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UPDATED: March 7, 2009 NO. 10 MAR. 12, 2009
New Phase of Energy Cooperation
The "loan-for-oil" agreement and other energy cooperation help shield China and Russia from the global economy's ups and downs

As the global economy continues to deteriorate, trade protectionism is on the rise. Under such circumstances, China and Russia signed their largest ever energy cooperation agreements on February 17 in Beijing. The agreements included a pipeline construction project, a long-term crude oil trading deal and a financing scheme between the China Development Bank and the Russia Oil Pipeline Transport Company. Taken together as a "loan-for-oil" package agreement, these deals represented a full stop in the bilateral energy negotiation period that started last October. The agreement marks a new phase in energy cooperation between the two sides.


A DEAL DONE: Chinese Premier Wen Jiabao meets with Russian Deputy Prime Minister Igor Sechin during the two countriesユ energy negotiations on February 17 in Beijing (YAO DAWEI)

A way out

Under a memorandum of understanding on oil that the two countries signed in October 2008, China would loan $15 billion and $10 billion, respectively, to OAO Rosneft Oil Company (Rosneft) and Russia Oil Pipeline Transport Company (Transneft), while Russia would export 300 million tons of crude oil from 2011 to 2030 and build an oil pipeline heading to China. Previously, the two countries had failed to reach a "loan-for-oil" agreement for a long time because of details such as loan interest. The memorandum of understanding stipulated that if the two sides could not reach consensus on specific contracts discussed in the memorandum before March 28, China and Russia would have to negotiate all related terms and conditions all over again. On February 17, the two countries held their third energy dialogue in Beijing and finally signed the formal agreement on "loan-for-oil."

The spreading financial crisis actually offered the two countries a new opportunity for energy cooperation. The Russian economy, which depends on the oil and gas industry, now faces its most difficult situation since 1998 due to the financial crisis and sliding international oil prices.

In 2008, the Russian stock market dropped 70 percent because of the financial crisis, and foreign investment dried up. By July 1, 2008, Russian businesses and banks owed foreign debts valued at $489.2 billion. Russia needs to pay off $295 billion in foreign debt by the end of 2009, not including $39 billion in interest. Most Russian energy firms are also saddled with heavy foreign debts. For example, Russian natural gas giant Gazprom owes $61 billion, Rosneft $21 billion and Transneft $7.7 billion.

This year the Russian economy will experience its first negative growth in 10 years, up to 3 percent. In January, Russia's major economic indexes were not optimistic. Its output value decreased 20 percent, while unemployment grew 23 percent over the same period last year. In addition, the Russian ruble had depreciated by one third since last August. Russia has used $210 billion from its foreign exchange reserve to slow down the ruble's depreciation. The Russian foreign exchange reserve has shrunk to $383.5 billion from $597.5 billion last August. Meanwhile, the financial crisis and ruble depreciation have caused rampant inflation, which might reach 19 percent in 2009. The Russian Government predicted the national budget deficit would reach 1.5 trillion to 2.5 trillion rubles (about $4.14 billion to $6.91 billion) this year, which would force Russia to dip into its oil reserve fund. International oil prices seem likely to continue falling, which would be a huge blow to the Russian economy. Therefore, both Russian oil enterprises and the government realized they needed to readjust their energy investment plans and reconsider energy cooperation with China.

Mutual benefit

With the global financial crisis squeezing their economies, China and Russia have been ready to cooperate in the energy field. Mutual benefit and reciprocity are the basis for their trade and economic cooperation, as well as the preconditions for guaranteeing the coordinated and sustainable development of their cooperation.

As it stands, the "loan-for-oil" agreement will help Russia survive the economic crisis. Rosneft is the largest oil enterprise in Russia, with the Russian Government holding a 75-percent stake in its shares. The company will receive $15 billion of the $25-billion loan in order to pay off its $8.5-billion foreign debt, which will mature by the second quarter of 2009. The Russian Government appreciates that the "loan-for-oil" agreement not only gives Russia a long-term and stable sales market and large amount of capital for oil exploitation and construction of transportation infrastructure, but also helps Russia cement a solid foundation on which to pass through the crisis and realize economic development by implementing large-scale and strategic projects in cooperation with China.

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