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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Putin’s Powerplay Could Jeopardize The OPEC Deal

In classic Putin style, the Russian president is now trying to push through reforms that would weaken the future presidency at the expense of the future prime ministerial post in a move that led to the surprise resignation this week of the entire government and the plucking from obscurity of a new prime minister that no one’s ever heard of. 

Some fear the sweeping resignation is a bloodless purge of anyone who might have stood in Putin’s way as he seeks (again) to hold on to ultimate power by a trick of the presidential-versus-prime minister pen. 

Still, others fear this massive shakeup--which included the resignation of the Russian energy minister--could have implications for the world’s most powerful oil cartel, OPEC, and its market-stabilizing oil production cuts.

What Would An Energy Minister Shakeup Mean?

President Putin has long supported the deal with OPEC, which should lend support to the continued cooperation with OPEC. As the ultimate decision-maker in Moscow, Putin’s position is the one that matters and this has not changed, whoever joins the new government as energy minister.

As for Novak, he will remain in office until the new government is in place, despite his resignation, and some suspect that Alexander Novak will retain his position under the new Prime Minister, Mikhail Mishustin.

“Putin believes the OPEC+ deal is positive for the Russian economy and Novak can count on retaining his position in the Russian political system,” said an analyst from the Russian National Energy Security Fund. “As a minimum, he would remain Energy Minister,” Igor Yushkov added. Related: Oil Glut Overshadows Geopolitical Risk In 2020

Rosneft’s Anti-OPEC Platform Could Grow

Yushkov said, however, that outgoing PM Dmitry Medvedev and the head of Rosneft, Igor Sechin, are not on the best of terms. And with Medvedev gone from the PM post, one could reasonably expect that Sechin’s influence in the Kremlin will increase, at least temporarily. Sechin is a rather outspoken opponent of the OPEC+ cuts, although he has so far towed the party line.

The Medvedev government resigned unexpectedly this Wednesday after President Putin said he will seek to make amendments to the Russian constitution. His proposals include giving more powers to the Parliament.

In an address to the Russian Parliament earlier on Wednesday, Putin said that he wants to put the proposed constitutional amendments to a nationwide vote because the amendments would change the balance of powers and the political system, as well as the executive, legislative, and judiciary branches in Russia.

There is plenty of fertile ground for speculation. For now, Russia and OPEC’s relationship has been mutually beneficial, although some in OPEC rightly worry that Russia’s say in matters concerning oil supply control is too big for comfort and that Russia and Saudi Arabia can practically make decisions on OPEC policies on their own as two of the three biggest oil producers globally.

What’s worse for OPEC members is that because of its size as an oil producer, Russia can single-handedly make or break oil production agreements. So the worry that a serious shift in power in Russia could upset OPEC is a legitimate one. Some have even called Russia the new de facto leader of the oil cartel.

And the price moves since the first OPEC+ agreement closed in 2016 support this view. Related: Is Iraq Too Risky For Oil Majors?

Russia, as represented by Alexander Novak, has been notoriously guarded in making any production cut pledges until the last minute. Novak has also publicly questioned the need for continued cuts several times, causing prices to slump immediately. This makes it clear that OPEC needs Russia—and definitely more than Russia needs OPEC.

This is because OPEC members have a greater need for higher oil prices than Russia does.

Russia’s oil export revenues account for a solid portion of its budget revenues, at 40 percent for 2019, according to S&P Global Platts. But the country has developed a commendable habit of budgeting much lower than actual oil prices since the 2014 crisis. In other words, Russia is more resilient to price moves than most of its OPEC partners.

In this context, if Novak continues as an Energy Minister, which is the most likely scenario, OPEC could continue capping production safe in the knowledge that Russia will too, although Russia—unlike OPEC—has not been particularly strict about sticking to its production quotas. 

On the other hand, if Mishustin for some reason decides to appoint a new top man in Russian energy a person close to Rosneft’s Sechin, there might be trouble for OPEC. Sechin, besides being against the production cuts, is quite a powerful person in Russian politics. Maybe powerful enough to change Putin’s mind about the cuts.

This is a much less likely scenario than Novak retaining his post. After all, the Prime Minister is the one who formally appoints the new ministers, but it is the President who, informally, approves the appointments before they are made. Talk is that most of the members of the new government will be Putin’s choices, with just a few that Mishustin will select himself. With Novak’s track record so far, he will almost certainly continue in the new government, and there will be little or no change to Moscow’s energy policies.

By Irina Slav for Oilprice.com

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  • Mamdouh Salameh on January 18 2020 said:
    President Putin’s proposed constitutional changes aim either at allowing him to serve for a third time as president of Russia or alternatively weakening the future presidency and strengthening the future prime ministerial post in case he becomes Prime Minister of Russia at the end of his second term as president. Under the current constitution, President Putin couldn’t serve more than two consecutive times.

    Either way, Putin will continue to be the master of Russia and rightly so with Russia under his leadership having a great renaissance. Not only it has become the world’s superpower of energy but it has expanded its global influence greatly and has also become a force for good.

    One of Putin’s great achievement has been the diversification of the economy enabling it not only to withstand the most intrusive US sanctions but also to be able to live with $40 a barrel. Therefore any changes to the Russian constitution enabling president Putin to serve Russia as long as he is fit and well should be welcomed by the Russian people.

    The proposed massive shakeup will have no impact whatsoever on OPEC+ since any decisions regarding energy and the relations with OPEC+ are ultimately taken by Putin himself.

    Russia looks at the OPEC+ deal beyond the small benefits of a rise in oil prices to future strategic, geopolitical and economic benefits.

    Through its association with OPEC, Russia hasn’t only managed along with Saudi Arabia to engineer the production cuts agreements thus doing a favour for OPEC members, but also gained a huge influence over OPEC and the global oil market in addition to consolidating its strategic interests in the Gulf region with Saudi Arabia and UAE at a time of growing disenchantment with the United States in the region. Moreover, the Russian budget which is based on an oil price of $40 has gained more than $100 bn in additional earnings as a result of Russia’s association with OPEC+.

    It is true that Russian oil companies who have invested heavily in expanding their oil production capacity particularly in the Arctic don’t want to be limited by the OPEC+ agreement. However, this decision is in the hands of President Putin. He and he alone knows better where Russia’s interests lie.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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