Saudi-Russian deal — more politics than oil

Author Samira Kawar

An agreement signed by Saudi Arabia’s oil minister Ali Naimi and his Russian counterpart Alexander Novak in St Petersburg last week created the fleeting impression that Saudi Arabia had convinced Russia to co-operate with Opec to defend prices.

An agreement signed by Saudi Arabia’s oil minister Ali Naimi and his Russian counterpart Alexander Novak in St Petersburg last week created the fleeting impression that Saudi Arabia had convinced Russia to co-operate with Opec to defend prices.

Naimi himself has said that the participation of non-Opec producers such as Russia and Mexico would be a pre-condition for resuming a strategy of defending oil prices through output constraint, and abandoning the new Opec strategy of defending market share. Back in March, he said: “Because it is a common interest, everyone should participate if we want to improve prices, because it is not right for one party to gain at the expense of the other."

So it was eye-catching that after last week’s agreement was signed, Naimi said the world’s two largest producers would co-operate “regarding the international oil market”. The Saudi government went as far as referring to the establishment of an “oil alliance between the two countries in the interest of the international oil market, producing countries and the stability and improvement of the market”.

The reality is very different. Such co-operation is a near impossibility. Nothing has changed since Novak told Naimi on the eve of the 27 November 2014 Opec meeting that Russia could not and would not cut output alongside Opec (see Argus Global Markets, 19 December). And Naimi still remembers with resentment that Russia did not deliver on a pledge to cut output alongside Opec 15 years ago.

So what is the point of the recently-signed energy co-operation agreement?

The point is a much wider political one. Naimi was part of a high-powered economic delegation that visited St Petersburg. The delegation was headed by the king’s son — deputy crown prince Mohammad bin Salman, who is also defence minister and head of a council that oversees the Saudi economy. Prince Mohammad met Russian president Vladimir Putin, and there is talk of a Russian-Saudi arms deal.

The visit signals a Saudi desire to improve political relations with Moscow, although that process is still at a preliminary stage. King Salman did not travel to Russia, nor did he send heir apparent Crown Prince Mohammad bin Nayef. Those contacts could come at a later stage.

King Salman and his new leadership team appear to understand that a settlement of the bloody Syrian conflict requires negotiations among the parties supporting the combatants — Russia and Iran backing the Assad regime, with Saudi Arabia, Turkey and Qatar supporting an array of Islamist rebel groups. A better working political relationship between Moscow and Riyadh would facilitate a political resolution in Syria. And Riyadh will hope that warmer relations with Moscow will drive a wedge between Russia and Iran.

For Putin, warmer political relations with Saudi Arabia — still widely seen as a close US ally — brings political prestige and weakens the isolation that Russia has suffered over the Ukrainian crisis.

Other key agreements during the visit to St Petersburg were one to promote joint economic investment and another to co-operate over nuclear energy. Those agreements may be more significant than the oil pact, which is likely to be quietly shelved.

Russia is keen to attract Saudi investment, and Riyadh is seeking an opportunity to diversify from US treasuries and gold reserves. And Saudi Arabia is serious about developing a nuclear power programme. It says the nuclear energy co-operation agreement with Moscow aims to support its "ambitious programme to diversify its energy resources by introducing an integrated system in which nuclear energy will play an active role".

Riyadh has talked of introducing nuclear power into its energy mix for several years, but has taken no concrete steps. Judging from the St Petersburg agreements, Riyadh now seriously intends to go down that path. It is partly a response to the looming possibility that the US and EU will drop sanctions against regional rival Iran as part of a deal on Iran’s nuclear programme. Saudi Arabia makes no secret of its unhappiness at that prospect. Co-operating with Russia to start a nuclear programme — for peaceful power generation — may help Riyadh exploit its uranium deposits, circumventing US opposition to this ambition.

In the wider scheme of things, the Saudi-Russian oil co-operation agreement is no more than a gesture of goodwill and a footnote that will soon be forgotten.