When Deputy Crown Prince Mohammed bin Salman first announced the Kingdom’s post-oil blueprint in April many commentators were skeptical. Saudi Arabia, they said, has been talking about ditching its oil dependency and diversifying its economy for decades. The pace with which the current leadership, spearheaded by the youthful deputy crown prince, has proceeded to implement its ambitious plans, on paper at least, might just be giving the most cynical observer pause for thought. At the beginning of May the Saudi cabinet approved the National Transformation Program, which aims to triple the Kingdom's non-oil revenue and create 450,000 private sector jobs by 2020.
Previously untapped industries like mining and tourism are due to be opened up for foreign investment, while the gargantuan sovereign wealth fund created to invest overseas and generate new revenue streams will help replace the petrodollars, which currently account for about 80 percent of the state’s income. The recent announcement of a $3.5 billion cash injection into Uber typifies the Kingdom’s radical new departure, while the high-growth potential of companies catering to the country’s growing population such as British companies Marks & Spencer or Jaguar/Land Rover signal the advent of new investment opportunities.
Meanwhile, much to the consternation of its OPEC partners, Saudi continues to rebuff calls to put an export cap in place in a calculated effort to win market share from its competitors, notably Iran. This maneuver forms the second flank of its economic offensive: by flooding the market with crude exports it has caused prices to fall below the level of profitability for many other oil producing states thus forcing them to cut back on production. It expects to keep this up until 2020 - the year the National Transformation Plan is hoped to start paying off. The effect of the Saudi’s beggar-thy-neighbor approach to oil output is nowhere felt more keenly than in Russia. Related: OPEC May Be Forcing Venezuela Into Regime Change
Lukoil, Russia's largest private producer, announced a 59 percent fall in profits and cuts to capital expenditure in the first quarter of 2016; the company’s CEO Vagit Alekperov predicts that overall Russian output will fall by 2-3 percent, the first fall in production in Russia for many years. The knock on effects of which have been a 4 percent slide in GDP and 10 percent cuts in spending to try to plug the black hole in the government's budget. Similarly, Rosneft reported a 75 percent drop in profits. It’s no surprise that at the recent Saint Petersburg International Economic Forum(SPIEF), panels talking about the looming death of hydrocarbon were ubiquitous.
This dire outlook has prompted calls for Russia to start putting in place its own, Saudi-style, economic diversification strategy. At the Moscow Economic Forum, convened at Moscow State University the forum’s co-chair, Konstantin Babkin called for increased investment in infrastructure to counter Russia's weak productivity growth and the fall in export goods being manufactured in the country. In a similar vein, Oleg Smolin, the first deputy chairman of the State Duma’s Committee on Education, has signaled the need for a rise in spending on education to 5 percent of GDP, having fallen to less than 3 percent currently. Smolin warned that failure to do so would deprive Russian of well-paid jobs that it needs to close the economic gap on its Western counterparts.
However, where Russia has failed to diversify beyond oil production, it has at least made some strides at diversifying within it, buoyed by the devaluation of the ruble, which has so far kept production costs down. Recognizing that Russia can’t compete with the Saudis in an oil-price war, Lukoil has decided instead to back a challenger who can, namely Iran. The Russian company has announced plans to restart operations in two Iranian oilfields, which were abandoned in 2013 when international sanctions were imposed on Tehran over its nuclear development program. At the SPIEF, Royal Dutch/Shell signed a deal with Gazprom to invest in a Baltic LNG project, while the Italian company ENI is on the verge of buying a large chunk from Rosneft. Likewise, energy cooperation deals with China have propelled Russia past Saudi Arabia as the world’s biggest exporter to the Asian superpower, even if some of their more ambitious joint plans have been pushed from the medium to the long-term horizon and others are less profitable than they first seemed. Related: Slavery At Sea: The Ugly Underbelly Of Oil Shipping
But while its ties with China and Iran may be blossoming, Russia’s more important ties with the West are withering. In sharp contrast with the Saudi Deputy Crown Prince who has been met with open doors in his American sojourn, Russian political representatives find themselves under travel bans, their overseas properties confiscated and access to market funding dried up thanks to sanctions imposed by the West after the Russian annexation of Crimea. This poses a serious handicap to its fledgling diversification agenda, effectively leaving it dead in the water.
With much less room to maneuver than Saudi Arabia when it comes to loosening the straitjacket of oil dependence, Russia needs to a make a corrective change to its political course or it runs the risk of being sunk by the same energy curse which proved fatal to the Soviet Union before it. According to a seminal analysis by Yegor Gaidar, an architect of Russia’s transition to a market economy under Boris Yeltsin, the USSR’s collapse can be traced to Saudi Arabia’s 1985 decision to boost production and apply downward pressures on the global oil price, which led to a collapse in government revenues and global influence.
It seems the lessons of the past weren’t properly learned, as Saudi Arabia is yet again in the driver’s seat, playing the oil card to upset not just Iran but also Russia. And just like in the past, Moscow is woefully ill-prepared.
By Scott Belinksi for Oilprice.com
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