With little fanfare, Russia and Saudi Arabia have reached an agreement wherein Moscow will invest in the forthcoming IPO of Aramco, the state-owned Saudi energy giant that is about to go public. Early indications are that Russian investors will purchase substantial shares of the 5% of Aramco’s total public value on offer in its IPO.
As reported in Oilprice.com,
“Kirill Dmitriev, CEO of the main Russian sovereign wealth fund, Russian Direct Investment Fund (RDIF), stated in Riyadh that he expects that a Russian and Chinese joint investment fund, working in conjunction with several major Russian banks, will be part of the Aramco IPO. He also indicated that other Russian financial institutions and investors are very interested to take a part of the 5 percent of Aramco being offered in the IPO.
These statements are a significant boost for MBS and his IPO advisors, as the participation of a Russia-China investment fund also shows the interest of Chinese parties in the stakes. While Chinese parties are expected to be willing to hand over tens of billions, Dmitriev’s statements have widened the scope. Russian and Chinese parties will not only involve the expected oil and gas companies, but others as well.
In addition to the Aramco IPO, the warm relationship between Moscow and Riyadh, already displayed in the current production cut agreement between OPEC and non-OPEC, now also reaches a level targeted by Putin and MBS last year: a full-fledged investment relationship focusing on the Russian oil and gas sectors, including LNG. The latter has likely been happening since mid-2017.
Russian sources close to the Kremlin stated to the press that Saudi Aramco, which was already invited before to take part in LNG projects in Russia, will enter into a major investment scheme for Arctic LNG-2. Last year, Saudi Energy Minister Khalid al-Falih said that Aramco was invited to invest in the Novatek-led venture. It could be a slip of the tongue, but al-Falih stated at the same time that [this investment deal] would become a part of Aramco’s gas strategy. With a targeted capacity of 18 million tons per year, the project is expected to be onstream in 2023″.
Beyond the fact that these deals look to create an economically prudent win-win situation for China, Russia and Saudi Arabia, the long term geopolitical implications will be even more far reaching than the short and medium term economic ones. Saudi Arabia’s de-facto strongman ruler, Crown Prince Muhammad bin Salman (MBS), has made it a priority to diversify the Saudi economy away from one entirely reliant of energy exports.
As part of the drive to diversify Saudi’s economic portfolio in preparation for what MBS calls his ‘Vision 2030 project’, Riyadh has also had to diversify its accompanying geopolitical portfolio. US relations with Riyadh are best described as that which values the status quo and is sceptical of any radical changes. The US is all too content in the ongoing cycle of Saudi selling its oil in petrodollars, thus bolstering the international value of the US Dollar, while then re-investing the Dollars in the purchase of overpriced US weapons, the profits from which are then ‘kicked-back’ to Riyadh in the form of other largely predictable US investments (hotels, office towers, etc).
Thus far, the US-Saudi trade model has been able to sustain profitable US weapons sales, while also sustaining high living standards among the Saudi elite, but as 21st century energy markets have proved to be volatile, the young MBS clearly seeks to create a new long-term economic model that is less dependant on the oil markets, but also less dependent on a single wealthy superpower partner, the United States.
Building trust with Russia
As an energy giant outside OPEC that is also a superpower and one with a vastly more diverse economy than Saudi Arabia, Russia is in a ‘kingmaker’ position in respect of controlling global energy prices and Saudi Arabia stood to learn the lesson the hard way. In 2017, when falling oil prices led OPEC to cut production in an attempt to stabilise oil markets, many felt that a Russian Federation battered by sanctions but independent of OPEC, would have opted to flood the market with cheap energy in order to profit from high volume sales against the artificially inflated cost of OPEC oil. Instead, the opposite happened, Russia and OPEC agreed to jointly cut production, resulting in a global stabilisation of energy prices.
While the agreement has been profitable for OPEC’s richest member Saudi Arabia, as well as Russia, Moscow could have foreseeably also profited from taking advantage of an OPEC which in 2017 was far more desperate for market stabilisation than Russia. The Russo-OPEC deal to cut production which in reality was a Russo-Saudi agreement, helped cement an atmosphere of trust between Moscow and Riyadh, in spite of holding historically polar positions in the old Cold War system of Middle Eastern alliances. But after all, as Egypt’s geopolitical position has shifted radically since the Cold War, so too could Russia’s and it did, but not in ways that were widely expected.
Russia remains a steadfast partner of Saudi Arabia’s Syrian opponent while Russia also continues to expand its economic, energy and security partnership with Iran. At the same time, Russia is one of the few countries that has also expanded good ties with Saudi Arabia, Egypt (once a Cold War ally, before turning to the west in the 1980s), Saudi Arabia and also Qatar.
In 2017, Saudi’s King Salman conducted the first ever state visit of a Saudi king to Moscow. The meeting was hailed as a success as Russia and Saudi agreed to multiple joint investment deals which are now coming to light – the Aramco deal being the most strident and immediate example.
Enter the Petroyuan
While China has also traditionally been on the ‘other side’ of old Cold War alignments in the Middle East, Beijing and Riyadh enjoy a quietly happy relationship. MBS will be fully aware that if there is one country able to provide monetary and beyond to logistical/physical investment in Vision 2030, this country is China.
With China and Russia both investing heavily in Saudi Arabia, the stage is being set for a gradual Saudi shift from the Petrodollar to the Petroyuan. Even without Chinese and Russian investment, the Petroyuan is fast becoming a new reality that soon all energy producers and buyers will have to adopt. As China is the world’s largest oil consumer and will soon be the world’s largest overall economy, history dictates that such a country will be able to set the standard for the international trading/reserve currency as economic leaders always have throughout history.
“For China and China’s partners this means that they will be able to set the terms of major international trade deals. For OPEC, it means intensifying discussions with China and China’s long term partners, as opposed to the US and its long term partners. This means that even traditional US allies like Saudi Arabia will begin looking to open new doors with China in preparation for an oil export market that will see banknotes featuring images of Mao Zedong supplant those with images of George Washington.
This will have a knock-on effect in geopolitics, making the richest countries in the Arab world, particularly those in the Gulf Cooperation Council, less attached to US foreign policy making. If China becomes their biggest trading partner and if the trade is conducted in the Petroyuan, it will be China whose geostrategic goals will be able to hold sway in the court of Gulfi Arab monarchies rather than the whims of Washington. Already, Saudi Arabia has begun courting China, likely in order to attract investment for its new megaproject, the creation of a massive new city on the Gulf of Aqaba”.
If Russia and China had ignored Saudi Arabia and likewise, if Saudi Arabia had failed to engage in productive discussions with Moscow and Beijing, the Petrodollar would have arrived at Saudi’s door in an atmosphere of mistrust and caution. Instead, by mutually working on joint investment projects before the grand arrival of the Petroyuan, China and Russia are using soft power incentives to ween Saudi Arabia away from the United States and lure it into a system of economic cooperation that appeals to a country whose economic diversification programme is tailor made for a Sino-Russian multipolar partnership.
China and particularly Russia are not “abandoning” its traditional partners in the region like Syria and Iran, but just as Russia and Turkey have gone from historical rivals to contemporary partners, so too can something similar happen in respect of Saudi Arabia, albeit it at a reduced level due to the comparatively small diplomatic reach of Saudi Arabia vis-a-vis Erdogan’s highly geopolitically active Turkey.
By the time the Petroyuan becomes unavoidable, Saudi Arabia will have already been a recipient of Russian and Chinese investment. Therefore, far from a worrying development, the eventual departure of the Petrodollar from Saudi’s economic way of life, will actually happen harmoniously and perhaps even in a spirit of excitement as it will make Saudi economic diversification all the simpler. Saudi Arabia will no longer have to contend with a US financial/monetary apparatus that is hostile to any attempts among its partners to adopt a more multipolar economic model.
While Saudi Arabia continues to exercise its aggressive foreign policy prerogative, over time, it will become vastly more profitable for Saudi Arabia to cooperate with its ‘eastern’ partners than to engage in the export of terrorism and war in the region in an attempt to exert influence which has been largely unwelcome throughout much of the Arab world.
In this sense, Saudi Arabia could shift from an ambitious regional bully, to a country integrated into the win-win economic schemes that characterise the 21st century’s largest economic interconnectivity initiative, China’s One Belt–One Road. In this sense, the Russian Aramco deal is one small step for joint wealth creation, but one giant lead for multipolarity in the most unexpected of places.