What does Russia have a lot of? Oil.
What does China have a lot of? Foreign exchange reserves.
No surprise then that the two are joining forces to help each other out in their hours of need.
According to Reuters the states will sign a much-delayed long-term oil supply deal today, and at the same time, Beijing will enter talks with the Kremlin over $20-25bn of export-backed loans to liquidity-strapped Russian companies.
The deal will give Beijing access to 300 million tonnes of Russian oil over the next 20 years, accounting for 4 percent of its annual demand, while allowing Russian firms to sort out immediate financing needs during an acute liquidity squeeze and an oil price slump. The deal will be on the agenda when Chinese Premier Wen Jiabao meets Russian officials on Tuesday, at a time when Moscow’s relations with the West are at a low ebb.
JBC Energy says if the deal goes through, it is expected Rosneft will get some 60 per cent of the funds while the remainder will go to Russia’s pipeline monopoly Transneft. While Chinese demand does appear to be waning – hitting 6.67m barrels per day in September, it’s lowest level since May – JBC writes the figure is still not too far from this year’s average of 6.77m barrels per day.
If we take out the months of June and July, which were at extreme highs due to the Olympic Games, last month’s figure is only 20,000 b/d below the average. Support for demand could come from a reduction in retail prices that is currently being considered. In addition the country’s government has reportedly approved $292 billion for the construction of railways and has plans to increase spending for additional infrastructure projects which should boost oil demand in the world’s second largest consumer.
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