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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Will Saudi Arabia Ditch The U.S. For Russia And China?

  • Last week's meeting between Russia and Saudi Arabia to deepen cooperation in energy and other sectors shows that Moscow is serious about splitting Riyadh away from its long-time ally, the U.S.
  • It also accords with China’s plans to roll-out its multi-generational power-grab project – ‘One Belt, One Road’
  • While the U.S. is looking to re-define its Middle East strategy, many countries in this region have started to drift toward the East.

The meeting last week between Russian Deputy Prime Minister, Alexander Novak, and Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, to discuss broadening and deepening the two countries cooperation in the energy sector and others marks a key point in the ongoing attempts by Moscow to decisively split the Kingdom away from its long-time ally, the US. This strategy aligns with the ultimate intention of Russia and China to neuter US influence across the Middle East, which, in turn, is a central plank in Russia’s plans to increase its influence over Europe, with the endgame being to split up the NATO security alliance. It also accords with China’s plans to roll-out its multi-generational power-grab project – ‘One Belt, One Road’ - that would see it replace the US as the number one superpower across the globe. The genesis for this seismic shift in geopolitical alliances was the failure of Saudi Arabia’s 2014-2016 Oil Price War, which was launched with the specific intention by the Kingdom to destroy - or at least severely disable for as many years as possible – the US’s then-nascent shale oil sector. It was obvious to the Saudis at that point that the unchecked build-out of lower fixed cost, lower lifting cost, US shale oil in ever increasing volumes would eventually mean the extreme diminution of Saudi Arabia’s power in the world and as a key player in the Middle East, given that its only true basis of power is its oil supplies. In short, the Saudis had no real choice but to try to take on the US’s shale sector, and it did, but it lost and paid a terrible price, with all of this – including the real figures relating to Saudi’s crude oil reserves, spare capacity, and production - analysed in full in my previous book on the global oil markets.

The immediate aftermath of the 2014-2016 Oil Price War was not only that Saudi had devastated its own economy and those of its OPEC brothers for years to come but, more importantly from a geopolitical perspective, that it had lost its credibility as the de facto leader of OPEC and that OPEC had lost its credibility as the indomitable force in global oil markets. This meant that OPEC’s pronouncements on future oil supply and demand levels – and therefore, on pricing – had lost much of their potency to move markets in and of themselves, and that their joint production deals were diminished in effectiveness. At the end of 2016, then, and fully cognisant of the enormous economic and geopolitical possibilities that were available to it by becoming a core participant in the crude oil supply/demand/pricing matrix, Russia agreed to support the OPEC production cut deal in what was to be called from then-on ‘OPEC+’, albeit in its own uniquely self-serving and ruthless fashion.

Since then, Russia has used its position as the true key player in the OPEC+ alliance to do what it does best: cause pockets of chaos into which it can project its own solutions and thus extend its power. In the case of the Middle East, this cornerstone strategy has been employed in virtually all of the Shia crescent countries – albeit most obviously recently in Iran, Iraq, and Syria – but it has also been systematically whittling away at the foundation stones of the longstanding US-Saudi alliance. As also highlighted in my last book, the basis for this relationship had been formulated at a meeting on 14 February 1945 between the then-US President Franklin D. Roosevelt and the Saudi King at the time, Abdulaziz. The landmark agreement made was this: the US would receive all the oil supplies it needed for as long as Saudi had oil in place, in return for which the US would guarantee the security both of the ruling House of Saud and, by extension, of Saudi Arabia. By the end of the 2014-2016 Oil Price War, though, the agreement had been changed slightly to reflect the growing US impatience with Saudi’s attempts to hamper the development of its shale oil sector. The new agreement was: the US will safeguard the security both of Saudi Arabia and of the ruling House of Saud for as long as Saudi guarantees that the US will receive all of the oil supplies it needs for as long as Saudi has oil in place, and that Saudi Arabia does not attempt to interfere with the growth and prosperity of the US shale oil sector.

Related: Saudi Arabia Looks To Attract Tourists With ‘Epic’ Offshore Rig Thrills

Russia saw in this added codicil a huge opportunity to decisively split Saudi away from the US and since then it has been building out the relationship foundations for this to be achieved, latterly with the assistance of China as well. In a textbook strategy by which intelligence agencies recruit and develop new sources, a deal was discussed between Saudi Arabia and Russia in the third week of June 2020 that laid the foundations for much greater co-operation in the future. In theory, it looked like only a marginal extension of the OPEC+ agreements that had been in place between Russia and Saudi since 2016 but it also included additions that were based on discussions undertaken during the visits to Moscow by King Salman in 2017 and MbS in 2019. This new mutual understanding was clearly signalled when Russia’s President, Vladimir Putin, invited Saudi Arabia’s King, Salman bin Abdulaziz al-Saud, to Russia in October 2017 – the first ever visit to Moscow made by a sitting Saudi monarch. 

At this meeting, and the many corollary meetings between officials of the two countries in which the real business is done, several tangible deals were made across a wide range of areas, not just in the oil sector. Among the US$3 billion or so specific deals announced at just that time, was an investment by the Saudis of at least US$150 million into Russia’s Eurasia Drilling Company and, on the other side, Russian petrochemical company Sibur was considering building a US$1.1 billion plant in Saudi Arabia. Russia’s Energy Minister, Alexander Novak, also flagged at the time that Russian gas producer Novatek was in talks for Saudi investors to take part in its Arctic LNG2 project, a follow-up to its US$27 billion plant in the Yamal peninsula.  At the same time, it was agreed that Saudi Arabia’s sovereign wealth fund, the Public Investment Fund, was to establish a US$1 billion fund alongside Russia’s sovereign wealth fund, the Russian Direct Investment Fund, which would invest in Russian technology companies. In the same vein, Russian state-owned hydrocarbons companies Rosneft and Gazprom entered talks with Saudi counterpart Aramco to conduct co-ordinated oil and gas trading operations – bringing in the expertise and non-crossover contacts of Lukoil’s Litasco trading operation when required – and the establishing of a joint research and technology centre.

Even more seriously from the US perspective were two other key points discussed – and agreed in principle - between Russia and Saudi Arabia during these meetings. Firstly, the Saudis rowed back on their demand that Syria’s President Bashar al-Assad be removed from power and, secondly, and perhaps most extraordinarily, Saudi signed a memorandum of understanding for the purchase from Russia of its S-400 air defence system. These two latter points can be regarded as the first clear evidence of the deal creep that Russia had been looking to leverage since it began co-operation with the OPEC+ deals back in 2016 and, by so doing, decisively move Saudi away from its longstanding relationship with the US and replacing it with one with Russia (and, by extension, China). 

By the time that the 2019 visit to Moscow of MbS came around, Russia was in an even stronger position. Firstly, Saudi Arabia’s finances were still deteriorating markedly, given that its then-US$84 per barrel of Brent budget breakeven price was still higher than the spot oil price. Moreover, any attempt to move the oil price up had been effectively cut-off by U.S. President Donald Trump’s Tweet that: “He [Saudi King Salman] would not last in power for two weeks without the backing of the US military.” Secondly, Saudi’s security vulnerability had been shown up by the rocket attacks on 14 September 2019 by the Iran-backed Houthis on two of the Kingdom’s key oil facilities – the massive Abqaiq oil processing facility and the Khurais oil field. Since that point, of course, Saudi Arabia’s relationship with the US was worsened when the Kingdom broke the added codicil prohibiting further moves against the US shale oil sector with its 2020 Oil Price War, and, as this occurred, so it has moved closer to Russia and continues in this drift eastwards.

By Simon Watkins for Oilprice.com

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Leave a comment
  • DoRight Deikins on October 18 2021 said:
    For 500 years, Russia has sought control over warm weather ports (Ivan and Catherine would be justifiably proud of Vladimir). Even I'm impressed. But I think that most of the world understands that Russia and China are nice to date (they buy lovely presents), but you don't want to build a long lasting relationship with them. The Chinese and Russian history of hegemony is too strong and that Russian bear hug can crush. The US, while not always as amiable as it could be, has never been interested in empire building. But perhaps the powers of the Middle East have forgotten, that when you play with fire, you're likely to get burnt. {Oops, am I allowed to talk about fire in a carbon neutral world?}
  • Lee James on October 19 2021 said:
    Russia, China and the U.S. This is where the geopolitics get really ugly in the the whole Middle-East region. I look for wisdom on the part of the Saudis, that oil is not just a few pieces of silver.
  • Mamdouh Salameh on October 19 2021 said:
    While Saudi Arabia will eventually adopt the petro-yuan as payment for its crude oil exports to China, its biggest oil export destination and even buy Russian weaponry, it will be very unlikely that it will move away from the dollar or the United States.

    Meanwhile, Saudi Arabia will deepen its relations with the China-Russia strategic alliance which is gaining more influence in the Middle East at the expense of the declining influence of the United States.

    As a result, the most probable course of action for Saudi Arabia is to maintain its relations with the United States while establishing very strong strategic relations with both Russia and China and keep equidistant from both groups thus being able to play one against the other exactly as the United States has been playing Iran against Saudi Arabia since the days of the Shah to secure protection money from the Saudis mafia-like.

    Saudi Arabia is fully aware that in its strategic relationship with the United States dating back to 1945, the US was the almost only beneficiary in that it used the partnership to quenching its thirst for oil, getting Saudi Arabia to finance American wars and military adventures, doing its bidding in its foreign policy and securing more than $1 trillion dollars in sales of US weapons to it.

    Having promised to protect Saudi oil installations from attacks, the United States failed miserably to come to the defence of Saudi Arabia when the Houthis, Iran’s allies in Yemen, attacked and destroyed the Abqiq oil processing station in September 2019 this costing Saudi Arabia 50% of its oil production.

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

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