Russia is not a satellite of China

 “Isn’t that obvious?” you say. Well, perhaps it is, but yesterday Vladimir Putin opened a pipeline to China, crossing the border near the town of Skovorodino, the financing of which caused many observers to doubt the truth of this post’s title.

In February 2009 the China Development Bank lent $25 billion to Rosneft and Transneft to build a pipeline, in return for 300,000 barrels a day for two decades. The loan was a floating LIBOR-based rate, then about 6%.  At face value, analysts reported that the deal translated to oil at $20 per barrel.  (I calculated $14, but close enough.)

Wow! Taken at face value, that sounds like a great deal. Even you think the Russians will renegotiate when oil prices rise, that is still a great deal. (Renegotiation is expensive and risky, so China would still get below market oil for some time.) The Washington Times was breathless. Bloomberg reported analysts practically yelling “Buy Sinopec!” Philip Zelikow, over at Foreign Policy, called it “informal empire,” and if the above had actually been the deal, I would have unequivocally agreed with him.

Which means that you shouldn’t take things at face value. First, the Russians did promise to deliver a fixed quantity of oil, but at whatever the market price happens to be at delivery. This is exactly the same sort of long-term contract that Saudi Aramco signs: they promise to show up on time with the exact quantity, and you pay whatever the market says it’s worth.

Second, Transneft issued 10-year Eurobonds in August 2008 at an interest rate of 8.7%, more than the rate on the Chinese loans. (The link is to an official Transneft financial statement for the first quarter of 2010.) Admittedly, the Chinese loan was floating rate, not fixed, but for twice the term as the Eurobonds ... it still doesn’t look as if China got a particularly good deal.

This is not to say that it was a bad deal. China got its pipeline, which the Russians were not thrilled about building. The pipeline increased the People’s Republic’s ability to import, meaning that unforeseen Chinese demand shocks (or China-specific supply shocks) will be marginally less likely to cause Chinese prices to spike relative to world prices. Plus, the China Development Bank got a not-terrible interest rate, about the same as on Russian ten-year bonds, and without the currency risk. Russia, meanwhile, got a guaranteed market and $25 billion to develop new fields at time when credit is less-than-available and exploration and development costs are rock-bottoming. It all makes business sense.

But an expansion of some sort of Chinese economic empire into Russian territory this is not. Yet.

Comments

[bodzin]

Worth a read about the nature of China's oil policy: http://www.umich.edu/~twod/writing/china_iran_sanctions_22mar10aa.pdf

[Will Baird]

A few years back they also granted some extensive concessions on forestry and mineral rights in the Far East to the Chinese. Really extensive, iirc.

[Noel Maurer]

The notable thing about the pipeline deal is that it isn't particularly favorable to either party; it really looks like a commercial transaction. I don't know about other concessions.

[Will Baird]

"Russia and China discussed a long-term lease of one million hectares of Siberian forests as "a pilot project on joint use of forest resources," the Russian Natural Resources Ministry press service said in a statement on July 26. The project was considered at a meeting in Moscow between Boris Bolshakov, deputy head of the Russian Federal Forestry Agency (Rosleskhoz), and Li Yuchai, deputy head of China's State Forestry Administration."

It was to be a pilot project with a lot more to come. That was 4 years ago, iirc.

I'm scrounging from my notes about the mineral deals as well.

Came from:

http://www.jamestown.org/edm/article.php?article_id=2371331

However, they've moved the URL.