Will we see a Russia-Saudi oil cartel?

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Illustration: Liu Rui / Global Times

For the first time in history, current King of Saudi Arabia Salman bin Abdulaziz Al Saud arrived in Russia on a state visit, which was held from October 4 to 8 2017. Preparations for the trip began in 2015.

Following talks between Russian President Vladimir Putin and the King of Saudi Arabia, agreements were announced in the energy and defense fields.

Russian Energy Minister Alexander Novak said that Russia and Saudi Arabia would create a joint $1 billion fund for investment in energy. Meanwhile, Saudi Arabia is now investing $10 billion in the Russian oil sector through its Public Investment Fund.

Moreover, the countries agreed on a further reduction in oil production, which is taking place within the framework of the OPEC+ agreement between the old members of the cartel and other large oil exporters, such as Russia and Kazakhstan. Now this agreement is valid until March 2018, however, in November 2017 there will be talks on whether it is worthwhile to extend it. Russia and Saudi Arabia are key participants in this agreement, because these two countries produce 25 percent of world oil.

The agreement concerns only oil production, and not exports, and this is why Russia and Iran are still boosting their oil market shares.

This agreement led to the fact that oil prices have risen by one-third since early 2016, which brought almost $2 billion to the Russian budget, the minister added.

Furthermore, Russian company Rosneft will be able to trade with Saudi Aramco, the world’s largest oil company in terms of oil production and the size of oil reserves. Another Russian company SIBUR will get access to the Saudi oil market.

Analyst of the social network for investors eToro in Russia and the Commonwealth of Independent States (CIS), Mikhail Mashchenko, notes that Saudi Arabia urgently needs to increase oil prices due to its budget deficit that has increased to 10 percent of GDP (this deficit was about $87 billion in 2016).

Therefore, it was decided to conduct an IPO of the largest oil company Saudi Aramco to raise additional funds into the budget. Crown Prince Mohammad bin Salman said that after entering the market the company will be valued at about $2 trillion. However, consulting company Wood Mackenzie estimated it at around $400 billion in February 2017. It is assumed that 5 percent of the company’s shares will be immediately sold to foreign companies.

Of course, any good Arab fairy tale cannot do without politics.

Grigory Kosach, professor of the Faculty of History, Political Science and Law of the Russian State University for the Humanities, believes that this visit is more political, and its goal is to reach an agreement with Putin on Iran and Syria, because Saudi Arabia’s share in Russia’s foreign trade is about 0.1 percent.

Kosach also suggests that Saudi Arabia wants to establish relations through economic cooperation, as it did with China, for which the Russian companies will receive a contract for the construction of several nuclear power plants.

These agreements include purchases of Russian arms to the tune of $3.5 billion, for instance, the S-400 air defense system, as well as a license for the production of Kalashnikov AK-103 assault rifles.

Leonid Isaev, senior lecturer at the Higher School of Economics, thinks that Saudi Arabia already has enough American and Chinese weapons, but it is important to buy up new Russian weapons, which are in short supply now, so that they do not get to Iran. It is also a good signal to the US that there are other arms producers.

Nevertheless, head of research at the Institute for Dialogue of Civilizations, Alexei Malashenko, doubts the prospects for long-term relationship between Russia and Saudi Arabia, since attempts for cooperation have been going on for the last seven years, but there has been no result because of the fundamental differences in the policies of these countries.

Now it seems that Russia and Saudi Arabia are also linked by the transition of power.

In Saudi Arabia, the brother of the incumbent king always inherited power, but the new king appointed his 32-year-old son in June 2017. He leads the operation in Yemen, broke off relations with Qatar, manages a conflict with Iran, and tried to change the regime in Syria. No actions have brought Saudi Arabia the desired result, and therefore the position of Russia, which has agreed not to interfere in the affairs of Saudi Arabia in Yemen and increase its oil price, can strengthen the position of the prince.

In response, Saudi Arabia urged Western countries to remove international sanctions from Russia imposed over the occupation of Crimea and the war in the east of Ukraine.

Putin also needs additional income from oil, who, according to all leading Russian experts, will announce in November 2017 that he will run for a new presidential term of six years in March 2018.

It is important for Russians to find a common language with Saudi Arabia, since this country is in many ways considered a leader of Sunni Muslims, and Russian companies such as Gazprom Neft Middle East and Rosneft already have plans to develop oil and gas fields in the Kurdish part of Iraq and the eastern regions of Syria released from terrorists.

Political agreements between the largest players in the Middle East can bring economic benefits to them; however, as has been noticeable over the past years, the situation can change at any time.

By Vladimir Legenko and Jiang Yuan Source: Global Times

The authors are analysts of post-Soviet and international affairs. Wu Chaolong, an undergraduate of Shanghai University, contributed to this article. opinion@globaltimes.com.cn

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