16.10.2015 Author: Petr Lvov

Riyadh & Its Foul Game with Russia

12763581The recent visit of deputy crown prince and Saudi Arabia’s minister of defence Mohammad bin Salman to Russia, along with the talks he held in Sochi with Russia’s President Vladimir Putin on October 11, were largely interpreted as a sign of rapprochement between Moscow and Riyadh. Some analysts have even suggested that the new Saudi leadership, which is not entirely satisfied with Washington, is seeking Russia’s support against the so-called “Ferrari revolution” within the ruling elites of the kingdom. The British media have even published two letters written by an anonymous Saudi prince, who openly called for the overthrow of King Salman, due to a growing sense of discontent within the ruling clan.

Yet, one can hardly imagine a naive enough soul that can sincerely believe in the prospect of a Russian-Saudi rapprochement. After all, Saudi Arabia – is de facto a sort of an American colony or provisional state. Its financial system is closely tied to the Federal Reserve just like Saudi Arabia’s national currency is tied to the dollar. If one is to consider the fact that there’s US military bases all across the Arabian Peninsula , it would be safe to assume that Washington is perfectly capable of replacing one ruling clan in the kingdom with another in the matter of hours. Nevertheless, the ruling elite in Riyadh are stubborn in the belief that promises to provide Russia with 10-15 billion dollars of investments will change Russia’s position on the key issues of Middle Eastern policy overnight, even as far as Syria, Iraq, Iran or Yemen are concerned. Before Prince Mohammad used such transparent and elementary diplomatic tactics, it was the former head of Saudi intelligence services Prince Bandar who was especially keen on promising Russia staggering sums in investments.

Proof that Saudi Arabia is guilty of foul play against Moscow is not hard to come by. On 14 October Russian Energy Minister Alexander Novak told reporters that Russia believed that Saudi Arabia was its “toughest competition” on the European hydrocarbon markets, which have been dominated by Russian oil companies for decades. It has been reported that the world’s largest oil producer – Saudi Arabia – started to the supply “black gold” to Poland in late September, while trying to push Russia out of the market by meeting the demand of approximately 20 million tons a year. The news of Saudi Arabia’s oil sales at “magic discounts” in Poland came only on October 13. “We have global oil markets. Every country has the right to sell, where it sees fit. This competition is now fierce competition … we see that Saudi Arabia implements its strategy for participation in the competition in the oil market, all have to be ready “- said Novak on the next day. About 40% of Russian oil exports – about 100 million tons a year – are sold to Northern Europe, making this region the most important consumer of Urals grade crude oil. Russian oil companies have already started losing their positions in European oil markets due to the influx of cheaper grades from the Middle East, and Saudi intervention on this market can only push prices further down due to increased competition.

Europe – is a crucial region for Russia’s oil exports, but according to Reuters, its positions on this market has recently been contested by cheaper crude oil grades from the Middle East. Urals remains the dominant grade in Europe due to geographical proximity and the fact that European refineries are designed to work with it. But this year Russian companies are facing growing competition from the Persian Gulf. This trend has been further exacerbated in recent months because of falling demand in Asia, that is forcing oil producers to redirect oil flows to Europe.

One shouldn’t forget that Saudi Arabia less than half a century ago was a major player in European oil markets. In the 1970s a half of all Saudi oil exports went to Europe, but then the volumes of these supplies started to fall gradually. In 1986 a total of 34% Saudi export oil was shipped to Western Europe, while by 1990 this number fell to just 18% then to hit rock bottom two decades later in 2010 – with the rate of 10%. According to the EU, in 2012, supplies from Saudi Arabia covered about 8% of EU demand of crude oil. But in the first half of 2015, Saudi Arabia has sharply increased its oil supplies to Europewhile reaching the rate of 1.01 million barrels a day. In comparison, Russia in the same period of time was delivering about 1.7 million barrels a daily.

Characteristically, Saudi oil is now much cheaper that any common regional oil grade in Asia, the US and Europe. In fact, the Saudi authorities have once again decided to use the strategy of dumping, despite their rapidly vanishing state reserves. It’s curious that the Saudi Arabia oil intervention on the European markets started amid the growing controversy between Moscow and Riyadh over the prospects of a Syrian crisis resolution. Russia carries on air strikes against US and Saudi-backed “rebels”, which the Al Saud royal family is hoping to end by applying economical pressure on Russia. According to Bloomberg, Saudi Arabia has increased discounts for certain consumers in both the Asian and the North American regions. The selling price of medium grade oil has been reduced by 1.9 dollars per barrel. Discounts for certain consumers in November are to be increased from 1.3 to 3.2 dollars per barrel – the highest discount since 2012, the year when Saudi Aramco introduced the practice of making discounts for certain groups of consumers. The official price of Arab Light grade for Asian consumers has also been reduced by 1.7 dollars per barrel. Bloomberg points out that – “The decrease was the deepest since January. The company trimmed November pricing for its Light, Medium and Heavy grades to the U.S. by 30 cents a barrel each.”

As far as Russia’s supplies to Europe are concerned, oil that is being transported via pipelines remains in high demand, yet the emergence of new competition can affect the price of oil rather than on the volume of supply. But should Moscow face a defeat in Syria, then Saudi Arabia will build a pipeline across the Syrian Mediterranean coast just in a year. It will then be followed by a parallel gas pipeline sponsored by Qatar, and then the Russian economy will face some dark times. The consequences of such a defeat has clearly been calculated in Moscow.

So Moscow has a lot of facts to consider. Both in terms of countering the Saudi oil dumping and in terms of providing more active support to Syria in an attempt to suppress Islamists sponsored by Saudi Arabia, Turkey, and the US. In fact, its a matter of Russia’s economical survival…

Peter Lvov, Ph.D in political science, exclusively for the online magazine “New Eastern Outlook”.