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Putin discusses OPEC+ options with Mohammed bin Zayed to circumvent Western cap on Russian gas prices

The Russian and Emirati presidents discuss ways to circumvent the effects of the $60 per barrel Russian gas price cap imposed by the EU, the G7 and Australia in a telephone conversation
Vladímir Putin Mohamed bin Zayed

AP/ALEXANDER ZEMLIANICHENKO  -   Russian President Vladimir Putin and then Emirati Crown Prince Mohammed bin Zayed al-Nahyan attend the official welcoming ceremony in Abu Dhabi, United Arab Emirates, 15 October 2019

Vladimir Putin held a telephone conversation with the president of the United Arab Emirates on Wednesday "on the occasion of the state holiday, the National Day" of the Gulf country, according to the Kremlin. The celebration took place on 2 December. In fact, the Russian president took the opportunity to discuss with Mohammed bin Zayed the roadmap that OPEC+ should follow in the coming months following the price cap on Russian gas supplied by sea, agreed by the European Union, G7 members and Australia, according to TASS

The Russian and Emirati leaders "stressed the effectiveness of joint work within the framework of OPEC+ in ensuring the stability of the world oil market and noted with satisfaction that all participating states consistently implemented the agreed decisions," the Russian state news agency said. "In this context, they referred to the situation related to attempts by several Western countries, which contradict the principles of world trade, to introduce counter-market restrictions on the cost of Russian crude oil." 

The Saudi- and Russian-led energy cartel, which also includes the United Arab Emirates, faces an uncertain horizon after the approval of the $60 per barrel cap on Russian gas approved by the world's seven richest democracies, EU partners and Canberra with the aim of "reducing the revenue that Russia earns from its oil sales". The move could damage the waterline of an OPEC+ that has been significantly reducing the volume of crude oil production in recent months, maintaining the upward trend in global energy prices.

OPEP
PHOTO/OPEC  -   Joint Technical Committee meeting prior to the 29th OPEC and non-OPEC Ministerial Meeting, 1 June 2022

The effectiveness of this measure, which will take effect from 5 February 2023, is being debated by experts. It is not clear, for the moment, how it might affect the market or what the response of the Organisation of the Petroleum Exporting Countries might be. Neither Russia nor the other members of the group accept the limit, Mamdouh Salameh, an oil economist and consultant to the World Bank, stresses in conversation with Atalayar. "OPEC+ could decide to cut production in retaliation," Salameh adds, a step it has taken recently. 

"The price cap works by allowing access to the maritime services industry, which includes insurance, trade finance, and other key services that support the complex transportation of oil around the world, to suppliers in Coalition countries [those supporting the price cap] for Russian oil only if it is purchased at or below the price cap," explains the US Treasury Department. 

The European Union, G7 members and Australia argue that "the price cap level has been set high enough to maintain a clear economic incentive for Russia to continue selling oil on world markets". "This price is set at a level that Russia has historically accepted, which is above its cost of production and comparable to the prices at which it sold before its war in Ukraine," they say. However, the Kremlin considers that the decision goes against "the principles of world trade".

Rosneft
REUTERS/SERGEI KARPUKHIN  -   Rosneft-owned Suzunskoye oil field, north of the Russian Siberian city of Krasnoyarsk

The $60 per barrel cap will not affect the financing of Russia's so-called 'special military operation'. The Kremlin's war machine on Ukrainian soil will not suffer as a result of the price cap, according to Moscow, which is motivated precisely by this objective. 

The Kremlin is preparing a forceful response. On the one hand, it is considering blocking oil sales to countries that have backed the measure, even if they purchase Russian oil indirectly, through intermediaries, reports the officialist daily Vedomosti. On the other hand, it is considering banning the export of crude oil under contractual clauses that include such price limits. The last option would be to set a maximum discount for Urals oil as opposed to Brent, the benchmark in Russia and Europe respectively. 

Russia and the Emirates united by OPEC+ 

"Russian-Emirati relations are at a high level," stresses the note published by the Kremlin following the telephone conversation between Putin and Mohamed bin Zayed, aka MBZ. "It is important that, despite the difficult international situation, our countries continue to cooperate actively in politics, trade, investment, energy and other areas," adds a statement referring to the "strategic partnership between the Russian Federation and the United Arab Emirates for the prosperity of our friendly nations and for the sake of ensuring stability and security in the Middle East and North Africa".

atalayar-presidente-emiratos-arabes-unidos-mohamed-bin-zayed-viaje-san-petersburgo-presidente.rusia-vladimir-putin
Corte Presidencial de los EAU via REUTERS  -  UAE President Sheikh Mohamed bin Zayed Al-Nahyan meets with Russian President Vladimir Putin in St. Petersburg, Russia, 11 October 2022

The Emirati ruler made his first official visit to Russia in October as head of state of the small Gulf state. MBZ met with Putin to relaunch their trade relations, but above all to consolidate their alliance within OPEC+. The group unanimously decided, barely a month after the meeting between the Russian and Emirati leaders in St. Petersburg, to undertake a production cut of 2 million barrels in order to maintain the upward trend in prices and thus increase its profits. 

But the Emirati ally has not sided with Russia in Ukraine despite common energy interests. In fact, Abu Dhabi has promoted rapprochements with Kiev in the context of the war. On Monday, Emirati Minister of State for Foreign Trade Thani Al Zeyoudi and Ukrainian Economy Minister Yulia Svyrydenko initialled a joint statement on negotiations for a Comprehensive Economic Partnership Agreement (CEPA). If successful, it would be the UAE's first economic partnership agreement with a European country.