Saudi Arabia Landed in Russia’s Trap

0 198

Translated by Ollie Richardson for Fort Russ

18th January, 2016

The Saudi move to destabilize the oil market has led to huge losses for the Russian budget, but the Kingdom itself, as it turns out, has suffered from this more.

Until recently it seemed that the financial capacity of Saudi Arabia was almost limitless, the country capable of surviving for a long time, even with the low oil prices. But this impression was deceptive. The fall in oil prices led to huge holes in the budget of the Kingdom. So, last year, the budget deficit of the country was a frightening figure of 21.6% of GDP or more than $150 billion. To patch the budget, the authorities had used foreign exchange reserves, which by November 2015, lost more than $80 billion, some $70 billion were withdrawn from sovereign wealth funds. And while Riyadh continues to have various accounts and high-liquid assets by the hundreds of billions of dollars, according to experts, these stocks will melt in 5 years.

- Advertisement -

In this regard, Saudi Arabia has resorted to saving, a notion almost unknown to its inhabitants. In Russia, all have been accustomed to the fact that petrol is getting more expensive and oil and honey getting cheaper. And for the residents of the Kingdom, the rising prices at the gas station was a very unpleasant surprise. It is expected that for 2016, gasoline prices, by reducing subsidies, will grow by 67%, DT — 79%. With the help of these extremely unpopular measures, the authorities plan to save $7 billion in the current year.

However, these measures proved to be insufficient, given the size of the budget deficit. So Riyadh in 2016 shocked economists with a statement, presented by the second crown Prince Muhammad bin Salman, on the forthcoming privatization of the national oil company Saudi Aramco. Later his words were somewhat mitigated by the qualification that the privatization will not affect the company and its subsidiaries, so essentially it does not change anything.

However, neither the privatization of state assets or the spending of reserves will completely close the budget gap. It does not help its access to the debt market. The only solution in the current context is to further reduce costs. But here arises another problem — the population of the Kingdom is not used to saving. Therefore, the reduction in subsidies and direct payments can lead to increased social tensions. Given that the position of the dynasty of the Saudis is already shaky enough, the protests could lead to the fall of the current administration and the section of the country.

Recall that in 2015, oil prices fell largely due to the actions of Saudi Arabia, who did not want to reduce production, despite the position of some other country-members of OPEC. Also Riyadh refused to return to Iran its production quota. Considering the lifting of sanctions against Tehran and the position of Saudi Arabia, world oil production in 2016 will increase significantly, which will not increase the prices.

By reducing the oil prices, the Saudi authorities tried to squeeze other oil producers out of the market  (shale projects in the U.S. and projects on the Arctic shelf in Russia) and to cause them irreparable harm, assuming that the difficult economic situation would lead to mass protests (“this is our country”). In regards to Iran, Saudi Arabia is unable to keep its quota for geopolitical reasons, because a refund will be perceived as a sign of weakness in relation to the principal opponent.

Subscribe to our newsletter
Sign up here to get the latest news, updates and special offers delivered directly to your inbox.

Get real time updates directly on you device, subscribe now.