Charlotte’s VEB: Beijing feigns partnership with bank play

By Nicholas Trickett

Putin’s visit to Beijing in June bred the usual dog and pony show of effusive and warm statements about Sino-Russian ties. But the details, as usual, told a different story. In particular, a tentative agreement that China Development Bank (CDB) loan Vneshekonombank (VEB) roughly $10 billion was an eye-catching PR ploy to highlight bilateral cooperation on infrastructure projects. But the terms of the loan and China’s choice to lend to VEB point to a growing deficit of trust between the two neighbors and a prominent case of how personnel changes (or the lack thereof) in Moscow have affected China’s interests.

According to sources cited by Vedomosti, VEB would have five years to service the interest on the loan – worth 600 billion rubles per Russian sources – put forward by CDB. But two conditions from the agreement seemed odd: CDB only gave VEB five years to service the interest on the loans and tried to mandate that VEB only finance up to 40 per cent of the infrastructure projects Beijing hopes will be developed in support of its Eurasian integration ambitions.


CDB loans money for international projects relevant to China’s economic strategy, generally using medium to long-term financing facilities. The bank has backed loans to other resource-rich emerging markets like Venezuela and Argentina. CDB secured a set of loans worth $25 billion to Russian oil giant Rosneft and Russia’s oil pipeline monopolist Transneft in 2009 using crude oil shipments. CDB secured another $2 billion loan with Russian oil giant Rosneft in 2013 with the same model.

But Rosneft wore out its welcome last year after agreeing to a flurry of deals with CEFC China Energy, a privately-owned company that rapidly expanded in recent years under the umbrella of Beijing’s Belt and Road Initiative. Incurring suspicion from party leadership, the company has fallen on hard times thanks to investigations into reckless acquisitions made using cheap state credit. CEFC was hoping to acquire a 14.12 per cent stake of Rosneft worth over $9 billion. CEFC claimed to have CDB’s backing to finance the second stage of the deal, which eventually fell apart. No Chinese lenders or firms were interested once it did. Rosneft’s pivot from state firms to private firms in China after stringing along China National Petroleum Corporation (CNPC) and CDB failed to secure closer ties with China more broadly.

Beijing has been a reliable importer of Russian oil, but its largesse has had limited effect. Chinese firms have been unable to acquire significant ownership of energy assets such as oilfields in Russia. The quick turn around on the CDB loan to VEB is signal that China is putting pressure on the Kremlin to further incorporate Chinese firms. Designating a 5-year period was likely intentional because many of the relevant projects the loan is intended to finance will take more than 5 years to build and operate profitably, so to effectively service these loans VEB has to rely further on state money or look to China for financing.

The much-touted Eurasia high-speed rail route that would eventually link Beijing and Berlin via Moscow is not profitable using commercial financing with loans at annual rates of 5.75 per cent. This is one key example where conditions needed to make the project viable require considerable subsidies. Beijing aims to exploit Russia’s lack of access to financing for these types of projects to then give Chinese firms access to contracts and stipulate that Chinese equipment be imported in support of the project.

But current Russian law does not allow foreign or domestic concessionaires to negotiate terms over things like tariffs or taxation, instead relying on direct negotiations over how capital is provided while the project is built. Firms can secure state guarantees on their investments but can’t affect pricing for services once the route is in use without backing in Moscow. That creates a permanent roadblock for China’s companies since many infrastructure projects, particularly for rail, can’t maximize profits lest they bankrupt Russian consumers and companies in the country’s regions by charging too much.

Further, the riders stipulating that outside investors had to be brought in is evidence that China is fed up with Russia’s refusal to open up its infrastructure market to outside players. CDB and other firms’ experience with Rosneft and the Russian energy sector don’t speak well of their prospects for infrastructure.

The outside investor stipulations will also create a sore point when, most likely, Russia will use firms registered offshore whose beneficial owners are close to the regime. Thus, they would meet the bare minimum of the conditions as announced in the Russian press while also undermining China’s intention: capping VEB’s stake to encourage outside investors. After failing to reach substantive agreements, both sides likely agreed to vague terms so that they could issue press releases for domestic and international audiences to highlight cooperation. However, Putin’s recent re-inauguration and the personnel shifts the new term suggest the deals weren’t insignificant.

Turn and face the strain

 VEB exemplifies how policy and personnel fights in Moscow hinder China’s infrastructure plans and feed its disillusionment with Russian firms who take loans from Chinese banks and firms, but offer relatively little in return.

Before Putin’s mid-May inauguration, news emerged that deputy Igor Shuvalov wanted out of the government. Putin suggested he head VEB, a post he assumed shortly thereafter. Shuvalov walked into a testy managerial situation. VEB recorded record losses in 2017 – roughly $4.5 billion – and, despite its name, does not have a banking license. Rather it exists as an economic development institution that frequently directs funds for projects and spending designed to enrich those connected to it.

Shuvalov is part of prime minister Dmitri Medvedev’s coterie and, while in government, handled issues pertaining to the Eurasian Economic Union (EAEU) and Eurasian integration. The move out of government was reportedly something he wanted. The move was largely interpreted as a loss of influence for Medvedev, but also reflect a PR problem facing the Kremlin – the need to rehabilitate VEB’s image.

Shuvalov has done little to hedge against further losses and fix VEB’s public image. Shuvalov’s initial move to feint towards efficiency was to announce the potential dismissal of 40-50 per cent of VEB’s workforce to save money. At the same time, Shuvalov worked up an as yet undefined idea to make VEB a platform to coordinate the country’s various development institutes and institutions. What he was really doing was trying to carve out a space for his new fiefdom to affect financial flows from the Russian Direct Investment Fund (RDIF) and related outlets.

The RDIF is one of Russia’s primary official vehicles to court larger Chinese investments and would give Shuvalov greater sway over deals with China. However, Shuvalov’s departure from government has meant that finance minister Anton Siluanov has taken over parts of his portfolio involving the EAEU and Eurasia writ large. That’s likely a loss for China, given Siluanov has little track record cooperating with Beijing on policy outside of announcements about bonds in yuan that went nowhere. The net effect is the dilution of responsibilities between two competing individuals with a weak track record delivering results for China.

No Country for China hands

There’s little reason to believe that the loan is going to lead to a breakthrough on big projects. After all, it was worth less than one fifth of the expected costs of Russia’s section of the Eurasia rail route alone and there is as yet no conceivable means for Chinese contractors to bid on concessions. What’s likelier is that Beijing knew it needed to walk a fine line: offer a financial win to Putin and, in this case, Shuvalov while also making clear that it expects to get more in the future.

There’s no clear “China constituency” or policy bloc that can be readily pointed to in Moscow. Shuvalov’s loss of his Eurasia portfolio is a problem for Beijing insofar as Siluanov likely has many more important things on his plate to worry about at the Ministry of Finance. Putin’s hinted interest at replacing foreign policy aide Yuri Ushakov with current Russian ambassador to China Andrei Denisov. Floating Denisov offered evidence that the presidential administration collectively understands it needs someone with direct China experience at the highest levels for negotiations like the VEB loan.

The slow pace of Putin’s staff turnover post-campaign has hindered Beijing’s ability to make use of newer faces to push for compromises by introducing a degree of uncertainty as to whom China should approach. Moves like the CDB loan to VEB are designed to curry favor and enrich target constituencies in Russia with whom China can deal in the future. Energy firm Novatek is one example. But these loans are failing to secure deals, forcing China to offer harsher and harsher terms to little effect.

Mutual trust for major deals between Moscow and Beijing’s business communities will continue to decline until the correlation of Russia’s domestic political forces better suit China’s agenda. Politics, Max Weber once opined, is the strong and slow boring of hard boards. Investing in Russia isn’t much different, a lesson China is learning over and over again.


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