analysis

The many sided benefits from a Saudi-Russia proximity

The far-reaching deal on oil production cuts is but one of the many favourable outcomes

12:46 October 11, 2017

When there is an extraordinary event, the results will definitely be unexpected.

Over the course of 90 years of diplomatic exchanges between Saudi Arabia and Russia — which had paused for a while in between — King Salman Bin Abdul Aziz Al Saud’s visit to the Russian capital was a first of its kind. The visit is likely to result in multiple upshots and which will have a bearing not only on the two countries but also the wider regional and international issues, including stability in the global oil markets.

Accounting for 20 per cent of the world’s oil production, Saudi Arabia and Russia are today the world’s largest oil producing countries. This means any agreement between the two would directly affect oil prices, and this is what happened even before King Salman’s visit, when Saudi Arabia and Russia agreed at the end of last year to cut oil production to support prices.

Interestingly, the Saudi-Russia agreement was expanded to include all members of Opec, besides other non-Opec key producers who responded to such a call. The results were good. Oil prices have doubled to settle at above $50 (Dh183.50) a barrel on average and even close to $60 in the third quarter of 2017 due to a set of predictable outcomes from the Saudi-Russian deal besides other technical reasons related to strategic oil reserves in the US, the recent natural catastrophes and geopolitical developments.

Therefore, both countries’ commitment to cut oil production — as reaffirmed during King Salman’s visit — and supporting the agreement when necessary have been correctly understood in oil markets. This will boost gains and maintain prices at between $50-$60 a barrel, a decent price that will suit oil producing and consuming countries alike in the present time.

Maintain stability

To ensure the implementation and sustainability, the Saudi-Russian investment forum will discuss it as part of its agenda. The Russian minister of economy said that the forum represents a good step towards augmenting investment with Saudi Arabia, supporting the mutual agreement to cut production and maintain stability. With that in mind, oil production and prices are expected to achieve further stability, a positive for oil producing countries.

There will be further positives for the Saudi and Russian economies through bringing about a further change in their international relations and re-drawing of the balance of power. Both countries’ economies and investors will thus be able to achieve gains thanks to available opportunities in Saudi Arabia and Russia.

During King Salman’s visit, Saudi Arabia announced the investment of $10 billion in the Russian sovereign fund besides signing a number of cooperation agreements and MoUs in the energy sector.

Besides inking five MoUs with Russia’s largest energy companies, Aramco signed a memorandum of understanding with the Russian petrochemical company Sibur to stimulate joint investment opportunities. The Kingdom also signed an agreement to establish a $1 billion joint fund.

Geopolitical consequences

Such shared interests between the two largest oil producing countries — one of whom is a superpower while the other is one of largest regional powers in the Middle East — will result in significant geopolitical consequences that would define many of the changes in powercentres in the region.

It is because both countries’ approach aims to ease regional tensions and open the doors to capital and flows. They also support development in regional countries unlike the mullah regime in Iran, which seeks to aggravate the situation by supporting extremist organisations and exploit its international relations to militarise some communities by supporting various militias.

This means a sheer waste of development opportunities, wealth and deterioration in living standards, including for the Iranians themselves.

Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.