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Putin Won’t Submit to What Is Seen as Saudi Oil-Price Blackmail

Published 03/20/2020, 02:30 AM
Updated 03/20/2020, 03:28 AM
Putin Won’t Submit to What Is Seen as Saudi Oil-Price Blackmail

Putin Won’t Submit to What Is Seen as Saudi Oil-Price Blackmail

(Bloomberg) -- Russian President Vladimir Putin will refuse to submit to what the Kremlin sees as oil blackmail from Saudi Arabia, signaling the price war that’s roiling global energy markets will continue.

The unprecedented clash between the two giant exporters -- and former OPEC+ allies -- threatens to push the price of a barrel below $20, but the Kremlin won’t be the first to blink and seek a truce, said people familiar with the government’s position.

Putin’s government has spent years building reserves for this kind of crisis. While Russia didn’t expect the Saudis to trigger a price war, the people said, the Kremlin so far is confident that it can hold out longer than Riyadh.

“Putin is known for not submitting to pressure,” said Alexander Dynkin, president of the Institute of World Economy and International Relations in Moscow, a state-run think tank that advises government on foreign policy and economy. He has proved that he is ready for a hard competition “to protect national interests and to keep his political image as a strongman.”

After two decades at Russia’s helm, the president has enough experience to survive the current crisis, said three people, asking not to be named because the information isn’t public. Putin is not someone who gives in, even if the fight brings significant losses, said one person.

The entire oil market is watching and waiting to see if Russia or Saudi Arabia will balk at the painful price slump and call a truce. Brent crude has plunged from over $50 a barrel in early March to as low as $24.52 this week as the Gulf kingdom, angered by the Kremlin’s veto of deeper OPEC+ cuts, undertook a historic output surge just as the coronavirus pandemic wiped out demand.

The losses are already visible for Russia, weakening its currency and potentially putting the nation on course for a recession. The state budget, which is based on oil prices of just above $40 per barrel, will be in deficit this year, forcing the government to tap its sovereign-wealth fund just two months after Putin promised higher social spending.

U.S. President Donald Trump Thursday called the price war “devastating to Russia” and said, “at the appropriate time, I’ll get involved.” The Wall Street Journal reported the White House is considering new sanctions against Russia as a means to push for higher prices. So far, the Kremlin has refused to change policies in the face of such restrictions from the Trump administration.

“Someone’s economy always suffers from low or high oil prices,” Kremlin spokesman Dmitry Peskov said. “Now many companies are suffering, including shale-oil producers in the U.S.”

Russia is always ready to talk, “especially in such dramatic times,” he said. Earlier in the week, Peskov said Russia would like to see oil prices higher. Crude prices jumped after Trump’s comments.

Russia and Saudi Arabia were architects of the original cooperation deal between the Organization of Petroleum Exporting countries and several other non-members in 2016. Their goal was to end a slump in prices as low as $27 a barrel and initially their accord was a great success.

Crude rebounded and relations between the two nations and their leadership were very warm. But over time, the alliance became increasingly unbalanced as the Saudis took an greater share of output curbs and Russia flouted its obligations.

Putin engaged in obvious power plays, making the OPEC+ meeting in June 2019 essentially redundant by pre-announcing fresh cuts after a chat with Saudi Crown Prince Mohammed bin Salman in Osaka, Japan.Russian decisions came to carry ever-greater weight within OPEC+, eventually leading to a rupture early this month. Saudi Energy Minster Abdulaziz bin Salman, the Crown Prince’s older brother, demanded additional cuts to offset the impact of the coronavirus, but his counterpart from Moscow, Alexander Novak, said no.

Saudi Arabia responded with a shock-and-awe oil price war that stunned the global oil industry. Riyadh’s unprecedented barrage on the crude market included the deepest price cut in 20 years, a record supply surge and a fleet of tankers to deliver it, and tens of billions of dollars for new fields.

If these shock-and awe tactics were designed to bend Putin to the kingdom’s will, so far they haven’t succeeded.

The Russian president has made refusing to back down under pressure one of the hallmarks of his rule. From the brutal crackdown on Islamist terrorists in Chechnya to the recent showdown with Turkey over the civil war in Syria, Putin has shown he’s willing to face down foes in the face of both military and economic pressure.

In 2014, when waves of western sanctions over Putin’s annexation of Crimea in Ukraine battered Russia’s economy and some of his closest associates, he refused to consider calls from some of his allies to soften his line. Earlier this year, Rosneft PJSC, run by the president’s close ally Igor Sechin, shrugged off U.S. sanctions on its trade in Venezuelan crude.Putin’s team expected the collapse of OPEC+ talks to lead to a price decline, two of the people said. The Russian leadership was ready for crude plunging as low as $20 and is facing the economic consequences with a cool head, one person said.

Still, with the national economy bleeding, “Russia has enough pragmatism and common sense not to refuse talks,” with its OPEC partners, Dynkin said.

The Kremlin is still open to cooperation with OPEC, but on its own conditions. The Russian proposal -- rejected by the Saudis -- for OPEC+ to maintain its existing production cuts until the end of June still stands, two of the people said.

For any discussion with the Gulf kingdom to restart, both Russia and Saudi Arabia will need to make some face-saving steps requiring “a complicated PR dance,” said Elina Ribakova, U.S.-based deputy chief economist at the Institute of International Finance.

Russia’s current position is unlikely to achieve that.“It is unlikely that Saudi Arabia now would turn around and agree to the Russian proposal of extending the current cuts,” said Dmitry Marinchenko, senior director at Fitch Ratings Ltd. “That would essentially mean they have given in to Russia and lost face.”

Latest comments

today india is lockdown
thank you for lowering oil price , thats good for our business
I'm absolutely certain I'm along for the ride and can't see where we're going.
Shale will be gone soon.
Hope the world is eventually better off for it.Fracking not good.
Walmart stock is gold
Oil should be under the custody of the world nations and not allow to monopoly the global financial stability
Why stop there? What about water, timber, land, etc...
Oil is the main generator of the global economy. If we keep it in safe and reasonable hands, everyone will win. Likewise, if I measure the global economy’s losses in relation to the current or past oil war, you will accept my idea
Oil is the main generator of the global economy. If we keep it in safe and reasonable hands, everyone will win. Likewise, if I measure the global economy’s losses in relation to the current or past oil war, you will accept my idea
Will Trump save América again?
Why would Russia or Saudis help us? The last time Trump asked the Saudis to reduce their output he allowed exemptions on Iran oil. That caused a crude collapse that eroded trust and the Saudi budget. And output reductions aid their arch enemy (shale).
Why would Russia or Saudis help us? The last time Trump asked the Saudis to reduce their output he allowed exemptions on Iran oil. That caused a crude collapse that eroded trust and the Saudi budget. And output reductions aid their arch enemy (shale).
the" appropriate time" is when he is more oil calls in his portfolio
China is Saudi Arabia's #1 customer...
Just a few words, oil war just began and will only finish if trumps bow his head to russian and saudi demand.
There's something more sinister at work here. A price war would not hold over 1.5mbd given current wti @27 & 50 prev or even 40. Don't need a genius - just simple math.
Russia and Saudi Arabia can survive a 50 year long energy war.... America can survive a 3 month war... 99% o American companies are extremely over-leveraged and can't survive a 2 week crisis...
Trump will force every American citizen to bail out the bankrupt oil producers in the US. With his bailout plan he my keep them alive for 30 years! That war is already lost on it is the US citizens that need to pay for this artificial war. why not let the market resolve it? No, Trump need oil to start a real war to get the focus away. period
Russia n Saudi are working together to destroy dollar.
it's doing great.. EUR/USD dropped from 1.13 to 1.07 in few days...
Saudi is destroying its currency !!! Saudi currency has fixed exchange rate with $.
How comes the US expects others to do production cuts but it doesn't do any?
Should we buy oil at 28 or sell
depends whether you need oil. If you need it, buy it, if you don't need it sell it.
This from the biggest flunky president ever....he has a stack of excuses for his inaction...expect nothing from this.
Typical Trump-administration play to put the blaim somewhere else.
On track for a recession? More like guaranteed recession and potentially a depression if they keep it up.
U.S. President Donald Trump Thursday called the price war “devastating to Russia” and said, “at the appropriate time, I’ll get involved.” This is a very funny comment, particularly when the U.S is on the brink of a massive financial crisis.
haha , I will involve too.. hahathere is no room for him to involve. haha
good because they started this. it's not even economical at 100 + oil and a major environmental concern.
Thx,Putin for your global taxcut.
Watcing 2 children playing in oil war game.
This article is far from truth. It is Russia who started this price war not Saudi Arabia. Also Russia is not solely oil base economy.  Actual victim is US shale gas industry which is based on junk bond. Look at oil rig count that say all. Saudi wont last long with this low oil prices, they are depend on nothing but oil.
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