How Putin has changed the future of oil

Sanjay Kapoor | Updated on January 20, 2018 Published on March 25, 2016

Russian President Vladimir Putin walks into a hall before addressing journalists after he met his French counterpart Francois Hollande at Moscow's Vnukovo airport, December 6, 2014. REUTERS/Maxim Zmeyev (RUSSIA - Tags: POLITICS)   -  Reuters

His audacious intervention in Syria has shifted the power balance in the region, stabilising plummeting oil prices

On September 30, 2015, when Russian President Vladimir Putin surprised the world by sending in his air force to help out his beleaguered ally, Syria’s President Bashar-al-Assad, no one really expected a country fighting western sanctions, plummeting oil prices, falling ruble and domestic anxieties to become militarily adventurous.

It did not make sense to many strategists in western capitals why Putin should go to war when oil revenues had fallen so precipitously.

Five months after Russia’s triumphant stay in Syria where it changed the course of this messy war; it has managed to bring in more sanity to a volatile oil market.

The day Putin announced his military intervention, oil prices were $47 per barrel, which is far below the $100 mark, considered to be the level at which Russian development budget and its economy could be viable.

After sanctions, Russian economy had contracted by 4 per cent and soft crude oil prices were adding to its discomfiture. US President Barack Obama, too, could not conceal his surprise at Russia’s audacity when he said that they would not succeed in Syria and would get stuck in a “quagmire”.

A cheap war

Earlier in 2015, Obama had said that the Russian economy was in tatters after the sanctions. He did not bring in the issue of soft oil prices, but there were many takers for the theory that Saudi Arabia, the world’s largest producer of crude oil, was party to the grand conspiracy to hurt Russia by flooding the market with oil and hammering down its prices.

There were other implications of Saudi’s obduracy not to bring down oil production: destroy shale oil industry of US, hurt Iran’s attempt to rebuild its economy by raising its production to pre-sanctions level.

How was Russia supposed to fund its Syrian operations? Fresh from its success in acquiring Crimea and stirring trouble in Eastern Ukraine by deploying what is known as “hybrid war”, Russia was confident of using its state of the art weaponry to change the balance of war in the West Asian country.

Russian economy watchers claim that most of the expenses of the intervention were met from its military budget as it involved using only a few aircrafts — about 40 bombers and fighters — and missiles that were near expiry date as they had not been used since the collapse of Soviet Union.

So in some ways, Russia mounted a war, which was inexpensive and managed to provide Moscow dividends far beyond everyone’s expectations.

Russian military strategists and intelligence were justifiably of the belief that the Islamic State’s war against the Syrian government was bankrolled by the smuggling of crude oil to Turkey. There were a number of commentaries available on Russian news sites on how smuggled cheap oil was dampening global oil prices.

Shift in balance

This was a lot of hogwash, but the Russians found plenty of reasons to target the long lines of crude-laden oil convoys snaking into Turkey. Russian defense minister Sergei Shoigu briefed Putin on March 14, the day the decision was taken to withdraw the Russian forces.

Shoigou said their military had “hindered… resource support to the terrorists” by intercepting hydrocarbon trade to Turkey. “209 facilities for producing and processing and transferring of fuel were destroyed by the air force along with 2,912 sources of petroleum delivery (read trucks),” he said.

The Russians also managed to help the Syrians re-establish control over oil fields near Palmyra, which has been brought back to production. The Russian operations aggravated tensions with Turkey, which has been trying for Assad’s overthrow.

After notching significant military victories in Syria, Putin managed to broker a ceasefire with the help of the US, which has tenuously held on for more than three weeks now.

The shift in military balance also helped in kick-starting a moribund peace process in Geneva in which nearly all the important players are taking part, including the pugnacious Saudi Arabia, which does not want to deal with Assad’s government.

Russian presence in Syria has had a sobering influence at another level. A month before Moscow decided to bring down the curtains on their five-month-long campaign, Russia managed to hammer out a significant deal with the Saudis. Along with Venezuela and Qatar, they managed to freeze oil production at the peak of January 2016.

Deals and after

The impact of this agreement was that oil prices stopped sliding below $30 per barrel and began to inch up slowly. On the day Putin announced the withdrawal of his military, oil was in the vicinity of $40 per barrel. In real terms, it may have slid about $7 from the time the Russian air force went in to bomb the rivals of Assad in September 30, 2015, but clearly the prices would have gone lower if the Russians had not cobbled a deal with the Saudis.

What threatens to upset this deal is the outright rejection by the Iranian’s who want to increase their oil production to four million barrels of oil every day to fund their post-sanctions development programmes. They would not want a Russia-Saudi deal to cramp them in anyways, but some analysts claim that Tehran may not have an option but to fall in line.

The reason for this again lies in how Russia has managed to establish itself as a factor in West Asia. The US may hate doing that but the Russians have compelled them to back them in their fight against the Islamic State and also served to check Saudi Arabia’s desperate attempts to preserve its hegemony over the Sunni world.

At the face of it, the Saudis have put together a grand Sunni coalition along with the Turks and other countries to ostensibly fight the IS, but quite clearly, they would like to use their enormous money and muscle power to oust Assad, who has the backing of Iran and the Hezbollah.

The only reason why they have not attacked Syria after being so hawkish, is due to the looming presence of Russia and its promise to re-assemble their forces in Syria within a few hours if the ceasefire is violated or Syria’s sovereignty is threatened.

This worries the Saudis and the Turks, but also makes Iran conscious of the high stakes Moscow has in freezing oil production. Surely, Iran would not like to antagonise the Saudis and Russia at the same time. It is in this calculation lies the future stability of oil.

The writer is Editor, HardNews

Published on March 25, 2016
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