The Top Play in Russia’s $400-Billion China Deal

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The Top Play in Russia’s $400-Billion China Deal

Last week, Russian President, Vladimir Putin, announced that he would accept the outcome of the Ukrainian elections and begin pulling Russian troops back.

How noble!

Don’t be fooled, though. The timing of that statement was no coincidence.

It came as Russia signed a new $400-billion energy deal with China, which will see it supply 38 billion cubic meters (bcm) of natural gas to the Chinese.

Negotiations with China have actually been ongoing for almost 10 years now. But a finalization of the deal was likely prompted by the global pushback against Russia over its meddling in the affairs of Ukraine.

You see, while the 38 bcm pales in comparison to the more than 160 million cubic meters (mcm) that Russia supplies to Europe (over 30% of European supply), it will fill a gap that’s sure to occur, given that the eurozone is actively looking for other suppliers for its energy needs.

And the gas won’t start flowing until 2018 or 2019 . . .  which is about the same time that Russia will face major competition from other natural gas suppliers to Europe.

It’s another pertinent reminder of what I say time and time again here: He who has the energy, has the power.

And in this case, there’s a standout play . . .

Russia and China Stick it to the West

The deal with China isn’t going to be cheap for Russia.

There’s little doubt that the deal is structured favorably for the Chinese, as it’s not in the dire monetary straits that some of Russia’s cash-strapped customers are.

For example, Russia will have to foot the cost of building a gas pipeline (it will actually build enough capacity to supply up to 60 bcm), and then hope that the Chinese live up to their end of the bargain and buy the gas.

Nevertheless, it’s another example of why, despite any sanctions that the West imposes, controversial nations like Russia can never be frozen out of the energy game.

As I said, energy is power. Even the Iranians – under ongoing sanctions, isolation and the threat of military action from the West – still have customers for their oil.

Russia is no different. It boasts the world’s largest natural gas reserves. That gives the country a lot of leverage in both price and supply.

Its deal with China is mutually beneficial. The Russians don’t have to worry about what China thinks of its human rights record or vice versa. Neither country could care less about what the West thinks, and both are superpowers in their own right.

It also means that Russian energy companies, which are among the cheapest in the world today, continue to represent speculative value for investors who have the nerve to stick it out . . .

The Big Winner From Russia’s Deal With China

One of the best plays is Gazprom (OGZPY).

It’s the largest gas company in the world, accounting for more than 20% of global supply and more than 85% of Russian supplies.

Over the past six or seven months, its share price has suffered amid growing concerns regarding Russia’s increasingly belligerent attitude.

At current levels, the share price values the company at around one-third of similarly sized rivals like Exxon Mobil (XOM). It’s worth considering for the speculative portion of your portfolio. Shares are very liquid on the U.S. over-the-counter exchange.

Keep in mind that since it’s majority-owned by the Russian government, its policies and agreements are basically subject to the blessing of the Kremlin. Still, in light of the major deal with China, if there’s one company that stands to benefit massively in the coming years, Gazprom is probably the bet to make.

And “the chase” continues,

Karim Rahemtulla

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