After oil prices collapsed to $26 per barrel in early 2016, Saudi Arabia agreed on coordinated oil production cuts with Russia, only an observer at the Organisation of the Petroleum Exporting Countries (OPEC), to reduce global supply. This action led to the recovery of crude prices, but increasing exports from the US capped the climb to $70.
Saudi Crown Prince Mohammed bin Salman told Reuters that Riyadh and Moscow were considering a deal to extend the year-to-year agreement to a possible 20-year arrangement. The scenario will both increase the price of oil and reduce its volatility, but will the two countries succeed in building trust?
The Historical Challenges
Last year, the arrangements to develop a $1bn joint energy fund as well as multi-billion investments by the Saudi sovereign wealth fund, set the pace for closer cooperation on a business level. King Salman became the first Saudi monarch to visit Moscow fueling further optimism. But conditions were not always as promising.
Historical relations between the two states have been characterised by rivalry on a geopolitical and economic level. While initially the USSR perceived the Arabian people as natural allies in their struggle against colonialism, the subsequent ideological conflict between Wahhabism and communism prevented further collaboration.
The anti-Soviet influence of Saudi Arabia limited USSR’s presence in the region, although relations with some key Middle Eastern and North African countries, such as Algeria, Iraq, Egypt, Ethiopia, and Yemen, allowed the USSR to export arms and technology in exchange for oil, which would later be sold for much needed hard currency. Although the 1979 Egypt–Israel Peace Treaty, brokered by the US, weakened USSR’s position in the Middle East, the Iranian revolution allowed for a reemergence of Soviet influence.
The collapse of the Soviet Union and the end of the cold war gave hope for a recovery of relations between the two countries. An agreement between OPEC and Russia (as well as three other non-OPEC nations) was struck in 1999 to reduce oil supply. The Chechen wars and close ties with Iran obstructed any Russian effort to take advantage of the split between the US and Saudi Arabia caused by the implications of the War on Terror. In 2002, Russia mostly rejected pleas from OPEC and only reduced production by a fraction of the requested amount. Russia did not take up the 2009 offer to join OPEC.
In truth, OPEC membership is not in the best interest of either Russia or Saudi Arabia. From a Saudi perspective, such a development would only decrease consensus within OPEC and would undermine their leadership in the organisation. Russia has historically been able to influence key members of the group such as Venezuela through trade and diplomacy or by using its position on the UN Security Council to veto unappealing resolutions. A closer bilateral cooperation, on the other hand, might prove more useful for the objectives of the two countries.
The Incentives: It Is Not Just About Oil Prices
The recent talks between the two countries regarding the break of the boom-bust oil cycle were mirrored in the diversification efforts of the Kingdom of Saudi Arabia, as represented by Saudi Vision 2030. The combined effect of the Paris Climate Accord, the decreasing share of oil-driven vehicles, and the extensive investment in renewable energy fuels pessimism regarding the price of oil.
Natural gas is seen as a more environmentally friendly product which could even out supply gaps during the transition period to increased renewable energy dependency. Significant investments by Saudi Aramco in the Fadhili, Wasit and Midyan fields, together with extensive infrastructure development, have marked a turn towards the resource. At the same time, the Gas Exporting Countries Forum (GECF), which is controlled mainly by Russia, Iran and Qatar, is already proving pivotal in steering gas trade flows. Established initially as a strategic platform against the development of monopsony powers from European countries, it has morphed into a more dynamic institution. Uncertainty about the direction the forum will take is raising concern in Riyadh. A closer collaboration between Saudi Arabia and Russia might provide the kingdom with influence over the GECF’s future decisions.
For Russia, closer cooperation with Saudi Arabia might hold the key to success in major geopolitical projects and interventions, such as in Syria or Libya. Russia could acquire decision–making powers in both the oil and gas markets, which would serve to expand its global reach and further support Moscow’s vision of providing energy resources to both Europe and the Far East.
The US will play a critical role in influencing the Saudis over this deal. A Saudi-Russian agreement might prove beneficial for American shale producers. The emergence of the US as a net exporter of energy resources has put at risk the petrodollar system. The largest oil importer, China, has recently disclosed plans for yuan payments in crude import contracts. With the Chinese currency appreciating against the dollar and ongoing deregulation of Chinese capital markets, a combined agreement to increase prices of energy commodities will provide American exporters with enhanced earnings, justifying the strategic decision to develop oil exporting capabilities.
Potential complaints from Iran might not reduce Russian willingness to cooperate with the Saudis. Since the US-Iran nuclear deal, the commercial importance of Iran has been deteriorating for Russian exporters. Initially, Russia was able to trade technical knowledge regarding nuclear energy production, increasing its influence with Tehran and reducing the competition in the EU gas markets; Iran would remain sanctioned as long as nuclear projects remained operational. After the deal, Iranian gas has been competing with Russian exports, an unfavourable development for Moscow’s gas exporters.
Will a deal be struck?
Negotiations are unpredictable, and so are the results of talks. A long-term deal is in the interest of all key energy commodity exporter countries. Although Saudi Arabia and Russia have faced major ideological and geopolitical conflicts in the past, a deal, perhaps with a less ambitious duration of 5 years, is possible. Its implementation will depend on future circumstances and the effectiveness of any control mechanisms established.
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