RUSSIA - CHINA INVESTMENT

FT - There has been no shortage of big investment promises each time a Chinese government delegation has visited Moscow in recent years, but concrete deals have often been lacking.

So the $9.1bn stumped up by CEFC China Energy this month for a 14.16 per cent stake in Russian oil producer Rosneft was a welcome surprise for those keen for China to become a big investor in Russia.

As one of the largest Chinese investments in Russia and the second-largest oil and gas acquisition by a Chinese company, it strengthens the bonds between two of the world's biggest producers and consumers of energy, at a time when relations between Moscow and the west are increasingly sour.

It also indicates that business relationships between China and Russia are maturing.

"We think we will see increased energy co-operation through corporate partnerships between both countries," said Alejandro Demichelis, director at boutique investment bank Hannam & Partners in London. "Corporate partnerships with China are one of the very few alternatives still open to Russian players to finance their expansion ambitions." 

"The fact that the first large deal done by a Chinese company . . . is with Rosneft — arguably the closest Russian company to Mr Putin — shows the seriousness of the partnership push."

CEFC will buy the stake from a consortium controlled by mining company Glencore and the Qatar Investment Authority, restructuring a complex and opaque transaction last year that highlighted the difficulties for western groups investing in Russian companies targeted by sanctions.

The deal will give CEFC access to oilfields in eastern Russia close to the Chinese border and is the first time a Chinese company has taken a stake in one of the most important businesses controlled by the Kremlin.

Rosneft chief executive Igor Sechin said he was "happy that it was specifically a Chinese corporation" that had bought a stake. CEFC chairman Ye Jianming said the deal "will inject new energy" into the bilateral relationship.

"This deal and the wider relationship makes sense for both sides," said a person involved in the transaction. "Russia wants cash, and the Chinese want good assets."

Russian natural resources offer long-term supply opportunities for China just across its northern border, while Chinese cash offers Moscow an alternative to US and European investors. Russia's increasing need as western sanctions have become tougher also makes it a buyer's market for Chinese corporates.

In May, a Chinese consortium led by Fosun agreed to buy as much as 15 per cent of Polyus, Russia's largest gold producer, then in June, Beijing Gas Group bought 20 per cent of Rosneft's Verkhnechonskneftegaz — one of eastern Siberia's biggest oil and gasfields — for $1.1bn. 

CEFC is also in talks to acquire a stake in Russian hydropower and aluminium company EN+ as a cornerstone investor in the group's planned initial public offering.

"It used to be really hard to do business with Russia. Because they are a resources-rich country, they wouldn't give an inch," says Lin Boqiang, an energy expert at Xiamen University. "But now it's a lot easier. Because of the market conditions, they need it more and it's become a lot easier."

"It's a big opportunity."

Russia has long looked to China as a source of foreign investment, and has intensified its efforts since EU and US sanctions have cut off funding to some of the country's largest banks and companies.

"Investors have started to look more to Russia because assets are so cheap, and political momentum is there, but are still very cautious," says Alexander Gabuev, chair of the Russia in Asia-Pacific program at the Carnegie Moscow Center. 

"The recent CEFC agreement with Rosneft is viewed in China as a deal more about politics than business," Mr Gabuev adds. "The magnitude of the deal and readiness of Igor Sechin to cede control over a large stake in Rosneft have caused people in the Chinese oil industry to raise their eyebrows."

Chinese lenders also stepped in to provide funding to Yamal LNG, a major Arctic gas project by Russia's Novatek and France's Total after its project financing was hit by sanctions, and last year Bank of China agreed to loan €2bn to Kremlin-controlled Gazprom, which is building the Power of Siberia pipeline that will export $400bn of gas to China through 2050.

In July, during Chinese President Xi Jinping's state visit to Moscow, China Development Bank agreed to provide $11bn to two Russian investment groups, while in the past four months a joint Russia-China Investment Fund has announced plans to invest in infrastructure development, tourism and healthcare.

"Russia's credibility, creditworthiness still isn't high but it's true, they are more open and their attitude has changed," a senior Chinese oil executive says. "China can get the oil or gas by pipeline and the resources are a known quantity. It's a better bet than taking the same amount of money to Africa or Venezuela."

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Earlier:

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September, 11, 12:35:00 CHINA BUYS ROSNEFT 14.16%, $9 BLN CEFC China Energy is set to take a stake of almost $9bn in Russian state-controlled oil company Rosneft, in a major strengthening of energy ties between Beijing and Moscow as relations deteriorate with the west. English

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