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Russia: Moscow Rebuffs OPEC's Call For Cut In Oil Production

Russia's relations with OPEC nations appear to be entering a new phase as Moscow openly rebuffed the cartel's calls for a big cut in oil production yesterday. The rift in policy has helped the Russian economy recover since the ruble crisis of 1998, but relations with OPEC countries could grow tense if their economies suffer as a result of any price war.

Boston, 16 November 2001 (RFE?RL) -- Russia seems to have opened a new chapter in its relations with countries in the Organization of Petroleum Exporting Countries (OPEC) by openly refusing to support oil prices with a major production cut.

Yesterday, Russian Prime Minister Mikhail Kasyanov told reporters at a press conference in Madrid: "We are not going to at any time reduce production on a big scale. It's impossible."

In a partial contradiction, Reuters quoted Kasyanov as also saying, "Perhaps we could cut some production for some time to achieve a fair price."

OPEC nations -- meeting earlier this week in Vienna -- agreed to cut quotas by approximately 6 percent in order to stabilize falling world oil prices, but only if non-OPEC oil producers also significantly cut output.

The Russian prime minister argued that any significant drop in Russian exports would violate the country's promise of energy cooperation with the European Union. In September 2000, EU leaders announced a plan to double energy imports from Russia by 2020, but no formal agreement has been signed.

Kasyanov's clear rejection of OPEC demands this week for a reduction in Russian exports of 300,000 barrels per day -- or about 10 percent -- marked the first public split with the oil cartel after Moscow's strategy of maintaining an appearance of cooperation for the past two years.

OPEC officials have been quietly grumbling for the past year about Russia's practice of raising its export and budget revenues at OPEC's expense. While the 10 participating OPEC nations have lowered their production quotas by 13 percent this year, Russia has boosted its exports by 7.6 percent to take advantage of their belt tightening. The strategy has been central to Russia's economic recovery since the ruble crisis of August 1998.

So far, the friction has not shown up in other areas of Russia's relations with OPEC nations, but testy reports in the Iranian press this week suggest that linkage to other issues may not be far off.

In an interview with RFE/RL, Robert Ebel, director of the energy and national security program at the Center for Strategic and International Studies in Washington, said Russia's conflict with OPEC is now out in the open. "OPEC has finally taken the gloves off and said, 'If you want to play, it's OK, but you're either with us or against us.'"

Kasyanov's critical statement yesterday was in sharp contrast to his pledge of voluntary cuts by Russian oil producers on 9 November, which caused prices to shoot up briefly before the weekend. But on 12 November, producers reluctantly agreed to reduce exports by only 30,000 barrels per day, while some complained privately that they would resist pressure for more. Prices quickly plunged.

Yesterday, Mikhail Khodorkovsky, the president of YUKOS, Russia's second-largest oil company, called OPEC's demands "unacceptable."

Prices of benchmark Brent crude slumped 10 percent on 14 November after OPEC postponed a planned daily cut of 1.5 million barrels because of the lack of support from non-OPEC producers, led by Russia, which is now the second-biggest exporter in the world.

Brent slipped nearly 7 percent again by midday yesterday (15 November) to $17.88 per barrel after Kuwait's oil minister said prices could fall to $10. On 14 November, the OPEC basket of crudes fell $1.14 cents to $18.09, a drop of 6 percent. OPEC, which has already cut its output four times this year, has been struggling to keep prices within a range of $22 to $28.

Russian Finance Minister Alexei Kudrin took a softer tone, apparently to maintain diplomatic relations with OPEC nations. He said the search for an agreement with OPEC had been difficult, adding, "But I think it will be found anyway."

Analyst Ebel said restraint by Russian oil companies is highly unlikely because most have already invested in more production. Although Khodorkovsky said he would comply with a government order to cut output, Ebel said such pressure "would cause all kinds of internal problems." Russian producers have been privatized since 1994.

Ebel said Russian companies will probably keep pumping even if prices decline to $13 or $14 per barrel. "They'll sell whatever the price is."

If prices fall too low, Ebel said Russian producers may start to ease off their investments in new production. But even if they do, the effect on output could take a year to show up in the world market.

Ebel argued against the idea that Russia is about to become the world's new so-called "swing producer," replacing Saudi Arabia. He said a swing producer is one that raises or lowers production to keep prices within a stable range. So far, Ebel said, Russia is only showing that it can increase production.