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Oil War And Peace: A Russian-Saudi Standoff Is Over -- At What Cost To The Kremlin?


Russian President Vladimir Putin (left) and Saudi Arabia's King Salman in Riyadh during the former's much publicized visit to Saudi Arabia last year.

When the alliance of oil-producing countries known as OPEC+ reached a deal to slash crude-oil output by a historic amount, it staved off a further collapse in the price of Russia's main export commodity.

The April 12 agreement requires Russia to cut crude-oil production by nearly one-quarter in May and June, a much deeper reduction than the one Moscow rejected when Saudi Arabia proposed it in early March. And the showdown may come at a steep long-term cost for the Kremlin, harming a relationship with Riyadh that had been budding after careful cultivation.

President Vladimir Putin has been wooing Saudi Arabia for years as part of efforts to expand Russia's influence in the energy-rich Middle East, where the United States has been the dominant outside arbitrator since the Cold War.

The first-ever visit to Russia by a Saudi king, in 2017, followed a historic agreement by Moscow a year earlier to join Riyadh in output cuts under the new OPEC+ umbrella -- and seemed to underscore the Kremlin's new clout in a region where its profile had been lowered considerably in the wake of the Soviet collapse of 1991.

Last October, Putin made his first trip to Saudi Arabia since 2007 as their countries -- two of the top three oil producers on the planet -- toasted their partnership in OPEC+ and agreed on investment deals.

'Fully Devoid Of Truth'

That picture has been badly clouded by the standoff that started when the two nations failed to reach an agreement on oil-output cuts.

With the coronavirus already depressing global demand, Saudi Arabia came to a March 6 meeting of OPEC+ in Vienna with a proposal to reduce output by 1.5 million barrels per day -- and Russia rejected it.

As Moscow and Riyadh publicly exchanged accusations over who was to blame, global oil prices tumbled.

The worsening COVID-19 crisis closed borders and drastically reduced travel and industrial activity, putting huge amounts of downward pressure on the demand for energy.

Six months after he was feted in Riyadh, Putin was reprimanded by the Saudi foreign minister, who said a statement in which he pointed the finger at Saudi Arabia was "fully devoid of truth."

Fair-Weather Friends?

"I think this crisis was a litmus test for Russian-Saudi relations -- it proved this relationship is transactional rather than strategic," Rauf Mammadov, an energy analyst focusing on the former Soviet Union at the Middle East Institute in Washington, told RFE/RL.

"The nature of a partnership is revealed during crisis times and this showed that there are huge flaws" in the two countries' understanding of one another, Mammadov said.

In 2015, Russia -- hit by Western sanctions that were imposed over its seizure of Crimea, and which have curtailed foreign investment -- signed an agreement with Saudi Arabia that foresaw Riyadh investing $10 billion into the former Soviet republic.

However, only about a quarter has been invested so far – a fact that had rankled the Kremlin.
But if unhappiness over investment flows was one reason for Russia's decision to reject the Saudi proposal, Riyadh may have fired back soon after the showdown in Vienna.

Days after the rancorous March 6 meeting, Russian media reported that a deal between the Russian Direct Investment Fund, a state-owned investment vehicle, and Saudi Arabia's Public Investment Fund (PIF) to acquire a nearly 31 percent stake in a Russian oil services company had been put on hold.

As it reportedly turned away from Russia, PIF bought stock in four of the European Union's top energy companies -- Equinor ASA, Royal Dutch Shell PLC, Total SA and Eni SpA -- worth about $1 billion over the past month.

Meanwhile, Igor Sechin, an influential Putin ally who heads state oil giant Rosneft and who Russian media reported was behind the Kremlin's decision to break with Riyadh at the OPEC+ meeting, later said the alliance had lost its significance as the United States and other countries raised output to counter its cuts.

Murky Motives

The motives behind Russia's move are murky, though, and may have been multiple. Some analysts said Moscow was out to punish the U.S. shale-oil industry, while others said that Russia's coordination with OPEC+ may have been undermined by different aims more broadly, beyond energy markets.

James Phillips, a Saudi Arabia analyst at the Heritage Foundation think tank in Washington, said the nations' common goal of higher oil prices -- a result of their heavy reliance on the commodity to fill their budgets -- contrasts sharply with their divergent foreign-policy interests and makes it difficult for them to cooperate.

"It was an arms-length relationship to begin with, based on shared economic interests but clashing foreign-policy interests, so I think it will be difficult for either side to closely cooperate with the other," Phillips told RFE/RL. "They will continue on in kind of a cold, transactional relationship."

Riyadh and Moscow back opposite sides in the war in Syria, while the Kremlin continues to support the government in Iran, a political and religious adversary of Saudi Arabia.

A day after Russia rejected its March 6 proposal, Saudi Arabia unexpectedly announced it would significantly ramp up oil output in April by more than 2 million barrels a day even as the coronavirus caused demand to drop.

The aggressive move -- which caused the largest one-day decline in oil prices in nearly three decades -- was viewed as Riyadh's attempt to get the Kremlin back to the negotiating table.

Winners, Losers

Moscow didn't take the bait and stood its ground at the time, boasting it could withstand lower oil prices longer than Riyadh on account of its higher foreign currency reserves and the lower price it needed for its budget to break even.

However, analysts say no one could have anticipated the demand destruction just around the corner caused by the coronavirus that would send Russia's crude blend Urals to as low as $10 a barrel in some parts of Europe.

Russia needs a Urals oil price in the low $40s to balance its budget, according to the BCS Brokerage.

Moscow was forced back to the table with Riyadh to discuss historic production cuts, analysts said, raising questions of whether Putin miscalculated.

Konstantin Sonin, a Russian economist and professor at the University of Chicago, told RFE/RL that, even if Moscow had agreed to the initial Saudi proposal, it would not have avoided the eventual price decline brought on by the coronavirus-driven collapse in demand weeks later or the need to agree again on new output cuts.

Russian President Vladimir Putin (left) with Rosneft CEO Igor Sechin (file photo)
Russian President Vladimir Putin (left) with Rosneft CEO Igor Sechin (file photo)

Nonetheless, Sechin's name in Russia will inevitably be tied to the events due to his perceived prominent role in scuttling the agreement with Saudi Arabia, he said.

"Sechin will be blamed for this anyway, because in bad times people like to find scapegoats," Sonin said. But he added that this would not hurt Sechin's standing with Putin, calling the Russian president "extremely loyal" to such allies.

If Russia was eager to get back to talks, so too were the Saudis, who were facing the prospect of having no buyers for their increased output, said Ellen Wald, president of U.S.-based Transversal Consulting and a specialist on Saudi Arabia.

"If they had not agreed to cut production when they did, then [the Saudis] would have looked very stupid if they had filled all these tankers and they were just sitting there with nowhere to go," Wald told RFE/RL.

Saudi Arabia's actions may have also damaged its strategic relationship with the United States, said Phillips. Six U.S. senators, mainly from oil-producing states, called for cutting American support for Riyadh if it did not reduce oil production.

There was almost no such talk about Russia by senators, and Putin may be hoping that the agreement to end the price war – which U.S. President Donald Trump pressed hard for and helped broker – could provide a platform for an improvement in ties with the United States.

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