Harsh economic reality on oil price drives Saudi-Russia accord
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Saudi Arabia and Russia are hardly the most obvious allies. The world’s two largest oil exporters have been locked in an increasingly fierce battle for market share. They are on opposite sides of the bloody conflict raging in Syria. Previous attempts to co-operate on oil output have ended in bickering and distrust.
But the two states have been forced together by harsh economic reality, in the shape of collapsing oil price, which led to Tuesday’s tentative agreement to freeze oil production, also backed by Qatar and Venezuela.
Coming at least 14 years since the previous joint agreement between Opec and non-Opec countries, Tuesday’s announcement, which seeks to hold production at January levels, represents the first serious effort to halt the 70 per cent decline oil prices have endured over the past 18 months.
“This is the first public acknowledgment from the two heavyweight sovereign producers that all is not well in this price environment,” said Helima Croft, chief commodities strategist of RBC Capital Markets.
Moscow and Riyadh are responding to low prices, squeezed budgets and a chaotic Middle East in which Saudi Arabia’s bitter rival, Iran, is ramping up oil exports and projecting its power in the region, notably Syria, Iraq and Lebanon.
“With Iran emerging from the sanctions regime [over its nuclear programme], and with Russia having a unique relationship with Iran … [as Saudi Arabia] you have to sit down and do trade-offs,” said Dmitri Trenin at the Carnegie Moscow Centre.
The announcement signals a change in tone if not in policy. For much of the past year Russia has dismissed talk of co-operation with Opec while Saudi officials have rejected any suggestion of a limit on their own output.
Over that time Moscow has been seen as the key to unlocking any output agreement with Opec. Riyadh has made clear that any production cuts would require the participation of Russia as well as other big producers such as Iran and Iraq.
A senior Gulf Opec delegate said the deal could pave the way for future production cuts if necessary.
“First let’s see if everyone agrees, then let’s see if we can rebuild the trust between the big producer countries,” he added. “If in a few months it is clear more needs to be done, then we will know if everyone will commit to cuts or not. It’s a test.”
Iran is the biggest sticking point. Other large producers are already close to capacity output. Oil prices fell back on Tuesday after having initially risen on news of the understanding.
But both Moscow and Riyadh are under severe economic pressure, because of low prices.
Already suffering under the weight of international sanctions, Russia is set to undergo a second year of recession after its economy contracted by 3.7 per cent in 2015.
Saudi Arabia faces its worst fiscal outlook in 15 years amid falling oil prices, forcing the government to announce an austerity budget in December. The kingdom has cut public spending, causing pain in the private sector, and increased domestic energy prices.
The countries are also trying to foster new political connections. Saudi Arabia, like other Gulf nations, has toyed with closer relations with Russia over the past few years. This follows concerns that the countries’ traditional ally, the US, is pulling back from the Middle East. In particular, the nuclear deal with Iran has driven a wedge between Washington and Riyadh.
Despite unease with Russia’s support for Bashar al-Assad and its growing alliance with Iran, many leading Saudis hope that Moscow can be persuaded to support a post-Assad settlement as long as its own regional interests are taken into account.
Sunni Gulf Arab governments regard Russia’s regional interests far more benevolently than they see Iran, which they condemn as a sectarian exporter of Shia discord across the Arab world.
Russian President Vladimir Putin has held several bilateral meetings with Prince Mohammed bin Salman, Saudi Arabia’s powerful deputy crown prince. Last year Saudi Arabia’s sovereign wealth fund signed an agreement to invest $10bn in Russia.
Mr Trenin said the two countries’ relations were underpinned by a perspective they shared despite being on either side of the Syria war. Both, he said, were “brutally pragmatic”. But he cautioned there were limits to any co-operation. “The Saudis are very difficult partners for Moscow and vice versa,” he said. “There is very little trust.”
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