Despite the fact that Russia has been repeatedly deceived by Riyadh’s empty promises, it seems that there’s still some circles in Moscow that carry on believing the claims that one day Riyadh will invest tens of billions of dollars into the Russian economy and would even start buying its military equipment and weapons regularly. These false hopes are understandable, since the low oil prices, in spite of a temporary recovery they saw in the last 4 months, are compounding the effects of anti-Russian sanctions, forcing Moscow to seek major partners among those who are not engaged in the campaign launched by the US and EU in order “to contain Russia”. However, previous engagements with Saudi Arabia suggests a simple idea – Russia can only rely on itself, achieving its goals through deep economic reforms which will lessen its dependence on the oil and gas sales. And if you’re going to do business with a state, you must first acquire a deep understanding of the internal processes that are taking place deep within it. Let’s take a look at Saudi Arabia.
In early June, Saudi oil and gas giant Saudi Aramco held a forum in Moscow aimed at Russian companies. The stated goal was to inform Russian business circles about Aramco’s projects and a handful of analysts assumed that this event was the factual confirmation of a genuine Saudi desire to establish close business ties with Russia. But as of now, there’s virtually no trade or economic relations between the two countries to speak of. Moreover, Russia and Saudi Arabia remain each other’s main competitors in the oil markets.
Against the background of Saudi security dependence on the US and the reliance of the Al Saud regime on Washington as a guarantor of internal stability within the country, the Kingdom of Saudi Arabia (KSA) will never dare pursue any serious reconciliation with Russia even for the sake of ensuring the stability of the world’s oil markets. Moreover, Saudi Arabia has repeatedly interfered in the affairs of Russia’s Muslim community, and Russia has the largest Muslim population among all European nations.
There’s really no need in mentioning the poisonous role the KSA has been playing in the Syrian conflict, since it’s pretty much obvious to all at this point. So any claims that after a four-year cooling-off in bilateral relations regarding Syria, Riyadh has finally decided to separate its foreign policy ambitions and its economic relations to establish “a comprehensive strategic partnership” with Russia sounds delirious at best. Moreover, those claims are dangerous since they create the illusion within Russia’s political establishment that Riyadh wants to make friends with Russia, while in fact the KSA wants to use the game of “alleged cooperation” with Moscow to apply pressure on Washington and further aggravate tensions regarding Russian-Iranian relations. In the meantime, Saudi Arabia will still be advancing the plan of Russia’s economic suffocation, the very goal that Washington set in front of the Al Saud clan to begin with.
On June 2, all eyes were on the OPEC meeting with other major oil producers with the aim of freezing oil production. Although no analyst would expect a serious breakthrough on the oil pricing issue, some experts, including in Russia, hoped that with the changing of the Saudi Energy Minister new policies might have prevailed. However, there were no preconditions for any changes, partly due to the fact that Riyadh still seeks to bring US shale companies to bankruptcy. To pursue this goal, Saudi Arabia had to take a severe financial blow, since it has no means of covering up to 50% of its budget expenditures as price per barrel is hovers near 50 dollars, exceeding the figure of one hundred billion dollars. If oil prices plunge even lower the KSA’s annual budget deficit will reach a staggering number of 150 billion dollars. Riyadh is digging deep in its reserve funds, which have shrunk from 800 billion dollars to 590 billion dollars, which means that the kingdom is on an economic collision course and it will be able to maintain its current policies for only 3-4 years more.
Therefore, the Al Saud clan has adopted a plan to diversify the economy of the kingdom to decrease its excessive dependence on petrodollars. At the same time its members are forced to maintain the policy of dumping prices in order to preserve the volume of oil exports. This means that there must be a serious tightening of financial discipline, the closure of a large number of projects, and the end of any subsidies on water, education, health care, fuel and food. But none of these measure would work if Mohammad bin Salman‘s plan to create a 2-trillion investment fund to enter the global financial markets would fail.
But this plan can hardly be called a realistic option. There’s absolutely no experienced financial specialist in the kingdom, since an entire generation of Saudis have been taught to enjoy a life of luxury at the expense of the government, and is reflected in social trends in Saudi Arabia today. For Salman‘s plan to succeed, Riyadh has to wait for a change over the course of perhaps 2-3 generations. And time is short for Saudi Arabia today. As soon as oil prices go up, US shale companies will be back in business. So oil prices have no prospect of rapid growth and Saudi Arabia will still be losing money rapidly. It will be forced to give up its plans of projecting Riyadh’s influence into Yemen, Lebanon, Syria, Libya and Iraq, along with cutting its military expenditures. It’s clear that it will have no resources to buy Russia’s weapons or pursue cooperation with Moscow in the field of peaceful nuclear energy.
Even if oil prices reach the level of 70-80 dollars per barrel by 2018, which is unlikely, Riyadh will then have lost any interest in economics reforms, and the consequent stagnation will be the agony of the ruling Al Saud clan and the kingdom as a whole for years to come.
Saudi Arabia’s rhetoric is as fierce as ever, however its ability to back it up with real options has been greatly diminished. In reality, Saudi Arabia, and the rest of the GCC’s members are planning to seriously ramp up oil production by 2020. Daily oil production in the KSA will remain at the minimum level of 10.5 – 11 million barrels no matter what, and Russia should accept this fact as a reality, instead of hoping for the best.
But Russia’s Minister of Energy Alexander Novak has made a mistake by not going to the OPEC meeting, even if he hasn’t been officially invited. On the very eve of the last OPEC meeting in Doha, President Putin did everything he could to secure an agreement between Saudi Arabia and Iran, the two main competitors in the Middle East, persuading them to freeze production to stimulate prices. Today, when the price grew to the level of 50 dollars per barrel, Russia prefers to wait: “The price has jumped significantly, and production freezing has ceased to be a relevant option,” – Alexander Novak said in an interview.
But there were a lot of reasons for prices to rise, along with the rumors that China has been storing millions of barrels of oil. The production level is still higher than the world consumes. According to the experts from the Financial Times, the price of 50 dollars – is the worst case scenario, since it won’t allow oil producing economies to recover, but at the same time it’s not low enough to force oil-producing countries to strike a deal that would save them all. The UAE Minister of Energy Suhail Al Mazrouihas declared at the meeting that the market will take care of itself, which is unlikely.
According to the representative of Iraq at OPEC, Falah al-Amri, some countries have been “virtually destroyed” by the collapse in prices. In Russia, the economic deterioration can now be felt by its population. According to Russia’s Vedomosti, for the first time in nearly 10 years, sales of medical drugs in Russia decreased by 10%, which a sign that Russians have started cutting on their most vital needs. The OSCE has just worsened its forecast for the Russian economy from 0.4% to below 1.7% in 2016, while the Russian government made certain concessions toward sanctions, which, if left unchanged, would lead to a shortage of certain essential products, such as baby food.
Russia can still consider itself to be pretty “lucky” against the background of other OPEC members. Venezuela is on the verge of bankruptcy. Nigeria is riddled with terrorist attacks, Libya is mired in perpetual chaos and Iraq is a battlefield of constant bloodshed. Along with Algeria, these countries are now called the Fragile Five – those that are unable to withstand the production race, and which, for a number of internal reasons, were forced into cutting oil production.
So the action of the KSA has been costing Russia dearly, and so there should be no illusions about the possibility of future relations. This is especially so against the backdrop of the upcoming elections in the US, where Riyadh has bet on Hillary Clinton, a candidate that despises Moscow. And the Wahhabi state of Qatar is in no respect different, let alone other GCC members.