Saudi-Russian Oil Dialogue After Syria
Middle East Briefing/October 10/15
The main question now in the oil market is if tension between Saudi Arabia and Russia will restrain talks on coordinated production policies. The answer to this question may be available only in the short term. In a longer term, however, there are no clear answers available. What is available there is more questions.
According to information obtained from main investment firms in the region, Riyadh liquidated at least $50 bn. of its investment portfolios abroad during the last 6 months in order to fill the gap of its budget and to finance military operations in Yemen. Saudi financial reserves, invested in several forms and funds, declined by around 10% during the year ending last August. These reserves are estimated currently at $660 bn.
The structural rigidity of the Saudi economy leaves little room to compensate for the reduced oil revenues if the Kingdom’s social welfare expenses are to be preserved. On the other hand, reducing these expenses in the current regional environment would be a risky proposition. Expenses related to security cannot be reduced neither in view of the challenges facing the Kingdom in the current regional turmoil.
Nonetheless, the Kingdom’s finances are far from being threatened. It has enough to carry on for few years. Yet, the decline in reserves is causing an understandable degree of concern in Riyadh. This degree of concern, though not acute, paves the road towards a serious consideration of the current production policy and puts pressure in order to coordinate with other producers, namely Russia.
This coordination faces serious challenges. There is, first, the Iranian and Iraqi output which is expected to increase steadily in the very short term. Second, estimates of increased demand next year seems to regional producers as optimistic and they are not significant enough to cope with the potential increase in production. Third, the bitter rivalry between Iran, hence Iraq, and Saudi Arabia reached a too high level to allow rational coordination between the two countries. Fourth, there is the recent Russian involvement in the Syrian crisis. This involvement is causing a substantial surge in anti-Russian sentiments in Saudi Arabia which in turn maybe reflected on the current talks between the two powers or in calls to reach an arrangement with them.
Chances of any success in the current Saudi-Russian talks depend mainly on the extent of self-motivation in Riyadh. If this factor is to balance the current electrified atmosphere in the relation of the two countries due to Syria, there might be a positive conclusion for the ongoing negotiations between the oil ministries in the two countries.
Riyadh has, at this critical moment, different views on the table of discussions within the oil official circles:
There has been a view that Russia should be given membership in OPEC. According to the head of Rosneft, Igor Sechin, the idea was discussed during the months of August and September of this year.
Another idea is that relations with Russia should be limited to coordinating production for a specific period of time. There is concern that Saudi Arabia may lose its usual role as a swing producer if Russia is allowed into OPEC. Opponents of the idea go as far as warning that such a step will dilute the role of the Cartel and will force it later into a fragmentation between clusters of producers. They claim that allowing Russia into OPEC makes the organization irrelevant.
A third view warns that in any case prices will recover slowly and the benefits of coordinating with the Russians would gradually be reduced. This view does not oppose coordination, but opposes taking this coordination beyond the limits previously explored during other periods of low prices.
The fourth view goes as far as rejecting coordination with the Russians at this moment. The impact on shale oil producers needs a little more time, as they say, and the Kingdom is in a good place financially to bear the consequences of an additional period of low prices.
The debate will be settled by a complex set of factors. Although the kingdom succeeded in relatively separating economic policies and strategic political considerations, the two sides are not totally separated. The effects of concerns about using the from reserves, the level of strategic polarization, the prospects of an impact on prices of coordinating with the Russians, the resilience of the shale energy sector in the US and the extent of the effect of the regional tension within the Kingdom are among the factors that will determine the next Saudi step.
The two proposals that made it to the final line was to talk to the Russians or to postpone this step until the regional intentions of Moscow becomes clearer. Those who call for talks with the Russians support their argument with a history of separation between political considerations and oil policies. They emphasize that it is mainly in the interest of the kingdom that such a dialogue take place.
The opposing view base its argument on the fact that any improvement in prices will be slow anyway. They describe worries about the Kingdom’s reserves as exaggerated and suggest a slow pace in approaching Moscow.
And it is this second camp that is gaining momentum, at least in the short term.
Russia Faces Israel Deconfliction Dilemma
Middle East Briefing/October 10/15
The Netanyahu government in Israel is deeply disturbed by the unfolding situation in Syria and the lack of a solid understanding with Russia over how to deal with the ongoing threat from Hezbollah and Hamas. On Tuesday, Oct. 6, a Russian military delegation, led by Deputy Chief of Staff Nikolai Bogdanovsky, arrived in Israel to continue talks that began last month in Moscow, when Netanyahu and Israeli Defense Forces Chief of Staff Gadi Eisenkot visited the Russian capital to confer with President Vladimir Putin and Valery Gerasimov.
While the Russians and Israelis announced they would establish a working group at the general staff level, significant disagreements remained after the Moscow talks, and there is skepticism that the issues have been resolved during the Russian delegation’s visit to Israel.
In the Moscow talks, Netanyahu sought Russian approval for Israel to continue military operations inside Syrian territory, whenever Israel got intelligence on weapons convoys moving towards the Lebanese border. The Syrian route is one of the primary channels for the smuggling of Iranian weapons into Hezbollah in Lebanon and Hamas and Islamic Jihad in Gaza. Putin outright rejected Israel’s blanket authorization to continue air operations against Hezbollah inside Syrian territory. He pledged, instead, that Russia would not permit Hezbollah rocket attacks on Israel from inside Syria and would not permit Russian weapons to be turned over to Hezbollah. This left an enormous gap between the Israeli demands and the Russian promises. Most of the weapons obtained by Hezbollah and Hamas come from Iran, not Russia. Syria is known to be the storage depot for components of advanced rockets, which are smuggled into Lebanon and Gaza and are then assembled.
In the second round of negotiations in Israel, Netanyahu and the IDF leadership made clear that they consider it a high national security priority to have a free hand to block weapons smuggling into Lebanon and Gaza from Syria. Israel will not accept any deal that falls short of ironclad promises that the smuggling routes will be verifiably shut down.
Israel has already conducted reconnaissance sorties into airspace along the Syrian-Lebanese border, profiling for weak spots that can be penetrated. In one instance, Russian MIGs chased Israeli F-16s out.
Pentagon planners in Washington know that the deconfliction deal between Russia and Israel is a vital element of the overall conflict-avoidance architecture now being put in place, and they are deeply worried that the Israel-Russia dispute can blow apart the entire situation, regardless of the level of cooperation achieved between the US and Russian militaries. There is no doubt among Washington national security planners that Israel will take whatever actions it deems necessary to prevent the expansion of Hezbollah and Hamas capabilities to attack Israel with devastating rocket and missile assaults.
Among the proposals on the table when the Russian delegation sat down with IDF Deputy Chief of Staff Yair Golan and top officials from Israeli military intelligence and the IDF Air Force: Israel would provide Russia with actionable intelligence against rebel forces in Syria, in return for permission for the IDF to carry out bombing runs against Hezbollah arms caravans crossing Syrian territory into Lebanon. Israel would provide advance warning to Russian military officials before launching any such actions.
From Israel’s standpoint, such a deal would be a win-win proposition. It would give Israel a leg up on Iran, as a source of intelligence for Russia’s military operations inside Syria, and it would put pressure on Russia to block Hezbollah from conducting any actions against Israel for the duration of the Russian military operations inside Syria. Israel would be a de facto stakeholder in the future of Syria, whatever the outcome of the new phase of combat and diplomacy.
From the Russian standpoint, such a deal would mean that Israel is neutralized as a border factor. In order to combat what all Israeli factions view as the greatest threat—Iran and Hezbollah—Israel had been providing limited support to some Syrian rebel factions, including some units affiliated with the Nusra Front, to keep Hezbollah and Iranian Revolutionary Guard Corps forces out of the border region. Israel could move to take control over larger portions of the Golan Heights as part of an enhanced security buffer zone.
Russian-Israeli relations have always been close (historically, the Soviet Union was the first country to recognize the State of Israel). But in their Moscow talks, Putin made clear to Netanyahu that the one million-plus Israeli citizens of Russian descent are a voting bloc that he can influence. Avigdor Lieberman, who was once a close Netanyahu ally, serving as his chief of staff and later as his foreign minister, has broken from the Likud leader and could, at some point, help bring Netanyahu down. http://mebriefing.com/?p=1967&utm_source=MEB+VOL+-+III_+Issue+98+September+2015&utm_campaign=VOL+III+-+Issue+98&utm_medium=email
