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2014-09-08 18:20:00

SANCTIONS HELP RUSSIA

SANCTIONS HELP RUSSIA

If western governments are right, Russian troops are now fighting in Ukraine. Forty-five years ago, they were facing an altogether different enemy.

In March 1969, the Soviet Union was involved in a brief border war with China. It only ended when the Soviets launched a full-scale tank assault on Damansky Island, a tiny piece of disputed territory lying between the two countries which had been a focus of the fighting.

Fast forward to the present and relations are a lot more cordial. Indeed, they reached a whole new level last week, when President Vladimir Putin invited China's state-owned oil group CNPC to join Vankor, a huge oil project in Eastern Siberia. Nothing better symbolised Russia's pivot away from its old friends in the West towards its new ones in Asia.

Moscow used to be paranoid about the Chinese. That fear was most pronounced in eastern Russia, a thinly populated, economically weak region closer to Beijing than Moscow and facing a vast, booming and crowded neighbour.

Over the last couple of decades, Russia allowed Chinese companies to cross the border and buy up its oil, coal and timber. But it steadfastly blocked them from owning stakes in its oil and gasfields.

That has changed. Sinopec was allowed to buy a chunk of Russian producer Udmurtneft in 2006. And CNPC last year acquired 20 per cent of a $27bn liquefied natural gas project in the Yamal Peninsula, in Russia's far north. It was also offered equity in oil licence blocks in the Arctic and East Siberia.

Yet Mr Putin's overture on Vankor is perhaps the most significant move yet. It also represents a stunning change in strategy. For years, Russian state-owned energy companies only ever partnered with foreign oil groups on projects that were too difficult for them to execute by themselves, such as Sakhalin 2, an LNG venture in the far east developed by Royal Dutch Shell .

Vankor is different – a huge onshore field that presents few technological challenges for its operator, Rosneft . A lot of the big investments have already been made and it is generating tons of cash. Vankor and its satellite fields could produce 1m barrels a day by 2020. Western oil majors must be green with envy.

And Mr Putin really rubbed their noses in it. "In general we are very careful about letting in our foreign partners," he said, announcing the potential tie-up with CNPC. "But of course for our Chinese friends there are no restrictions."

Yet this new rapprochement is more a sign of weakness than strength. Rosneft badly needs CNPC's money. It is heavily in debt after swallowing TNK-BP, and sanctions have restricted its access to new western funds.

The company has already mortgaged much of its production to the Chinese. In 2009, Beijing provided Transneft and Rosneft with $25bn in loans, backed by oil exports, to help them build an oil pipeline spur to China. It struck an additional oil prepayment deal with CNPC last year. Cut out of western capital markets, its reliance on Chinese bank finance is likely to grow.

But this time round, the Chinese clearly want their pound of flesh. The stake in Vankor will do nicely.

Other recent energy deals also smack of Russian weakness. In May, Gazprom agreed to sell CNPC $400bn-worth of natural gas over 30 years. At a time when Europe, outraged by Russia's annexation of Crimea, was desperately seeking ways to reduce its reliance on Russian gas, the deal showed that Gazprom has other markets, and other partners. But the negotiations with the Chinese were incredibly tough. To win the deal, Russia clearly had to concede on price.

Intensifying the energy relationship with China makes sense for Moscow. A year ago, China overtook the US to become the world's largest net importer of crude oil and liquid fuels, and its total oil imports are expected to reach 9.2m b/d by 2020, nearly four times the level of 2005. Meanwhile, Chinese natural gas demand is growing fast, rising 11.4 per cent last year to 163.4 billion cubic meters. Diversifying into such a fast-growing market will clearly pay dividends.

But working with CNPC will present its own challenges. In Europe, Gazprom has played divide and rule, bullying weaker customers and indulging stronger ones. In China it will be at the mercy of one big counterparty, CNPC, with a strong bargaining position which will probably only get stronger.

The Soviets regained control of Damansky Island after their tank assault in 1969, but it ended up in Chinese hands anyway. In 2008, Russia ended up ceding 174,000 square kilometres of disputed territory to China. Local Russians protested, especially those who lost their dachas on the island of Tarabarov, now called Yinlong.

When it comes to Russia, however belatedly, China often gets what it wants.

ft.com

Tags: RUSSIA, CHINA, SANCTIONS, OIL, CNPC, SINOPEC, SHELL, ROSNEFT, BP, TRANSNEFT, GAZPROM

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