The last six months have been tough on Russia-Saudi relations. The unprecedented rapprochement that began with a promising partnership built around the OPEC+ deal has since lost its momentum. Riyadh’s confrontational rhetoric during the Russia-Saudi Arabia oil price war in March, and the consequent withdrawal of the Saudi Arabian Public Investment Fund from the largest investment in the energy industry of Russia raised questions in Moscow regarding the nature of the Kremlin’s ties with the Gulf monarchy.
The Need to Control Energy Market Started Collaboration
The Russia-Saudi Arabia rapprochement started with impressive plans. The oil production cut agreement between Riyadh-led OPEC and Moscow-led non-OPEC countries in November 2017 was followed the next year with the first-ever Saudi reigning monarch visit to Russia and grandiose joint investment plans, especially in the energy sector. Saudi Arabia ultimately invested $2.5 billion in the Russian economy. However, this figure was significantly below the promised $10 billion. To the chagrin of the Kremlin, the Saudi deals mostly avoided the energy projects. Moreover, bereft of long-term financing opportunities due to the Western sanctions over Moscow’s annexation of Crimea, Russia had hoped to lure Saudi Arabian investments in significant oil and gas projects. Vladimir Putin even took matters into his own hands when he suggested to Saudi Arabia’s then-energy minister Khalid Al Falih an investment in Novotek’s Arctic LNG 2 project. Yet, Saudis steered clear of Russian energy projects, causing significant disappointment in Moscow.
Then came the COVID pandemic, which caused the most abrupt destruction of demand in the history of the oil industry. The plunge of demand sent oil prices to historic lows while also generating a litmus test for the nascent partnership between the world’s two largest oil exporters. Disagreement over how to react to the plummeting demand amidst the pandemic in early March led to a temporary breakup between Riyadh and Moscow, which could be mended only with Washington’s mediation.
Can the OPEC+ Deal Salvage the Relationship?
The parties eventually reinvigorated the OPEC + deal, but the relationship had already suffered significant damage. The Saudi Arabia’s Public Investment Fund announced withdrawal from its largest energy investment in Russia, which was the acquisition of 30% percent of Novomet, Russia’s major oil and gas equipment manufacturer, in partnership with Russia’s Direct Investment Fund. The Saudi sovereign wealth fund explained its decision to end the contract negotiations by pointing to uncertainty in the markets. Another indication of Russia-Saudi tensions was when Riyadh irked Moscow through its eagerness to supply oil to Belarus, which at the time was engaged in oil supply negotiations with its traditional supplier, Russia. Saudi Arabia delivered its first-ever oil cargo to Belarus in April. Together with other non-Russian supplies to Belarus, it played into Minsk’s hand in its negotiations by undermining Moscow’s bargaining positions. Nevertheless, the OPEC + deal remains active and constitutes a cornerstone of the relationship between Moscow and Riyadh.
This partnership within the OPEC + format has its peculiarities. Firstly, production cut agreements within the OPEC+ deal have remained short-term arrangements as Riyadh’s efforts to institutionalize the deal have proven futile. Furthermore, opposition to OPEC+ is expected to grow as Russian companies need to surge their output in light of the country’s tightening tax regime. This month, the Russian parliament ratified the tax code changes, which now obliges the companies to pay the mineral taxes even if the oil price goes below $15 per barrel. The Kingdom is likely to ramp up its output to decrease the budget deficit, which is expected to equal 12% of its GDP.
Secondly, Russia and Saudi Arabia have to compete for the market share in important markets such as China and Europe. The price policies of Saudi Arabia aimed to undercut Russian supplies in Europe have raised eyebrows in Moscow. In contrast, Russia’s aggressive market share policy in China has caused the same effect in Riyadh.
The United States has been wary of the slowly improving relations between the Kremlin and the Kingdom. The Obama administration’s support of Joint Comprehensive Plan of Actions -also known as Iran nuclear deal- was viewed by Riyadh as a concession to Tehran and a betrayal of its interests. This was one of the factors that pushed Saudi Arabia towards a closer relationship with Russia. The subsequent withdrawal of the Trump administration from the JCPOA, and its continuous support to Saudi leadership throughout the kingdom’s recent diplomatic crises, has played a significant role in alleviating the latter’s fears of an American withdrawal from the Middle East and, consequently, dampened its motivations for a turn towards Moscow. At the same time, the Trump administration considers a close Washington-Riyadh partnership crucial for balancing the oil market.
Desire to gain leverage over balancing the oil market brought Moscow and Riyadh into a condominium. Until March, the two countries had managed to disentangle their disagreements and concentrate on partnership, hoping to foster it beyond OPEC + format. Beyond the two countries’ failure to expand their partnership beyond the OPEC + deal, the deal itself came under serious scrutiny in both capitals due to the devastating impact of the pandemic. Uncertainty around COVID-19 may cause significant discrepancies in how Russia and Saudi Arabia perceive the market’s situation and compete for the market share both in Europe and Asia, similar to what we saw in March.
Rauf Mammadov is a resident scholar on energy policy at the Middle East Institute. He focuses on issues of energy security, global energy industry trends, as well as energy relations between the Middle East, Central Asia, and South Caucasus.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.
