Putin recently hosted a giant Saudi entourage accompanying King Salman, the first time a Saudi monarch visited Russia in history. Relations between both nations were extremely strained during the cold war, despite the Soviet Union being one of the first countries to establish diplomatic relations with the Kingdom. This visit is truly landmark for the ailing Saudi monarch to reach out to Moscow in this way. But what really lies behind Saudi-Russian rapprochement? In essence, its mainly about oil.
But before I go into that, lets explore some other reasons. Saudi Arabia is increasingly feeling cornered in the Middle East, having backed the wrong side in Syria and lost the regime change project, along with billions of dollars wasted and the ideological defeat of Wahhabism on the battleground. Russia firmly controls events in Syria along with its strategic ally in the region, – Iran. Saudi Arabia has understood this fact. It has also understood that its war against Yemen is leading to nowhere, and that Iran is now one of the prominent powers in the Middle East, – its arch rival. Saudi Arabia thus feels like events in the Middle East have fundamentally shifted against its favour, while the US is not offering enough to allay its insecurities. Russia and Saudi Arabia most likely discussed the situation in Syria, and likely quid pro quos between the two.
To add further troubles to the Kingdom, the Qatar blockade has backfired, with the tiny Kingdom of Qatar still holding out against completely unreasonable Saudi demands. In addition to this, the Kingdom is financially strained, with the need to raise additional funds by selling a public stake in Saudi Aramco, its national oil company and the most valuable company in the entire world. The hope is to sell a 5% stake in the company by way of IPO, raising over a hundred billion dollars in funds. However, the IPO is now looking uncertain, hence the need to fill funding gaps much sooner.
The crucial thing to note about Saudi Arabia is its famed Saudi Vision 2030 plan. This is the brainchild of the Crown Prince, Mohammed bin Salman, set to take over the Kingdom when King Salman eventually dies. This plan is the defining politic of Saudi Arabia, with the hopes of lifting its struggling economy out of overt dependence on oil by kick-starting large infrastructure projects and developing its domestic production industry. Saudi Arabia also needs access to new technologies, – something Russia can offer in the space, nuclear, arms and manufacturing industries. To this end, a $1 billion joint investment fund was set up between both states, essentially allowing both energy exporters to mutually invest their sovereign wealth funds in each other’s economies into various projects.
Earlier in the year, Saudi Arabia signed an enormous MoU with China, signing up to $65 billion worth of deals. Saudi Arabia is increasingly turning towards the Asian market to invest portions of its giant sovereign wealth, as well as diversifying relations in an era of increasingly shakier Western guarantees to its security. And this turn inevitably leads to Moscow. For one, the Saudis are signing to purchase Russian arms including the S400 defence system and setting up a Saudi AK production factory. All up, with the joint investment fund, over $3 billion in deals were signed with Russia, the majority of which were energy investments and arms. This falls in line with its 2030 Vision, to move away from oil dependence, increase domestic industrial production and diversify its defence needs. For Russia, it means expanding its arms clients on traditionally US turf, and inserting a geopolitical presence within the Kingdom, – something it can later use to its advantage as it builds its image of a regional power-broker and mediator. Thus, Russia, along with China, by cementing strong economic ties with Saudi Arabia, can have a more prominent future influence on the Saudis, should they begin to relapse to their destabilising ways again.
Crucial things to watch for
US dollars or not?
Will the deals be denominated in US dollars or Riyals and Roubles? This is key to see if any de-dollarisation lays beneath the deal. It appears that it is not a deal-breaking de-dollarisation deal.
The Saudis have turned to China for cooperation on nuclear energy earlier on in the year, and now they are eyeing Russia. The Saudis clearly want nuclear energy and are looking for potential partners. This will help them diversify off oil with their 2030 Vision, while at the same time, laying the groundwork to challenge Iranian nuclear ambitions. Israel and the US may not be too willing to help the Saudis in the nuclear department, hence why the Saudis are turning to China and Russia instead. This is an interesting development to keep an eye on, especially how it may affect Iran later down the track.
The main meal: Oil
With all these massive outlays and ambitious spending programs, how are the Saudis going to fund it all, as their Aramco IPO falters? Oil of course. Russia also sets to benefit from higher oil prices. And so the main meal of this rapprochement is in joint Russian (non-OPEC) and Saudi (OPEC) oil cooperation to stabilise the oil market and raise prices. Russian and Saudi efforts to work together in the oil market is not new, – they have been working on this before. However, cooperation was set to expire in March 2018, hence the need to renew. And while their mutual market challenger is the US shale industry, which won’t abide by any OPEC-Russia deal, Russia and Saudi Arabia command the majority of market share to be able to swing the prices in their favour, provided both sides abide by their end of the deal. This is ultimately the backbone to the rapprochement. King Salmon’s visit to Russia could be thus read as an important strategic Saudi turn towards Eurasia in a quest to diversify relations and implement its own sovereign interests, while sharing increasingly converging interests with Russia. However, it is too early to brand this as a dramatic shift away from the Petrodollar, or de-dollarisation per se. It doesn’t yet look like a ground-breaking shift away from the US dollar or its American alliance. Despite that, Saudi Arabia is definitively departing away from the old order and ways of the world and Middle East. Times are changing, alliances are shifting and the Saudis don’t want to be the last fools to realise that.