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Putin’s Powerplay Could Jeopardize The OPEC Deal

In classic Putin style, the Russian president is now trying to push through reforms that would weaken the future presidency at the expense of the future prime ministerial post in a move that led to the surprise resignation this week of the entire government and the plucking from obscurity of a new prime minister that no one’s ever heard of.

Some fear the sweeping resignation is a bloodless purge of anyone who might have stood in Putin’s way as he seeks (again) to hold on to ultimate power by a trick of the presidential-versus-prime minister pen.

Still, others fear this massive shakeup--which included the resignation of the Russian energy minister--could have implications for the world’s most powerful oil cartel, OPEC, and its market-stabilizing oil production cuts.

What Would An Energy Minister Shakeup Mean?

President Putin has long supported the deal with OPEC, which should lend support to the continued cooperation with OPEC. As the ultimate decision-maker in Moscow, Putin’s position is the one that matters and this has not changed, whoever joins the new government as energy minister.

As for Novak, he will remain in office until the new government is in place, despite his resignation, and some suspect that Alexander Novak will retain his position under the new Prime Minister, Mikhail Mishustin.

“Putin believes the OPEC+ deal is positive for the Russian economy and Novak can count on retaining his position in the Russian political system,” said an analyst from the Russian National Energy Security Fund. “As a minimum, he would remain Energy Minister,” Igor Yushkov added.

Rosneft’s Anti-OPEC Platform Could Grow

Yushkov said, however, that outgoing PM Dmitry Medvedev and the head of Rosneft, Igor Sechin, are not on the best of terms. And with Medvedev gone from the PM post, one could reasonably expect that Sechin’s influence in the Kremlin will increase, at least temporarily. Sechin is a rather outspoken opponent of the OPEC+ cuts, although he has so far towed the party line.

The Medvedev government resigned unexpectedly this Wednesday after President Putin said he will seek to make amendments to the Russian constitution. His proposals include giving more powers to the Parliament.

In an address to the Russian Parliament earlier on Wednesday, Putin said that he wants to put the proposed constitutional amendments to a nationwide vote because the amendments would change the balance of powers and the political system, as well as the executive, legislative, and judiciary branches in Russia.

There is plenty of fertile ground for speculation. For now, Russia and OPEC’s relationship has been mutually beneficial, although some in OPEC rightly worry that Russia’s say in matters concerning oil supply control is too big for comfort and that Russia and Saudi Arabia can practically make decisions on OPEC policies on their own as two of the three biggest oil producers globally.

What’s worse for OPEC members is that because of its size as an oil producer, Russia can single-handedly make or break oil production agreements. So the worry that a serious shift in power in Russia could upset OPEC is a legitimate one. Some have even called Russia the new de facto leader of the oil cartel.

And the price moves since the first OPEC+ agreement closed in 2016 support this view.

Russia, as represented by Alexander Novak, has been notoriously guarded in making any production cut pledges until the last minute. Novak has also publicly questioned the need for continued cuts several times, causing prices to slump immediately. This makes it clear that OPEC needs Russia—and definitely more than Russia needs OPEC.

This is because OPEC members have a greater need for higher oil prices than Russia does.

Russia’s oil export revenues account for a solid portion of its budget revenues, at 40 percent for 2019, according to S&P Global Platts. But the country has developed a commendable habit of budgeting much lower than actual oil prices since the 2014 crisis. In other words, Russia is more resilient to price moves than most of its OPEC partners.

In this context, if Novak continues as an Energy Minister, which is the most likely scenario, OPEC could continue capping production safe in the knowledge that Russia will too, although Russia—unlike OPEC—has not been particularly strict about sticking to its production quotas.

On the other hand, if Mishustin for some reason decides to appoint a new top man in Russian energy a person close to Rosneft’s Sechin, there might be trouble for OPEC. Sechin, besides being against the production cuts, is quite a powerful person in Russian politics. Maybe powerful enough to change Putin’s mind about the cuts.

This is a much less likely scenario than Novak retaining his post. After all, the Prime Minister is the one who formally appoints the new ministers, but it is the President who, informally, approves the appointments before they are made. Talk is that most of the members of the new government will be Putin’s choices, with just a few that Mishustin will select himself. With Novak’s track record so far, he will almost certainly continue in the new government, and there will be little or no change to Moscow’s energy policies.

By Irina Slav for Oilprice.com, 01.22.2020


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