On Friday, Russia declined to participate in a plan devised by the Saudi-led Organization of the Petroleum Exporting Countries (OPEC) to cut oil production levels, in order to keep oil prices steady in response to the COVID-19 outbreak. The article describes this refusal as the cause of the 10% oil price crash on Friday alone, which was exacerbated by a further 30% crash on Monday.

What reasons has Russia given for their refusal to participate in the OPEC group's plan?


6 Answers 6


Disclaimer: I'm no expert, this answer is based on my modest understanding of the situation at play.

The OPEC decision to cut oil production was meant to keep prices high: if every OPEC country were selling all the oil they could, it would drive prices down since there would be more supply than demand. So if every OPEC country agrees to sell only a limited amount of oil, the global supply matches the global demand and prices stay high. Naturally this works only if all the big oil producing countries play the game: it's tempting for a country to sell more than its agreed quota, especially if the price is high.

Russia is not an official member of OPEC, only an observer. As such, it is free to follow OPEC policies or not, depending on its own interests and strategy. I'm not aware of any official reason why Russia refused to follow this particular recent decision, but it looks like a rational economic decision: if many oil producers (competitors) reduce their supply and the prices are high, why would Russia limit their own supply if they have no obligation to?

"This refusal is cited as the cause of the 10% oil price crash on Friday alone, which was exacerbated by a further 30% crash on Monday."

This is not the full explanation: the Russian refusal led Saudi Arabia to cancel the original plan to reduce production (Guardian), and instead to flood the market with their own oil. This is what drove prices down sharply, especially in the current context of low demand due to the corona virus.

The Saudi surprise strategy could arguably be interpreted as a kind of tactical response against Russia's refusal to play according to OPEC rules: since Russia apparently wants to reap the benefits of high prices without sacrificing their own production, Saudi Arabia is telling them that "two can play this game". The effect is that all the oil producing countries are going to suffer from low prices, but some more than others:

The new strategy adopted by Riyadh appears to target Russia and US shale oil firms, many of which are known to have high production costs and lose money when crude prices fall below $50 a barrel for more than a few months.

Saudi Arabia can produce oil at a lower cost than Russia and US shale oil industry, so they are probably trying to use the opportunity of the Russian refusal to get rid of some competitors: Saudi Arabia can afford to take a temporary economic hit, whereas many shale oil companies may go bankrupt quickly. Strategically, their initiative is certainly also meant to assert their dominance on the oil market.

[Added: a similar analysis by Kevin Drum, found just after posting my answer]

The nickel version of this story is that oil prices started declining in February due to fears of lower demand caused by the coronavirus outbreak. OPEC tried to cut a deal with Russia to reduce output all around, but Russia balked. Saudi Arabia then decided to bring out its big guns, lowering prices immediately by about $7 per barrel and announcing that it would increase output in order to take share away from Russia. At that point the decline turned into a rout, with the price of WTI crude collapsing to $28 as I write this.

  • 12
    "it looks like a rational economic decision"... Not sure if "rational" is the right word given the apparent "prisoner's dilemma" scenario. Maybe "naive" if the rationale truly is to reap the benefit of the OPEC cut without repercussion.
    – xiaomy
    Commented Mar 9, 2020 at 20:57
  • 15
    "Saudi Arabia can afford to take a temporary economic hit, whereas many shale oil companies may go bankrupt quickly." Good luck with that! Sure, the current owner of the mineral rights and pumping kit and current employer of the skilled staff could go bankrupt. But these assets don't magically disappear. Instead they get bought up at the liquidation for pennies on the dollar and rehire the same staff possibly at a lower salary. Thus, the follow-on firm will have a lower cost of production. At worst they save the equipment and restart if/when prices nose back up a bit. Commented Mar 10, 2020 at 1:57
  • 7
    I'm wondering what this is doing to nations that were already hurting, like Venezuela.
    – EvilSnack
    Commented Mar 10, 2020 at 2:05
  • 2
    One has to wonder why the Saudi's haven't done this before, i.e. kill the US shale etc. competition by "flooding the market" as they are doing now... Commented Mar 10, 2020 at 11:41
  • 4
    @Fizz - Because many OPEC countries have less than 80 years of reserves. If they double production, then we're into squeaky-bum territory where reserves will run out within the lifetime of the people making those decisions.
    – Valorum
    Commented Mar 10, 2020 at 21:04

The reason Russia didn’t want to do a production cut is because the US is not participating in this, since the US is also not part of OPEC and actually leaves all the oil production to market forces and in the decisions of private businessmen rather than state-controlled oil like most of OPEC.

While it's true that Russia needs a higher oil price for their oil companies to be profitable, they don't need the oil revenue as much as Saudi needs it - e.g. oil and gas make a higher percentage of Saudi's government revenue, so while Aramco can make a profit at a lower price - they need a higher percentage of that profit to keep their government services functioning than Russia.

Russia has come out and said that they can sustain low prices for 6-10 years, and Saudi Arabia certainly can't do that - those numbers may be bloated for political reasons, but either way it's undeniable that Saudi Arabia needs the oil revenue more than Russia does.

If oil prices did rise then whatever cuts they agreed to would just provide market share to the US which doesn't participate in cuts and that's what Russia really cares about.

The Saudis knows they can't influence the US on this because of the huge difference in power; with Russia it's more even so they try to negotiate there.

All this is based on Russian government's communications. It may not be true - but it sounds plausible.

  • 1
    It's probably just me, but I can't make much sense of this. In what way do Russia's price cuts impact the US? Commented Mar 10, 2020 at 1:22
  • 7
    Lower prices for 6-10 years sounds great.
    – trapper
    Commented Mar 10, 2020 at 1:40
  • 7
    @PresidentJamesMoveonPolk the US shale oil producers have much higher production costs than Russian oil companies (iirc, $50 a barrel vs. $15 a barrel). So the low prices which are still profitable for Russia bring outright losses to the US companies.
    – Spc_555
    Commented Mar 10, 2020 at 8:53
  • 5
    "Russia has come out and said that they can sustain low prices for 6-10 years", I highly doubt that (unless by sustain they mean Venezuela-like scenario). Russia's economy is highly dependent on oil prices and each previous price drop impact the economy and ruble significantly.
    – Dan M.
    Commented Mar 10, 2020 at 13:08
  • 2
    @trapper it sounds great until you start to take minor problems into account, such as our oil dependency and climate change. Commented Mar 10, 2020 at 21:41

The head of Rosneft, Igor Sechin, has long been convinced that the OPEC deal "plays into the hands of the United States" by making its shale oil industry profitable. Allegedly he finally managed to convince Putin to decline the deal in order to drive the US oil producers out of business.

  • 4
    Surely that hurts Russia too in the short-term. The Saudis can play the long game, but the Russian economy is not that resilient?
    – James
    Commented Mar 10, 2020 at 12:04
  • 3
    @James There is a widely supported opinion in Russian press that declining the deal actually hurts Russia the worst. Though it won't be the first time when Russain govt. hurts the economy while trying to show off its geopolitical might. Commented Mar 10, 2020 at 12:09
  • 12
    @James While Saudi Arabia can cut their prices lower than Russia and still make profit, Oil pretty much is their economy; Russia has other options it can fall back on over the long term. Russian Oil exports may be higher than all Saudi exports combined, but their Oil products only account for 51.2% of their exports, while for Saudi Arabia it's about 95%. Short term, Saudi Arabia can drop further, but Russia can maintain it better long-term - you have it backwards. (Figures sourced from: the Observatory of Economic Complexity) Commented Mar 10, 2020 at 15:13
  • 7
    Should be noted that the USA has been the world's largest single oil-producing country since 2018 (a year after SA ended its last price-dumping campaign). The reason Russia is a bigger concern to SA is that the US also uses so much oil that its still not much of a net exporter (although it is now in the black).
    – T.E.D.
    Commented Mar 10, 2020 at 18:06
  • 4
    ...what this implies together with this answer is that the Saudi reaction is likely to do exactly what Putin wants (drive the US shale producers out of business), but history shows they won't be gone for long once prices recover.
    – T.E.D.
    Commented Mar 10, 2020 at 18:10

One other point not mentioned is Syria. With Russia and its allies gaining the upper hand over Saudi supported forces, this could be considered an opening up an economic front in that conflict.

  • 2
    "this could be considered an opening up an economic front in that conflict" - can you please develop this idea? This is particularly useful for those not familiar with the economical side of the Syrian conflict.
    – Alexei
    Commented Mar 11, 2020 at 14:26

To kill off American competition.

US shale-oil fields are very costly to run. So if the oil price falls below certain level, US oil producers are making a loss. If the low prices persist for long enough, some of them might be incited to call it quits and shut the whole thing down.

OPEC was trying to keep prices reasonably high, making profit for everyone - including US. Russian goal was to drive prices slightly below US break-even to try to force them out of business. That was the OPEC-Russian initial disagreement. OPEC, being generally believed to play US-friendly, used this tactics against Russia: they intentionally drove the prices even lower to harm Russia. Saudi Arabia, the leader of OPEC, has the cheapest to run oil fields. They can afford the price war.

So the first 10% crash was Russia fighting USA, the second 30% was OPEC giving Russia taste of their own medicine.

COVID-19 is not responsible for the crash, it merely shrunk the market to the point where crashing the prices became a viable tactics. Had everyone played friendly, the prices would have been maintained.

Nobody actually stated anything, those are just analysis.

  • 1
    Russia selling their oil at market value is Russia fighting the U.S. And then when Saudia Arabia floods the market with oil, it's Russia getting a test of their own medicine? Commented Mar 11, 2020 at 20:12
  • 1
    @dan-klasson The concept of "market value" doesn't apply to a cornered and controlled market. OPEC was created (and is very successful at) driving the price of oil artificially high, way above "market value". The last time we saw market value prices was probably before the 1973 crisis. So yes: Russia wanted to sell their oil at prices closer to "market value" and Saudi Arabia floods the market with oil at even closer to "market value". Russia hits USA, SA hits Russia with same tool. That's textbook "taste of own medicine"
    – Agent_L
    Commented Mar 12, 2020 at 9:53
  • I understood you the first time. My point, however, is that Russia can either withhold selling their oil and miss out on revenue. Or it can continue selling the oil at a reasonable market price. Russia, as most other non-OPEC countries, opted for the latter. Why are you singling out Russia in all of this? They have nothing to do with it. Commented Mar 12, 2020 at 17:45
  • 1
    @dan-klasson I'm not singling out Russia - OP asked about Russia. I'm defending Russia - OP is blaming Russia for the second crash which is 100% OPEC-made.
    – Agent_L
    Commented Mar 12, 2020 at 21:20

My answer challenges the status quo mindset in the West (Russia bad, US & West Europe good), so it might be a bit difficult to wrap your mind around it...

Putin made his thesis on energy - he knows what role energy plays in both geopolitics and overall economically both internally (for Russia) and globally. While the neocons have surrounded Russia militarily during the last 20 years, which is an existential threat, the control structures in the West have intentionally created an "everything bubble", forcing countries like Russia to give up their physical resources with imaginary "valuable" printed paper.

What Putin did (and this is why Russia walked out of the OPEC negotiations) was speed up the pricking of the everything bubble - the low oil prices will force the 40% of the junk bond companies (such as shale oil companies) to go bankrupt, which is one of the many negative vortices in the future total reset of the global financial system.

See also this YouTube channel regarding the future reset of the financial system, and this video explaining why Russia is threatened by the West.

  • 2
    Are shale oil companies financed by junk bonds? Do you have a source? Can you add it to your answer? Commented Mar 11, 2020 at 15:57
  • 2
    There is indeed a very large bubble, but it could be burst by anything, including by a small wasp in the Western Sahara desert. Commented Mar 11, 2020 at 15:57
  • 2
    This answer would do well without a condescending tone. Not everyone here is from "the West" and, regardless of ideology, we need answers supported by evidence. And, unsupported conspiracy theories aside, your answer is surprisingly low on evidence and doesn't address the current situation. Anyway, welcome to politics.se! This is not a good start, but I've seen worse :) Commented Mar 12, 2020 at 4:35
  • Are shale oil companies financed by junk bonds ?! ft.com/content/c048d870-6138-11ea-a6cd-df28cc3c6a68 The evidences are all around us - financialisation of the economy, totally out of control money printing, huge sovereign debts - usdebtclock.org, trading at ridiculous levels. Commented Mar 12, 2020 at 13:30
  • 1
    At the time of writing S&P was only 16% down, as of today it is already in bear market territory - 21%. You WILL get EVEN MORE evidence - in 3 months the broad markets WILL be halved, and the majority of the people will still search for outside enemies to blame ... I am not surprised of the downvoting, I am surprised of the fact that the whole answer was not banned ... Commented Mar 12, 2020 at 13:30

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .