Russian oil - strategic asset or good business to China

After several weeks of negotiation, China and Russia’s RosNeft and TransNeft reached a strategic agreement for China. Under its terms, China will receive and expanded supply of Russian oil in exchange for $25 billion of low-interest loans. We all know what it means for China, but what does this agreement mean for Russia and its strategic oil industry?

Russia was able to strike the biggest oil deal with China, providing it with 10% of China’s demand for oil. I believe the decision is very timely and shows a very important trend of Russia’s foreign policy – economy first, foreign policy ambitions second.

Rapidly depleting Russian foreign currency reserves hinders the government’s ability to provide strategic companies with bailout and credit money. At the same time, this industry is proclaimed to be strategic, therefore, needs to be protected from the external influence. It seems like the Russian government finally realized the dangers that the world economic crisis has brought for the country, and let its largest corporation to enter profitable and natural-for-business deals. Let’s just hope that other Russian corporations stop waiting for the government money and start seeking money abroad.

For China, the contract reduces the risks associated with oil deliveries through Mongolia, and by sea from Australia and Africa, and from Saudi Arabia. A new oil-pipe to China that Transneft will start constructing in the mid-2009 will further decreases these risks. The contract is also a positive step in Russia-China relations and a good point of leverage for future deals.

Keynes is still right

In his recent article Mr. Armey argues that the Keynes’ economic principles are inapplicable in the current economic situation. I believe that given his experience as a former majority leader of the House of Representatives and being a chairman of FreedomWorks Foundation, he knows that using budget spending during the economic downturn is a useful tool for policy makers. I gladly agree with that, but not with the application of Keynes’ ideas that Mr. Armey provides.

For instance, he argues that “"Stimulus" spending often does more harm than good, because it takes more money out of the system than it creates and thereby destroys jobs and leads to stagnation and diminished prosperity for all”, completely forgetting that the money for the stimulus package will be borrowed and not come from higher taxes or printing the money. During current economic downturn it is feasible to borrow money to keep local businesses going, providing them with contracts. Government contracts are not going to be as efficient as private business; however, it is still be better than taking the economy down the spiral of high unemployment and growing expectations of a depression. Better times will bring more money, which equals to higher tax revenues and the debt could be successfully eliminated during those times.

This game is about choosing the lesser of two evils, and in the end even distributing free contraception would drive the economy in the short run.