There was likely never much hope in the Kremlin that OPEC would ride to Russia’s economic rescue by slashing oil production quotas in order to drive prices higher, and whatever was left was dashed Friday morning.
The cartel announced that there would be no change in the production levels of its member states, meaning that OPEC will continue to pour oil into a global market already swimming in it.
The decision on the part of the Organization of Petroleum Exporting Countries is a complex one, and likely had little to do with Russia. It is a combination of a long-term bet that high-cost shale oil extraction operations in the U.S. and elsewhere are not as well positioned to weather a long bout of low prices as the mostly low-cost OPEC members are, a desire to maintain market share against an eventual rebound in prices and recognition that OPEC’s influence over the oil markets, while still formidable, isn’t what it used to be.
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For Russia, which rode $100-a-barrel oil out of a recession and then used it to mask its other economic failings, such as the failure to diversify its economy, the OPEC announcement portends a long period of greatly reduced income at a time when the government of President Vladimir Putin is greatly increasing its investment in the military.
While Russia may have enjoyed some good news, such as it is, of late, the economy isn't out of the woods. The World Bank recently predicted that, largely on the basis of stronger oil prices, the Russian economy might being growing again before the end of 2016, if only at an anemic rate of 0.7 percent. However, that will follow a brutal 2015 in which GDP is projected to plummet by 2.7 percent.
"The most acute phase of the crisis is yet to come," former finance minister Alexei Kudrin told Interfax, adding that eventual recovery is far from certain. "Beyond that, the situation may stabilize and the decline come to an end."
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In an interview with government-controlled news agency Russia Today, Energy Minister Alexander Novak said that he doesn’t view the ongoing struggle between OPEC and new oil producers as a price war.
“There is no price war,” Novak said. “There is a market, there is demand and there is supply. That’s what determines the price. We shouldn’t forget about market cycles, either. Prices dropped because the large inflow of investment into the industry generated a large number of expensive projects while the prices were still high, and that drove up production to the level to where supply exceeded demand.”
Novak said that Russian companies are continuing to invest in long-term shale oil production capacity and that the country has substantial reserves of such oil. But he said that Russian producers generally regard shale oil as a resource to be tapped in the future.
Novak met privately with OPEC officials in advance of this week’s meeting, but told the Interfax news agency that the meeting was “simply an exchange of information.”
He added, “At the meetings, it is not planned to agree on production volumes.”
After the OPEC decision was announced oil prices were down slightly in afternoon trading, and shares in various Russian firms tied closely to the extraction business, including oil giant Rosneft, were also trading lower.
The Russian ruble, however, which has regained much of its value after a massive plunge last year, was up slightly in afternoon trading.
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