The Resurrection Of Putin: What It Means For The Oil Markets

One week before the U.S./Russian truce agreement in Syria, the Washington Post headlined an article with, “Whether or not the Syrian cease-fire sticks, Putin Wins.”

Is Putin winning? There’s little doubt that Russia’s intervention in Syria has reversed the Assad Government’s position from what looked like certain defeat to a far more commanding position in the field. For many world leaders, these impressive achievements in only nine months have also served to reverse Putin’s status from western pariah to a leader extolled by many.

The ripple effect from Syria has seen a sudden rush of world leaders beating a path to Moscow, with U.S. allies, Israel, Japan, Turkey, and Saudi Arabia, the most recent visitors to pay homage to the Russian President.

The question remains; is he winning? If so, with Russia an oil super power, what does winning mean for oil markets?

Consider recent examples of warming relationships with Russia and some of the U.S./EU closest allies, including Israel, Japan, Turkey, and Saudi Arabia.

Saudi Arabia and Russian:

At the G20 meeting in Hangzou, China, President Putin met with Deputy Crown Prince Salmon of Saudi Arabia, the eldest son of the Saudi King and his country's Defense Minister. The Russians, despite having “…a firm alliance with Iran in hand, are now cementing a strategic oil partnership with Saudi Arabia.” They met again in Vienna, where the Saudis "agreed to narrow their differences [over output] with Iran to about 600,000 barrels per day".

For nearly 22 months, Russia and Saudi Arabia have been competing for market share, with the Saudis producing over 10 million barrels per day and the Russians over 11 million. The competition has all oil producers suffering budget crises. It seems like they've finally wrestled each other into a draw. It didn't hurt that Russia had been seriously cultivating the other Gulf Kingdoms for support.

It can hardly be a coincidence that the OPEC meeting in Algiers took place after Parliamentary elections in Russia showed Putin's party winning substantial victories, while his popularity polls continue to rise skyward. Whatever hopes the West may have had for the oil price wars crashing the Russian economy and its President's popularity, the election clearly showed his party winning and his popularity soaring.

OPEC had to find a way out, and it looks likely that the start of a consensus was found in the recent meeting in Algiers, where OPEC has agreed to a freeze in production at around 32 million barrels per day, down from over 33 million barrels. Russia and the Saudis have promised to reduce production if all OPEC members also agree. Although the negotiations are likely to be difficult, with Iran, Iraq, Libya, and Nigeria asking and likely gaining exemptions from the agreement. In reality, the oil producers have little choice but to find an agreement.

The progress is likely to be agonizing slow, with plenty of fits and starts. Even with an agreement, the exemptions with Iraq, Iran, Libya, and Nigeria are likely to add substantially to the global oil glut. To reach agreement, OPEC will have to cut much deeper. Even so, it will take at least six to nine months from the time of agreement to make a real dent in working down the glut to clear the market.

Yet oil markets are future oriented and will undoubtedly anticipate rising prices, with oil prices already rising since the Algiers meeting.

Israel and Russia:

As stated here, while frequently described as America’s best and closest ally, Israel is the only “Western” country that has steadfastly refused to take part in the international sanctions imposed on Russia over its military intervention in Ukraine.

“Israeli-Russian relations have been improving for some time despite Russia’s support for Iran, Syria and the Palestinians. The improvement stems in part from the fact that both countries have a common interest in opposing Islamic terrorism. Russia has also become Israel’s major oil supplier, while also becoming a major trading destination for Israeli exports. [Currently,] the two countries are in…process of finalizing a free-trade agreement.”

Israeli observers who openly acknowledge the Israel-Russia rapprochement argue, basically, that the alleged retrenchment of the United States from the Middle East — especially in its unwillingness to remove Syria’s Bashar Assad and its purported appeasement of Iran in the nuclear agreement — has forced Israel to come to terms with the new dominant power in the Middle East, Russia. Related: Oil Hits $50 As OPEC Suggests It Might Deepen Output Cuts

“The past three years’ upheaval across the Arab world has for now resulted in increased Russian presence and diminishing American prestige.”

Russia is especially interested in acquiring Israeli technology; Israel, … is … a world leader in advanced [military] technology. A major example is the deal signed between Israel Aerospace Industries (IAI) and the Russian government through Oboronprom, a Russian defense company, was much more than an arms sale, and involved direct military cooperation with Israel training at least 50 Russian officers on UAV operations in Tel-Aviv.”

Capping off the relationship was the blockbuster announcement that Netanyahu and Palestinian Authority Chairman Mahmoud Abbas have agreed to hold talks at the Kremlin to find solutions to their multi-decade standoff.

It can hardly be coincidence that only one week after the announcement of these talks, the Obama Administration countered with its own announcement of a $38 billion, ten-year defense aid to Israel for the explicit purchase of U.S. military equipment.

Turkey and Russia:

Prior to the coup attempt in Turkey, and following a series of terrorist attacks in his country, President Erdogan announced a reversal in policy that essentially renounced his support for the Saudi/NATO war alliance against Syria. Following fast upon the coup’s failure, in which Russian warnings played a key role, Erdogan flew to Russia, proclaiming Putin as his closest friend, before flying on to Syria for an attempt at rapprochement with President Assad.

As stated here, numerous announcements came from the Russian meeting, including talks for the resumption of agreements to build “Turkstream,” the planned natural gas pipeline from Russia, under the Black Sea to Turkey. This was a project that was fiercely opposed by the U.S. and EU. Recently, Gazprom received its first building permits from authorities in Turkey for the implementation of the Turkish Stream pipeline. Gazprom’s CEO stated that work is expected to begin in Oct.

The two parties also agreed to a joint venture in which Russia would build a nuclear plant in Turkey. Along with that, Russia immediately dropped all counter sanctions against Turkish imports, while also immediately lifting the ban against Russian tourism to Turkey.

Japan and Russia:

For many observers, Japan and Russia make a perfect match for trading partners in terms of their close proximity, Japan’s needs for energy, Russia, an energy super power, along with its need for high technology and finance. However, “U.S. President Barack Obama is known to have cautioned Japanese leader Abe against pursuing a rapprochement with Russia.”

At the recent Eastern Economic Forum the most active area of discussion involving delegates from Japan and Russia…centered on plans to boost Japanese investment in Russian oil and gas, as well as in renewable energy.

The Japan Bank for International Cooperation (JBIC), a state-controlled institution, signed a Memorandum of Understanding on a strategic partnership [with] Russia’s Novatek. JBIC will provide Novatek with $400 million in financing for its Yamal LNG project, with further investment to follow in the company’s Arctic LNG project. This is expected to lead to an increase in Japanese imports of Russian liquefied natural gas. There was also discussion of the possibility of JBIC taking a 10 percent stake in Rosneft, Russia’s state-controlled oil company.

Also within the energy sphere, discussions advanced about the “Energy Ring.” This is an ambitious scheme to connect the power grids of the countries of Northeast Asia, including by means of an undersea cable that would enable electricity exports from Sakhalin to Hokkaido.

A Bloomberg article notes that Russia has also offered, and Japan has welcomed, opportunities for further joint ventures in the Arctic, including plans for rebuilding and modernizing Vladivostok, along with modernization plans for the huge Northeast Russian Arctic territories.

EU and Russia:

The refugee crisis now also threatens to pull the EU apart, where rising right wing movements attempt to shut down immigration, while the Brexit may only be the beginning of countries exiting the Union. The recent election losses suffered by the Merkel government is directly linked to Merkel’s leadership and its open door response to the refugees’ plight. Last year Germany accepted more than one million refugees.

A recent editorial in Bloomberg stated that "…only peace can stem the surge of refugees that is swamping the world. More than 65 million people are now displaced -- the highest number since the UN began keeping tabs. Ultimately, though, the way to solve the crisis is to end the conflicts that have created it.”

Both the EU and UN are calling for an immediate resolution of the Syrian war, as the chief cause for the refugee crisis, while a growing chorus of European leaders are calling for the lifting Russian sanctions.

It should be clear that the turn in political attitudes are taking place against the backdrop of the West’s 15 years of failing military policies in the Middle East and Eurasia, where the neo-con strategy of regime change has left in its wake the wreckage of fallen states, the blow-back of global terrorism, along with an enormous EU refuges crisis. In the EU the glaring contradictions are becoming ever more clear between relying on Russia’s military muscle to take on ISIS, while continuing to undermine the Russian economy.

U.S. and Russia:

The Russian military actions in Syria were key to reclaiming its leader’s reputation as a force to be reckoned with. We’re seeing Putin’s image everywhere, nowadays, featured ever more prominently. Bloomberg recently hosted an exclusive 3-hour interview with the Russian ruler. Be assured, a coordinated media cleansing effort is starting up.

Even U.S. military leaders are beginning to admit to Russia’s effectiveness in Syria against the forces of ISIS. When old cold-war warriors start singing Russian praise, you know something important is happening. Consider the following from two renowned U.S. military leaders:

According to retired Gen. David Petraeus, former head of the CIA, and Michael O’Hanlon, a defense analyst at the Brookings Institution, Russia’s moves to date “have been select and calibrated”

“Crimea, after all, was historically Russian and “is populated by a majority of Russian speakers, and is home to Russia’s only Black Sea naval base.” What’s more, when Mr. Putin moved into Syria last fall, “He did so only after having determined that the Obama administration was keeping its own involvement limited,” they argue. While these actions “may have been cynical and reprehensible” they “were not completely reckless or random, nor were they particularly brutal by the standards of warfare.” Related: 1.5 Trillion Barrels Of Recoverable U.S. Oil Waiting To Be Tapped

In short, they conclude, Russia’s actions “do not likely portend a direct threat to more central NATO interests.”

Even more surprising is this statement from one of the most famous of cold war warriors, Zbigniew Brzezinski, former foreign adviser to Presidents Carter, Reagan, and Bush, the elder:

“Turkey was on the verge of reconsidering its foreign policy after failure in the Syria during the last five years, and the U.S. miscalculation in supporting the coup and hosting its leader (Fethullah Gülen, now in CIA-arranged exile in Pennsylvania-w.e.) was so serious that it is no longer possible to put the blame on once-U.S.-ally, Turkey, if it turns its back on U.S. and rethink(s) its policies.” He continued: “A potential Russia-Turkey-Iran coalition would create an opportunity to solve the Syrian crisis.”
“America can only be effective in dealing with the current Middle Eastern violence if it forges a coalition that involves...also Russia and China”

U.S./EU Election Aids Putin's Rise:

There must be some unwritten rule that says the more bizarre the elections in the U.S., the more its adversaries gain. As much as the Russian election established that Putin was the man to deal with in Russia, his rise was also helped by German elections that saw sharp losses in the polls for Prime Minister Merkel’s party, due in large part to the leading support of refugee migration and Russian sanctions. Hillary Clinton's declining polls also seems to work to the Russian's advantage, as the world saw Russia's chief adversaries weaken.

Praise for the Russian President also comes from the U.S. Republican Presidential candidate, Donald Trump, who was strongly attacked for his pro-Putin stance by President Obama, Hillary Clinton, and a host of Democratic and Republican party spokesman. Yet surprisingly, Trump seems to have suffered no real political consequences for what would have appeared, at any other time, as a deliberate act of political suicide.

The reason for that could be a major shift in Republican attitudes towards Putin, where recent polls show that an incredible 85 percent of Republicans view Putin as a strong leader, while only 18 percent hold similar views of Obama. “In August, an Economist-YouGov poll found that only 27 per cent of registered Republicans have a negative view of the Russian president, compared with 66 percent two years ago.”

Sticking to his guns, the Real Estate Mogul candidate at nearly every public meeting raises the issue of "...wouldn't it be nice if we had peace with Russia and China...and let them take care of ISIS." It is a question that at once focuses on ISIS as the main global threat, and as Russia and China as possible allies in the fight. At a time of very dangerous saber rattling between the two sides, with threats of imminent nuclear war carelessly tossed around, this could easily become a major issue in the campaign.

Russia and China: Russia’s Coming Out Party

One of the most important contributions to Russia’s rising influence is its deepening relationship with world power, China, as its closest ally. As stated here: “What was different [about the recent G20 meeting was that it was distinctly China’s G20. China…made it very plain that it was leading, and to make it clearer still, it made sure that the world should see that the guest of honor was the Russian President, not the American President…. There was a deeper purpose here: to underline strategic co-ordination with Russia in the context of the display of Chinese leadership.”

Much more explicitly, ”in his [recent] address to the Chinese Communist Party, Chinese President Xi said that relations of Russia and China should not be confined solely to economic relations, but rather, these two states should create an alternative military alliance: “we are now witnessing the aggressive actions by the United States against Russia and China. I believe that Russia and China may form an alliance before which NATO will be powerless.”

Conclusion:

So what exactly has Russia won? Certainly it has increased its prestige, with Russia's voice once again heard in important decision-making councils. Moreover, Putin's agreement with the Saudis has raised the Russian leader's status as a powerful arbiter in global oil markets, not as a threat but as a conciliator. Given the still essential role of oil in the global economy, that could well serve to bolster Putin’s influence.

The biggest news on Putin rise, however, may come from Syria, where for the first time the U.S. and Russia are coordinating battleground field intelligence and operations in Syria. Press reports have claimed that because of Hillary Clinton’s recent shaky election polls, the Democrat Party is putting a lot of pressure on Obama to end the war before the November elections. Unlikely as that is to happen, it has little chance without Russian mediation with its allies, Syria, Iran, and Hezbollah.

Much more tellingly, after five years of unending combat, the sudden emergence of political concerns for an ending a controversial and unpopular war clearly shows that the Democrats see that the wars weigh heavily against Clinton's election chances. Strangely enough, that means an American electorate that is famously indifferent to foreign affairs, has been roused to opposing the war, and former Secretary Clinton as one of its major proponents.

If that scenario proves true, that likely means that the U.S. has finally heard the pleas of their European allies, who are facing a massive human catastrophe as literally millions of Eurasians and African seek refuge. The message is clear and unequivocal, for Russia and the U.S. to put aside their differences and organize a worldwide coalition ready to take on ISIS as an existential threat.

It seems that there is something like a secret ongoing global election to decide which leader can best keep the world safe from attack, Obama or Putin. The answer the world seems to have settled on is to try them both as part of the same team.

Two more different leaders could hardly be chosen for the role of mission leaders attempting to coordinate their separate militaries, that until today were bitter enemies. The so called accidental bombings of Syrian troops and the UN aide mission by the U.S., occurring only days after signing new agreements to work together, show the immense difficulties in developing a unified command amongst recent adversaries.

Reportedly, many hardline U.S. State Department Officials protested to Obama against any form of military cooperation with Russia. But Syria remains the place chosen to become the test case for forming a united front against ISIS. If it works, the emerging coalition will also be broadened to include other member states in Central and East Asia.

But there remains some very good prospects for successful collaboration, based upon the two years of intensive cooperative diplomacy by both countries, working against a powerful and highly organized opposition, to achieve the spectacularly successful Iran nuclear agreement. The U.S. and Russia also successfully collaborated in eliminating the Syrian government’s chemical weapons. Add to that that American oil companies will likely be helped by a Russian/Saudi oil agreement on curtailing production.

Despite their major differences, the two countries have proven that they are capable of some remarkable achievements when they seriously decide to work together. The fact is that the western alliance has finally come around to the idea that military collaboration between the two adversaries just may be the last best hope against the forces of ISIS.

The only question left is what took them so long?

By Robert Berke for Oilprice.com

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