Russia is showing the economic tensions of war with Iraq as it blasts the Organization for Petroleum Exporting Countries for boosting output to assure global oil supplies. Deputy Prime Minister Viktor Khristenko has charged the cartel with playing "political games" in a sign of the high economic risks for many countries as they await the outcome of the war.
Boston, 28 March 2003 (RFE/RL) -- Russia has blown the facade off its cooperation with the Organization of Petroleum Exporting Countries (OPEC) as tempers flare over the economic risks of the war with Iraq.
Speaking to reporters on 25 March in Moscow, Deputy Prime Minister Viktor Khristenko blasted the 11-member oil cartel, saying, "If OPEC starts to play political games over the war in Iraq, it will be the beginning of the end of this organization."
Khristenko warned, "OPEC must be preserved as a commercial organization of countries dedicated to keeping oil prices fair and speculation to a minimum," Interfax reported. Khristenko added, "There are risks for OPEC, and those risks could grow in magnitude if OPEC attempts to become a political player."
Although Khristenko did not spell out his objections to OPEC's actions, his remarks stood in sharp contrast to the cooperative mood in mid-March when Saudi Arabian Oil Minister Ali bin Ibrahim al-Naimi visited Moscow for three days. The world's two biggest oil producers then agreed on the need to keep stability in the world oil market at fair prices.
It was a rare show of solidarity for Russia, which has challenged OPEC as an alternate supplier to the West for much of the past year. The accord came only four days before the war began.
But the agreement may have been one of the shortest on record. Khristenko seemed angry that OPEC immediately declared a suspension of production quotas for its 10 participating members, excluding Iraq, to offset any potential shortages. Two days before fighting erupted, Saudi Arabia also made it known that it had amassed a previously secret pool of 50 million barrels of oil as an extra cushion against any cut in supplies.
The effect was immediate. Oil prices plunged 25 percent in two days, despite widespread predictions that the onset of war could cause prices to soar. Despite rumor-driven trading and civil strife in Nigeria, prices have struggled to breach the $30 per barrel barrier since.
Russia's frustration seems to echo on several levels. The first may be political. Khristenko's warning suggests that some officials see OPEC's support for world oil security as support for the war, which Moscow is dead set against.
At least one OPEC member, Iran, has also objected to the lifting of quotas. On 21 March, Iran's OPEC governor, Hossein Kazempour Ardebili, told the official news agency IRNA that there had been no agreement for the measure, calling any overproduction a "violation." But like Russia, Iran may find it hard to hike exports any more than it has.
OPEC members seemed to brush off the criticism. This week, the Dow Jones news agency reported that daily OPEC output has risen this month by 1.3 million barrels per day, or more than 5 percent since February. That means production is already 8.5 percent over cartel quotas.
While Khristenko cited political concerns, Russia's fears are mainly economic. Some officials believe that the world oil market is already oversupplied and that the 25 percent price drop could be a taste of more to come. Iraq itself added fuel to that argument this week with reports that oil from its northern oil fields at Kirkuk had kept flowing through a pipeline to the Turkish port of Ceyhan, long after it was presumed to have stopped.
On 26 March, the Associated Press quoted analysts as saying that Iraq could restart exports through the Persian Gulf within weeks from oil fields captured by coalition forces in the south.
Russian frustration was also on display this week as Nikolai Tokarev, chief executive of the Russian state oil firm Zarubezhneft, complained that prospects were poor for postwar participation in Iraq's oil industry because of U.S. interests. Tokarev told Reuters, "There will be nothing good for Russian firms in Iraq." Energy Minister Igor Yusufov said yesterday that the government is working to return Russian oil companies to Iraq "immediately after peace is restored," Interfax reported.
Although officials have argued that Russia's budget can withstand prices of $18 per barrel or even lower, the government continues to see $25 as its "fair price." This week, OPEC vowed to cut production quickly when the war ends and prices start falling. But Russia could get caught in the squeeze, because then, it may also be producing too much.
The outcome seems sure to affect both Russia and the world economy. In the United States, the Federal Reserve specifically cited "oil price premiums" as a major factor in what it called "the hesitancy of the economic expansion," "The Washington Times" reported. The statement raised hopes for recovery when prices ease. On the other side this week, the International Monetary Fund's managing director, Horst Kohler, warned that a long war could risk a "global recession," Reuters reported. A downturn could also heighten pressure to cut oil output.
But another source of Russia's frustration seems to be its marginalization in any of the decisions. Several months ago, it was promoting its energy partnership with the United States in defiance of OPEC efforts to trim global production and keep prices up. Now, the situation is reversed, and little has been said about the energy partnership with the United States, which would presumably welcome more oil from Russia, OPEC, or both.