No subject

centres in the east of the country. China hopes that the loan and the
forthcoming agreement will help ensure that the Russian presidential
administration (the Kremlin) does not act on previous threats to
divert the whole of the pipeline's supplies to consumers such as Japan
from its eastern Pacific coast if it is not satisfied with the terms
of an agreement, although whether Russia would really have been
prepared to sacrifice access to the largest oil market in Asia over
import pricing issues appears unlikely. China's willingness to provide
the loan indicates its wish to push the oil supply agreement with
Rosneft forward, which would account for around 4% of China's current
annual oil demand. Given the size of this agreement (the biggest ever
between Russian and Chinese oil firms), China is indeed more than
willing to provide the funds given the strategic benefit to its own
oil import supply security. Indeed China is extremely keen to increase
oil imports from Russia to offset its dependence on oil imports via
tanker through the Strait of Malacca, which are vulnerable to supply
disruptions from, for example, collisions in the Strait, congestion,
attack by pirates, or even a naval blockade by a hostile foreign
power.

Outlook and Implications

The export-backed loan deal, assuming it is finalised, will represent
a win for Russia and China individually, as well as a victory for the
two countries together in expanding their economic ties and
strengthening their co-operation. For Russia, the loan will provide
much-needed financing to cope with the duel effects of the financial
crisis and the oil price slump, as well as providing additional
incentives to push on with ESPO construction, the tie-in branch
pipeline to China, and funds for exploring and producing the oil in
eastern Siberia to send to China via the Skovorodino-Daqing pipeline.
Construction of the cross-border pipeline and implementation of the
oil supply deal will allow Russia to diversify its export markets as
well, marking a major splash for Russia into the Asian oil market.

For China, the loan deal helps secure oil imports from Russia while
helping to ensure Russian follow-through on its earlier promise. What
is more, the deal binds Russia and China tighter economically, marking
a significant step forward in their blueprint to increase their energy
co-operation. A supply agreement would be likely to start reversing
the recent decline in Russian oil imports from China that reportedly
fell 19.5% between January=96July 2007 and 2008, while providing an
alternative source of oil supplies from the Atasu-Alashankou pipeline
between Kazakhstan and China, which is likely to transport around 6.5
million tonnes of oil this year (see China - Kazakhstan: 24 September
2008: Crude Supplies Via China-Kazakh Pipeline May Rise 30% This
Year).