On February 17, China and Russia signed loan-for-oil deal. Rosneft and Transneft will split $25 billion in loans from China Development Bank. In exchange, Russia will provide China with an additional 15 million metric tons of crude oil a year, which is totally exporting 300 million tons of crude oil to China between 2011 and 2030.The oil Russia will provide equal to 10% of Chinese import. The crude oil market rebounded strongly after the big deal. The price was $35 per barrel, while now it was $45.
Win-win deal
Benefit for China
Oil strategic reserve
Crude oil as the most essential resource in production means a lot to a country. It is also connected with national strength.
The oil Russia will provide equal to 10% of Chinese import. By 2010, the Chinese oil strategic reserve will reach 30 days of consumption at current level, which is twice as present. China also had a deal with Brazil’s Petrobras 2 days after Russia, Brazil would provide China between 100,000 and 160,000 barrels of oil a day. In return, China will supply loans of up to $10bn.
Profitable investment
China as the biggest American’s creditor may short for anything but US Dollar. How to use the US Dollar reserve efficiently bothers Chinese government a lot. The new American president Obama had signed the $18.7 billion plan to stimulate the economy, it seems every time USA stepped into recession, the best and only way was to print more money. US Dollar flooding the world is definitely a huge harm to the value of Chinese reserve.
The RMB appreciate 20% against US Dollar in 2008, while the interest rate of American T-bills was only 2.9%. Though Chinese ideal interest rate for Russian loan was 7%, compared with 2.9%, it was far better. And Russia as the world’s third US Dollar reserve country is definitely a good back up for paying the loan.
Benefit for Russia
Thirty for loan
Rosneft had problems due to the financial crisis. The businessmen explained that the overall debt volume of the Russian fuel and energy complex totals some $80 billion. But they need money not only to pay creditors. It can be done at the expense of “state targeted credits”. In addition, the money can be used for research and developing new oil field.
The crash of economy
The forecast of Russian economy will contract by 2.2% this year, which is the first time GDP is to shrink in the world’s largest country since the 1998 financial crisis. The industrial production would fall by 7.4%, while investment would be down 14%. All the figure showed Russia needed aid.
An extraordinarily large order
Russia, the world’s second largest oil exporter, was badly affected by the slump of crude oil price, the current account had turned deficit when the price was below $60 per barrel. Getting an extraordinarily large order during the recession is definitely a good deal.
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