RIYADH: The world’s largest crude producer, Russia, is warming up to Organisation of the Petroleum Exporting Countries (Opec) — finally.

Last Tuesday, Russian Energy Minister Alexander Novak called on Opec Secretary General Abdullah Al-Badri and other officials in Vienna.

Although the annual meeting between Russia, the world’s largest producer and Opec representing exporters controlling some 40 per cent of the global oil market, was planned much in advance, yet the timing and the significance of the meeting was not lost upon pundits.

Russia has been reluctant to publicly coordinate moves with other producers. And though there has been no official acknowledgement of any such possibility, yet a Reuters report quoting Russian government officials did indicate that “the talk (within the Russian energy ministry) of closer cooperation with Opec on prices have long been there.”

Russia has had a bumpy relationship with Opec. In fact Moscow has been striving to increase its markets share — at the expense of Opec. Political developments, concerning Syria and Iran, also did not help bringing the two closer.

But a change of heart seems in offing, as sanctions, imposed by the United States and European Union after the annexation of Ukraine in March and tightened since then over Moscow’s support to separatists, is appearing to bite.

Russian economic growth is ebbing fast and is expected to be just 0.4pc at best this year, with recession a possibility, if the West takes more measures against Moscow.

Russia’s currency too has fallen to a historic low against the dollar — jacking up the price Russians must pay for many imports, from vegetables to luxury goods.

Russian budget projects that the economic fallout of the sanctions will result in a revenue shortfall of nearly two trillion rubles ($52 billion) over the next two years.

Russian reliance on its oil exports is well known. Hydrocarbon exports revenues account for almost 50pc of its budget. Already squeezed by Western sanctions over Ukraine and balanced on the edge of recession, melting crude markets and the growing squeeze on oil revenues is adding another dimension to Russian woes.

Russian budget assumes prices of oil to average $100 per barrel. Most now feel this as ambitious. Urals, the country’s chief crude blend, stood at around $96 per barrel earlier the week and Capital Economics sees benchmark Brent crude — which usually trades at a slight premium to Urals — at $90 by the end of next year.

Should oil prices end up lower, Moscow’s budgetary deficit will become larger. Incidentally, all large investment projects [of Russian oil companies] too are based on estimates of growing, not falling oil prices.

Directly hit would be Russia’s biggest oil producer Rosneft, which has several costly investment projects like drilling for oil in the Arctic and is burdened with almost 1.5tr rubles ($44bn) of debt, according to its first half report.

Rosneft has also been locked out of Western capital markets by US sanctions over Russia’s involvement in Ukraine, damaging its ability to refinance debt coming due. The company, which produces more oil than Iraq or Iran, is now seeking a $42bn loan from a fund earmarked for Russian pensions to help it weather Western sanctions.

In a further sign that sanctions were taking their toll, gas giant Gazprom, which supplies Europe with one-third of its gas needs, reported its first year-on-year loss since 2008, even though it is not directly targeted by the US or EU restrictions.

And it is in this context that the Russian central bank in its quarterly monetary policy document is hoping, apparently against hope, “that the price of oil for Urals blend will return in coming quarters to above $100 per barrel, taking under consideration the continuation of geopolitical risks in the Middle East and Ukraine.”

The central bank expects the price to recover to around $102-$103 in 2016-17.

Economy Minister Alexei Ulyukayev echoed this view last Tuesday, calling prices below $100 per barrel a “temporary phenomenon.”

An otherwise reluctant Russia could now be striving for a closer coordination with Opec — courtesy — the sanctions regimen.

Published in Dawn, September 21th, 2014