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Contextualizing the Russia-KSA Oil Deal: Can it Last?

The interim between late 2020 and early 2021 has witnessed new developments in bilateral ties between Russia and the Kingdom of Saudi Arabia (KSA), an unexpected turn given the highly destructive “oil price war” of early 2020. Overall, three main episodes need to be underscored.

First, the recently concluded (February 19, 2021) agreement on military-technical cooperation – accompanied by growing fissures in the U.S.-Saudi partnership and based on, among other things, cooperation in the realm of security – gives the impression that Russia might increase its presence in the Saudi security architecture.

Second, the soon-to-be signed (reportedly in mid-2021) comprehensive “roadmap” on trade and economic cooperation between Moscow and Riyadh is to further strengthen the economic pillar of the partnership between these two energy superpowers whose economies are wrestling with the negative consequences of COVID-19 and plummeted oil prices. Reportedly, this new roadmap will also strengthen the institutional component of the Saudi-Russian partnership, allocating central coordination roles to the Russian Direct Investment Fund (RDIF) and the Saudi Public Investment Fund (PIF). According to Russian sources, the document will pay special attention to cooperation in the realm of energy projects, encompassing – projects in green/renewable and nuclear energy as well as in the domain of non-renewable energy (hydrocarbons), totaling twenty-four initiatives.

The third development of crucial importance is the new meeting of the OPEC+ monitoring committee that commenced on April 28. Its decision to increase oil extraction output – by 350,000 barrels in May and June, and 441,000 in July – has had a soothing effect on investors, signaling growing confidence among the world’s largest oil producers that the global demand for oil is far from over.

From a more strategic perspective, these developments are illustrative of a growing partnership between the KSA and Russia – the world’s largest oil producers. However, certain factors might interfere, derailing a seemingly nascent partnership.

Saudi Compromises for Economic Stability

Current Saudi cooperation with Russia – with OPEC+ renewed agreement serving as a foundation – is primarily premised on the understanding that further escalation and destabilization of the global oil market, which would have occurred had Moscow and Riyadh failed to reach an agreement a year ago, would be a huge blow to its largely oil-dependent economy. As a result, Riyadh had to voluntarily go ahead with large cuts in oil extraction (1 million barrels per day), which led to the overall volume of oil exports to plummet by 14.5 percent. Many experts have argued that there is no need to be dramatic about the cut and its impact on the Kingdom’s economy since decreasing supply results in a greater demand, which in turn is reflected in growing/stabilizing oil prices.

That said, however, two strategic factors must not be ignored. First, the Saudi budget breaks even when oil prices are around $60 per barrel, but there is no guarantee that this price will endure for long if other oil-producing nations start increasing their output, which would jeopardize the Kingdom’s economy. The second main concern is related to potential risks associated with Saudi Arabia’s shrinking share in the global oil market. Specifically, if the Kingdom continues to reduce oil output, then its oil exports to its main oil consumers (primarily China and India) will subside, and its spot may be taken by other aspiring nations. This risk is already visible in Beijing’s policy, as China has already pledged to increase cooperation with Iran as a way to diversify its oil supplies and increase the level of energy security. Moreover, Beijing is expressing strategic interest in Russia’s oil/LNG Arctic-based projects, which makes Moscow and Riyadh strategic rivals competing for a respective share on the Chinese market, rapidly recuperating from the COVID-19 crisis.

Russia Seeks a Better Deal

The “oil price war” coupled with the world’s decreasing consumption of energy resources has dealt a severe blow to the Russian economy which, like that of Riyadh but to a lesser extent, is also dependent on oil-generated revenue. According to the Federal Customs Service of Russia, during the first eleven months of 2020, the overall share of oil revenue in the Russian budget contracted drastically, plummeting by 40.9 percent, which equals to $66.4 billion. While Russian experts and politicians argue that shrinking energy-generated revenue presents Russia with a unique – and in a way historic – chance to decrease its dependence on oil/gas exports, fact and figures demonstrate that in the short-to-mid-term prospective exports of hydrocarbons will remain a foundational pillar of Russia’s economy.

Moreover, it appears that among Russia’s leading policymakers and energy experts, disappointment – already visible last year amidst the “oil price war” – with the deal as well as Russia’s participation in OPEC+ is growing. For instance, the leading expert in the National Energy Security Fund, Stanislav Mitrakhovych, has stated that sooner or later Russia will have to leave the OPEC+ platform. Specifically, he argued that “the longer Moscow is ‘sitting’ on conditions of OPEC+ deal, the more opportunities the competitors to have to increase their oil output. First and foremost, these are the U.S., Brazil […] Norway.”

While not directly pointed at Saudi Arabia, these sentiments are nonetheless indirectly level against it. Should Russia abandon the deal at any point in the future, the global energy market is likely to once again sink into the abyss of havoc and hostile competition.

With A Temporary Agreement, Conflict Looms

Overall, the Saudi-Russia relationship and its developments emphasize two critical points. First, while both Russia and the KSA are strategically interested in global oil demand to remain stable, high(er) oil prices are much more important for Riyadh than Moscow. Russia – which now seems to be paying more attention to diversification of its budget revenues – partly realizes the dangers of excessively high oil prices that could derail its import-substitution and diversification efforts. Thus, keeping oil prices slightly above $40 per barrel – a point at which Russia’s budget breaks even – is the Kremlin’s strategic objective for now. Moreover, increasing oil revenues are likely to increase the value of Russia’s national currency, which will have a negative impact on Russia’s foreign trade. For the Kingdom, such a price is well below the acceptable threshold. If oil prices are below $60-70 per barrel, the Kingdom will suffer economic losses.

Second, Western pursuit of the so-called green energy agenda poses a serious challenge to oil-exporting countries, who will be increasingly competing for China’s and India’s business. Despite the talks, it seems rather dubious that these actors will be able to switch toward green/renewable sources of energy ahead of Western players. This means that both Russia and the KSA will have to compete for an increase of oil supplies to these countries, which will inevitably pit the two energy superpowers against each other.

Indeed, while cooperation-bind rhetoric between the KSA and Russia is seemingly becoming more audible, the potential for conflict exists and is likely to break out once again in the near future.                                              

Dr. Sergey Sukhankin is a Fellow at the Jamestown Foundation, and an Advisor at Gulf State Analytics (Washington, D.C.). He received his PhD from the Autonomous University of Barcelona.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.

Issue: Energy & Environment
Country: KSA

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Dr. Sergey Sukhankin is a Fellow at the Jamestown Foundation, and an Advisor at Gulf State Analytics (Washington, D.C.). He received his PhD from the Autonomous University of Barcelona. His areas of interest include Kaliningrad and the Baltic Sea region, the Arctic region, oil diplomacy and the development of Russian private military companies since the outbreak of the Syrian Civil War. He has consulted or briefed with CSIS (Canada), DIA (USA), and the European Parliament. His project discussing the activities of Russian PMCs, “War by Other Means” informed the United Nations General Assembly report entitled “Use of Mercenaries as a Means of Violating Human Rights and Impeding the Exercise of the Right of Peoples to Self-Determination.” He is based in Edmonton, Alberta, Canada.


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