The effects of the current financial sanctions against Russia have led to Gazprom, the Russian state-owned oil company, to begin talks with the Bank of China. With both US and European financial markets closed to them, Gazprom needs to secure reliable credit lines in order to function, and the Russian banks have only so much capacity to handle the strain.
Both the US and the European Union have banned banks from providing financing to Russian companies for more than ninety days. In addition, BNP Paribas has ceased to offer letters of credit to Russian banks who deal with commodities traders following heavy fines when it fell foul of European Union sanction law back in June this year.
The move comes during a week of intense discussions between Russia and China around deeper economic integration. Energy is the most pressing concern for both parties, but talks are also in progress around setting up currency trades and the creation of forex derivatives contracts between the two nations’ Exchanges.
Gazprom’s ability to secure lines of credit is essential to the Russian economy – most notably because its cash flow generation is a major source of the government’s income, but also because it is responsible for most of the oil exported and used by Russia. Income for Gazprom has fallen by $20 billion dollars over the last few months. The sanctions ban US and EU energy companies from doing any business at all relating to Russian energy exploration and development.
While these foreign countries can afford to wait things out, this is not a luxury open to Gazprom, which is what has led to the negotiations between Gazprom and Industrial and Commercial Bank of China. Attempts are being made to build a relationship between the two organisations that would include trade and corporate credit, the issue of Gazprom bonds in Chinese currency and the creation of a payment system between the two nations.
The Chinese stand to make a great deal of money out of the deal if it can be agreed, and Gazprom is a heavy borrower of capital. It would seem to be a perfect match if the deal can be struck, and it would lose some US and EU banks a major client. In its 2013 accounts, Gazprom declared $615 billion in long term debts, and about half that in short term debts. Nearly 80% of both its long and short term debts are currently owed in dollars and euros, so if China can relieve those debts it would remove the sting of sanctions at a stroke.
Beijing is already lending to foreign institutions and is eager to open its capital markets. While its rates aren’t as low as those on offer from US and EU institutions, they’re still better than Russia’s domestic rates – offering a benchmark 6%, compared to Russia’s 8% rate.