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Saudi Arabia and Russia: neither allies nor enemies but wary friends

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of this site. This site does not give financial, investment or medical advice.

Shortly after hosting US President Trump in Saudi Arabia, the Kingdom’s actual ruler – Deputy Crown Prince Mohammed bin Salman – flew off to Russia to meet Russian President Putin.

My colleague Adam Garrie has recently suggested that Saudi Arabia needs Russia more than Russia needs Saudi Arabia, and that this account for the visit.  He is absolutely right.

I have recently written of the grandiose plans Prince Mohammed bin Salman has for Saudi Arabia.  I have made it clear that I think them wholly unrealistic and certain to end with the Kingdom’s bankruptcy.

I have also discussed Prince Mohammed bin Salman’s intense hostility towards Iran, and how he openly talks of pre-emptive war against that powerful country.

Putting aside the question of whether Prince Mohammed bin Salman’s grandiose plans are realistic, even he undoubtedly realises that they will require simply immense amounts of money.  If they are to have any possibility of success that means a high and stable oil price.

That must be why Saudi Arabia in 2016 abruptly reversed its previous policy of allowing the oil market to stabilise naturally, and instead agreed first to an oil production freeze and then to an oil production cut.

They key point is that this policy can only succeed if it is backed by Russia.

In the world today there are three great oil producers producing roughly the same amount of oil who between them dominate the oil market: the US, Russia and Saudi Arabia.

There is no possibility of the US ever agreeing to freeze or cut its production.  However though US oil production is important in deciding the oil price, the US is a net oil importer, and it does not compete internationally with Saudi Arabia and Russia for global market share.

What that means is that Saudi Arabia needs Russia’s cooperation if it is to stabilise the oil market and preserve its market share.  That forces Saudi Arabia to talk to Russia if it is looking for oil production freezes or oil production cuts.

Back in 2014 there was very widespread speculation that Saudi Arabia had deliberately engineered the oil price crash in a plot with the US to undermine Russia.

I have always been very skeptical about this theory, which the Saudis have emphatically denied. In my opinion the collapse of oil prices which happened that year was caused by the tightening of monetary policy in the US, which put a downward pressure on oil prices since they are denominated in dollars. However there is no doubt that Saudi Arabia’s policy in 2014 of letting the oil price stabilise naturally put further downward pressure on prices that year.

Now that Saudi Arabia has reversed the policy it has become clear that it is Russia not Saudi Arabia which has the whip hand, obliging Saudi Arabia to look to Russia for help to stabilise oil prices.

This was made clear in the introductory comments Prince Mohammed bin Salman made during his meeting with Putin

Today relations between Saudi Arabia and Russia are going through one of the best stages. Our countries have attained mutual understanding on many issues. As for those issues on which we are divided, we have efficient mechanisms for overcoming our differences. We are moving ahead at a fast pace and the current visit will become a big achievement in consolidating relations between Russia and Saudi Arabia.

The main point is that we are building a solid foundation for stabilising the oil market and energy prices and this is creating good opportunities for building our strategic future.

As you rightly pointed out, there are many economic cooperation programmes between Saudi Arabia and Russia, and this is bound to help us build up our cooperation in the future.

There are no points of conflict in our respective policies and we hope we will manage to steer them in the right direction in the interests of both countries. We achieved much in the previous brief stage but more work lies ahead of us.

(bold italics added)

Objectively this should come as no surprise.  Russia is a huge country with a large well-educated population, a powerful scientific and industrial base, and a vast agricultural sector.  Saudi Arabia is an oil monarchy.  Of course Russia has been able to ride out the oil price fall better than Saudi Arabia has been able to do.  The wonder is why so many people expected otherwise.  It is testament to the huge number of false ideas there are about Russia.

Whether the oil production cut the Russians and the Saudis have agreed will stabilise the oil market in the way that Prince Mohammed bin Salman obviously wants is another matter.  Since US monetary policy for the moment is continuing to tighten, and since shale oil production in the US is still rising, and since the previously relentless rise in energy consumption in China appears to have slackened, the current ceiling for oil prices seems to be no more than $55 a barrel.  Currently oil is trading below this ceiling, and the Russian government and Central Bank say they expect oil prices to fall to $40 a barrel by the end of the year.

Regardless, the fact the Saudis have to talk to the Russians about oil prices means that they have no realistic choice but to talk about other things as well.  That has created the conditions for a dialogue to develop between the two countries.  The fact that the Russians always deal with the Saudis with their customary tact has obviously made establishing this dialogue easier.

Russia and Saudi Arabia can never be close allies or friends.  They are not however enemies, and they seem to be determined to avoid becoming such, recognising that it is neither of their interests.  In the meantime they are able to work together on questions of mutual interest, and that is what Prince Mohammed bin Salman’s visit to Russia was about.


The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of this site. This site does not give financial, investment or medical advice.

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