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Turning East
When the Going Gets Tough, Russia Turns to China

Russian state-owned energy firm Rosneft has seen better days. Oil prices are down 50 percent from last year, the ruble is tumbling, and, as Reuters reports, Western sanctions are denying it access to much-needed capital, financing, and technologies it needs to exploit new projects and unconventional reserves:

State-controlled Rosneft has struggled financially under sanctions imposed a year ago over the Ukraine conflict, which have all but cut it off from financing from U.S. and European capital markets. Sanctions rules have also limited Western cooperation in exploring Russia’s Arctic, deep-water and hard-to-recover oil deposits. […]

Rosneft may have to delay development of its liquefied natural gas (LNG) plant on the Pacific island of Sakhalin for at least two years, sources said, after prices fell and financing all but dried up due to Western sanctions.

A Rosneft source told Reuters that the company would be putting the brakes on that Sakhalin LNG facility “for three to five years because of lack of funds and low fuel prices.” Meanwhile, Western sanctions are essentially freezing projects in Siberian shale by depriving companies like Rosneft of the technology and expertise necessary to tap projects that are becoming increasingly important as Russia’s conventional plays mature.

The West’s sanctions have Rosneft on the ropes, but in its time of need a new player looks to enter the fray. Beijing is keen on investing in Russian energy projects, and in the face of recent sanctions Moscow is of a mind to invite it into projects it previously might not have. Reuters reports:

[A] proposed Chinese investment in a stake in the [east Siberian oil field Vankor] would go far further than Moscow has ever gone before to luring Beijing into its hydrocarbon industry.

Rarely has Moscow considered offering an ownership stake in such a big strategic onshore deposit to outsiders, despite decades of interest from Western majors. The offer is the more remarkable for being made to China, a rival for decades with which Russia nearly went to war in the 1960s over a border dispute.

This comes on the heels of Gazprom’s $400 billion gas supply deal with China, and with another major gas deal in the works it’s clear that Russia is serious about its own version of a pivot to Asia. But while China can provide financing and access to capital, it can’t replace the know-how Western companies would bring to unconventional projects. For that, Moscow still needs the West, and that’s a lever Brussels and Washington can employ in the future.

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  • Kevin

    I suspect cash (and reliable markets) will prove more important than technology and know how – cash and Chinese partners will allow them to get access to the technology.

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