‘Sitting in Ambush’ for Russian Companies

Bank of China has agreed to loan Russian state-owned gas giant Gazprom (ticker: OGZPY) €2 billion ($2.17 billion). In the company’s press release, Gazprom said the loan was the largest deal in terms of the amount of financing attracted directly from one financial institution and the first bilateral loan facility agreement with a Chinese bank.

The deal is the latest in a string of agreements between Russia and China for more energy flowing east, as relations between Russia and the West continue to deteriorate over Ukraine. U.S. sanctions against Russia have cut its energy sector off from investment, forcing Russian oil and gas producers to increasingly turn their focus towards Asia.

The timing of the release, which followed news that the U.S. would extend sanctions against Russia, is also a public-relations message, Natalia Orlova, chief economist at Alfa Bank in Moscow, told The Wall Street Journal.

“Still, one shouldn’t expect that Chinese banks will replace the global capital market,” said Orlova.

Gazprom did not disclose the terms of the loan, which will likely be used for refinancing and is not huge for a company with an investment program around 10 times the size of the loan announced this week.

Russian companies, particularly Novatek, whose Yamal LNG project has been on hold while the company negotiates financing, have increasingly had to turn to China for money to help continue capital-intensive exploration. The loan given to Gazprom could be part of a larger plan to gain leverage over Russia for more favorable energy supplies as the Russia looks for funding outside of Western markets.

“China is sitting in an ambush waiting for Russian companies to get into a predicament and then save them on their own terms,” said Mikhail Krutikhin, partner at RusEnergy consulting firm.

China extending lifelines to financially-stressed operators

Gazprom is not the only large state-run company that has recently closed a multi-billion dollar loan from a Chinese bank; Petrobras, (ticker: PBR) the world’s most in-debt oil company, announced a $10 billion loan from the China Development Bank to help pay down its debt this year earlier this week. In exchange for the assistance in helping pay down debt, Petrobras will supply oil to Chinese companies.

China has been lending to distressed companies in Latin America that are shut out of private debt markets. The loans appear to help China secure energy requirements on good terms.

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