The Real Reason Russia Joined OPEC+

In his relatively brief stint in power, Saudi Crown Prince Mohammed bin Salman (MbS) has managed to destroy the Saudi economy in record time while also sullying his own reputation and endangering Saudi Arabia’s geopolitical relations with the murder of journalist Jamal Khashoggi. Now, it appears that there is another calamity in the making for MbS. Russia is currently offering him all sorts of benefits in exchange for his consideration of a deal. The deal, though, is pure poison – for him, for his family, and for his country – and it involves Saudi Arabia switching its core alliance from the U.S. to Russia. In exchange, Russia says it will guarantee the future safety of Saudi Arabia, including from Iran-backed threats. A timely reminder of Saudi Arabia’s current vulnerability to the continued threat that Iran and its proxies pose it – one of the key threats that the deal with Russia would eliminate, the Kremlin has said – came in the form of the attack on Tuesday 23 June when the Saudi-led military coalition fighting in Yemen intercepted and destroyed eight booby-trapped unmanned aircraft that were targeting civilian objects and civilians in Saudi Arabia. The Saudis also intercepted three ballistic missiles from the Saada governorate towards Riyadh, according to the reports.

In theory, the deal being discussed between the Kremlin and the Royal Palace is one that looks like only a marginal extension of the OPEC+ coalition that has been in place between Russia and Saudi since 2017. In practical terms, though, it may well lead to the most important geopolitical power shift since the fall of the U.S.S.R. “The Kremlin had this deal creep in mind from November 2016 when it agreed to support the Saudi-led OPEC [oil] production cuts,” a senior oil and gas industry source who works closely with the oil sectors of Iran and Iraq told OilPrice.com last week.

This new mutual understanding was clearly signaled when Russia’s President, Vladimir Putin, invited Saudi Arabia’s King, Salman bin Abdulaziz al-Saud, to Russia in October 2017. “It was the first-ever visit to Moscow made by a sitting Saudi monarch and the largest ever foreign delegation to Moscow,” said the source. At this meeting, among the US$3 billion or so specific deals announced at just that time, was an investment by the Saudis of at least US$150 million into Russia’s Eurasia Drilling Company and, on the other side, a US$1.1 billion agreement for Russian petrochemical company Sibur to build a plant in Saudi Arabia. Russia’s Energy Minister, Alexander Novak, also flagged at the time that Russia gas producer Novatek was in talks for Saudi investors to take part in its Arctic LNG-2 project, a follow-up to its US$27 billion plant in the Yamal peninsula. At the same time, it was agreed that Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF), was to establish a US$1 billion fund alongside Russia’s sovereign wealth fund, the Russian Direct Investment Fund (RDIF), which would invest in Russian technology companies.

In the same vein, Russian state-owned hydrocarbons companies Rosneft and Gazprom entered talks with Saudi counterpart Aramco on conducting co-ordinated oil and gas trading operations – bringing in the expertise and contacts of Lukoil’s Litasco trading operation when required – and the creation of a joint research and technology center. The upshot for Russia was, firstly, that the Saudis rowed back on their demand that Syria’s President Bashar al-Assad be removed from power and, secondly, that Saudi Arabia signed a memorandum of understanding for the purchase from Russia of its S-400 air defense system.

These two latter points can be regarded as the first clear evidence of the Kremlin’s core strategy of decisively moving Saudi Arabia away from its long-standing relationship with the U.S. and replacing it with one with Russia (and, by extension, China). As highlighted in my latest book on the global oil markets, this relationship was established in 1945 between the U.S. President, Franklin D. Roosevelt, and the Saudi King at the time, Abdulaziz, in the Great Bitter Lake segment of the Suez Canal. The deal was that the U.S. would receive all of the oil supplies it needed for as long as Saudi Arabia had oil in place, in return for which the U.S. would guarantee the security of the ruling House of Saud. This has been altered slightly to ensure that Saudi Arabia also allows the U.S. shale industry to continue to function and to grow. “Particularly since the end of the first oil price war in 2016 when Saudi’s finances had obviously been severely damaged for a long time to come, Moscow has been there to fan the flames of Saudi discontent about having to stick to production cuts that supported the very shale sector that used those production cuts to effectively steal supply contracts that were left unfilled by the Saudis,” said the source.