China Has Decided
Russia Is Too Risky an Investment, by MAXIMILIAN HESS
The
economics of a major oil deal seemed to make sense. But when energy companies
are arms of the state, economics aren't the only factor.
On May 4, the planned investment by the Chinese
company CEFC China Energy into Russian state oil giant Rosneft fell apart,
eight months after it was first announced. The tie-up’s failure reveals the
strict limits on the potential for energy cooperation between China — which is
in the process of taking ownership of CEFC — and Russia, and with it a broader
political alliance between the two countries.
Beijing has come to view Rosneft more as a tool
of the Russian state than a traditional oil company, and to the extent the two
countries don’t share political priorities, China has little interest in any
significant economic relationship. Although China is actively searching for new
political and economic partners around the world, it seems to have decided the
Russian government is too risky a political investment.
Rosneft makes little effort to disguise its
political motivations and its status as a major domestic political player
throughout the Vladimir Putin era. When Yukos, then Russia’s largest oil
company, was seized in 2004 following oligarch Mikhail Khodorkovsky’s fall from
grace, its assets were ultimately transferred to Rosneft. Rosneft subsequently
controlled 16 percent of domestic oil production. Today, the firm claims to produce
about 40 percent of Russia’s oil output.
Since Igor Sechin was named its CEO in May 2012,
Rosneft has increasingly become a foreign-policy instrument.
Sechin had previously overseen energy policy in his role as vice premier of
Russia, and he foreshadowed his future plans for Rosneft in negotiating with BP
over its Russian operations and by personally taking a leading role in
developing Russian-Venezuelan cooperation. Within a year of being named Rosneft
CEO, Sechin oversaw the purchase of BP’s Russian operations, resulting in the
British oil major taking a 19.75 percent stake in Rosneft itself. Sechin was
feted in London, and many in Moscow saw the deal as a way to align Russian and
Western interests.
Just one year later, Sechin found himself on
Western sanctions lists as relations between Russia and the West soured
following Moscow’s annexation of Crimea and invasion of Ukraine. That same
geopolitical shift brought Russia closer to China. President Vladimir Putin
famously traveled to China in May 2014, when he reportedly agreed
to Chinese pricing demands on a 30-year gas export agreement.
Russia’s shifting geopolitics coincided with
Chinese President Xi Jinping’s launch of the Belt and Road Initiative to invest
in and develop trade with dozens of countries, using China’s economic pull to
enhance its influence and deepen political ties. Rosneft, which had recently
agreed to double deliveries to China in one of the oil market’s largest-ever
deals, seemed poised to benefit. Meanwhile, the previously little-known CEFC
was launching its own foray into global markets, seemingly taking its cues from
Beijing.
Subsequent events attest that CEFC was following
the Belt and Road playbook of investing in locations that are strategically
significant for the Chinese state. CEFC’s first major foreign efforts came
through its heavy investments into the Czech Republic. The company’s founder,
Ye Jianming, was even named an advisor to Czech President Milos Zeman, who in
2015 was actively seeking to boost relations with Beijing. Ye was essentially
borrowing from Rosneft’s playbook. Chinese state holding company CITIC then
agreed to buy in to
CEFC’s Czech assets, though these are far removed from its core business.
CEFC also appeared to be executing Beijing’s
foreign-policy aims through another blockbuster deal when in May 2016 it agreed to
buy 51 percent of KMG International — a subsidiary of Kazakhstan’s state energy
giant, KazMunayGas. The deal was seen as crucial for Kazakhstan, where Xi had
launched the Belt and Road program, and which was suffering from its own
economic slowdown. CITIC is reportedly considering
buying in to its stake in Abu Dhabi’s onshore oil concession as well, in which
the state-owned China National Petroleum Corp. is already invested.
All this raises the question of why the
investment into Rosneft — although professedly also in the spirit of Belt and
Road — has now been allowed to collapse. When the $9.1 billion deal was
announced in September 2017, it appeared to be a new crest in the burgeoning
Russian-Chinese energy partnership. Much coverage of CEFC since Ye’s detention
in late February and speculation into CEFC’s downfall has focused on the
significant debts the company amassed. CEFC’s debts may have been cumbersome,
but Russia’s state-owned VTB offered to provide much of the financing for the
tie-up, though Beijing could easily have done so as well.
Beijing was also clearly willing to deepen its
oil ties with Moscow — in 2016, Russia displaced Saudi Arabia as China’s main
oil supplier, with the lion’s share being delivered by Rosneft. Just days
before the deal’s cancellation, it was reported that
a separate five-year supply contract between Rosneft and CEFC, agreed last
November, was being adjusted but would continue. However, a direct CEFC
investment into Rosneft proved a bridge too far.
Rosneft’s geopolitical machinations ultimately
are to blame for the CEFC deal’s collapse. Sechin has allowed Rosneft’s debt to
balloon as it seeks to counteract the cost of U.S. sanctions, continuing his
mission of prioritizing potential geopolitical reward over financial risk.
While Beijing’s willingness to continue
financing the Venezuelan regime appears to have been exhausted,
Rosneft has only doubled down. Just last September, Rosneft agreed to
make multibillion-dollar loans to Iraqi Kurdistan, less than a month before its
independence referendum. Conversely, China has avoided overtly involving itself
in Iraq’s internal squabbles. Furthermore, Rosneft’s effective takeover of
India’s Essar Oil, finalized last June, allies the oil giant with New Delhi.
This may ultimately provide geopolitical rewards to Moscow, and CEFC’s stake
would likely not have been sufficient to influence Russian decision-making with
regards to one of Beijing’s main rivals.
The cost of Rosneft’s geopolitical machinations
has often been borne by its partners. Its shareholders have failed to see
returns comparable to other oil firms, even those also concentrated in Russia,
amid the oil-price recovery. Last month, BP CEO Bob Dudley joked that
he would have advised a younger version of himself to avoid Russia, though his
firm is very much still invested in Rosneft. Beijing appears to have heeded
that warning.
Nine years after Igor Sechin launched the first
bilateral commission on Russian-Chinese energy cooperation, his machinations
have demonstrated that cooperation’s limit. While China and Russia now describe their
relationship as “strategic partners,” the collapse of the CEFC tie-up
demonstrates that this is still some way off from an alliance.
No comments:
Post a Comment