Oil-for-loans: Chinese energy investments in Russia

China’s consistent economic growth, driven by wide-ranging capital investments and a thriving manufacturing sector, has made it the world’s largest energy consumer. Consequently, Beijing has found a reliable trade partner for energy commodities such as oil, gas, and coal in fossil fuel-rich neighbouring Russia. This relationship’s mutual affinity and security issues have been discussed and examined in recent years. The Ukrainian war and the subsequent Western sanctions on Russia have further driven Russian interests eastwards towards China and India. This article analyses Russia’s energy sector and illustrates an array of Chinese acquisitions in Russian oil and gas companies financed by China’s state-owned banks and companies.

A reliable partnership between the Russian state energy complex and China 

China became a net oil importer post-1992. China consumed 14.13 million barrels daily in 2021, 14 percent more than the International Energy Agency’s 2015 forecast of 9.5 million. The periods of intense economic growth in 2002-03 and 2007-09 further accelerated its oil demand. To overcome China’s exacerbated strategic and economic vulnerabilities caused by ever-growing imports, Beijing devised a “loans-for-oil” policy and equity investments (with a buyback option in exchange for oil imports) to create resilient and diversified energy supply chains. 

The era of strategic cooperation between state-owned Russian energy companies and Chinese national oil companies, especially between Rosneft and China National Petroleum Corporation (CNPC), began in 2004 following the “Yukos affair”. Yukos, one of Russia’s biggest private oil and gas suppliers, was driven to bankruptcy following tax fraud allegations, allowing China to up its ante. CNPC facilitated Rosneft’s acquisition of Yukos’ subsidiary, Yuganskneftegaz, a major oil producer, by allowing Rosneft to buy back controlling shares from CNPC. In return, China earned a sustained oil supply of 49 million tonnes annually. 

Table 1: Chinese Stakes in Russia’s State Oil and Gas Companies 

S. No.	Year	Investor	Transactional party	Quantity in Millions ($)	Share size in percentages
1.	2006	China National Petroleum Corp. (CNPC)	Rosneft	500	0.62
2.	2009	China Investment Corporation (CIC)	Nobel Holdings	300	45
3.	2010	China Huadian Corporation (CHC)	JSC Territorial	360	51
4.	2011	Three Gorges	EuroSibEnergo	2290	50
5.		CHC	TGC-S	590	100
6.	2013	State Grid	Sintez	1140	N/A
7.	2013	Shenhua	En+	460	50
8.	2014	CNPC	Rosneft	990	10
9.	2014	Power Construction Corporation (Power China)	RusHydro	1460	49
10.	2014	CNPC	Novatek	940	20
11.	2015	State Administration of Foreign Exchange (SAFE)	Novatek	1210	10
12.	2015	China Petroleum and Chemical (Sinopec)	Sibur	1340	10
13.	2016	SAFE	Sibur	1150	10
14.	2016	CEFC China Energy	EN+	500	N/A
15.	2017	CIC	Eurasia Drilling	100	6
16.	2019	CNPC	Rosneft	9100	18

Source: Oxford Energy, Russian Government data, Chinese Government data, Reuters 

A rough calculation of its investments in Russia between 2005 to 2021 reveals that Chinese state companies have invested a staggering US$ 95 billion in energy infrastructure while also investing US$ 48 billion in acquiring stakes in Russian state oil and gas companies.

Table 2: China-funded Energy Infrastructure Projects in Russia

S. No.	Subsector	Project	Contractor	Chinese investments in US$	Year
1	Gas	Amur gas processing plant (GPP)*	China Petroleum Engineering & Construction (CPECC)*	12,700	2015
2	Gas	Power of Siberia Gas Pipeline	China National Petroleum Corporation (CNPC)	N/A	2019
3	Gas	Ust-Luga Gas and Chemical Complex*	China National Chemical Engineering (CNCE)*	13,300	2019
4	Gas	Amur Gas Chemical Complex (40% stake)	CNPC	11,600	2019
5	Gas	Yamal LNG Export Facility (20% + 10% stake)	China National Offshore Oil Corporation (CNOOC), Silk Road Fund (SRF)	5,900	2017
6	Gas	Arctic-2 Liquefied Natural Gas Project (20% stake)	CNPC, CNOOC	4,040	2020
7	Gas	Chayandinskoye LNG plant (10% stake)	CNCE	1,170	2019
8	Gas	Process modules (Arctic LNG-2)*	Bomsec OffShore Engineering*	520	2019
9	Oil	Eastern Siberia Pacific Ocean Pipeline*	CNPC*	25,000	2009

Source: Oxford Energy, Russian Government data, Chinese Government data, Reuters; *fully funded by China

Chinese financial interventions strategically reallocated and built assets crucial to Russia's energy economy, helping Russia consolidate its “Pivot to Asia” policy. Political will at the highest rungs of both governments, Beijing’s vast financial resources, Russia’s “Look East” policy, Western sanctions of 2014 and subsequent alienation reinforced this partnership.

Oil-for-Loans 

The Eastern Siberia Pacific Ocean Pipeline (ESPO) project, crucial to oil transit between the two nations, highlights China’s “oil-for-loans” policy. ESPO provided Beijing with a land-based route for China’s energy trade and was thus most critical in ensuring China’s energy supply stability. Russian President Vladimir Putin termed the trade deal worth US$ 25 billion as the “Gateway to the East”.

CNPC funded ESPO in exchange for delivering 15 million tonnes of oil annually to China till 2030. Rosneft and Transneft agreed to a daily supply 0.18 million barrels and 0.12 million barrels. China Development Bank (CDB) facilitated the loan to the Russian energy giants at CNPC’s behest. CDB held the authority to deduct money directly from these accounts to ensure timely repayments. If a default occurred, CDB could withdraw the entire funds from the accounts.

ESPO provided Beijing with a land-based route for China’s energy trade and was thus most critical in ensuring China’s energy supply stability.

CNPC accounts for the bulk of imports from the ESPO; China National Chemical Corporation (ChemChina), Sinochem Group and China National Offshore Oil Corporation (CNOOC) are the other major buyers. Russia’s Rosneft still accounts for 40 percent of the total ESPO exports. Yet, players like SurgutNG account for roughly 27 percent of the ESPO crude going to China and other recipients, including Japan and South Korea.

This energy axis also helped the partners de-dollarise bilateral trade, as China agreed to pay in Rubles and Yuan from September 2022.

Weathering Western sanctions of 2014

The Sino-Russian bilateral relations go beyond commerce and trade. As Western sanctions, imposed after Russia’s annexation of Crimea in 2014, began taking a toll on the Russian economy, President Putin and President Xi struck a deal that would cushion the sanctions’ blows, leading to separate deals between CNPC and Rosneft, Novatek and China Petroleum and Chemical Corporation (Sinopec) and  Rosneft, Sibur.

However, this was different in the financial sector. As major Chinese banks complied with the Western sanctions, Russia missed out on potential foreign investments worth US$ 471 billion. To circumvent the sanctions, some Chinese banks facilitated aid to Russia through CDB, Silk Road Fund (SRF), and Chinese state companies – all less connected to the global economy, thereby suited to undertake riskier investments. A case in point is SRF’s financial assistance to Novatek in December 2015 and the subsequent purchase of 10 percent stakes in the Yamal LNG project. In April 2016, CDB extended a US$ 10-billion loan for the same project. Sinopec reportedly paid US$ 15 billion in prepayment for gas imports to stabilise Rosneft’s financial position. Sinopec and ChemChina also bought controlling stakes in Rosneft following its privatisation in 2014.

To circumvent the sanctions, some Chinese banks facilitated aid to Russia through CDB, Silk Road Fund (SRF), and Chinese state companies – all less connected to the global economy, thereby suited to undertake riskier investments.

Conclusion

Between 2014 and 2019, Putin and Xi met 30 times, emphasising the resilience and growth of the Sino-Russian energy relations. In November 2022, at the fourth China-Russia Energy Business Forum, Xi labelled the energy partnership as the bilateral’s cornerstone. The growing convergence, convenience, and alignment of energy interests have made the Sino-Russian bilateral relations the most amicable in their history. China is financing energy infrastructure across the global energy economy to create resilient supply chains for itself. But, with energy transition and grid decarbonisation gaining prominence, how long will such fossil-fuel friendships remain relevant is the million-dollar question.

• International Affairs
• China
• India
• Russia and Eurasia
• USA and Canada
• The Pacific, East and Southeast Asia
• economic growth
• oil
• Oil-for-loans
• Silk Road Fund
• Western sanctions

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