Russia is set to re-open talks with China within the coming week to secure $25 billion in loans, for two cash-strapped Russian energy companies, in exchange for guaranteed long-term crude oil supplies in the opposite direction.
The initial round of talks, staged last week, were according to reports halted by a financial dispute over interest rates and state guarantees.
A source close to the talks said that the Chinese wanted to attach "absurd conditions" to the loan package: most notably higher interest rates owing to the global credit crisis. China had previously agreed to lend the money at 7% a year.
Russian Energy Minister, Sergei Shmatko, denied that this was the case and claimed that the temporary collapse was down to a “technical pause”. Mr. Shmatko added: “I think the talks will resume soon – in the next few days, even next week.”
Beijing is considering lending $15 billion to Rosneft, a major Russia's state-owned oil company, and $10 billion to pipeline monopoly Transneft, as the Russian companies find it tougher to access funding amid plunging oil prices and the global credit squeeze.
The loans are of utmost importance for Russian oil firms as they are in a separate need for cash to refinance their heavy debts and fund growth during a time of relative crisis in the oil industry.
The talks are part of a broader package that would allow oil-craving China to secure 15 million metric tonnes – the equivalent to 300,000 barrels per day (bpd) – of crude, from Russia, ever year for the coming two decades.
The Russian commodity would be supplied through a much-delayed pipeline project signed off during Chinese Premier, Wen Jiabao's, visit to Moscow, at the end of October. The East Siberia-Pacific Ocean (ESPO) trunk pipeline is to be linked to China via the Siberian city of Skovorodino, some 70 kilometers (44 miles) north of the Sino-Russian border. Upon completion the route is set to have the capacity to carry 15 million tonnes of crude per annum.
Not only would a further delay in the talks deal a blow to the Kremlin's strategy to showcase its strategic relations with Asian energy consumers at a time of strained relations with the West, but it would also have a negative impact upon the market.
On news of the initial round of failed talks shares in Rosneft, although in line with the index at large, fell 6.8% on Moscow's MICEX exchange.
The deal – if completed – will be a milestone in energy cooperation between oil-hungry China and its former Cold War rival Russia. At current the Kremlin is only the fifth-largest supplier of crude oil to the Chinese market despite the two countries' convenient geographic proximity.