The increasing economic alignment of Russia and Saudi Arabia was brought clearly into focus by King Salman’s arrival in Russia on 4 October. Ten years after President Vladimir Putin became the first Russian president to visit the kingdom in 2007, a Saudi monarch has at last reciprocated. The visit is scheduled to conclude on 7 October.

Mr Putin’s visit to Saudi Arabia came after Russian firm Lukoil in 2004 became one of the few foreign firms permitted to enter the kingdom’s upstream sector (MEES, 15 March 2004). But its Luksar JV with Saudi Aramco to develop unconventional gas reserves foundered on unattractive economics, and the visit failed to spark further economic links.

Will this time be different? The two countries are cooperating in cutting oil production in a bid to rebalance the market and Crown Prince Muhammad bin Salman, the king’s favored son and arguably the driver of Saudi policy, met with Mr Putin in Moscow in May.

King Salman says he aims to build on this “positive cooperation between the two countries.” “We are confident that there are vast opportunities for expanding and diversifying economic cooperation…[to] push the trade exchange in accordance with the Kingdom Vision 2030.”

BOOSTING TRADE FROM A LOW BASE

Russia’s Industry Minister, Denis Manturov, said on 4 October that bilateral trade in the first half of 2017 had increased 30% year-on-year. However, certainly before this year, bilateral trade had been falling: 2016’s $7.4bn was well down on the previous year’s $12.4bn. The key exports of each country are hydrocarbons and so trade potential is somewhat limited – Saudi Arabia lacks gas for power generation but has traditionally been reticent to turn to imports, preferring to burn liquids instead.

Rather than bilateral trade, the real economic importance of the two countries’ growing ties lies in their joint investment plans. Saudi Arabia’s Public Investment Fund (PIF) agreed in July 2015 to invest $10bn in the Russia Direct Investment Fund (RDIF) over five years (MEES, 8 April 2016). But investments so far have been on a much smaller scale.

JOINT ENERGY PROJECTS

Russia’s Energy Minister Alexander Novak said ahead of King Salman’s visit that $3bn worth of deals primarily focused on the energy sector were expected.

Aramco signed a total of five MoUs with Russian companies to cooperate in a number of fields, but none of the agreements are on a major scale. As expected, Aramco signed an MoU with Russian state-petrochemicals firm Sibur to cooperate on projects and market petrochemicals products in the two countries. The two have been in talks over a joint venture to construct a petrochemicals plant in the kingdom.

An MoU was also signed with Gazprom Neft, the upstream oil arm of the Russian state giant, to collaborate in various areas of R&D including drilling. CEO Alexander Dyukov says “it is of paramount importance that major oil producers coordinate their activities to improve the stability of the global oil and gas market.”

Aramco, PIF and RDIF signed an MoU that Aramco says will facilitate “new business development in the energy value chain, oilfield services and manufacturing, the Ras Al Khair maritime yard development and potential partnerships in the Energy Industrial City.” But these are far from concrete plans.

Another notable MoU was with Lukoil’s trading arm Litasco, which Aramco states will give it access to Russian-owned refineries in the Mediterranean. Aramco is seeking to firm up its access to overseas refineries for Saudi crude, primarily through acquiring equity stakes, and this offers an alternative avenue.

A further MoU was signed between Aramco and state gas firm Gazprom. The two firms will look to “develop a significant business portfolio in international upstream gas, allowing the introduction of new vendors and suppliers to the Kingdom’s market” according to Aramco, which says the MoU covers LNG trade.

Moves towards importing LNG from Russia would mark a major shift, but one that would put Saudi Arabia in line with nearby Kuwait and UAE. Yet with plenty of alternative suppliers closer to home Russia is not the most economic source of LNG.

Mr Novak has raised the possibility of Saudi Arabia investing in Russia’s planned 16.5mn tons/year Arctic LNG project. However, Saudi Aramco CEO Amin Nasser says there are no discussions about Aramco taking a stake at the project.

GEOPOLITICAL DIVISIONS

The nascent warming in bilateral relations is centered on a confluence of interests regarding the need to boost oil prices. But geopolitically, the two countries remain rivals on key issues.

Russia’s key Middle East ally is Saudi Arabia’s perennial rival, Iran. King Salman even made it a point to harangue the Islamic Republic upon arriving in Moscow. “The security and stability of the Gulf region and the Middle East are an absolute necessity for achieving international security and stability. Therefore, Iran must commit to stop interference in the region’s affairs and destabilizing the region.”

Russia and Iran are the key international backers of Syria’s President Assad in the country’s civil war, while Saudi Arabia has been positioned on the other side of the divide providing support to Sunni rebels. The kingdom has made no secret of its desire for the Assad government to be toppled, but this is no longer a viable outcome (MEES, 29 September).

Syria was expected to dominate discussions during King Salman’s visit to Russia, but the kingdom must now be looking at how to minimize its losses. This likely boils down to seeking to minimize Iran’s gains in Syria. With Russia the key interlocutor in Damascus, Saudi Arabia will be hoping to convince Mr Putin to squeeze Tehran out of the picture.

Relations are improving, but Saudi Arabia will still struggle to drive a wedge between Russia and Iran. Russian companies are eagerly eyeing the potential rewards on offer in Iran’s oil and gas sector following the easing of sanctions last year. Russia has six firms qualified to bid for IPC contracts in Iran, more than any other country. And with continued restrictions on dollar trade and hardline rhetoric from US President Trump concerning western IOCs, Russian firms may capitalize.