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bne July 2018 Eastern Europe I 41
Rosneft spurns CNPC
In the next big deal Sechin sold a 19.5% stake in his company at the end of 2016 to China in what was hailed at the time as the largest Chinese investment into Russia ever. The deal was intended to raise billions of dollars to close a RUB2 trillion hole in the budget and had no other means of raising cash following the financial sanctions imposed by the west in 2014. He went into a consortium between the Qatar Investment Authority (QIA) and commodities trader Glencore.
CNPC had missed a chance to acquire
a large stake of a Russian state firm, but the privatization was completely opaque raising questions over what exactly happened. The privately-owned company China Energy Company (CEFC) smelled an opening.
CEFC signed large supply deals with Rosneft in the second half of 2017 but
the “privatisation” turned out to be more of a loan and CEFC eventually moved to acquire roughly 14.2% of Rosneft’s shares from those acquired by QIA and Glencore for around $10bn in a “real” deal.
Things fall apart
Chinese ownership of such a large stake of Russia’s oil champion would have cemented Russia’s fastest expanding oil trading relationship. But CEFC CEO Ye Jianming was investigated for economic crimes in late February, casting doubt on the deal.
By May, doubts were replaced with the certainty that the deal was off. CEFC’s Shanghai subsidiary defaulted on some of its debts after news emerged that the company was not taking part in the deal for shares. CEFC’s investments in central Europe, and in Czechia in particular, have also since fallen to pieces.
Rosneft may have overextended itself
by pursuing such a large deal with a privately-owned company, as normally Beijing would prefer state-owned firms to buy stakes of foreign companies. Neither CNPC or Sinopec expressed any interest in stepping into the breach as the deal with CEFC fell apart despite the clear political benefits, which should raise red flags in Moscow.
Their lack of interest forced Rosneft’s hand. It sold the 14.2% stake to QIA and has changing its corporate spending plans to improve returns for sharehold- ers. The whole saga reflects problems posed by sanctions.
The effect of financial sanctions
Western financial sanctions on Rosneft forced the company to jump through hoops to shield the sale of shares. It also meant that no western oil firms could feasibly make offers given the scrutiny they’d receive from the US Treasury’s Office of Foreign Assets Control (OFAC). Rosneft has become a toxic asset for western investors, which can now be penalised for doing any sort of business with the Russian hydrocarbon behemoth.
The company was also cut off from access to western capital markets, forcing it to take out a record amount of debt domestically to finance operations. Russian state-owned bank VTB had
to lend Rosneft $11bn to finance the privatization deal.
Profitable expansion abroad is necessary for the company’s bottom line. It can only borrow so much in Russia where sanctions limit opportunities.
The effect of technology sanctions
Rosneft is also hobbled by the techno- logical sanctions. These developments parallel problems facing Rosneft regarding access to advanced drilling technology. Since 2014, Western sanctions on Russian firms’ import
of technology and services for oil projects has interrupted Arctic offshore oil development plans.
That’s huge since over half of the Rus- sian Arctic’s oil reserves are offshore.
Russia relies on imports for over 80% of its technological needs for offshore oil projects, mostly from the US and EU. Chinese firms have moved in to the mar- ket in response.
But China’s gear can’t yet replace
that of western firms for many of the Arctic’s technically complicated projects. Further, Chinese offers of financing
for energy projects often include
stipulations forcing Russian firms to buy Chinese equipment.
Vietnam and Japan’s role
in Rosneft’s strategy
This is where Japan and Vietnam come in. Rosneft is looking to gain experience working offshore in Vietnam to advance its international expansion plans. It needs to go abroad for opportunities to develop projects offshore given how difficult it is to work in the Arctic, without the proper gear.
Rosneft is leasing equipment from Japanese firms for its work in Vietnam. Cooperating more closely with Japan in particular could alleviate a growing dependence on China’s technology and replace western imports.
Russia has also actively sought to diver- sify its economic and political relation- ships across the Asia-Pacific since 2013. Vietnam fits into a broader push into Southeast Asia’s oil sector, Russia’s strongest card to deepen economic ties.
China’s ready to push back
Russia remains officially neutral on the status of the South China Sea so that it can pursue closer ties with a wide range of regional partners, including Vietnam to whom it exports weapons and has enjoyed close ties with since Soviet times.
China’s Ministry of Foreign Affairs spokesman Lu Kang urged the countries and companies involved to “respect Chi- na’s sovereign and jurisdictional rights.” That’s a big shift from opting for silence over drilling activities conducted in mari- time territory China claimed before 2016.
Broader Sino-Russian relations won’t take a large hit over the development, but Russia’s ability to pursue its interests in Vietnam independent of Beijing has been curbed.
China is now willing to push back on projects in the South China Sea of vital interest to Russia’s biggest taxpayer and its oil strategy. That can’t be comfortable for the Kremlin.
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