Russian rejects Cyprus to embrace China
(Business New Europe – bne.eu – March 25, 2013)
The news images on Friday were dripping with symbolism. A Cypriot delegation lead by Finance minister Michael Sarris was on its way out to the airport having failed to secure a 10bn rescue package from the Kremlin, while newly anointed Chinese premier Xi Jinping was on his way in from the airport on his first foreign trip to do a raft of deals with Russia covering energy and rabbit breeding worth several tens of billions of dollars.
Relations with the EU have been deteriorating steadily since Russian President Vladimir Putin called on the west to honour its promises to Russia during a Munich Security Council speech in 2007 putting the west on warning that Russia was loosing patience and wouldn’t wait for ever for its overtures to be met half way.
But the west did not respond and Putin made it clear that time ran out during his keynote speech at the St Petersburg Economic Forum in June 2012. Russia followed through that November by pulling out all the stops for China, its new best friend, at a sumptuous ASEAN summit in Vladivostok.
Cyprus came and put everything on the table that Russia could want: Sarris said Cyprus was not just looking for loans but investment. It put stakes in its two biggest banks and a share of its $2bn worth of oil and gas deposits on the table, but the Kremlin said nyet.
That decision was a message that said the EU had to deal with its own problems and could no long expect help from Russia. While the Kremlin is of course interested in protecting the interest of its citizens that have an estimated $20bn or more on deposit in Cypriot banks and under the terms of the rescue agreed on Sunday March 24 will lose up 40% of their cash if it was in Laiki bank, this remains lunch money for Russia.
The Kremlin’s unwillingness to come to Cyprus rescue stands in stark contrast to its enthusiasm for making deals with China.
Xi’s three day visit to Moscow got off to a flying start on Friday March 23 with the signature of a clutch of agreements that will deepen energy ties between Russia and China. The two leaders signed off on ten agreements on Friday after their first meeting. Sarris must have been stamping his foot in frustration.
While the two sides didn’t close a long mooted gas supply project to China and only signed a memorandum of understanding, the fact of the document was a signal of the warm ties between the two, even if they still can’t agree on how much the Chinese should pay for the gas.
The Chinese president said after meeting Putin: We did not come to see you for nothing.
The fact that Xi chose Moscow as the first country to visit after his appointment this month is also significant showing the ties are a two way street. Kingsmil Bond, the chief strategist at Citi in Moscow, has called the Russo-Chinese relation the best synergy on the planet; Russia has the raw materials and energy China’s factories so desperately need, while Beijing has the market and the money Russia needs.
China’s demand for oil is increasing while that of European is in decline. At the same time the advent of shale gas and liquid natural gas (LNG) supplies has depressed the price of gas in Europe for state-owned Gapzrom, but China’s demand for gas will only increase, making it a long-term reliable partner.
Amongst the deals signed over the weekend was one by Russian state-owned oil major Rosneft, which will tripling supplies to China to 1 million barrels a day, making it Russia’s single biggest oil client. Rosneft will increase exports to China by some 34 million tonnes to around 50 million tonnes by 2018, Reuters reports.
And in increasingly typical form for Russo-China deals, the other side of the bargain is investment cash and loans for Moscow: the oil agreement may involve up to $30bn in loans for Rosneft, which needs the money to cover the purchase of British-Russian TNK-BP for $55bn billion, after closing the deal last week.
Igor Sechin, Rosneft’s president could barely conceal his glee. We have obtained an additional credit line on very advantageous terms, he told Interfax.
The terms suggest that China appears to be willing to pay in advance for Russian oil, but at the same time is driving a hard bargain and wants a share in upstream projects for its China National Petroleum Corp as well to bolster the security of supply deals. Sechin also said that Russia and China would jointly explore three offshore blocks in the Barents Sea and eight blocks onshore Russia.
The appointment of Xi has also started speculation that progress will be made on signing off on the long mooted gas deal which has been under negotiation for six years now. If an agreement is reached Russia could supply up to 68 billion cubic meters of gas a year to China through the new cross-Siberian routes, a bit more than a tenth of Gazproms total annual production.
And business in general has been improving. Bilateral trade between Russia and China has beenskyrocketing over the past few decades, CCTV correspondent Tian Wei told RT. The China Institute of Contemporary International Relations forecasts that trade between Russia and China will exceed $100 billion in 2015, which means it is chasing Europe as Russias biggest trade partner overall.
Xi and Putin will meet once again at the BRICS summit in South Africa with the other emerging economies of Brazil, India, and South Africa soon as this meeting increasing goes from a marketing term created by Goldman Sachs to a real economic entity.
Although the failure of Russia to come up with a loan for Cyprus has been cast in a political light, for the Kremlin it also looks like a bad deal, whereas deal with China makes much better business sense. Cyprus was asking for a loan that many said was unsuitable, where as China was coming with mutual investment plans.
Both countries want to encourage reciprocal investment. We agreed to make more active use of the possibilities the Russian-Chinese Investment Fund offers, and to pay particular attention to infrastructure and production projects in the Russian Federations Far East, Putin said following his first meeting with Xi.