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Analysis & Opinion
15.12.08 Flirting With OPEC
By Sergei Balashov

Russia appears to have gone too far in figuring out ways to stabilize the market amid negative expectations and declining consumption. Last week, President Dmitry Medvedev warned that Russia could cut oil and gas production to track back the falling revenues, and did not rule out the possibility of Russia joining OPEC, its longtime rival. He said that Russia is ready to protect its revenue base and is prepared to take decisive steps in order to do so.

If the president’s revealed intention to join the Saudi-dominated OPEC was an effort to harness the threat potential so often exploited by OPEC, it clearly fell short of its goal. Crude prices have been going back and forth without any detectable pattern, driven by much stronger factors than Russia’s mulling of production cuts and OPEC membership. “Such statements have been losing weight. Stock traders have negative expectations that currently shape the market and drive down the prices,” said the Deputy General Director for Science at the Institute for Energy Strategy Alexei Gromov.

Oil prices have already grown by over ten percent last Thursday, on speculation that OPEC could cut as much as 2.5 million barrels worth of daily production. On Saturday, news from the United States provided another boost, as its government gave strong assurances that it wouldn’t hesitate to take action to save the auto industry from a meltdown. That, however, was followed by a retraction to $46.28 per barrel, reflecting another round of consumption cut reports.

The oil price rollercoaster leaves Russia uncertain of its future. Budget planning has always been on the conservative side, based on the price of just $26 per barrel in 2005, when the actual market price stood at over $45. This number subsequently grew to $40 in 2006 and $61 for the record-breaking 2007. At the same time, the dependence on commodity prices was hardly altered. Back in 2005, two thirds of all tax revenue was derived from oil and gas. The efforts to diversify the economy and move it away from heavy reliance on commodities haven’t produced any palpable results. Today, crude oil alone makes for 45 percent of Russia’s exports.

When planning the 2009 budget, the Finance Ministry thought a price of $95 would provide enough of a cushion, while forecasting that it would not go below $70. It was far off the mark, as oil is yet to cross even the $50 per barrel threshold. Russia has vast reserves sufficient to guarantee the budget spending for the next year, but it is doubtful that this strategy would prove viable in the long run. “[The falling oil prices] aren’t the end of the world, but more should be done to prop up the non-financial sector and cut the budget. I think they should not touch the reserve fund right now,” said Maria Kazakova, the head of the economic development laboratory at the Institute for the Economy in Transition. “There is a slight panic, and that’s where the talk comes from,” she added.

Should Russia join OPEC, it will be a rather odd marriage. Russia and OPEC have had the same goal of keeping oil prices at an acceptable level, but at the same time they compete in the global oil market. Over the past eight years, Russia has increased its export market twofold, most of which came from OPEC’s losses amid tense relations with oil importers.

Neither have previous attempts to cooperate been successful. In 2002, OPEC urged Russia to cut production, but to no avail. Over four years ago, then OPEC President Purnomo Yusgiantoro approached Russia, this time asking to increase production to tone down the rapidly growing prices. That request was also turned down.

But the current commodity freefall turned out to be enough to get the two parties to reach across the aisle. “They’re now facing the threat of losing profits and the distance will not be as great as before,” said Gromov.

In November, the Russian Deputy Prime Minister Igor Sechin said that Russia would coordinate oil production with OPEC. This intent later took the form of a cooperation agreement handed by Russia to OPEC. It is expected to be brought for consideration and passed at OPEC’s next session on Wednesday.

Yet, as much as OPEC would like to put Russian exports under control, cooperation is unlikely to extend beyond coordinating some production cuts. “We just examined our options and pitched to see how the market would respond. Joining OPEC would seriously curb our space for maneuver; Russia has already taken its own niche in the market and would not want to give it up,” said Gromov.

No gas cartel, either

Another possibility that has been mentioned by Medvedev was Russia’s participation in what he called “new organizations.” This could have been a veiled reference to the so-called gas OPEC, an organization of the world’s largest gas exporters, primarily Russia, Iran and Qatar. Talk of such an entity getting set up has died down, even though natural gas prices are likely to start falling shortly after the New Year. Tighter control over production could cushion the revenue slowdown, but it would be impossible to establish such control quickly.

Compared to oil, the natural gas market is much more complex. Each major producer has its own consumer base and its own export structure, as Qatar ships liquefied gas to the United States by tankers and Russia pumps its natural gas via pipelines to Europe. Iran does not have an infrastructure developed enough to ship gas outside of the country. “All the major players here are working in different segments, and any partnership would limit itself to technological cooperation,” said Gromov.

Linking Iranian and Central Asian natural gas producers to its gas transport system, as opposed to setting up cartels, will be Russia’s priority for the time being. As for Medvedev’s flirting with OPEC, it shouldn’t be seen as more than a tentative shot at balancing out commodity prices. “For now, our teaming up with OPEC is merely in political statements,” said Gromov.
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