Saudi Arabia is the largest loser in the oil conflict
US, WASHINGTON (ORDO NEWS) — The threat that followed the collapse of the OPEC + agreement between Saudi Arabia and Russia was not the first of its kind. On November 4, 2016, the kingdom threatened to lower oil prices, which forced Moscow to coordinate its policy with him in order to prevent a state budget deficit that is 50% dependent on energy exports (oil and gas).
As a result, the countries concluded an agreement in the OPEC + format, which they complied with from the moment of signing at the end of 2016 until the beginning of March of this year.
The OPEC + Agreement embodied an unprecedented improvement in relations between Saudi Arabia and Russia, culminating in the first visit of the Saudi king to Russia in October 2017. During this visit, the parties discussed huge arms sales contracts, Saudi investments in the Russian economy and support for Moscow’s efforts in Syria.
It is likely that these promises became one of the main motives for the adoption of this agreement by Moscow. In general, with a few exceptions, they were not fulfilled, probably because Saudi Arabia does not want to anger its strategic ally, the United States.
The OPEC + agreement collapsed overnight when Russia rejected a proposal to further reduce oil production in order to stop the fall in prices amid falling demand and the coronavirus epidemic. The Kingdom announced an increase in its daily production to 12.3 million barrels per day, after which Saudi Aramco announced an increase in production capacity to 13 million barrels per day. This led to a drop in oil prices below $ 30 per barrel.
At the same time, the UAE announced its readiness to supply four million barrels per day to the oil market, which contributed to an even greater reduction in oil prices, to a record level over the past 20 years.
Of course, such energy prices have a negative impact on all countries exporting black gold, but most often experts are trying to assess the losses of Saudi Arabia and Russia as the main participants in the current crisis. Which of them will lose more?
According to experts, Russia loses from 100 to 150 million dollars a day at a price of $ 40 per barrel of oil, and it needs a price of $ 50 for a balanced state budget, as well as the support of millions of unemployed Russians.
Since at present the country cannot borrow funds from abroad due to US sanctions, it is likely that it will not be able to compensate for the losses caused by lower prices. This will cause a slowdown in economic growth from expected 2% to zero this year. Maybe a recession will begin.
As a result, the Russian ruble collapsed due to the collapse of local stock markets. The value of the currency approached the level of the crisis in 2014 and exceeded 75 rubles per dollar, while the financial stress index on the Russian market exceeded the critical mark of 2.5 points.
According to Forbes magazine, the losses of Russian businessmen and wealthy citizens caused by a sharp drop in the ruble exchange rate and a decrease in the share of Russian companies in world markets exceeded $ 8.8 billion.
Despite future large losses for the Russian economy, it depends on income from energy sales only by 50% compared with the Saudi economy, where this figure is much higher.
According to the Arab summary report, oil revenues accounted for 92.6% of all government revenue in 2000. In 2018, they still account for almost two-thirds of these revenues, despite a significant drop in oil prices since 2014.
To compensate for the reduction in income, the kingdom had to introduce more taxes, as a result of which the share of tax revenues to the state budget increased from 4.9% in 2000 to more than 30% in 2018.
The kingdom recorded a budget surplus of about 4.4% in 2000, which increased to more than 18% in 2005, but a deficit later became the norm for the budget. It reached a maximum in 2015, amounting to more than 103%, and then fell to 82.9%, 63.9%, 33.1% in 2016, 2017, 2018, respectively, after raising a number of taxes, fuel prices and state service charges.
In addition, fuel still accounts for most of Saudi exports. In 2000, the indicator was about 92.1%, and in 2017, it fell to almost 80%. According to estimates, lower oil prices cost Saudi Arabia $ 400 million a day, or about 150 billion a year.
The nature of the Saudi economy and the inability of the state to diversify its production, despite targeted reforms (10 development steps between 1970-2019), led to the fact that the country cannot resist the depletion of natural resources and develop competitiveness in the international arena. These are necessary tools to achieve economic stability in the medium and long term, and therefore, the absence of oil revenues means the use of state reserves and external borrowing.
Saudi Arabia’s foreign exchange assets have been continuously declining. They decreased from 737 billion in August 2014 to 529 billion at the end of 2016 and $ 493 billion in April 2017. At the end of 2019, they increased to $ 503 billion. The overall decline in assets is due to the decision of the government to cover the huge budget deficit caused by the fall in oil prices since 2014.
In other words, Saudi Arabia’s foreign exchange reserves have declined by more than 30% over the past five years, although the price of oil has not dropped below $ 45 over this period. If prices drop below $ 30, we can expect a complete depletion of Saudi foreign exchange reserves over the next five years.
The Kingdom continues to issue bonds since the beginning of 2019, leading the Gulf market with a value of $ 30.81 billion, or 47% of the total value of bonds of countries in the subregion.
The state budget of Saudi Arabia also finances the salaries of 2.7 million civil servants. Budgeted expenditures are the main driver of economic activity, the pace of which has declined due to past reforms. There is no doubt that an increase in the budget deficit as a result of an even greater drop in oil prices will entail severe saving measures, as well as a burden on citizens.
Christine Smith Divan of the Gulf Arab Institute (Washington) said: “It is highly expected to observe arrests in the kingdom amid the failure of negotiations with Russia.”
According to her, the Crown Prince understands that the economic situation will worsen, so he wants to ensure stability against new challenges.
Saudi Arabia is an example of a rentier state that is vulnerable to external shocks.
This means that lower oil prices will entail a serious economic crisis in the kingdom, the main burden of which will be borne by ordinary Saudis, as the country will not be able to fulfill external obligations, whether due to the war in Yemen or the purchase of American weapons in light of the strengthening enmity with the Iranian regime.
The Crown Prince of Saudi Arabia involved the kingdom in a suicidal duel with a Russian bear. There is no doubt that both sides will lose, but the losses of Saudi Arabia will be greater and the people will pay the price of the current conflict. It is unlikely that one can count on the support of the UAE, since it is likely that they will encounter other problems.
In my opinion, the normalization of relations with Qatar, accelerating the settlement in Yemen and changing the policy of Saudi Arabia in favor of strategic interests, rather than personal whims, can serve a Saudi citizen for the benefit of the crisis. Will the Saudi authorities be able to agree with this and put the interests of their people in the first place?
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The article is written and prepared by our foreign editors from different countries around the world – material edited and published by Ordo News staff in our US newsroom press.
