Putin delivered one of his most important speeches of his career at Sochi this year (picture courtesy of Russia Today)
By Wan Ahmad Fayhsal
The oil market is
entering a bearish phase. It sends shivers down the spine of many oil-producing
countries as they rework their federal budgets, which are massively dependent on
oil and gas revenue. Malaysia is not spared from this and stands to lose
billions of ringgit if crude prices remain as low as $85 USD per barrel.
Is this another
regular jitter in the oil cycle or is something being manufactured to push down
the price of oil? The cue perhaps can be found in the latest speech made by the
embattled Russian premier, Vladimir Putin, in Sochi last month.
Putin's recent
rhetoric at an event organized by the Valdai International Discussion Club – an
annual elite gathering among statesmen, scholars and entrepreneurs to discuss Russia's
role in the international arena – pretty much sums up the tense geopolitical
climate between the Western powers, especially the US and the rising Sino-Russian
alliance.
Noted by many as his
most important speech on international affairs, Putin made a clarion call to the
international community on the need to have a balance of power in
counterweighing Washington’s global influence. Putin believes that
US-centricity and unipolarity have permeated into various international bodies
like UN, WTO, World Bank – bringing with it more disorder than before,
challenging the very foundation of the Wesphatlian international system that
characterizes our modern world.
The rhetoric in truth
is just an icing on the cake for Putin. Earlier this year, he made a few strategic
moves that really ruffled Washington’s feathers. Besides the establishment of
BRICS international bank that many sees as a challenge to US and Euro-led World
Bank and IMF, Putin has also struck a deal with China for a 3-year rouble-yuan
currency swap deal and a 30-year agreement for China to purchase Russia’s
natural gas, both amounting up to $25 billion and $400 billion USD
respectively.
Such moves are definitely
signs of a growing Sino-Russian alliance, aimed at allowing both states to decouple
themselves from an international monetary system that has always been dominated
by the US dollar. Washington views these developments as a significant threat,
knowing very well that the two giants wield massive influence in Eurasian
politics and the world economy.
While maintaining the
traditional physical containment via NATO-led forces around Russia’s backyard,
Obama has now resorted to an economic containment policy by sanctioning Russia,
but with very minimal impact. US-led economic sanctions have backfired, as its
EU allies seem unsupportive of further tightening. Russia – being the single
largest supplier of European energy needs, from gas to coal – will surely have
the last laugh this coming winter if the EU presses ahead with sanctions. They
dare not fight an economic war with Russia when they know they badly need
Russian gas to warm their homes. Putin has now checkmated Obama’s sanctions.
Enter Saudi Petrodollars
All is not lost, as
Washington still has one card to be played that can really devastate Russian
economy: the Petrodollar. Half of Russia's massive federal budget is derived
from the revenue generated by its oil and gas-related activities. According to the
US Energy Information Administration, oil and natural gas sales accounted for
68% of Russia’s total export revenue in 2013. This makes Russia as one of the
largest oil and gas producers in the world, or a petro-state like other OPEC
behemoths.
As its EU allies show
glaring vulnerabilities, the US is in need of a more powerful ally to pry open
the chink on Russia’s economic armor. It is natural for Washington to turn to
their long-time ally - Saudi Arabia - to finish what the EU has failed to do. The
Saudis are the best party to perform this job, as they have proven to be
Washington’s most loyal and able ally in the Middle East, but also pretty much
isolated from Russia’s virulent energy politics.
On top of the surge in
US shale oil and the resuming of Libya's oil production, the real factor that
drives down global oil prices is none other than the move made by the Saudis, who
have ramped up production, despite knowing fully well as an OPEC swing producer
that its production profile wields massive influence in determining the supply
and demand equilibrium, hence the global oil price.
The calls of other
OPEC members for Saudi Arabia to halt its uneconomic moves only fell on deaf
ears. Citing the reason of ‘reclaiming market share’, Riyadh’s incessant oil
production will surely jeopardize and destabilize the oil market further.
This deliberate act is
something that both the US and Saudis can stomach economically. Most
importantly, it represents strong, underlying geopolitical interests aimed to
contain their common petro-state adversaries: Russia and Iran, who dare to
challenge the hegemony of the US dollar in oil trade – better known as the
petrodollar.
As oil production increases,
the US dollar is simultaneously being printed and will find its way to the
international market. As the demand for oil grows, so does the demand for US
dollars. Washington’s hard power grows in tandem with the rise of US dollar as
the sole-preferable, a lockstep currency in oil trading.
At this stage, Russia
has suffered tremendously and the impact is more severe than the imposed
economic sanctions. Just by reducing the price of crude by $12 USD, experts
estimate that Russia will lose $40 billion USD in oil revenue.
This act prompts a
reminder of the same geopolitical strategy used by the US, through the role of
the Saudis, to weaken the then Soviet Union's economy in 1985 by flooding the
market with cheap oil that pushed the price as low as $10 USD per barrel. The
dwindling down of the USSR’s export revenue, which many believe was dependent
on oil exports, was one of the precipitating factors that lead to the collapse
of the Soviet empire in the early 90s.
Putin has every right
to question interventionist US policies, not only in the former Soviet republics
that surround Russia’s borders, but also in the hegemonic role of US dollar in
an international trading system that only serves Washington’s strategic
interests at the expense of other nation’s growth and prosperity. Indeed, this
move by Washington and Riyadh is another act to preserve the present world order,
which has been largely shaped by the unipolar policies of the US as the main
victor of World War II.
The author is a Fellow at Putra Business School, Malaysia.
(this article was published by The Malaysian Reserve, 12th November 2014)
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