Will Saudi Arabia’s Geopolitical Strategy Backfire?

Yves here. Perhaps because the author assumes readers are already familiar with this part of the Saudi story, the kingdom is facing serious budgetary pressures even with oil now over $70 a barrel. Stability has been achieved only by generous payments to the populace at large. Take that away and the legitimacy of the government comes into question. This was the reason for trying to take Aramco public at an unrealistically high price, and for Crown Prince Mohammed bin Salman to be keen about pipe dreams to greatly reduce Riyadh’s dependence on energy revenues in a mere decade.

By Tim Daiss, an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets and geopolitics for Forbes, Platts, Interfax, NewsBase, Rigzone, and the UK-based Independent (newspaper) as well as providing energy markets analysis for subscription newsletters. I’ve also authored geopolitical reports and analysis for Singapore-based consultancy Enerdata. Originally published at OilPrice

Russian Deputy Foreign Minister Mikhail Bogdanov said on Friday that Vladimir Putin is preparing to visit Saudi Arabia. The statement comes after the Russian president received an invitation from Saudi King Salman at an unspecified time, according to reports. Bogdanov added that the visit is pending on Putin’s schedule.

King Salman became the first Saudi monarch to visit Russia last October, meeting Putin in the Kremlin. The disclosure on Friday also comes just months after Saudi Crown Prince Mohammed bin Salmon visited Moscow to attend the opening of the 2018 World Cup. He also meets with Putin during this visit.

While Bogdanov declined to disclose what the talks would be about, it’s apparent that global oil markets will be on the top of the agenda as will developments in Syria (where Moscow and Riyadh are on opposing sides in the ongoing Syrian Civil War), as well as talk about fresh U.S. sanctions on Iran that could remove, according to many estimates, up to 1 million barrels per day of oil from global markets.

It was Russia that came to the aid of Saudi Arabia after the kingdom had for all practical purposes lost its decades long ability to play global oil markets swing producer as U.S. shale oil production revolutionized markets.

As a refresher, in late 2014 the Saudis responded to increased U.S. production by trying, unsuccessfully, to protect their market share by not trimming production as it had often done in the past but opening the output spigots to try to force U.S. shale producers out of business, an allegation the kingdom vehemently denies to this day.

While the plunge in global oil prices that followed pushed nearly all U.S. producers to pump well below their break-even points, forcing them out of business, others survived, and effectively lowered production costs even more, rendering the Saudi attempt ineffective.

By 2015, the Saudis were swimming in debt and were forced to enact politically unpopular austerity measures. They finally turned to unprecedented fund raising through the issuing of international bonds, therefore had little choice but to form a coalition with non-OPEC producers, led by Russia. In essence, what Saudi Arabia did for years in oil markets it could no longer do without Russian help, a geopolitically weakened position for the Saudis.

In early 2016, OPEC and non-OPEC partners started to trim production, eventually reducing OECD oil inventory levels to five-year averages and forcing oil prices back up. The new floor under oil prices has allowed Saudi Arabia to regain much of its oil markets swagger and start to refill coffers drained by the multi-year roil in global oil prices.

A rebound in prices has also allowed Riyadh to put on hold its much hyped IPO for national oil company Aramco. People familiar with the matter told Bloomberg last week that the postponement doesn’t mean a permanent cancellation, but at the end of the day it remains to be seen if the IPO will ever be resuscitated.

Saudis May be Faced with a Hard Decision

Earlier this year, there was talk about a more permanent, 10 or even 20-year, Saudi-Russian oil production agreement, bin Salman told Reuters news agency.

What remains to be seen however, in spite of the successful recent Saudi-Russian agreement to take back control of global oil markets, is whether or not a permanent so-called expanded OPEC, non-OPEC cartel would even work long term. While both countries seem to be putting aside stark differences over Syria (where Russia supports the country’s embattled president Bashar al-Assad, while Saudi Arabia, along with Qatar and Turkey, support the Syrian rebels) it has nonetheless strained relations. Russia and Saudi Arabia also have differences over how to handle Iran’s nuclear power development ambitions.

It’s these very geopolitically dangerous quagmires that could cause the fledgling Saudi-Russian relationship to eventually fall apart or at least become weakened.

The growing friendship between Russia and Saudi Arabia also comes, perhaps ironically, as U.S.-Saudi relations reach a decades-long high-water mark, largely orchestrated by both Washington’s and Riyadh’s distain for Iranian hegemony ambitions in the middle east, including its controversial nuclear development program.

Most agree that it was the Saudis that were in large part instrumental in convincing Trump in May to reimpose sanctions on Iran. However, that job might not have been too difficult since Trump campaigned in 2016 in large part on an anti-Iranian nuclear accord platform. During his 2016 campaign, Trump also ratcheted up tensions with Saudi Arabia over oil production, middle eastern security problems and other issues – all conveniently forgotten now two years later.

Now that Russia and the U.S. are gearing up to enter a new phase in Syria in what media has recently called using their local representatives in a final push to defeat militant groups on opposing sides, the Saudis might have to make a hard decision over its relations with Washington and Moscow.

While it’s not likely that Riyadh would want to willingly damage relations with either side, at the end of the day it may have to nonetheless choose to favor one over the other. If so, history is on the side of the U.S.-Saudi relationship, while historically Russian-Saudi relations have been strained. On the other hand, the Saudis have never been in a position where their influence in global oil markets thus its financial well-being was dependent on another oil producing country – in this case Russia.

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  1. PlutoniumKun

    I think its a bit too kind to describe the Saudi’s as having a ‘strategy’. They are flailing around in the deluded belief that they can impose themselves in a region where that just won’t work anymore. It seems they now see that the Russians are major players and they can’t be driven out – but they are caught now in a bind because while the Russians are happy to make carefully circumscribed deals with anyone, they also have a strong geopolitical interest in keeping Iran stable and relatively strong, and are increasingly friendly with Qatar. So the Saudi’s may realise soon they’ve backed the wrong horse in thinking that an American-Israeli-RSA alliance can destroy Iran and Qatar and anyone else they don’t like.

    The only saving grace for MbS is that in Arabic culture and politics there is no big issue with doing 180 degree turns, nobody considers it much of a humiliation. So if he has learned anything, he’ll cool things down with the Qataris and Iranians and focus on his domestic economy, which is rapidly going downhill. There are plenty of Gulf players around who would be more than happy to step into the House of Sauds shoes if they continue to blunder around.

    1. NotTimothyGeithner

      I’ve long thought the Saudis are threatened by alternative Arab or heavily Muslim governments and are out to knock them out. Turkey might be too distant or still aligned with Europe/NATO to try, but the Sauds are monsters. Their best selling point is the appearance of consistency. Would a cadre of colonels or a democratic style government with oversight from a religious council be as steady as the House of Saud at providing the dole? Israel works great for the House of Saud because its an apartheid state led by Europeans from a different religion.

      Don’t forget exporting their more troublesome subjects. I’ve fancied the idea that the whole point of the Yemen war is to keep much of the army away from Riyadh where a few enterprising colonels could give orders about a national emergency that left so many VIPs dead.

      The biggest problem the House of Saud has is their power derives from control of the oil fields, but with their tribal system and new wealth, there are only about 5 to 7 thousand Saudi tribe males of fighting age who might not be able to bug out. Everyone else is less secure and probably could care less who is calling the shots especially when it would be so easy to make improvements to people’s lives.

      1. Colonel Smithers

        Thank you.

        My father, a former Royal Air Force officer, was employed in KSA from 1992 – 2013, including as doctor to the royal family.

        There are some organisational matters that make a coup difficult.

        Employment (well paid and with good perks) and promotion in the armed forces are dependant on having several generations of what would be considered Saudi citizenship (even though the state did not exist before the 1930s).

        Tribal loyalty from the Sudeiri, Shammar and Najd clans give the Al Sauds protection and divide these three family / regional clans from others in other regions. They are a bit like the Orangemen doing the dirty work for the Anglo-Irish ascendancy.

        The military is balkanised into the Armed Forces (fiefdom of Prince Sultan’s family), Security Forces (fiefdom of Prince Nayef’s family) and National Guard (fiefdom of King Abdullah’s family and staffed by his Djebel Shammar / Al Rashid relatives).

        There are also Pakistani mercenaries on site. French forces can be called in from across the Red Sea in Djibouti, as they were to Mecca in 1979.

  2. The Rev Kev

    It must have been a terrible shock to the Saudis that after decades in the American military shadow, when they went to make their own moves, it was realized that all their vast wealth, their high-tech military weaponry and all their support to Sunni extremists did not automatically translate into regional hegemony. And Bahrain in 2011 had been such a promising start but now tiny Qatar won’t even hand over their 300-400 billion dollar sovereign wealth fund to them. What’s a medieval monarchy to do?

  3. Louis Fyne

    During the oil crisis, it had a population of less than NYC proper. Plenty of $$$$ per person.

    Fast forward, now the native Saudi population = that of Florida. Not so easy to spread the cash around, especially when the Saudi “royal family” is a crazy large number when their own allowances.

      1. Clive

        The amount kept afloat by royal trust funds, quite a few of which are managed out of the U.K., is staggering. I sometimes think half of Central Park West is dependent on KSA family money. They (the extended Royal Family) are given fairly modest stipends though, not lavish but enough to run a nice-ish Manhattan apartment, a maid, maybe a driver and a car. A bit of spending money. Nothing spectacular.

        It’s essentially tarted-up hush money — go away, have a nice life, don’t try to rock the succession boat, keep your head down (or else you might, the awfulness of it, have to go out am so get a job!)

  4. Chauncey Gardiner

    Writer indirectly raises some interesting questions. Seems to me that Riyadh isn’t the only capital where shifts in the historical paradigm should be front and center. Raises a number of derivative issues, which I suspect have been topics of discussion in the DC metro area, in NYC, and in some key foreign capitals and money centers:

    Global monetary system and US dollar hegemony,
    US economic dependence on oil, both domestically and internationally,
    Derivative effects on the US economy… particularly on the MIC, oil companies, and Wall Street,
    Climate change,
    Israeli leverage.
    Rapprochement with Iran… among others.

  5. KnowNothing

    Lots of questions:
    1- Has the US backed the wrong horse? As I recall, Iran has been ‘red-lined’ ever since their leaders got the notion the nation’s oil wealth should be used for the benefit of their own people not Britain or Western investors. For Saudi Arabia on the other hand see Simmons’ Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy; i.e. who has the largest proven oil reserves?
    2- Perhaps it is time for the US to abandon its attempts to control access to Middle Eastern oil as a (not so) peaceful tool for clinging to global economic and military hegemony? (Win the battle, cook the planet?)
    3- For that matter, perhaps it is time for the U.S. to accept the reality of a multi-polar world? (and fire or even imprison the idiots who have fiscally and morally bankrupted the country with their single-minded pursuit of “full spectrum dominance”)
    4- What happens to the role of the US dollar as the preeminent reserve currency if we do accept the reality of a multi-polar world?

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