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Russia’s hand: weaker than it seems

The devaluation of the rouble has been seen as insulating Russia during any sustained price war. But it may not be sitting as comfortably as thought

That Russia, and indeed Opec members, seriously underestimated the demand-side impact of Covid-19 when they walked away from the negotiating table in March and committed to unconstrained supply is beyond question.

But the received wisdom that Russia—due to currency weakness better supporting its margins while the dollar price of oil falls—is better placed to weather a drawn-out battle of attrition may be less clear-cut. And it may influence Moscow’s negotiating position tomorrow.

When it walked away last month, Moscow believed it had the coronavirus outbreak under control and hoped that the world—or at least the parts that generate the most oil demanddid too. It was wrong. Now Russian president Vladimir Putin has postponed a 22 April referendum on extending his rule and the country is on lockdown.

Russia experts agree the crisis has the potential to pose the toughest economic challenge yet in Putin’s 20-year rule

As, indeed, are large swathes of the global population, with painful consequences for oil demand and its major producers. Estimating global crude demand to fall by c.30mn bl/d, or 30pc, there could be 6mn bl/d of ‘homeless’ crude by the end of April and 7mn bl/d in May, according to the Vienna-based analysis firm JBC Energy.

Russian pain

In a “moderate” scenario presented to Putin by Russia’s audit chamber last week, it forecasts the country’s economy contracting by between 3pc and 5pc this year; a gloomier outcome would involve an 8pc hit to GDP.

“The current economic situation in Russia is so worrisome, due to the double shock of the oil price crash and the coronavirus, that it is desperately looking for a way out [of the oil price war],” says George Voloshin, a senior analyst at Aperio Intelligence, a UK-based strategic intelligence company.

His assessment runs contrary to the argument that Russia is better cushioned from the economic shock than the majority of its Opec counterparts across the negotiating table. But other Russia experts agree the crisis has the potential to pose the toughest economic challenge yet in Putin’s 20-year rule.

“Russia is the weakest and most vulnerable link in the current oil crisis,” says Stanislav Ivanov, a leading Middle East expert at the Russian Academy of Sciences’ Institute of World Economy and International Relations. “If we take into account that the Russian economy is in a recession and the country is internationally isolated, and Saudi Arabia is closely connected with the United States and the West, it can be assumed that low oil prices will hit Russia more strongly than Saudi Arabia.”

Finding a way out

Russia’s one possible escape route is that, even if it is in a weaker position than some think, other actors are still likely to be hurting enough to also want to compromise. A production cut up to ten times larger than that which Russia and Opec spurned in early March is now up for discussion tomorrow.

And the weekend’s war of words between Russia and Saudi Arabia over who was responsible for February’s failure could be seen as last salvoes from two parties who realised they both got it wrong and must return to the table.

If the two largest Opec+ players are in the mood to compromise, the big question is if and when the US, now the world’s largest crude producer by country, brings its c.13mn bl/d to the table. “In many ways, the collapse of Opec+ was inevitable because every production cut [previously] agreed to between Russia and Saudi Arabia had been ultimately offset by higher production, and therefore bigger market share, by US producers,” says Voloshin. 

The Texas Railroad Commission, the closest thing the country has to a regulator that could force rules on its many private E&P companies, is scheduled to discuss an output reduction next Tuesday. On the other hand, president Donald Trump has been offering his usual mixed and largely unhelpful signals, alternating talking up a deal to restrain production with the idea of tariffs on oil imports, which could offer artificial protection to domestic producers to supply more than global prices would be indicating.

But producers as diverse as Canada, Norway and Brazil have offered in recent days clearer commitments to a willingness to share in the pain. Russia may fancy its chances of getting a coalition much wider than Opec+ on board with a new agreement.

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