OPEC is dead, long live OPEC+. Arguably the collaboration between the world's two largest exporters of oil, Russia and Saudi Arabia, is a significant development caused by and comparable to the shale revolution in the U.S.
Desperate times require desperate measures. A decade ago, a partnership between Moscow and Riyadh would have seemed impossible due to contradicting interests. Recent developments have somewhat aligned the countries into what has been dubbed OPEC+.
However, this doesn't mean that Russian and Saudi exporters aren't competitors anymore. In fact, the oil behemoths are contending more than ever for market share in Asian markets such as China. Also, Moscow and Riyadh take into consideration the relative position of their competitor and partner during further talks on production cuts to bolster prices. One of the measures, which is indicative of the bargaining position of the participating country, is the size of the respective Central Bank’s wealth in terms of money, gold, and other securities.
Russia's relative wealth has been increasing in recent years, while Saudi Arabia's has been decreasing. This development says two things: first, the state of the economy, and second, the respective country's choice of strategy and consequential bargaining position.
State of the economy
The diverging wealth gap between Saudi Arabia and Russia is a consequence of internal and external developments leading to a build-up or spending of oil wealth. In Moscow's case, the Western sanctions of 2015 and the lower revenue from oil sales have caused severe economic damage. Russia was able to maintain relative economic stability due to its savings (see the above figure for the drop in relative wealth after 2015). Moscow has learned to appreciate its rainy-day fund, meaning that a new financial buffer is required in case of another crisis.
Second, the financial stockpiling, or spending in Riyadh's case, is indicative of the country's state of the economy. Although Russia is battered after several years of sanctions with a strong dependence on its energy sector, the Eurasian giant is still home to a sizeable diversified economy. Saudi Arabia's, in contrast, has a higher degree of dependence on oil production. Therefore, decreasing income from energy exports needs to be compensated by spending the country’s savings.
Also, Saudi Arabia is engaged in a costly quagmire in Yemen where its forces are not able to defeat the Houthi rebels, which are supported by arch-enemy Iran. Furthermore, Saudi Crown Prince MBS has set the country on a path of diversification, which is partly funded with national resources.
Negotiating new cuts
Rating agency Fitch has upgraded Russia’s debt rating recently, due to what it called “prudent economic policies”. The country's reserves will amount to nearly $600 billion as a consequence of trade and budget surpluses. Moscow's sound policies have reduced the fiscal breakeven from nearly $110 a barrel in 2013 to $40 currently, and in the meantime, the Kremlin is successfully boosting its market share in European and Chinese markets
An aggressive foreign policy and ambitious domestic goals require large sums of money in Saudi Arabia's case. Therefore, Riyadh would prefer to see the price of oil around at least $80 per barrel to break-even its budget.
Moscow is well aware of the situation of its competitor and partner. Thus, it is highly unlikely that the Kremlin will agree on further reducing oil production to bolster prices. Saudi Arabia won’t accept that the price of oil drops below its current level and the country is considering all options, according to an official from the Kingdom. Already Riyadh's actions had a positive effect on prices, which rebounded slightly last week when the announcement was made of the Arab country's commitment to stabilize prices due to the trade war and the threat of a global recession.
Russia, most likely, has a fair estimation of its partner’s willingness and necessity to act without the participation of Moscow beyond the current OPEC+ agreement. Unless prices drop below $40 per barrel, Moscow will remain reluctant to agree on further cuts and instead free-ride its way into the future where prices hopefully are more favourable to producers.
By Vanand Meliksetian for Oilprice.com
