How Saudi Arabia could create a crisis for Russia’s economy

Russia’s wartime economy could face a tougher time securing needed oil revenue if Saudi Arabia tanks global crude prices.

The kingdom has reportedly signaled that crude could drop as low as $50 a barrel if the Organization of Petroleum Exporting Countries does not commit to reducing oil output.

In other words, Riyadh is hinting that it could flood the market with oil supply, analysts say. The move would slash prices and penalize OPEC members who have not cooperated in reducing oil flows — including Russia.

“With Russia already selling its oil at discounted rates and with higher production costs, a low-price environment in oil markets may impact its ability to finance its aggression in Ukraine,” Luke Cooper, a research fellow at the London School of Economics, wrote for the IPS Journal.

Saudi Arabia, the de facto leader of OPEC, has been trying to keep oil above $100 per barrel by pushing for member states to cut production.

But with international crude hovering below the $80 mark, this hasn’t worked. To shift strategy sources told the Financial Times that Riyadh now plans to turn on its taps by December.

“Saudi Arabia is fed up,” Simon Henderson, director of the Bernstein Program on Gulf and Energy Policy at The Washington Institute, told B-17. “Leadership of OPEC is a multifaceted responsibility. It can work well, but it’s also like herding cats — pretty damn impossible, at least some of the time.”

S&P Global Ratings data counts Russia among the overproducers in OPEC+. According to its last available data, Moscow produced 122,000 barrels above its daily quota in July. Iran and Kazakhstan also breached agreed-upon thresholds.

The Kremlin’s dilemma

Henderson suggested that some coalition members might be doing this to maximize profits.

In Russia’s case, Moscow is facing pressure to rake in as much as it can, as its war in Ukraine has ballooned defense and security spending in three years of war. These sectors will collectively account for 40% of all federal expenditures in Russia next year.

Russia’s finances, meanwhile, are heavily dependent on oil revenue. A few years ago, gas and oil production made up 35%-40% of the nation’s budget revenue, the country’s finance minister said this week.

It’s for this reason that the West has been so focused on curbing Russian oil profits. Consider the Group of Seven’s $60 price cap on Moscow’s crude: though the two-year initiative has not panned out as hoped, it was considered to be a key to keeping oil supply stable while denying the Kremlin much needed revenue.

Russia has been able to circumvent these caps using unregistered “shadow” tankers, but Riyadh’s $50 per barrel threat might be harder to overcome.

Things could turn sour if Saudia Arabia’s supply dump reignites an oil price war between Russia and the kingdom. Henderson suggested this could happen, referring to a similar event that occurred in 2020.

That year, production cut disagreements prompted both nations to unleash supply, testing who could survive this low-price environment longer.

In these situations, foreign exchange reserves become essential, which is problematic for Russia.

Since invading Ukraine, the country’s insurance against low oil prices has dissipated. Russia’s National Wealth fund was nearly halved at the start of this year, and it is no longer able to source Western currencies to diversify its foreign exchange reserves.

It remains to be seen whether President Vladimir Putin will want to engage in a price war with Riyadh, given his other, more immediate priorities, Henderson said.

Predicting the Kremlin’s moves is hard, he said, given many unknowns tied to Russia’s oil sales.

However, some kind of confrontation with Saudi Arabia may be stirring. This week, Russia’s deputy prime minister Alexander Novak said it’s unclear whether OPEC should increase oil output at its December meeting, as signaled by Saudi Arabia.

If things do take a turn for the worst, Cooper sees a potential price war as bad news for Russia.

“Unlike Saudi Arabia, its oil is not cheap to extract, making it poorly equipped to deal with low-price conditions. This drives a short-term escalatory logic for Russia’s war on Ukraine, requiring rapid battlefield successes prior to the emergence of low-price oil market conditions.”