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Oil Crisis Challenges Putin’s Power

Oil Crisis Challenges Putin’s Power

With oil demand collapses as…

Why Oil Markets Don't Have To Worry About World War 3

Why Oil Markets Don't Have To Worry About World War 3

The assassination of General Soleimani…

Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian has extended experience working in the energy sector. His involvement with the fossil fuel industry as well as renewables makes him an allrounder…

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The New Energy Superpower In The Middle East

Russia under President Putin has regained some of the global importance that it lost after the breakup of the Soviet Union. During the Cold War, Moscow had a significant presence in the Middle East where it supported proxies in its battle against the West. Russia’s recent advances in the region have been a reaction to the U.S.'s relative retreat.

Although Putin is accredited with excellent strategic insight, his accomplishments are primarily good decisions made at the right moment. The escalation of the conflict between the U.S. and Iran is another development that the Kremlin views favorably as they see opportunities to advance their position. The risks are severe, but so are the rewards. Moscow could make significant financial, strategic, and diplomatic advances at the expense of both Iran and the U.S.

Russia is already one of the biggest producers of oil in the world with a daily production average of 11.2 million barrels in 2019. A significant portion of the state’s budget is based on the export of oil and gas. Although conflict is usually bad for business, the rising oil prices due to the killing of General Soleimani increase Russia’s earnings in the short term.

Iranian oil is roughly the same quality as oil from Russian oil fields. Although Tehran’s exports have already collapsed due to Trump’s ‘maximum pressure policy’, Moscow still sees some room to increase market share at the expense of Iran. Every day that Tehran’s national oil company is absent from the global markets, competitors solidify their position.

Also, the recent tensions increase the risk of supply disruptions in an already sensitive region. Approximately 21 percent of the world's oil passes through the Strait of Hormuz. During the past two months, several ships have been attacked as a direct consequence of the rising tensions. Although Washington and Riyadh were quick with blaming Tehran, it is uncertain who was behind the attacks. What is certain though is that any supply disruption will have disastrous consequences for the world economy. Related: Iranian Cyberattack Hits Bahrain Oil Company

While customers of Middle Eastern oil are aware of the risks and try to mitigate its effects, Moscow sees opportunities. East Asia’s three largest economies, China, Japan, and South Korea, have a dependency of 44, 88, and 82 percent respectively on Gulf oil. These countries have a lot to lose if the U.S.-Iran conflict escalates. Therefore, the strategic importance of alternative producers such as Russia has increased.

Traditionally, the bulk of the country’s oil is produced in Western Siberia. In recent years, however, the country has invested significantly in the Arctic and Eastern Siberia. Russia’s relative proximity to Asian customers and the lack of bottlenecks make it an ideal supplier. Russia already dethroned Saudi Arabia in 2016 as the biggest supplier in China. With additional investments and the gradual shifting of production from the west towards regions near East Asia, Moscow expects to increase its exports even further.

Lastly, the tension between the U.S. and Iran improves Russia’s diplomatic standing. Moscow has achieved the impossible: maintaining good relations with all countries in the Middle East. The relative withdrawal of the U.S. from the region has created a power vacuum that Russia partly filled. Although Moscow does not have a military, economic, and diplomatic clout comparable to Washington’s, its flexible Middle Eastern strategy has made it one of the few power brokers of the region.

The value and importance of a mediator are only appreciated when there is a conflict to solve. Although Moscow's cooled relations with Washington rule out mediation, Tehran is keen on receiving support from the Kremlin in its conflict with Washington. The unprecedented economic and political pressure has left Iran’s leadership with few options. Moscow, however, is happy to help as long as the rewards are worth it.

By Vanand Meliksetian for Oilprice.com

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  • Mamdouh Salameh on January 19 2020 said:
    Crises create opportunities and who is better than President Putin, the world’s most astute strategist currently on the global stage to exploit them and benefit from them.

    Russia under President Putin is 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. It dominates global natural gas markets and is the largest crude oil producer in the world. Moreover, Russia is wedded to China, the largest economy based on purchasing power parity (PPP) and also the largest energy market in the world.

    One of Putin’s great achievements has been the diversification of the economy enabling it not only to withstand the most intrusive US sanctions but also to grow and be able to live with $40 a barrel.

    His association with OPEC+ has enabled Russia to gain a huge influence over OPEC and the global oil market in addition to consolidating its strategic interests in the Gulf region a time of growing disenchantment with the United States in the region.

    Furthermore, Russia’s strategic alliance with China is already changing the global political order and is emerging as the dominant force that will shape the globe in the next two decades.

    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. Therefore any changes to the Russian constitution enabling him to continue to serve Russia as long as he is fit and well should be welcomed by the Russian people.

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

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