Russian Oil Sector Now Where Soviet One was Just before USSR Collapsed, ‘Nezavisimaya Gazeta’ Says

Paul Goble

            Staunton, February 1 – Many observers have suggested that the single best indicator of what has happened and will happen in Russia is the price of oil. If it is high enough, they suggest, Soviet or Russian leaders can appear to do no wrong; if it is low enough, at least one current anecdote has it, Vladimir Putin will begin learning Ukrainian.

            In today’s “Nezavisimaya Gazeta,” Anastasiya Bashkatova, who specializes on economic issues, says that the situation in Russia’s oil sector is now so dire that “the events which preceded the collapse of the USSR may be repeated” despite all of Moscow’s attempts to escape that fate (ng.ru/economics/2016-02-01/1_opek.html).

            She reports that Moscow “has not been able to convince Saudi Arabia to end the price war,” even though Russia was prepared to “’capitulate’” before OPEC by reducing its own production by five percent.  Or at least that it what appears to be the case from the public statements from Russian energy minister Aleksandr Novakov and other news agency reports.

            Like Russia, Venezuela has been pushing for an end to the price war, but it has not succeeded. President Nicholas Maduro says that he believes that an accord on that is “’close’” but he stresses that this does not mean “’finally agreed upon.’”  Even that was enough to send oil prices up a little, but now OPEC leaders have shot down the idea of an end to the price war.

            As a result, Bashkatova says, Russia’s “oil branch could repeat the events of the end of the 1980s when over the course of several years, the production of oil on the territory of Russia contracted by almost 20 percent, from 568.8 million tons in 1988 to 462 million tons in 1991,” a contraction that was driven by a sharp fall in oil prices.

            Russia’s production has recovered and in 2015, experts say, it stood at 530 million tons, even though prices have again fallen.  Moreover, “under conditions of the budget deficit, the Russian government is seeking means to compensate for the fall in oil prices,” including the imposition of additional taxes and fees on the oil producers.

            The oil lobby will naturally oppose this and warn that “a growing tax burden will lead to a contraction in investment” in the sector. But experts say that “it would be unprofitable for Russia now to cut production.” That would be technically hard to do, would cost the government money and would make Russia lose face with other oil producers.

            According to Eldar Kasayev, an expert at the Union of Oil Producers of Russia, consumers not producers are driving prices and therefore “the suppliers (Russia, Saudi Arabia and Iran) are taking the interests of the purchasers into account, seeking by all possible means to keep their niche in the struggle with each other by offering serious discounts to clients.”

            He adds that “OPEC and Russia will never agree – their goals are too different.” That is all the more so because Saudi Arabia has a major voice in that organization and there are now serious differences between Moscow and Riyadh because of the war in Syria.  Riyadh assumes it has enough resources saved up to last five to seven years of low oil prices.

            The question, especially given the experience of 1988-1991, is whether Russia does.