It is said that nothing that comes out of Vladimir Putin’s government is accidental. “Loyalty and no surprises” seems to be the leading themes of his governance. As Steven Lee Myers explains in his recent book, “The New Tsar: The Rise and Reign of Vladimir Putin,” Putin firmly expects his subordinates to keep him abreast of all goings-on. Heads roll when Putin is blind-sided or when government officials speak out of turn on matters of state.
This is very important to keep in mind when trying to make sense of Russia’s oil policy, particularly when it is communicated to the world via various bureaucratic representatives. Moreover, as Russia depends on oil and gas revenue for about half its government budget, expect Putin to be even more attuned to the public proclamations of his subordinates.
Russia’s Deputy Finance Minister Maxim Oreshkin sees no reason for oil prices to rise above $50/bbl in the near future, and expects prices to remain in the $40-60 range for at least the next seven years. But Russia is prepared to withstand these lower for longer oil prices, he said, and the country has assumed this price range in its budget next year.
“The Oil Industry Is Changing Structurally”
“We will live in a different reality,” Oreshkin said at a breakfast forum hosted by Vedomosti, a Russian newspaper. “The market is going through a serious change.”
Russia’s Deputy Finance Minister Maxim Oreshkin
The emergence of this “different reality” and the seat of this “serious change” is the oil industry, which is undergoing structural changes that will inevitably impact the broader global economic order.
“In our estimates, one should hardly expect any serious growth of the oil price above $50. The oil industry is changing structurally and it may happen that… the global economy will not need that much oil…Therefore, we see a range from $40 to $60 somewhere for the next 7 years. And these are the prices we should base our macroeconomic policy on,” he said.
Saudi, Are You Listening?
These are the prices Russia has based its 2016 budget on, which forecasts a deficit of 3% of GDP, based on an assumed oil price of $40-$50 per barrel. Hence, Oreshkin said the Russian economy has adapted to $45/bbl oil and can withstand much lower for longer oil prices.
In saying this, he’s directly warning Saudi Arabia (and ergo, OPEC) that Russia can withstand depressed oil prices for a long time, due the floating rouble that protects the country’s budget. Conversely, Saudi Arabia is trapped by a fixed exchange peg, forcing it to dip into its foreign reserves to cover a budget deficit currently running at 20% of GDP.
As noted at the outset, in Vladimir Putin’s Russia, no government official speaks “accidentally.” These words were deliberately chosen to convey this message to Saudi: “We’ll be just fine, we’re going to produce more, and your economy will hurt more than ours.”
Russia justifies its claim that it has the ability to endure very low oil prices for a long time by citing the import-substitution policy it has implemented to revive its engineering and industrial core.
Can Russia Really Withstand Lower For Longer Prices?
Russia continues to produce at post-Soviet record highs of around 10.7 M/bpd, and earlier this year said it aims to boost oil production by a third to more than 14 M/bpd in the next 20 years. Hence, OPEC’s recent invitation for non-members to join in cutting production are having the effect of reverse psychology on Russia.
How would Russia act if it were unable to withstand lower for longer prices? (Or if it in fact isn’t able to do so, how would it act if it admitted it?)
As the world’s biggest oil producer, would Russia opt to collaborate with Saudi-led OPEC to curb production to raise prices?
In a September interview with the Telegraph, Russian Deputy Premier Arkady Dvorkovich said the following when he was asked whether Russia would collaborate with OPEC on a production reduction deal, “We are not going to cut supply artificially. Oil companies will act on their own. They will look at market forces and decide whether to invest more or less. If prices stay low, it is in the nature of oil companies to stabilize production, or even to cut production,” he said.
It is still an open question whether Russia really can withstand the very low oil prices for years. Currently, the economy is in recession, real incomes have dropped by 9%, and output has fallen by 4% over the last year. There is the possibility that Oreshkin’s “we’ll be fine” comments could be more about a show of strength than a concrete appraisal of the country’s economic health.
Several Layers Of Russo-Saudi Antagonism
The current Russo-Saudi antagonism is rooted in the following realities: 1) Russia is now arguably Saudi’s principal oil market share competitor, 2) the heightened geopolitical tensions between Saudi and both Russia (and Iran) in Syria, and 3) Saudi’s attempt to gain European oil market share from Russia.
As we recently reported, OPEC’s decision on December 4 to abandon the quota system was likely influenced by Saudi’s increasingly antagonistic attitude towards its rival oil producers. Saudi is ramping up, rather than scaling down, its battle for market share and regional gravitas. Now it doesn’t have a recommended quota to worry about.
With US oil production slowing and Russian production hitting record post-Soviet highs, it can arguably be said that Russia is emerging as Saudi’s chief market share rival. And with Iran and Iraq standing with Russia and opposite Saudi in Syria, and with both countries planning to ramp up oil output soon, Saudi’s mind is pondering strategies of how to strengthen its own geopolitical position and weaken theirs.
Russia and Saudi are not only fierce competitors for global oil market share, they are also on opposing sides in the Syrian crisis. Russia’s incursion into Syria in September in support of Bashar al-Assad, and the warming of relations between Russia and Iran as a result of this move, further isolated Saudi in the region.
The two countries are also engaged in a fight for dominance in Europe’s oil market. In recent months, Saudi Aramco and Russian oil companies have been significantly discounting their crude to Europe. Saudi has been targeting countries such as Poland and Sweden, challenging Russia’s long-time dominance in the region.