Oil Price; New Front in Russia-West Dispute

 

By Shuaib Bahman

 

Introduction

 

Oil price has fallen 34% since June to $76.76 in November, hitting four-year lows. The sharp decline in oil prices in markets could not have happened naturally because the prices slumped amid forecasts by energy experts of oil price hikes in the future.

Some analysts say the price fall might have been a joint Saudi-US plot for ramping up pressure on Iran and Russia. If true, it means that the West resorts to any action for undermining its rivals. What strengthens this possibility is that if the oil prices fall below $70, oil production in the US would no longer be economical. Therefore, what has caused oil prices to fall is not technical and economic issues and it has political and geopolitical aspects.

Russian officials seem to be well aware of developments in the energy sector and have prepared themselves to encounter sharp energy prices.

Russian President Vladimir Putin said recently that Moscow has already made forecasts about oil prices and added that Kremlin is determined to meet its social obligations by dipping into accumulated reserves to keep the country’s economy afloat.

Such remarks by Putin are indicative of the fact that Russia has already prepared itself to face different scenarios in the energy sector.

 

West Objective: Energy War on Russia

 

Russia produced more than 523 million tons of oil in 2013, up 5.2 million tons from 2012. This production hike shows that Russia’s dependence on petrodollars has pursued an upward trend and that oil price fall can seriously impact Kremlin’s economy and foreign policy. The West seems to have the intention of undermining Moscow by pushing energy prices down. Some of West’s Russia policies that could be realized through oil price slump are as follows:

First is that the West plans to curb Russia’s geopolitical ambitions by causing reduction in energy prices. Russia owes the bulk of its revenues to energy sales; therefore, any decline in this sector can affect Moscow’s ambitious goals and stop some of Kremlin’s plans, particularly vis-à-vis Ukraine.

One should always keep in mind that Crimea’s secession from Ukraine and its annexation to Russia constituted the biggest geopolitical tragedy for the West since the end of the Cold War.

Therefore, oil price slide, in addition to impacts on Russia’s economy, can challenge Moscow’s ambitious goals regarding its support for separatists in Ukraine.

Second is that the West intended to pressure Russia into a gas deal with Europe and selling gas to Ukraine. The Europeans feared that Moscow may use energy as a weapon against them in winter they thought that low energy prices would force Russia to deliver gas to Ukraine and other European countries in order to make up for its shortfalls. At a time Russia’s petrodollars have fallen, cutting energy supply to Europe could further harm Moscow’s economy ; therefore, with falling oil prices Russia would have no option but to strike a gas deal with Ukraine and Europe.

Third, oil price fall can result in the devaluation of Russia’s national currency ruble, pushing the government into an economic plight. The ruble has already lost 40% of its value due to Western sanctions and oil price slide can result in significant budget deficit in this country in 2015.

The dependence of Russia’s budget on oil revenues and impossibility of diversifying its sources of revenue would make oil price falls very difficult for this country.

A 30% decline in oil prices since June has created major problems for Russia whose economy depends 50% on petrodollars. The falling oil prices and fiscal challenges in Russia could heavily affect its economy during the coming two years. That could stoke up inflation, trigger social unrest and hinder Russia’s long-term plans. For instance, Russia has had to reconsider its military modernization plan due to decline in its oil revenues. Such conditions are not favorable for President Putin who needs huge financial resources to carry out his reform plans.

Fourth is that oil price fall would dissuade major international companies from investing in Russia’s huge oil reservoirs. It is an undeniable fact that Russia’s petroleum industry is facing a serious and creeping crisis because most oil fields in Siberia that were not developed under the former Soviet Union are going towards depletion and Russia’s oil production will significantly fall if Siberia shale reserves and new offshore reservoirs in North Pole are not developed. The imposition of sanctions against Russia by the West in reaction to Moscow’s actions in Ukraine has restricted the Russian companies’ access to Western financial markets and equipment.

Oil price slide may dissuade Western companies from investing in Russia’s hydrocarbon fields. For instance, ExxonMobil is pulling out of a Russian project in North Pole, striking a big blow to Russia’s energy sector. That will have undesired consequences for Russia in the long-term. Due to these restrictions, Russia’s oil production is likely to decline in the coming years and any decline in Russia’s output will affect the political future of this country and world energy markets. In fact, lower production and oil price slide can always pose a threat to Russia’s national stability and its external influence.

Fifth is that oil price fall would force Russia to scale back on its military aid to the Syrian and Iraqi governments. Russia’s policy vis-à-vis Syria and its support of President Bashar al-Assad and less oil revenues would affect Kremlin’s support of Syria’s embattled president.

Sixth is feared border insecurity for Russia due to oil price fall. Every year, a large number of migrants from Central Asian countries move to Russia in search of job. But at a time Russia is under Western sanctions and its oil revenues are falling sharply, it would no longer be economical for migrant workers to look for jobs in Russia. That is why a large number of these migrant workers have left Russia to join the terrorist Islamic State of Iraq and the Levant (ISIL) group in order to make more gains. The return of these militants from Syria and Iraq to their homeland in the future would make Central Asian and Russian borders insecure.

Seventh is that oil price slump would keep Russia’s national currency, ruble, from becoming an international currency. Since Russia intends to use ruble in its transactions with other countries in a bid to weaken the US dollar in world markets, the West is causing ruble to depreciate by cutting energy prices in order to kill the competitive and attractive nature of Russia’s legal tender. That is an undeniable fact that using two or several currencies in international transactions will make the global trading system, dominated by the US, collapse.

Eighth is related to the financial structure of some emerging bodies, in which Russia is a top member, in the global economy. This structure is poised to suffer blows due to oil price falls. For example, the agreement by BRICS (Brazil, Russia, India, China and South Africa) for the establishment of their own financial body could be considered as a financial coup against the current financial system. Falling oil prices will not only challenge the economic structure of this body like BRICS development bank and its fund, but it will also limit their room for political maneuvering.

 

Russia-West Oil War Perspective

 

Russia is suffering nearly $40 billion in financial losses every year due to the Western sanctions imposed on Moscow over the crisis in Ukraine. The oil price slump in the world markets is also imposing $90 to $100 in losses every year on Russia. Oil and gas sales make up some two-thirds of Russia’s revenues; therefore, the impacts of Western sanctions and falling oil revenues on Russia’s economy are significant.

Juxtaposing the energy price slide and Western sanctions against Moscow would endorse Russian Foreign Minister Sergei Lavrov’s recent accusation that the West is trying to use sanctions imposed on Moscow in the Ukraine crisis to seek “regime change” in Russia.

“As for the concept behind the use of coercive measures, the West is making clear it does not want to force Russia to change policy but wants to secure regime change,” Lavrov recently told a meeting of the advisory Foreign and Defense Policy Council in Moscow.

His comments followed remarks in which President Vladimir Putin said Moscow must guard against a "color revolution" in Russia, referring to protests that toppled leaders in other former Soviet republics.

Anyway, although oil price fall can harm Russia’s economy, the fact is that Kremlin is trying to minimize the impact of this issue on its foreign policy. There are also reasons for the US and its allies, including Saudi Arabia, not to be able to keep the prices low for a long time. Some of these reasons are as follows:

  • The US and Saudi Arabia are not the only players in the energy sector and continuation of the present circumstances would bring other influential players in this sector into confrontation with them.
  • Oil price decline could harm American and Saudi economies on the long term. Since the US and Saudi Arabia are both producers of oil, they will also be affected by low oil prices in the long term. Therefore, they will have finally to bring oil prices back to their real level.
  • Russia, as a leading oil producer, can cut its production to shore up prices.
  • There are influential factors like fragile security in Libya and Iraq. Any change in the security and economic conditions of these countries could significantly affect oil prices.
  • Lower oil prices would be in the interest of US’s trading rivals like China. These rivals may take advantage of this opportunity to produce commodities at low prices in order to grab bigger shares of world markets. That would not benefit the United States.

 

Last but not least, Russia is suffering losses due to the present conditions dominating world energy markets, but oil prices are unlikely to remain low for a long time; therefore, Russia’s vulnerability to oil prices would not continue for a long time.