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Why Russia Won’t Abandon OPEC+ Just Yet

Russia OPEC

Russian President Vladimir Putin pried loose a couple of energy investment deals from Saudi Arabia on his latest visit to the region, on October 14 and 15 (TASSKommersant, October 14), but their total value reached only hundreds of millions of dollars, not the billions Russia had hoped for. He also picked up an investment from the United Arab Emirates (UAE) during his Middle East trip (Kremlin.ru, October 15). Although overall, the results were modest, every such economic agreement lays the groundwork for more in the future.

Moscow has been trying to strengthen its partnerships with the cash-rich Gulf states since striking a deal three years ago with the Organization for the Petroleum Exporting Countries (OPEC) (Opec.org, December 10, 2016), which would ultimately transform into the “OPEC+” coalition to raise global oil prices (see EDM, April 2, 2018 and October 31, 2018). Russia also wants stronger ties with the Middle East to boost its stature in the region and obtain energy-project financing that Western sanctions have blocked (see Jamestown.org, December 20, 2017 and March 8, 2018). Saudi Arabia, however, has been dragging its feet on investments because Russia is an oil and natural gas competitor.

The Saudis had originally instigated the OPEC+ deal. But Russia embraced the overture because it wanted to see falling oil prices stabilize and thought it could obtain geopolitical and investment benefits from the arrangement. Now, Riyadh hopes to extend OPEC+ for a decade or more, but Moscow refuses to commit to such a timeframe. The Russian side wants to be able to pull out of the agreement if shifting geopolitical and economic circumstances mean that it would be better off on its own again. Another important factor in why Moscow balks at a long-term OPEC+ deal is opposition from Russia’s energy-sector oligarchs, who want no limits on their ability to pump more oil. Related: Iran’s $280 Billion Sanction Skirting Scheme

If Russia begins leaning toward abandoning OPEC+, it will have to weigh whether this decision is worth losing its partnership with Saudi Arabia over. After all, Moscow is still hoping for multi-billion-dollar Saudi energy investments. The two countries’ sovereign wealth funds established a $10 billion investment fund after King Salman bin Abdulaziz alSaud visited Russia in 2017 to facilitate such deals (see EDM, October 23, 2017). Kirill Dimitriev, the head of the Russian Direct Investment Fund, boasted recently that the countries’ joint fund has already invested $2 billion in Russian and Saudi projects (RIA Novosti, October 10, 2019). But most of this Russian money went to air transportation projects and other non-energy infrastructure, rather than to the oil and gas–sector expansion the Kremlin so desperately desires.

Putin had hoped a personal pitch, two years ago, to Energy Minister Khalid alFalih would persuade the Saudis to buy into the Novatek Arctic LNG 2 liquefied natural gas project (Interfax, December 8, 2017). But this overture failed; and al-Falih has since been fired. Russia was also unable to obtain Saudi investment in its largest oil and gas service contractor, Eurasia Drilling, or to persuade Saudi Arabia to allow state-owned nuclear power contractor Rosatom to build a plant in the Kingdom. The Russians and Saudis did sign several business-related documents during Putin’s visit last week, but most were non-binding memorandums of understanding or cooperation agreements.

Related: How Much Oil Is Up For Grabs In Syria?

One binding agreement was for the two countries’ investment funds and Saudi oil giant Aramco to acquire 31 percent of Novomet, a leading petroleum field services provider, from Russia’s state-owned Rosnano. Novomet specializes in manufacturing electrical submersible pumps for oil wells (TASS, October 14). The second concrete deal during Putin’s trip was Saudi Arabian Basic Industries Company’s (SABIC) pledge to buy into a huge methanol plant that ESN Group is building at Amursk, in the Russian Far East (Kommersant, October 14). Gazprom is set to feed the plant with natural gas. SABIC, the Russian Direct Investment Fund and ESN pledged to invest $200 million into the project. The binding deal Putin signed in the neighboring UAE was for Russia’s Lukoil to buy a 5 percent stake in the Abu Dhabi National Oil Company’s Gasha gas field (Kremlin.ru, October 15). As with the Russia-Saudi partnership, the sovereign wealth funds of Russia and the Emirates often play a central role in the two countries’ deals. For example, in 2018 the UAE’s Mubadala fund took a 44 percent stake in Gazprom’s Neft-Vostok subsidiary, which operates 13 oil fields in Russia’s Tomsk and Omsk provinces (Mubadala.com, accessed October 22).

Russia’s flirtation with the Gulf is nascent and holds promise, but it is still standing on sands that could shift at any time. Although Moscow has yet to translate its Gulf partnerships into substantial investment flows, its pivot to the region has undoubtedly begun yielding benefits. The biggest is the extension of the OPEC+ agreement for two more years, keeping a floor under global oil prices. Another boon to Moscow is that Russia and its Arab-state partners have been able to separate their geopolitical interests—which are often at odds—from their economic ones, where both sides stand to gain. Against the background of this week’s (October 23–24) Russia-Africa Summit as well as the security deal on Syria that Moscow has reached with Ankara, the Kremlin’s attention toward this region and the “Global South” more generally can only be expected to increase.

By The Jamestown Foundation

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  • Mamdouh Salameh on October 24 2019 said:
    Great oak trees from acorns grow. While President Putin’s recent visit to both Saudi Arabia and UAE was modest in terms of signed trade deals, its geopolitical impact is a game changer.

    President Putin’s visit to Saudi Arabia came at a time of shifting sands under the Saudi-US alliance. A point of no return in the historic Saudi-American relations might have been reached when Iran’s allies, the Houthis of Yemen, attacked and inflicted heavy damage on Saudi oil infrastructure. The United States rushed to accuse Iran for the attacks but failed to retaliate against it. As a result, Saudi Arabia may have reached the conclusion that the United States has been using Iran as a threat to blackmail the Saudis for money.

    And with a changing global geopolitical landscape, Saudi Arabia may feel the need to ally itself with the new rising order that will shape the world in the next two decades, namely Russia’s strategic alliance with China, hence the great importance of President Putin’s recent visit to Saudi Arabia and UAE.

    Moreover, Putin played a major role in cooling rising tensions between Saudi Arabia and Iran and helping them move towards some form of a rapprochement as he always did inside OPEC by narrowing differences between Saudi Arabia and Iran on oil prices and production cuts. Furthermore, President Putin being the most brilliant statesman on the international scene currently, is cleverly laying the ground for Russia to fill the gap created by America’s eventual withdrawal from the Middle East.

    And whilst Russia neither has the intention of joining OPEC nor committing itself to an extension of OPEC+ for ten years as the Saudis hope, it will continue to coordinate its oil policies with those of OPEC in support of oil prices. It will also to continue to consolidate its strategic relations with Saudi Arabia. Such cooperation with the de facto leader of OPEC has enabled Russia to acquire huge influence over OPEC decisions regarding supplies and oil prices and exercise great influence on the global oil market.

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

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