Putin Won’t Submit to What Is Seen as Saudi Oil-Price Blackmail
2020-03-20 06:30:24.212 GMT
By Ilya Arkhipov, Evgenia Pismennaya, Dina Khrennikova and Olga
Tanas
(Bloomberg) -- Russian President Vladimir Putin will refuse
to submit to what the Kremlin sees as oil blackmail from Saudi
Arabia, signaling the price war that’s roiling global energy
markets will continue.
The unprecedented clash between the two giant exporters --
and former OPEC+ allies -- threatens to push the price of a
barrel below $20, but the Kremlin won’t be the first to blink
and seek a truce, said people familiar with the government’s
position.
Putin’s government has spent years building reserves for
this kind of crisis. While Russia didn’t expect the Saudis to
trigger a price war, the people said, the Kremlin so far is
confident that it can hold out longer than Riyadh.
“Putin is known for not submitting to pressure,” said
Alexander Dynkin, president of the Institute of World Economy
and International Relations in Moscow, a state-run think tank
that advises government on foreign policy and economy. He has
proved that he is ready for a hard competition “to protect
national interests and to keep his political image as a
strongman.”
After two decades at Russia’s helm, the president has
enough experience to survive the current crisis, said three
people, asking not to be named because the information isn’t
public. Putin is not someone who gives in, even if the fight
brings significant losses, said one person.
The Architect
The entire oil market is watching and waiting to see if
Russia or Saudi Arabia will balk at the painful price slump and
call a truce. Brent crude has plunged from over $50 a barrel in
early March to as low as $24.52 this week as the Gulf kingdom,
angered by the Kremlin’s veto of deeper OPEC+ cuts, undertook a
historic output surge just as the coronavirus pandemic wiped out
demand.
The losses are already visible for Russia, weakening its
currency and potentially putting the nation on course for a
recession. The state budget, which is based on oil prices of
just above $40 per barrel, will be in deficit this year, forcing
the government to tap its sovereign-wealth fund just two months
after Putin promised higher social spending.
U.S. President Donald Trump Thursday called the price war
“devastating to Russia” and said, “at the appropriate time, I’ll
get involved.” The Wall Street Journal reported the White House
is considering new sanctions against Russia as a means to push
for higher prices. So far, the Kremlin has refused to change
policies in the face of such restrictions from the Trump
administration.
“Someone’s economy always suffers from low or high oil
prices,” Kremlin spokesman Dmitry Peskov said. “Now many
companies are suffering, including shale-oil producers in the
U.S.”
Russia is always ready to talk, “especially in such
dramatic times,” he said. Earlier in the week, Peskov said
Russia would like to see oil prices higher. Crude prices jumped
after Trump’s comments.
Russia and Saudi Arabia were architects of the original
cooperation deal between the Organization of Petroleum Exporting
countries and several other non-members in 2016. Their goal was
to end a slump in prices as low as $27 a barrel and initially
their accord was a great success.
The Prince
Crude rebounded and relations between the two nations and
their leadership were very warm. But over time, the alliance
became increasingly unbalanced as the Saudis took an greater
share of output curbs and Russia flouted its obligations.
Putin engaged in obvious power plays, making the OPEC+
meeting in June 2019 essentially redundant by pre-announcing
fresh cuts after a chat with Saudi Crown Prince Mohammed bin
Salman in Osaka, Japan.
Russian decisions came to carry ever-greater weight within
OPEC+, eventually leading to a rupture early this month. Saudi
Energy Minster Abdulaziz bin Salman, the Crown Prince’s older
brother, demanded additional cuts to offset the impact of the
coronavirus, but his counterpart from Moscow, Alexander Novak,
said no.
Saudi Arabia responded with a shock-and-awe oil price war
that stunned the global oil industry. Riyadh’s unprecedented
barrage on the crude market included the deepest price cut in 20
years, a record supply surge and a fleet of tankers to deliver
it, and tens of billions of dollars for new fields.
If these shock-and awe tactics were designed to bend Putin
to the kingdom’s will, so far they haven’t succeeded.
The Strongman
The Russian president has made refusing to back down under
pressure one of the hallmarks of his rule. From the brutal
crackdown on Islamist terrorists in Chechnya to the recent
showdown with Turkey over the civil war in Syria, Putin has
shown he’s willing to face down foes in the face of both
military and economic pressure.
In 2014, when waves of western sanctions over Putin’s
annexation of Crimea in Ukraine battered Russia’s economy and
some of his closest associates, he refused to consider calls
from some of his allies to soften his line. Earlier this year,
Rosneft PJSC, run by the president’s close ally Igor Sechin,
shrugged off U.S. sanctions on its trade in Venezuelan crude.
Putin’s team expected the collapse of OPEC+ talks to lead to a
price decline, two of the people said. The Russian leadership
was ready for crude plunging as low as $20 and is facing the
economic consequences with a cool head, one person said.
Still, with the national economy bleeding, “Russia has
enough pragmatism and common sense not to refuse talks,” with
its OPEC partners, Dynkin said.
The Kremlin is still open to cooperation with OPEC, but on
its own conditions. The Russian proposal -- rejected by the
Saudis -- for OPEC+ to maintain its existing production cuts
until the end of June still stands, two of the people said.
For any discussion with the Gulf kingdom to restart, both
Russia and Saudi Arabia will need to make some face-saving steps
requiring “a complicated PR dance,” said Elina Ribakova, U.S.-
based deputy chief economist at the Institute of International
Finance.
Russia’s current position is unlikely to achieve that.
“It is unlikely that Saudi Arabia now would turn around and
agree to the Russian proposal of extending the current cuts,”
said Dmitry Marinchenko, senior director at Fitch Ratings Ltd.
“That would essentially mean they have given in to Russia and
lost face.”
