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Unlikely allies on the crude chessboard

Updated March 10, 2019

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Russia and Saudi Arabia are synchronising their steps on the global energy chessboard.— Reuters/File
Russia and Saudi Arabia are synchronising their steps on the global energy chessboard.— Reuters/File

The Russian-Saudi ‘crude’ amity is growing, impacting the regional geopolitics. The two countries are synchronising their steps on the global energy chessboard, endeavouring to provide a floor to the crude markets. Some feel this is making the other, rather ‘small’ players, irrelevant within the Organisation of Petroleum Exporting Countries (Opec).

Since 2015, Russia has agreed to several oil production cuts in collaboration with the Opec. In 2016, while the crude markets were facing a crisis, Riyadh and Moscow stepped in to take a lead and regulate global crude supplies.

Again, late in 2018, the crude markets were faced with a glut. Prices were collapsing, falling by nearly 40 per cent. In close coordination with Russia, Opec stepped in, announcing to cut output by 1.2 million barrels per day (bpd). Prices have gone up since.

Collaboration between Russia and Saudi Arabia – once seen as impossible – now holds sway over the global oil markets. Both countries are keen to deepen the relationship further. On the sidelines of the ‘Davos in the desert’ conference, Khalid al-Falih, the Saudi energy minister indicated that the kingdom was aiming to acquire 30 percent of Russian gas producer Novatek’s $21 billion liquefied natural gas project in the Arctic.

Saudi Aramco is reportedly in talks with Russia’s Sibur about setting up a joint petrochemicals plant. Rosneft and Gazprom Neft, two Russian state-controlled oil producers, are also in talks with Aramco about potential supply sharing, and joint research and development projects, while Riyadh has agreed in principle to a multibillion-dollar deal to acquire Russia’s S-400 missile defence system.

The alliance has possible dimensions too. When Prince Mohammad bin Salman went for the G20 Summit, in the immediate aftermath of the Khashoggi saga, the only leader showing bonhomie towards him publicly was none other than Russian President Vladimir Putin.

This was a paradigm shift in relations, especially when viewed in the perspective of the mistrust that existed between the two countries until a few years back.

When the Global Financial Crisis of 2008-09 hit the oil market, the former Saudi oil minister Ali al-Naimi says, he turned to Russia’s Igor Sechin, the then Deputy Prime Minister and Chairman of Rosneft, to cut output to strengthen the collapsing markets. “He agreed with me that we would both take off 300,000 bpd in production…The reductions never took place. The Russians did not follow through on their promises,” Naimi wrote in his recent memoirs.

Not only would they fail to make their agreed cuts in late-2008, in March 2009, while Sechin would claim to be ‘decreasing supplies’, according to Bloomberg. Another Rosneft official, Peter O’Brien, would confirm that they were on target to raise their crude production by 2pc compared to 2008.”

In 2014, when oil prices were again in flux, al-Naimi underlined, that whenever Russia was approached to cut output, they “almost always promised, but never delivered.” And it was in this perspective that, when the 2016 December output cut agreement was being finalised with Russia, Naimi had publicly warned that the Russians cannot be trusted.

But things have changed since. Despite some recent murmurs about Russia lagging behind in their promised output cuts, both countries continue to stand together.

And that is generating heat and unease in Tehran. There seems a concern there that Riyadh was endeavouring to wean Moscow off geopolitically from Iran, using the strengthening Saudi-Russian oil partnership.

In an era, when Trump administration is after Tehran, Moscow is crucial to Iran’s survival. Last October, an Israeli foreign ministry document revealed that Russia and Iran have reached a deal to circumvent the US sanctions against Iran.

The agreement contemplates Iran supplying its crude oil to Russia through the Caspian Sea to be thereafter exported worldwide, Israeli television news station Hadashot reported then. This, if implemented, could be the lifeline for Iran.

Last July, while Trump was tightening screws on Iran, Tehran touted $50bn worth of potential Russian investments in its oil and gas sector. “Russia is ready to invest $50bn in Iran’s oil and gas sectors,” Ali Akbar Velayati, a senior adviser to Iran’s supreme leader, said during a visit to Moscow then. “Military and technical co-operation with Russia is of major importance to Iran,” Velayati added.

The crude world is in transition. A new ‘crude’ geopolitical landscape is emerging, with Russia enjoying fraternal relations with both Tehran and Riyadh. It is still not clear if this newly found bonhomie between Riyadh and Moscow is at the expense of Tehran or not? Yet, one could say with some certainty, this may not be necessarily true.

Published in Dawn, March 10th, 2019