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Will Russia Buckle, Sell China Control of Its Oil Fields?

On Friday, Russian Deputy Prime Minister Arkady Dvorkovich signaled that the Kremlin would be willing to give Chinese companies majority stakes in Russian oil and gas fields. “There used to be a psychological barrier,” he said, speaking from Krasnoyarsk, a city in energy-rich Siberia. “Now it doesn’t exist anymore. We are interested in maximum investments in new industries. China is an obvious investor for us.”

At present, Russia caps foreign ownership at 50 percent for oil fields where reserves exceed 70 million tons and gas fields containing more than 50 billion cubic meters in reserves. Yet that could change if the Chinese want bigger stakes. As Dvorkovich said, “If there is a request, we will consider it.”

Given his country’s economic woes, it doesn’t seem likely that the cash-strapped President Vladimir Putin is in a position to say “nyet.” Last year, Russia’s gross domestic product underperformed every estimate, growing, according to official sources by only 0.6 percent, down from 1.3 percent in 2013, 3.4 percent in 2012, and 4.2 percent in 2011. The slide, now three years long, signals structural problems.

On top of the structural problems, the Western sanctions imposed on Russia over the invasion of Ukraine, occurring while energy prices collapsed, caused a major disruption to the economy. Money hemorrhaged out of the country last year, when capital flight doubled to $151.5 billion. The ruble, the world’s second-worst performing currency in 2014, fell 42.0 percent against the dollar, taking down the country’s foreign exchange reserves with it. Last year, the reserves fell from $510 billion to $380 billion, a drop of 25.5 percent.

This year looks even worse. Forecasts have progressively deteriorated. Once, Russian officials said GDP would grow 0.5 percent, but even that minimal rate looks unattainable now. Now, they are talking about the economy shrinking 3 percent, as Minister of Economic Development Alexei Ulyukayev said at the end of January. Others see even bigger declines. A Reuters poll of analysts predicts a 4.2 percent fall, and Moody’s is talking 5.5 percent. Anders Aslund of the Peterson Institute for International Economics predicts the drop could be as much as 10 percent.

Russia’s meltdown seems the perfect setup for China to ride to the rescue. “Putin is currently in a tough situation,” said a “senior Chinese oil industry official” to the Moscow Times. “We all know this. One of the ways to help him get out of the mess is trying to improve ties with China.” Not only has Beijing, through state-owned China National Petroleum Corporation, agreed to buy large quantities of oil and gas from Russia, it has extended assistance.

In October, for instance, China and Russia signed a $24.4 billion currency swap arrangement, effectively providing Russia liquidity, and the agreement might be expanded, as Chinese Commerce Minister Gao Hucheng has suggested.

Moreover, in late December the People’s Bank of China, the country’s central bank, permitted the trading of renminbi-ruble derivatives to facilitate commerce between the two countries. Perhaps the most dramatic sign of the degree to which Beijing is propping up the Kremlin is that China’s Export-Import Bank extended credit to two sanctioned Russian banks, relieving pressure from the measures.

And we can expect additional links between the two economies. Li Jianmin of the Chinese Academy of Social Sciences said in December that Beijing could do more by funneling additional assistance to Russia through the Shanghai Cooperation Organization or the BRICS forum.

China and Russia are molding their economies together. Total trade volume between the pair increased 6.8 percent to $95.3 billion last year, a record. Putin sees trade with China hitting $200 billion in 2020.

Even if trade does not reach such a lofty level, the integration of the two economies is accelerating, most notably in the oil and gas  sectors, which account for a disproportionate share of the trade volume. If the Kremlin allows a Chinese company to take a majority stake in a Russian energy field, as Dvorkovich indicates, the long-talked-about Dragon-Bear Axis cannot be far off.

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