As coronavirus forces the cogs of global capitalism to shut down, demand for its fuel plummets. But Russia sees this as a chance to use its leverage in exporting oil to further a political agenda.
Until recently, Russia and Saudi Arabia were on good terms – an agreement brokered in 2016 between the world’s largest petroleum-exporting countries to cut production had resulted in years of relatively stable, high oil prices. The arrangement suited every state, and for Russia and its President Vladimir Putin, it was exactly what was needed. The preceding years had seen an oil glut and Western sanctions critically wound Russia’s economy, which Putin has for years failed to diversify.
Co-ordinating to cut production further as demand dips might seem a sensible move; profit margins widen, and the state acquires more funds. Since Putin has announced every day until at least the end of April a bank holiday, the funds can be used to pay citizens for their time off. But when Saudi Arabia asked Russia to massively cut oil production it refused, and a price war ensued.
The public reasoning for this was that it was not clear at the time how deeply coronavirus would affect demand for oil, so cutting production was premature. The real reasons are more complicated. First, one should never underestimate the ability of mid-sized powers to take themselves too seriously. Saudi Arabia was arrogant in framing the offer as ‘take it or leave it’, and it should have known that Russia’s great power syndrome prevents it from accepting a position as a junior partner.
Second, when Saudi broke the agreement and started pumping, Russia decided it could outlast them. This is partly justified – though Russia has higher production costs, wider economic levers mean the Saudis will find it far more difficult to break even. This works up to a point. Russian firms may be able to turn a profit, but Russian energy law dictates that the firms can keep a larger proportion if profits are small, so Russian government coffers run dry. Without a functioning cartel, prices have decreased further than the state can handle. The rouble has dropped sharply against the dollar, and a forecast of running a budget surplus has been reversed.
But the Kremlin has identified a target in the price war which may make it reluctant to negotiate. American shale oil is a rapidly growing source of energy, but also has very high production costs compared to Russian crude oil. If the price goes low enough, the logic goes, American industries will be priced out. That way, Russian oil will have a larger market share in the long run, and a political point is scored against America, which will suffer failure of domestic industry. America takes far longer to be self-sufficient, and Russia yields more leverage internationally as exports boom.
Such grand strategic thinking is risky. State subsidies or threats of US sanctions could quickly reverse the outcome; US shale companies are already lobbying to block shipments to a massive Saudi refinery to decrease output. Indeed, America’s influence has already been felt – Trump recently announced that both Russia and Saudi Arabia had provisionally agreed on some production cuts.
Petropolitics is a complicated affair, and for Russia the effect is immediate on its capacity to battle the coronavirus. Russia cannot borrow billions like those in the West, as its currency is too weak. The 2020 budget relies on at least $42 a barrel. If determination for a successful energy strategy leaves the Russian state with inadequate funds, then containing the epidemic may be deemed far too expensive.
Image: xobellefemme via Creative Commons