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. Last Updated: 07/27/2016

Firms Pay 5% for China Loan

Rosneft and Transneft will pay interest rates of 5 percent to 5.5 percent on their combined $25 billion loan from China secured by 20 years of oil supplies, a Russian source said Wednesday.

The two sides estimated the value of the deal at $160 billion, based on a long-term oil price forecast, said the high-level government source, who spoke on condition of anonymity.

"This is an unprecedented success. The rate is pegged to LIBOR, and the interest rate will fluctuate between 5 and 5.5 percent," he said.

China agreed Tuesday to lend the money in exchange for the supply of 15 million tons of Russian oil over 20 years in the largest-ever deal between the two states, which are seeking to cement energy ties.

State-controlled Rosneft, the country's largest oil producer, will get $15 billion of the loan from China Development Bank and oil pipeline monopoly Transneft will receive $10 billion.

Supplies of 15 million tons over 20 years translates into 300 million tons, which means that the two sides are forecasting an average oil price of $72.76 per barrel, compared with the current price of $39 per barrel of Russia's main crude blend, Urals.

"Five-and-a-half percent is pretty good for a facility with such a long duration and for such a vast amount of money," said Alex Fak, an analyst at Troika Dialog. "But there's still a question mark over the exact price at which Rosneft will be selling crude."

Beijing has abundant cash that Moscow needs to access as it heads into its first recession in a decade. Access to the Chinese loans will also help Rosneft repay some of the debt accumulated when acquiring assets that once belonged to bankrupt oil giant Yukos.

Russia is seeking to diversify its exports away from the West and is targeting China as the main market for oil that will be extracted from the new generation of fields in eastern Siberia.

China, which is the world's No. 2 oil importer, has been working hard to win oil supplies from Africa and elsewhere to run its industries. The Russian deal should allow it to meet 4 percent of its current oil needs.

The agreement, originally planned for the end of 2008, did not come easily, despite being blessed high up in both governments.

Talks stalled in November over disagreements about interest rates and state guarantees China sought from the Russian government.

Speaking to reporters in Sakhalin on Wednesday, Deputy Prime Minister Igor Sechin, who signed the loan deal for the Russian side, said Rosneft was discussing not paying dividends for 2008.

The company's shares fell as much as 6.5 percent on the MICEX before paring the losses along with the broader market.

nRussia could earn an additional $36 billion per year if it refined all oil produced in the country, Rosneft CEO Sergei Bogdanchikov said Wednesday in Sakhalin.

(Reuters, Bloomberg)