China/Russia oil deal

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China has what Russia wants: masses of US dollars. Russia has what China wants: energy. Hence Tuesday’s oil-for-loans agreement between Moscow and Beijing. Russia’s state oil companies get 20-year loans to help them refinance while preserving capital spending. China gets cheap fuel for the duration.

Bilateral deals happen all the time between countries. The difference is no one has tried to dress this up as political or diplomatic. It is artifice-free exchange of one commodity for another.

For their part, Russia’s national champions avert a nasty cash crunch. The world’s second largest oil producer has floundered amid depressed crude prices and declining production: aggregate volumes shrank by almost 1 per cent last year. Rosneft, increasing output organically, is the country’s biggest producer, 75 per cent government -controlled. Its $15bn share of the $25bn loan package will cover its $8.5bn debt maturing this year. Some 60 per cent of that debt is owed to foreign banks; about half the total is due in the second quarter. Transneft, the overextended national pipeline operator, mops up the remainder of the package.

China does very nicely too: 300,000 barrels a day is about 4 per cent of its total demand, or 8 per cent of total oil imports. Russia pays 6 per cent on the loans, implying China secures supplies at about $20 a barrel, says UOB-Kay Hian, a Shanghai brokerage. As China buys most of its oil in the spot market, this is a significant saving.

There are fringe benefits. Russia diversifies its customer base away from Europe. China reduces its dependence on the Middle East. It also increases its chances of stake in long -term development of Russia’s fabled Siberian oil reserves – perhaps at the expense of Japan. But at bottom, this is barter. How very post-crunch.

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