OPEC & RUSSIAN DOMESTIC POLITICS

Russia with its oil output at record levels and state reserve running low, Russia has little to lose and much to gain from agreeing a deal with the OPEC cartel on limiting production.

Ahead of an OPEC meeting set for tomorrow November 30 in Vienna, Russia a non OPEC member is pushing for an agreement to be finally reached after so much aggravation.

Russia is the biggest oil producers in the world (11MM barrels per day) barely ahead of Saudi Arabia (10.7MM) and the United States (8.8MM), and has paid dearly for the collapse in prices over two years of recession, compounded by the Western sanctions.

While OPEC members argue about a reduction in production quotas for its members, President Vladimir Putin said last week that Russia was ready to "freeze production at the level it is at currently". Energy Minister Alexander Novak said Thursday that OPEC had asked oil-producing countries that are not members of the cartel to cut production by 500,000 barrels a day.

A freeze requires little to no effort on the part of Russian oil companies while Russia like most of the producing countries would benefit immensely from any deal that can help bump oil prices up a few dollars.

The relative rebound in oil prices since winter shows the market is extremely sensitive to any step -- even without a concrete result -- taken in conjunction by the exporter countries that up to now have competed for market shares and produced more and more oil.

Production in Russia has grown by around 50 percent since 2000 thanks to the relaunch of Soviet-era oilfields pushed by the government through Gazprom and Lukoil.

In recent years, this growth has been sustained by new horizontal drilling methods that prolonged the life of certain oilfields, particularly in western Siberia, as well as by the launch of new projects that were approved when the oil price was higher.

Despite Western sanctions on certain types of technology transfers and business partnerships, Russian companies have managed to maintain comfortable sales and are drilling actively.

After Russia and Saudi Arabia in February began to discuss limiting production, Gazprom, Rosneft and Lukoil increased drilling to produce more.

Everyone is preparing for a “freeze” or a reduction in output and wants to be position for the lesser impact on level of production. Oil and gas earnings made up half of the government's budget revenues during the years of high prices.

The fall in prices did challenge the Russian economy and force the government to reduce expenditures and push the budget deficit to almost four percent of GDP this year. Managing an economy at $50 a barrel compared to $100 is more challenging but Vladimir Putin’s government was able to manage fairly well.

The 2017 budget, which is now being debated by the Parliament, includes new spending cuts on education and even defense so everyone is looking at Vienna OPEC decision with hope for an economic recovery next year.

In the meantime, both the Government budget and the Gazprom balance sheet and projections are all using $40 a barrel as the reference. If OPEC put his acts together as everybody hope and expects a higher price of oil would help Mr. Putin in 2018, an election year and will allow him to spend more to rally his partisans.