Russia resurgent: Oil sees a turnaround in 2016

The year started poorly for Russia, but it has certainly ended well.

In January, the price of oil was moldering — below $30/b on occasion. Given Russia’s dependence on oil and gas revenue, the budgetary outlook was bleak. Hillary Clinton was going to be elected as the next president of the United States. Sanctions against Russia, imposed over its role in the Ukraine conflict, would continue, and the EU would further frustrate Russian plans for major new gas pipelines and its goal of a total Ukrainian bypass.

In addition, Russia’s Syrian ally, President Bashar al-Assad, was under severe pressure not just from democratic rebels, but radical Islamist forces, a particular concern for Russia given its own problems in Chechnya.

What a difference 12 months can make.

In the US, the election of Donald Trump as president and his nomination of ExxonMobil CEO Rex Tillerson as secretary of state could not be better for Moscow. Tillerson is a noted critic of sanctions against Russia, where ExxonMobil has substantial oil interests, arguing that they hurt not so much the target country, but US companies trying to do business there.

If nominated, he is expected to recommend their removal. Trump has also made indications that he will seek a much more cooperative relationship with Russian President Vladimir Putin and, if the CIA is to be believed, Russia appears to have had a direct hand in Trump’s election.

In Syria, a key bastion of the rebels, eastern Aleppo, finally fell in December, after a bloody and lengthy conflict which has caused huge civilian suffering. The victory for the Assad regime, which the UN has confirmed has used chemical weapons against opposition forces and civilians, could not have been achieved without Russian airpower and other assistance.

The message is not so much about Moscow’s disregard for human rights, but that Russia is both capable of and willing to defend its allies, while the West stands by impotently. Although this does not resolve the Syrian conflict by any means, the message has become fact.

The EU, meanwhile, looks weak and divided. The UK, one of its largest economies, has voted to leave, while there have been a rash of votes for populist candidates across Europe, suggesting that devotion to the European ideal is somewhat less heartfelt at ground level than in the upper echelons of Brussels.

Negotiations with the UK on its exit are likely to consume the EU’s and London’s attention for years, with potential long-term economic damage for both sides. Despite the vote of no-confidence in the EU from Britain, there appears to be no urgency in Brussels to consider reform.

Russia has patched up its relations with Turkey and construction of its southern gas pipeline TurkStream is expected to start in 2017.

But Russia’s real problems lie in its budget and its over-arching dependence on oil and gas revenues.

Even here there is good news. A historic deal has been reached between OPEC and non-OPEC producers to cut 1.756 million b/d of oil from the market. Moscow played a crucial role by offering to participate itself, and in shepherding other non-OPEC members to the table. Russia will contribute cuts of 300,000 b/d, and the hope is that these output reductions will boost the price of oil and with it Russian tax receipts.

It’s a bold venture, but fighting wars in the Middle East does not come cheap.

Moscow must hope that the deal is implemented and has a lasting impact on the supply/demand balance in the oil market. The oil price must rise sufficiently to more than reimburse the loss of volume. As of December 16, Dated Brent was at $53.93/b, just over $10/b higher than its year to date average.

Happy Christmas, Mr. President.