Russia and OPEC: An Unlikely Alliance

According to Russia's finance minister Siluanov, Russia is likely to lose 100 billion dollars a year due to the recent drop in oil prices. What can Moscow do about it? An obvious but yet unexplored option is to ally with OPEC to reduce the amount of oil available on the market.

MOSCOW, November 24 (Sputnik), Stanislav Fisher — At first glance, a joint action by Russia and OPEC countries seems to be improbable, but the volatile geopolitical situation makes it possible. OPEC is dominated by Gulf countries which are usually viewed as staunch US allies, but their thirsty budgets require an elevated price for oil, making them perfect situational allies for Kremlin. More often than not, financial considerations trump political agreements and this is exactly what's happening in the realm of oil exporting countries.

For the last several weeks, Moscow has been the nexus of global oil politics. It has been visited by high-ranking Saudi, Iranian and Venezuelan officials. After the recent meeting with Saudi foreign minister, Sergey Lavrov said that both countries are “opposed to the pressures on the oil market which are a result of political interests” and this statement can be interpreted as a proof of some ongoing negotiations between Russia and Saudi Arabia regarding the oil market situation.

According to the Russian business daily Kommersant, Venezuela's foreign minister Rafael Ramirez proposed a joint cut of oil production in order to make prices rise. According to this plan, Russia must cut by 15 million tons of oil, while OPEC must cut its combined production by 70 million tons of oil. Russia's energy minister Alexander Novak told the press that production cuts “are being considered” without elaborating further.

Will a joint production cut lead to a price increase? Most likely yes, but it is likely to be rather short-lived because US shale oil companies will likely use it to hedge their production through 2015 by selling oil futures. A massive hedging operation will swiftly bring the prices down. However, over the long term, even if a post-cut price surge will be quashed by selling pressure from the US oil producers, the fact that Russia and OPEC are capable of coordinated actions will slowly but surely drive the prices up. The possibility of a new coordinated cut will support prices more efficiently than the cut itself. In this context, for both Moscow and OPEC it makes sense to enact even a token coordinated cut just to bring the “cut risk premium” into the pricing equation of the global oil market. Besides obvious economic advantages, a joint action with OPEC will be a huge diplomatic victory for Kremlin. The OPEC meeting on November 27th will show whether an unlikely alliance between Russia and OPEC can become a reality.