Russian Oil Bluff Is Called, and Economic Losses Keep Mounting

News about a new deal on oil production cuts, agreed between Russia and the Organization of the Petroleum Exporting Countries (OPEC) and then augmented by the communique of the G20 energy minsters last Friday (April 10), had been expected; as such, the developments made little if any discernible impression on global energy markets. The benchmark Brent Crude price has continued to hover around $30 per barrel, a long way from the $60–65 level in January. Some price decline was certainly inevitable considering the unprecedented contraction in demand as a result of the unfolding world-wide recession caused by the COVID-19 pandemic; but the spectacular price collapse in February can be directly attributed to Russia’s self-defeating behavior. The decision to break the OPEC+ cartel arrangement was taken personally by President Vladimir Putin and turned out to be a bad blunder, which he has, thus far, refused to acknowledge, attributing the blame to Saudi Arabia. Riyadh, in turn, was bitterly offended by Moscow’s brusque demarche (RBC, April 10).

The consequences of that mistake have not been erased by the new, rather desperate agreement, which testifies to the deficient quality of political management of Russia’s energy business. It was Igor Sechin, the CEO of the state-controlled oil giant Rosneft, who persuaded Putin to withdraw from the OPEC+ arrangement, which was indeed unable to keep the oil price stable (Novaya Gazeta, March 11). Sechin knows how to play on Putin’s emotions, and his main argument was that the price drop would bankrupt shale oil producers in the United States and consolidate Russia’s status as an energy superpower (Republic.ru, April 10). That turned out to be a major miscalculation as Saudi Arabia moved to increase production and President Donald Trump provided support for US companies (The Insider, April 10). Russia found itself in the position of the designated loser in the price war, and Putin’s attempts to set conditions for renegotiating the deal, including a US commitment to a significant production cut, were firmly dismissed by Saudi Crown Prince Mohammed bin Salman (Nezavisimaya Gazeta, April 5).

Last week, Russia had to accept a cut amounting to about 18 percent of current production, far deeper than the symbolic cut it rejected a month ago (Kommersant, April 10). This sudden forced concession illustrates the poor expertise at the top level of decision-making in the Kremlin, which not only underestimated the strength of the Saudi position and the dynamics of the US “shale revolution” (mistaken in Moscow for a “bubble”) but also apparently misconstrued Russia’s own ability to reduce production (Novaya Gazeta, April 10). Unlike US shale producers, the majority of Russian production facilities cannot stop pumping for a limited time and then resume, because the technology allows only for uninterrupted streams (Znak.com, April 10; see EDM, April 9). Having made production cut commitments in 2017–2019, Moscow never actually delivered on them, enjoying a free ride on the OPEC+ deal. Now, the execution of cuts would mean the physical destruction of many units in Russia’s rusting oil business infrastructure (Fontanka, April 10).

Painful as the latest agreed production cuts are, they cannot guarantee a useful increase or even stabilization of volatile prices because, by most estimates, the shrinking of global demand is set to continue (Forbes.ru, April 11). For years, Russian officials have been talking about reducing the country’s dependency on oil revenues by diversifying the economy, but the sharp contraction of these money flows reveals the real depth of this reliance and the scale of the accumulated problems in Russia’s technologically backward energy industry (Novye Izvestia, April 10). The government has started to make cautious predictions about a probable economic contraction; but the recession has already arrived, and its depth and duration are set to radically redefine the worst-case scenarios (Izvestia, April 10). Russian experts argue about a “catastrophic underestimation” of the damage from the unfolding crisis to the economy, which never fully recovered from the 2014–2016 recession and failed to deliver any increase in household incomes (RBC, April 8).

Putin has pushed the burden of responsibility for dealing with the poorly registered spread of the pandemic down to the regional governors; and they are eager to report that the situation in their respective domains is under control (Nezavisimaya Gazeta, April 9). Since no meaningful financial support has come from the federal budget, the governors are left to interpret the decree on a “non-working period” (the official discourse avoids the term “quarantine”) at their discretion (Rosbalt, April 10). They actually have little choice but to ensure that the core economic activity, including in the military-industrial complex, continues without interruptions, no matter the wishful instructions about social distancing (Moscow Echo, April 11).

The situation in Moscow, where about two thirds of all COVID-19 coronavirus cases in Russia are registered, is quite different: some bloggers compare it with Wuhan (Newsru.com, April 9). But as the Chinese megapolis, reportedly, slowly recovers from the original explosion of the new disease, the situation in Moscow hospitals remains desperate and underreported (Meduza.io, April 11). Moscow Mayor Sergei Sobyanin has to resort to the strictest lockdown measures, from closing cemeteries for the traditional Easter-time visitations to introducing electronic passes for private cars (Kommersant, April 11). The government has plentiful manpower and electronic resources to enforce these measures but not to address the fast-aggravating social problems—from the plight of the tens of thousands of stranded labor migrants from Central Asia to the bankruptcy of small businesses that used to enrich Moscow’s flourishing urban environment (Svoboda.org, April 6).

Putin was loath to acknowledge the distortion of his carefully planned domestic political agenda, from the revision of the Constitution to the extra-grandiose Victory Day parade. Now he has to internalize the fiasco of the economic situation, centered on the channeling of funding into corruption-prone “national projects.” The bluff of shaking the oil market from the position of strength of an “energy superpower” has exploded in his face, and the costs of this blunder are too high for his subordinates to report to the irritated boss. The mismanagement of the oil-dependent and intricately corrupt economy had already condemned Russia to stagnation in relatively benign conditions, Western sanctions notwithstanding. Now, in the time of unexpected, underestimated and irrepressible troubles, this mismanagement is quickly propelling Russia into a crisis of a level unseen since the late Soviet period. Russian society is increasingly too demoralized and fragmented to withstand the impact, and the leadership appears paralyzed by fear and incompetence, making for a politically dangerous combination.