[Julian Lee] Russia flexes its soft power muscles

Oil has touched a level above $80 a barrel for the first time since November 2014. OPEC’s inventory target for output cuts has been met.

But even though its oil companies want to turn on the taps and its finance ministry may be worried about prices rising too far, Russia won’t bring its output deal with the group to a juddering halt when the participants meet in Vienna next month. Instead, it will stand alongside its Saudi partner and continue to toe the line on production restraint.

Its participation in the output deal, agreed after negotiations that lasted for most of 2016, was a major victory for Saudi Arabia. Under former oil minister Ali Al-Naimi, the country had made it clear that it wouldn’t act to prop up prices without broad and meaningful support that went beyond the members of Organization of the Petroleum Exporting Countries. Russia stepped up to provide it, leading a contingent of 11 countries from outside the group to join the agreement, even if it and Oman were the only ones to offer significant cuts that went beyond naturally declining output.

For Moscow, the deal has always been about much more than just oil. Russia’s annexation of Crimea in 2014 generated a threat of international isolation that still casts a shadow over its global strategy. Countering that threat means continuing to convince the world that it won’t be left out of the big global issues.

The military campaign in Syria is the first beyond the borders of the former Soviet Union since the 1979 invasion of Afghanistan, and gives the Kremlin the opportunity to demonstrate the capabilities of some of its new military hardware, and its ability to project political and military power beyond its immediate neighborhood.

The deal with OPEC offers a similar opportunity to take a lead role on the international stage. The forging of new alliances in the Middle East, as much as the importance of oil prices to the Russian economy, explains its active participation in the OPEC-led output cuts. The reduction in Russia’s oil production is in marked contrast to its only previous collaboration with the group in 2001, when it agreed to cut supply, but actually delivered very little.

As I wrote back in October the growing friendship between Russia and Saudi Arabia sends a very clear message that the US is no longer the only great power calling the shots in the Persian Gulf. Moscow’s desire to preserve that relationship and continue to drive a wedge between Washington and Riyadh will outweigh purely short-term economic interests when it considers the future of the OPEC+ deal.

Of course, all parties in Russia could get what they want -- the oil industry may still get a boost even if Russia stays in the deal. The impending return of sanctions aimed at Iran’s oil exports offer the opportunity for Russia and other producers to raise output while the group as a whole remains within its overall target.

The aggregate level of production aimed for by the OPEC+ group is much more important to the deal’s success than how that total is shared between them. The collapse in Venezuela’s oil production -- which still has further to fall -- means that the group has already reduced its overall output by more than it agreed. The anticipated loss of at least some of Iran’s exports will add to that over-achievement.

That gives headroom for individual producers to pump more while the group as a whole stays within its self-imposed limit. For now, though, neither Russia nor Saudi Arabia has stepped in to make up for the unexpected loss of Venezuelan oil. Far from seeking an exit from the deal, the talk has been of changing the measure of success to justify its continuation.

Oil ministers Khalid Al-Falih and Alexander Novak will meet in St. Petersburg later this week and discussing the response to rising oil prices will certainly be on their agenda. But as oil prices continue to nudge $80 a barrel, don’t expect Russia to give up its political gains and lead a charge for the exit. Its delegates are much more likely to polish up their soundbites to voice their continued support for their new friends.


Julian Lee
Julian Lee is an oil strategist for Bloomberg First Word. -- Ed.

(Bloomberg)