Russia signed the biggest-ever oil and military deal with India
AP Photo/Saurabh Das
Main page Economics, Russia, Oil

As Russia's relationships with Europe and the U.S. get сolder only intensified by the conflict in Syria, Putin turns to India, his long-lost ally, by investing billions of dollars into Indian oil and military.

During the last weekend's BRICS meeting in Goa, Russia's President Vladimir Putin had a very fruitful session with India's Prime Minister Narendra Modi that resulted in several deals worth billions of dollars for both countries. The biggest one involved the purchase of India's second-largest oil producer Essar Oil (IN: ESOIL) by Russia's Rosneft (LSE IOB: Rosneft [ROSN]) for $12.9 billion. As a result of the deal, Rosneft will acquire 98% of Essar Oil together with an oil refinery and a transportation port Vadinar both of which belong to the company's infrastructure.

However, out of the 98% stake, only 49% will go directly to Rosneft whereas the other 49% stake will be equally divided among a Dutch oil trader Trafigura, a close partner of Rosneft, and investment fund UCP, owned by an ex-Rosneft's management board member Ilya Sherbovich. Reuters announced the Rosneft-Essar deal to be the biggest "foreign takeover" for India as well as the most expensive foreign deal for Russia. Both Essar's Chairman Shashi Ruia and Rosneft's chief Igor Sechin said that this was a "historic day" for the companies:

“This is a significant milestone for the Company. Rosneft is entering one of the most promising and fast-growing world markets. At the same time, this project provides unique opportunities for synergies with the existing assets of the Company and is consistent with Rosneft's enhanced presence in the fast growing markets of other APR countries, such as Indonesia, Vietnam and The Philippines,” said Sechin.

Russian RBC says that the most attractive synergy opportunity that Sechin was talking about involved using Essar as a location for refinement of crude oil coming from Venezuela, another recent Rosneft's partner. India will serve as an "insider" oil production location that opens access to remote Asian markets, which would be much harder to access from Russia alone. According to Rosneft, the company plans to run more than 10 million ton of Venezuelan oil through Essar's facilities in the next 10 years, what is expected to significantly boost the market share of the Indian producer that accounts for only 9% of the domestic market.

However, this is not the first time Russia and India discuss the oil deals. Earlier this year, India has invested over $5.5 billion in Russian companies, said Indian Prime Minister. During the meeting in Goa, Rosneft also approved a purchase of an 11% stake of Russia's Vankorneft by the Indian ONGC (NSE: ONGC) for $930 million. With the additional 11%, the total stake of ONGC in Vankorneft will amount to 49%, with the control stake remaining in the hands of Rosneft. Vankorneft is exploiting the biggest oil deposit in Russia holding up to 265 billion tons of oil. In addition to that, Indian ONGC could also be one of the potential buyers of Rosneft's 19,5% stake that will be open for bidding in the next months.

Rosneft's "private" privatization puts cash in Kremlin's pocket

Rosneft's interest in India's Essar Oil is yet another example of the biggest oil producer trying to secure its position in foreign markets as a way to find new supply destinations in today's oversupplied market. Boosting the oil production in India also doesn't seem to fit in the OPEC-Russia oil production freeze plan.

Brent climbs as Putin promises to join OPEC in freezing the oil output

Long-lost allies

Apart from the hefty oil deal, Putin discussed the military future of the two countries that used to be strong allies back in the Cold War times. As a result of the military agreement, Russia will set up a production of military helicopters in India while India will buy Russia's missile systems, reports Reuters. The two countries found each other in the moment when Russia's relationships with the West got worse because of the disagreement on the civil war in Syria resulting in a new round of sanctions for Russia from the U.S. and several EU countries.

Indian Prime Minister said after meeting with Putin, whom he called "an old friend", that the countries have "a truly unique and privileged relationship" as they share the same view on the situation in the Middle East and the international terrorism, which, according to India, is coming from the country's neighbor and a long-time rival Pakistan.

"We are conducting a comprehensive dialog on a wide scale of international issues, in which Indian and Russian approaches are close to each other or coincide," said Putin, as reported by Reuters.

The new military agreements echo those of the Soviet times when the Soviet Union was the only supplier of the ammunition for India's army. As part of the defence pact between the countries, at least 200 military helicopters and an unconfirmed number of S-400 missiles will be built in India. According to Bloomberg, between 2011 and 2015, roughly 40% of entire Russian weapon export went to India. And this is the number that Putin wants to grow further.

Indian Prime Minister said that the long private conversation he had with Putin paved the way for the strong defense and economic ties between the countries.

"With the complex and changing global context, your leadership has provided stability and substance to our strategic partnership," Modi told Putin on the stage at BRICS meeting.

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