Friday, November 28, 2008

Russia and Opec

Financial Times

Russia, says President Dmitry Medvedev, is ready to “co-ordinate” – but not “collude” – with Opec to stabilise oil prices Two other Russian ministers have been making similar noises, just as Opec prepares to meet in Cairo on Saturday to consider further output cuts. Yet before consuming countries quake about a new price-fixing alliance between the oil cartel and the world’s second biggest crude producer, they should understand the precarious tightrope Moscow walks in relations with Opec.

Certainly, Russia has compelling reasons to boost oil prices. Urals blend is $20 below the $70 a barrel level at which Russia tips into budget and current account deficits. The sliding oil price also puts immense pressure on the rouble. Flinching from a politically hazardous devaluation, the Kremlin is burning through billions of dollars of foreign exchange reserves defending the currency. Production from Russia’s ageing oilfields, moreover, is already falling, but low prices make developing remote new reserves uneconomic. Most crucially, not co-operating with Opec risks seeing the cartel eschew production cuts to spite non-members who attempt to “free ride” on its efforts to bolster prices.

But co-operating with Opec has its own difficulties. Unlike Gulf states, Russia cannot easily turn off oil supplies; Siberian oil wells freeze if not kept running. Cosying up to Opec would infuriate Russia’s western partners. And it would strongly define Russia as a “petrostate”, a tag it resists and which runs counter to hopes of modernisers such as Mr Medvedev to wean the economy off reliance on energy.

Russia has one big card to play with Opec: its production, inevitably, will decline for the next few years. In response to any Opec production cut this weekend, Moscow is unlikely to go beyond vague commitments on trimming its own output. Continuing to tread the Opec tightrope, however, will require delicate diplomatic skills which in Russia are in rather shorter supply than oil and gas.

Comments: Seems to me they are stale, the oil prices I mean. It is just that the prices are too low for our comrades and their new found allies.

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