April 18, 2018 / 12:15 PM / 3 months ago

Breakingviews - China/Russia oil hug can dodge Huarong curveball

LONDON/SINGAPORE (Reuters Breakingviews) - China’s game of pass-the-parcel with Rosneft just took a fresh twist. The investigation of state asset manager Huarong’s chairman on graft allegations marks the second time in as many months that an entity interested in acquiring a stake in the Russian oil company has fallen foul of Beijing’s anti-corruption drive. But it’s less problematic for diplomatic relations than it looks.

FILE PHOTO - Logos of China Huarong Asset Management Co are seen during a finance expo in Beijing, China October 30, 2014. China Daily via REUTERS

Rosneft is a boon for fans of cross-border M&A of Byzantine complexity and obscure motivations. To re-cap: Glencore and Qatar acquired a 19.5 percent stake in the oil giant in December 2016 to help the Russian government raise funds, only to sell 14.2 percent via a $9.1 billion deal to CEFC Hainan – part of private Chinese group CEFC – last September. Yet in March this year, CEFC founder Ye Jianming was placed under investigation, raising questions about whether the deal would go through. The latest probe into Huarong chair Lai Xiaomin adds a second layer of uncertainty – news on March 9 that the asset manager had acquired a third of CEFC Hainan was seen as a stabilising factor that would help shepherd the Rosneft deal to completion. 

When seen through the lens of geopolitics the deal, which had been due to close in the first half of this year, looks more secure. Huarong and Rosneft are both state-dominated entities, regardless of management, and China and Russia have a clear interest in closer ties. The former is the world’s second-largest consumer of oil and wants to gain more security over its supply. The latter is keen to build ties with non-Western countries and find new markets for its oil, an objective that has received fresh urgency given U.S. sanctions on Russian companies revealed on April 6.

If anything, replacing Huarong’s chair with a more conservative state bank regulator ties it closer to Beijing, making it more similar to Rosneft, whose boss Igor Sechin is also associated with the more statist Kremlin players. Whether the entity that winds up owing 14 percent of Russia’s biggest oil group is called CEFC, Huarong or something else entirely is of secondary importance.

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