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Russia’s aversion to Opec output cuts

Though the country has suffered from the downturn they will not agree to change their policy

Russia has probably suffered more than any other crude producer from the sharp fall in the oil price. So why, if the Saudis and other Opec members say any output cut from them would have to be done in concert with non-Opec producers, particularly Russia, is Moscow unlikely to agree to any such move now or even later in the year?

“Even though it sounds sensible to do so, I do not see Russia participating in any output cuts with Opec,” says Chris Weafer, echoing the view of many analysts.

A cut in oil production and attendant rise in the price would, on the face of it, be hugely beneficial for Russia. Its economy was hammered in the last quarter of 2014 as the oil price dropped from around $90 a barrel to below $50/b, taking the Russian ruble down with it. The country’s finance minister, Anton Siluanov, warned before the last Opec meeting in November that Russia would lose around $40bn a year from Western sanctions and up to $100bn a year by the plunge in the oil price.

With the oil price recovering to around $60, the ruble has risen in tandem. In April, the Russian currency enjoyed its best month since 1993 by rising almost 14% to stand at around 51 rubles to the dollar, though this is still well down from the roughly 33 rubles it was trading at in the summer of 2014 before the fall began.

Still, even at these levels the Russian economy will suffer. Russia politicians expect the economy to have contracted by around 2% in the first quarter, with the economy returning to growth in the fourth quarter. But the government is more upbeat than the central bank, which forecasts the economy will shrink as much as 4% this year, then suffer a contraction of 1%-1.6% in 2016 if oil prices average $60-65/b. 

So it’s no wonder rumours of some possible cooperation persist. As Petroleum Economist revealed last year, Venezuela orchestrated a gathering ahead of the Opec meeting in November that included Igor Sechin, head of Russia’s biggest producer Rosneft, and Alexander Novak, Russian energy minister, as well as the oil ministers of Mexico and Saudi Arabia. Novak and Sechin disagreed in the meeting about whether Russia would agree to cut, if Opec did. The meeting ended without a deal – and much bafflement from the Saudis. Sechin later said that the four countries had only agreed to “monitor oil prices over the next year”.

Those talks have been continuing. On 15 April, Russian officials told the press that the Kremlin is involved in “unprecedentedly active” consultations with Opec, but insisted it isn’t discussing any production cuts to support prices. “The Energy Ministry is continuing to conduct active consultations and work with the European Union, countries of the Asia-Pacific region, the Middle East, including within the framework of Opec, as well as with the countries of Latin America,” deputy prime minister Arkady Dvorkovich told the state RIA-Novosti news agency. A spokeswoman for the Energy Ministry told the Wall Street Journal that the discussion with Opec involve issues on the oil market and sharing countries’ views, and there was no talk of Russia cutting its oil output.

Whatever the rumours, there are reasons to trust the official line. For one thing, the recent economic news, while gloomy, is still far from the apocalyptic predictions gleefully being put about by more Russophobic commentators earlier this year, which said Russia’s GDP could contract as much as 10% in 2015, triggering an economic meltdown. That’s now unlikely, and prime minister Dmitry Medvedev’s argument made on 21 April that the economic situation has stabilised is not bluster.

To get the economy growing in the face of continuing Western sanctions, the Russian government believes the best way is to sell as much oil as it can, relying on market forces to squeeze high-cost projects both at home and abroad, such as US shale oil, rather than artificially raise the price by selling less. (That happens to coincide with the Saudi-led Opec strategy, too.) Russia’s economy ministry forecasts that the country’s oil output would stay unchanged at about 12m barrels a day in 2015 and in 2016, falling slightly in 2017.

Russia’s oil-dependent economy is also cushioned from the falling oil price because its currency depreciates in line with it. A rule of thumb is that each $10/b movement of the oil price down shaves 2 rubles off the dollar exchange rate. In this way, the hard currency the government receives from selling oil on the international markets is worth that much more to the ruble-denominated budget.

Technically, Moscow insists it couldn’t cut production even if it wanted to. “Russia consistently argues that because of the technical nature of its wells it cannot simply turn up or down production as can be done in all of the Opec countries because of their geology,” says Weafer.

Russia also argues that, unlike in Opec countries where all have 100% ownership over national oil companies, it does not have exclusive ownership of the oil producers. Rather, they are all stock market-listed and have minority shareholders, so to force a cut on any company would be deemed an abusive action against minority shareholders. 

Then there is the difficulty of the Saudis and Russians working together to cut. There is little trust between the two sides. This is a legacy, in part, of events in 2008 when Russia reneged on a promise to hold back output in coordination with Opec, and increased it instead, grabbing market share off the back of the group’s actions.

“The only way an agreement like that could work would be if there were really potent enforcement mechanisms to monitor and force compliance, but I can’t see a realistic way that the Saudis and the Russians could develop those. In the past Russia has signalled its public approval of Opec production cuts while actually increasing its own level of production,” says Mark Adomanis, a US-based Russian commentator.

Animosity between the two sides doesn’t help either. “There’s a level of bitterness and vitriol in their diplomatic relationship that is unusual, even for Russia at the current time,” says Adomanis.

Finally, Weafer argues that the Kremlin is still determined to keep one foot in both camps - as part of the major global community and an important oil producer and reliable supplier. “If it were to ever side with Opec in a price support action, it would damage its standing in the global community.” Its seems likely, believe analysts, that Russia will only stand on the sidelines, watching as another Opec meeting passes without an agreement to cut and the price moves lower again.

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