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.