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52 Opinion MACRO ADVISER:
Russia and Saudi
Arabia have much to gain
from improving relationship
bne November 2017
bne IntelliNews
It has been widely reported that Saudi Arabia’s King Salman bin Abdulaziz Al Saud will lead a large delegation of officials and business leaders from the kingdom to Moscow in early October. King Salman does not do courtesy calls so
it can be reasonably assumed that his first official visit to the Russian capital is a serious event and we should expect to hear of some substantial investment deals and/or a deepening of the political relationship. Even without the king’s presence, the planned delegation is the biggest ever from the kingdom to Russia and that in itself shows very serious intent.
It is not too many years ago that such a visit would have been difficult, if not impossible. Saudi Arabia has traditionally been a staunch ally of the US and was very much in the western camp during the Cold War. The relationship did not improve in the 1990s as most Gulf media regularly portrayed Russia's then president Boris Yeltsin as the weak leader of a lawless country. Even 12 months ago Riyadh was highly critical of Russia’s involvement in Syria and the relationship looked as frozen as ever. Today that has changed 180 degrees. Both countries now see political and economic advantages from a closer, albeit pragmatic, relationship. This visit is intended to make sure it stays on track.
It is tempting to say that the new-found relationship resulted from Russia's agreement to make a significant contribution
to the Saudi-led initiative to cut oil supplies coming onto the world market last November. That was certainly a key factor, especially since very few actually expected Russia to make any effort to comply, never mind to fully adhere to its commitment. But the reason for the improving relationship is broader than the oil deal and, therefore, is likely to be longer lasting. Both counties have something of substance to offer each other.
It should also be noted that an important part of the background to this improving relationship is the opportunity created by the weakening in Saudi-US relations since the second Gulf War. US support for Qatar's funding of the Islamic Brotherhood in Egypt and the Al-Jazeera news channel, plus the Iranian nuclear deal agreed by former president Barack Obama, did not go down well in Riyadh. Perhaps what really grates on the Saudis is the fact that having spent billions of dollars to ensure OPEC remained a reliable energy partner
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with substantial spare capacity, the US totally ignored that and went headlong into shale development, disregarding the damage to the Saudi economy.
But, as stated, the developing relationship is broader than the specific oil deal. Both have much more to gain.
Since Moscow's estrangement from the West in 2014, the Kremlin has been pursuing a policy of diversification. Presi- dent Vladimir Putin has said that Russia should no longer be too closely aligned, or dependent, on only one relationship. In recent years we have seen an improving relationship with Chi- na for sure, but also with other Asian states, including Japan. Political ties with the other Brics states have also improved.
In the Middle East and the Gulf, Russia has a good relationship with Egypt, Israel, Qatar and the United Arab Emirates (UAE). Saudi Arabia was the missing big piece in that jigsaw. It is notable, but hardly surprising, that since the announcement of the Russia-OPEC oil deal late last year there has been no criticism of Russia's role in Syria from any of the Arab states. That is a perfect example of good business – Russia and Saudi both earn close to $2.5bn per month more from exports at $54 oil than they would at $45 – and good politics.
For Riyadh, the engagement is also good economics and
good business. Unlike Russia, Saudi Arabia has not allowed
its currency to devalue, sticking tightly to the US dollar-peg, and now needs a much higher oil price, approximately $85,
to balance its budget than Moscow does. The Russian federal budget needed $115 in 2013 but should balance at closer to $70 this year. The Fiscal Rule aims to cut this to $42 by 2022. The higher oil price also makes it relatively easier for Saudi Arabia to come close to the indicated target valuation of $2 trillion for the Aramco IPO. At sub-$50 per barrel that target would be no more than wishful thinking. On the politics side, the Kremlin provides a back channel to Tehran and that may prove critical
if a resolution to the Yemen crisis is to be reached.
Politics may remain behind closed doors at the Moscow summit but it is widely expected that several mutually beneficial trade and investment deals may be agreed or at least MOUs signed. Russia and Saudi Arabia are already well down