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Russia to Supply China with Significant Portion of Oil Needs

A global credit crunch is prompting Russia to diversify its energy sales eastwards. In February, Moscow and Beijing signed an agreement, where Russia would supply oil to energy-hungry China for the next 20 years. In exchange China will lend Russia $25 billion, which will help fund an extension of the new Siberian pipeline to the Chinese border. Analysts in Moscow say that while the deal is beneficial for both Russia and China, it might not be all good news for the Western customers of Russian oil.

Russia shifts energy exports from main market

The oil Russia pumps from its frozen, Siberian fields, with one energy deal, will soon provide a significant amount of China's daily needs, about four percent. Russia will deliver about 300,000 barrels of crude a day. In return, China will finance the pipeline Russia will build from its eastern Siberian oil fields to the Chinese border.

Energy analysts say the deal is another indication of Russia's eagerness to shift some of its energy exports from its main market, Europe.

Re-orientation towards the East

"What is happening right now with China is a logical development of re-orientation of Russian politics and economy towards the East which has been happening for the past five, six years," Evgeny Volk said.

Russia's state-owned petroleum company Rosneft, will get $15 billion of the work and the state pipeline owner Transneft, is set to receive $10 billion.

Construction has been delayed repeatedly as the two countries bargained over the cost of transporting crude oil to the border.

But the Russian oil industry, which for decades has been a main source of revenue for the country, has suffered a dramatic shortfall as the price of oil fell during the global economic crisis.

Energy analysts say the economy is pushing Russia to build closer ties with the Chinese. They say Russia also is seeking allies in the East where the Kremlin is seen more favorably than in the West.

Evgeny Volk, who heads the Moscow office of the Heritage Foundation says, "Economically it is also close to the majority of states in that region." And, he adds, "it fits better in the Asian states community when it comes to cooperation in politics and economy."

Using energy as a diplomatic weapon

Russia has used energy as a diplomatic weapon with the West. In January, it shut off gas supplies to Ukraine over a pricing dispute, leaving hundreds of homes in Ukraine without heating for three weeks. Russia also opposes Kyiv's desire to join NATO.

Tom Mundy is an equity strategist at Moscow's Renaissance Capital investment bank. "So there's clearly a threat," Mundy asserts. "There's a precedent of a threat and it's entirely feasible that as Russia's bargaining position improves, that can be used again.

Mundy says there is no immediate threat to the Western consumers of Russian oil and gas. But the pipeline's first link should be complete later this year and he adds, once the crude is flowing, Russia will have leverage that will only grow along with the world's reliance on natural energy resources.