Why Russia’s relationship with China is important

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Russia’s relationship with China

The crash of the MH17 Malaysia Airlines Boeing (BA) 777 flight in Ukraine has made the economic, political, and investment climate worse in Russia. Since the U.S. revealed its new list of sanctions on July 16, U.S. listed exchange-traded funds (or ETFs) investing in Russia such as the VanEck Vectors Russia ETF (RSX) and the SPDR S&P Russia ETF (RBL), which are heavily invested in top Russian firms like energy giant Gazprom (OGZPY) and Rosneft Oil Co. (OJSCY), have seen their prices slump. These ETFs have seen a price decline of 7.48% and 7.68%, respectively, from July 16–25.

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The silver lining

However, the latest round of U.S. sanctions may not leave Russia vulnerable for funding. China has proved to be a good source of funds for Russia in the past as well.

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Rosneft and other energy companies in Russia may start looking to China for their funding needs. Rosneft has repeatedly turned to Chinese lending during periods of tension with the West including taking a $6 billion loan in 2005 to buy Yukos assets. In the 1Q14, Rosneft reported $41 billion in commercial debt, mostly owed to Western banks. It also reported $25 billion in funds received as prepayment for expected oil deliveries, of which ~$20 billion is Chinese financing. It’s believed that Rosneft has retired some of the Western bank’s debt with the Chinese prepayment funds, suggesting their increasing preference for Chinese financing.

Russia’s natural resources industry’s growing reliance on Chinese lending may dilute the effect of sanctions aimed at the finances of Russian oil companies. The sector forms the backbone of the Russian economy. To this effect, Russia’s Gazprom has recently entered into a major gas deal with China’s CNPC.

To learn about the recent major gas deal between Russia and China, read our Market Realist series, Must-know: Pipelineistan calling for a new Eurasian economy.

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