Since the start of the standoff between Russia and Saudi Arabia on oil production cuts and the following sharp decrease in oil prices, much ink has been spilt over Russia’s supposed resilience compared to its former OPEC+ partner. Both countries seem to have lost faith in OPEC+ – a group of 14 members of the Organization of Petroleum Exporting Countries (OPEC) and 10 other non-OPEC oil-producing states whose aim was to keep oil prices high – but Russia looks relatively at ease with the transition to a post-OPEC+ world.
Igor Sechin, head of Russia’s largest oil company, Rosneft, has downplayed both the significance of OPEC+ and the disagreement with Saudi Arabia, predicting a quick rebound already this year. Early in March, Russia’s Finance Minister, Anton Siluanov,claimed that his country could weather oil prices of $25 to $30 per barrel for between six and 10 years, thanks to a $150 billion-worth National Wealth Fund (9.2% of Russia’s GDP) that would ensure macroeconomic stability. On the contrary, the International Monetary Fund (IMF) estimated the fiscal break-even price for Saudi Arabia to be around $80 per barrel. Low oil prices together with a soaring deficit would, therefore, put immense pressure on the kingdom.
Furthermore, according to some calculations, Moscow is actually benefitting from the steep devaluation of the ruble caused by the oil crisis, with the Russian currency at its lowest level against the dollar in four years. As a matter of fact, a falling ruble enabled Rosneft to cut its production costs compared to Saudi Arabia's Aramco. If last year Rosneft’s average lifting cost per barrel was $3.10, now it stands at $2.50 per barrel, while Aramco’s cost remained stable at $2.80 (because of the riyal peg’s fixed exchange rate to the dollar).
Lastly, pundits have been suggesting that Russia’s energy policies are inflicting deep pain on the US shale industry, which many experts deem particularly vulnerable to dropping oil prices. If US crude supply has grown 133% since the advent of shale oil production in 2011 – in 2017-2018, the US’ production of both oil and natural gas had the world’s largest-ever annual increase – it also shows severe weaknesses, including dependence on external capital. These weaknesses existed before the start of the COVID-19 pandemic and the Russia-Saudi oil price feud will only intensify under the current circumstances. This would mark, the argument goes, an act of not-so-cold revenge for Washington’s sanctions against Russia's energy industry, hitting hard on Rosneft and possibly jeopardising the future of the Nord Stream 2 gas pipeline.
So, is Russia killing two birds with one stone? Does Saudi Arabia’s (and the US’) loss mean Russia’s gain? Not really.
This oil price war is not risk-free for Russia: Moscow’s situation is not as comfortable as the Kremlin tries to project and “keeping afloat” may not be enough. Not only does the government need to boost its social spending at a time when the economy is already stagnating but it also needs to keep investing in the modernization of infrastructure and opening of new fields in the Arctic and East Siberia – today, the output is mainly from fields located in West Siberia. Western funding and technology are increasingly scarce due to sanctions, while Riyadh keeps enjoying almost unlimited borrowing opportunities internationally, and its companies are not burdened with high external debt. Low oil prices mean that even government-sponsored projects may not pay off and may also impact on gas contracts, which are partly oil-price linked.
Furthermore, the coronavirus spectre is looming and it has already made the Russian government and the main international organizations revise Russia’s GDP growth estimates. Asked about which threat is worse for Russia’s economy, the coronavirus or the oil price shock, Andrey Kostin, chief executive officer at the VTB Bank, declared in an interview that “while Moscow is prepared for and knows how to deal with economic crises, the level of uncertainty of the pandemic makes it far more dangerous than the oil price war.” Both threats combined could pose too much of a risk for the Russian economy.
While the prospects of resuscitating the OPEC+ format look gloomy at the moment, and a feeling of schadenfreude at Saudi and US losses seems to pervade Russia’s leaders, economic considerations as well as political ones will likely push Russia to agree to restrict production in the near future. After all, the Russian leadership should also evaluate the geopolitical risks of drifting apart from Saudi Arabia, especially in light of its foreign policy in Syria. Riyadh is not at ease with the growth of Russian influence in the Middle East, especially Moscow’s support for long-standing enemies, such as Iran and Assad’s regime in Damascus. A key element of the success of Moscow’s Middle East policy is the capacity to “speak with all actors” and overcome differences on the ground. But the crucial thing for Moscow is to start the process of reconstruction in Syria, for which it lacks the financial resources. The standoff with Riyadh undermines the prospects for Saudi financial support for Syrian reconstruction: earlier in March, the Saudi Foreign Minister, Adel Jubeir, reiterated that his country would not take part in any reconstruction efforts before stability is restored in Syria. With tensions remaining high on the ground, a “war of annihilation” with Riyadh over oil production might spill over into Syria as well.