Friday, September 26, 2014

Financial Comment - Chinese Jaws Opening for Russia?

Russia goes East

For some time, all the talk that Russia’s destiny is to end up in China’s jaws sounded like something out of conspiracy theorists’ playbooks. Now, the news flow coming from reliable sources is starting to prove this kind of forecasts. The latest round of sanctions from both the U.S. and the European Union has effectively cut off any kind of financing from the Western hemisphere for Russian companies. As a result, Russia’s financial ties with China have grown exponentially.

According to Bloomberg, the yuan-ruble trade on the Moscow Exchange has jumped 10-fold this year to $749 million in August. This trade is still no match for $367 billion in dollar-for-ruble sales in the same month. However, Bloomberg provides an example of Sportsmaster, Russia's largest retailer of sporting goods, which currently settles 20% of its Chinese contracts in yuan and plans to raise this number to 70% within three years.

China has also entered the scene as the major source of financing for Russia and is trying to squeeze the most out of this chance. Facing the threat of being shut out of the European market for the long term, Russia’s natural gas monopolist Gazprom signed a 30-year contract with China National Petroleum Corporation in May 2014 to supply 38 billion cubic metres of gas annually. The development of the “Power of Siberia” pipeline, which is estimated at $25 billion ( started this September. Gazprom planned to get this money from China as an advance. Now, the Chinese advance for the pipeline is “suspended” – China is apparently trying either to get a lower gas price or better deals for its pipe makers, or both. The cost of the development could thus be picked up by Russian taxpayers. Such developments pave the way for deeper involvement of China in the Russian economy on less than favorable terms for Russia.

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