after the Crimea annexation. The Kremlin is apparently even considering selling its 19 percent stake in Rosneft to keep the fiscal deficit at bay. China is high on the list of potential buyers. Simultaneously, Moscow is considering the relaxation of its restrictive ownership model to allow Chinese companies a controlling stake in some energy projects.

Related: What Happens When Oil Hits $50?

(Click to enlarge)

Source: Forbes

The newly founded Chinese investment fund, created specifically to invest in energy and infrastructure projects overseas, plans to invest in the Yamal LNG terminal in Eastern Siberia where Chinese National Petroleum Corporation (CNPC) already has a 20 percent stake. Russia’s Novatek has already invested around $10 billion in the project, but Western sanctions and low prices forced the company to seek additional sources of capital.

Related: Supply Outages in OPEC Countries Push Up Oil Prices

The picture is not entirely rosy, though. The situation has changed since Gazprom’s and CNPC’s chairmen Alexey Miller and Zhou Jiping signed the $400 billion gas deal in May 2014. Petroleum prices have collapsed in the meantime and the Russian side does not have the incentive to pursue the agreement under the same terms.

In addition, structural problems in the Chinese economy could slow the demand for Russian oil and gas. Chinese natural gas consumption grew only 3.7 percent in 2015, in comparison to 15 percent annual growth in previous years.


Russia only one of several suppliers

Russia is facing fierce competition from other oil and gas producers. Saudi Arabia is persistent in keeping its high output policy in place. China is an important part of this plan. In the LNG sector other countries, such as Australia and the United States, are joining the fight with traditional producers for their share of the lucrative natural gas market.

Finally, despite common political and strategic goals that both Moscow and Beijing are keen to promote, Chinese money does not come cheap. Chinese companies are not eager to invest in the uncertain Russian economic environment at any cost. The Kremlin will have to offer strong incentives to attract Chinese capital.

By Ante Batovic via Globalriskinsights.com

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