Kate Mackenzie China gets busy

While much of the west struggles with ailing financial sectors and ballooning fiscal deficits, China is getting busy on resources. Last week it was a $19.5bn injection for cash-strapped Anglo-Australian miner Rio Tinto, then an all-cash offer for Oz Minerals, then a $20bn loan to Russia for 20 years of oil, now a $10bn loan to Brazil’s Petrobras in exchange for some of its enormous oil and gas reserves recently discovered offshore.

Reaction to the Brazilian deal, announced late last night, is still filtering through and many pundits are still digesting the Rosneft agreement.

Philip Zelikow, a historian and former deputy to Condoleezza Rice, ventures that “this sounds like a deal worth something in the neighborhood of $20 a barrel” – and would lock in at least about 5 per cent of Russian oil exports for China.

If the United States had used credit to obtain such a long-term commitment of oil on concessionary terms from a debtor (say, one in the Arab world), some of my academic colleagues would be calling this an illustration of informal empire.

Zelikow concludes that if that $20/barrel figure is close to accurate, “this deal is a revealing glimpse into the current state of Russia’s political economy. Again, though, I invite others to refine these crude, initial guesstimates.”

One of his commenters is less impressed

$20/bbl means the loan is over-collateralized which is 100% normal.
Basically Rosneft needs the money – it has $8bn in short-term debt due this year. Getting it directly from the state would be a pain because it would erode the image of the company as something other than an arm of the state and it would also take away from the dwindling stock of FX reserves.
China HAS a lot of money so lending it out at 6% is no big deal at all (not a BAD deal either, getting paid T+350ish in big size guranteed by the Russian gov’t and secured by an asset).

Adding that it is a great deal for Russia, as it increases its leverage over the West.

Gregor thinks all of the China deals are perfectly logical: he tweeted earlier in the week: “Russia has oil and needs dollars. China has dollars and needs oil. Kismet!“. And gives kudos to the FT’s Lex column for its take: “China has what Russia wants: masses of US dollars. Russia has what China wants: energy. Hence Tuesday’s oil-for-loans agreement between Moscow and Beijing.”

The view here at Gregor.us is that the United States has been sleepwalking and navel gazing for years, while China locks up resources around the world. Especially in Africa. If the US now is willing to buy houses, or at least the loans on those houses, why not buy resources?

Update: We’re testing out a new video embed tool. Here is Rebecca Bream on the controversies of the Rio/Chinalco deal, when it was first confirmed: