N Janardhan
Saudi Arabia and Russia reaching a deal to freeze oil production at its current levels will have implications for different countries.
The two most powerful oil producers in the world – Saudi Arabia and Russia – reached an agreement to freeze oil production at its current levels about a fortnight ago. While the overbearing intent is economic, there are several geopolitical considerations too, primarily related to Iran and Syria.
As part of the economic rationale, joined by Qatar and Venezuela, this is the first deal between OPEC (Organisation of Petroleum Exporting Countries) and non-OPEC members in 15 years. It is a step aimed at tackling the growing production and oversupply of crude amid a global slowdown and helping prices recover from their lowest in more than a decade (from more than $110 a barrel in 2014 to about $30 at present).
The deal is unlikely to yield the desired results. The OPEC members themselves have been at odds for decades over output levels. In addition, non-OPEC member Russia, which last agreed to cooperate with OPEC in 2001, never kept its word.
Analysts also feel that a mere freeze in production is not enough to shore up prices; production cut is the real remedy, which is not easy to agree upon at this stage.
Saudi Arabia is facing a budget deficit of between 15-20 per cent and drawing from its reserves and savings abroad to make up, while Russia is also widening its deficit to cover its expenditure. Notwithstanding this factor, the deal denotes a mini Russian turnaround. In December 2015, Russia had said it is making plans based on oil prices fluctuating between $40 and $60 until 2022, which was a veiled challenge to Saudi Arabia.
Moscow indicated that it could withstand very low oil prices indefinitely because of a floating rouble that provides a safety net to its internal budget. On the other hand, Moscow argued that since Riyadh has a fixed exchange peg to the US dollar, it would have to dig into its reserves.
The script, however, gets murky because of Iran. The Islamic Republic is waiting to ramp up production and increase oil exports as soon as sanctions are completely lifted in accordance with the nuclear deal signed with the West last year. After first welcoming the freeze, Tehran “ridiculed” the deal, saying it would not give up its appropriate share of the global oil market.
Tehran is unfazed by the possibility of prices falling further when more of its oil gluts the market. While Tehran feels that in spite of its quantitative increase in output, additional sales and revenue will offset the low price factor, the Russian-Saudi deal is aimed precisely to stop that.
The script gets murkier when politics mixes with oil. The freeze agreement is not only aimed at offsetting Iran’s revenues, but also about reining in Tehran’s political influence in the region, especially in Syria and Yemen, which has been a huge concern for Riyadh.
The Saudi frustration with US failure to neutralise Iran’s regional influence was evident even in 2011 when former director general of the intelligence agency Prince Turki Al Faisal warned that Riyadh was considering using its oil wealth as a tool against Tehran – by oversupplying the international oil markets and reducing the price of crude unless Tehran halted its controversial nuclear programme.
With the nuclear deal done and dusted, Riyadh is now also keen about limiting the Tehran-Washington bonhomie, apart from checking Iran’s gains after sanctions are lifted.
The deal has a Syrian angle too. It is notable that Saudi Arabia, Qatar and Russia, which have been supporting different groups in Syria, are attempting economic cooperation, which is bound to have some political spinoff as well. The current ceasefire in Syria that took effect last week is a case in point. While chances that the truce will hold are slender, it would at least result in much-needed humanitarian relief operations throughout the war-torn country.
Politico-economic battle
Another example of the battle of economic wits for political gains is that while Russia believes it can withstand low prices better for a sustained period, Saudi Arabia also equally believes it can outdo Russia economically and gain political concessions in Syria in the bargain.
Riyadh has been trying to pressure Moscow to end its support to Syrian President Bashar Al Assad. While abandoning Assad is certainly not on Russia’s cards, it may certainly be amenable to a face-saving compromise.