By Denis Korkodinov
A sharp drop in oil prices was a highly anticipated process, given the severance of friendly relations between Moscow and Riyadh. Nevertheless, coronavirus in its economic consequences turned out to be much more dangerous than the termination of the OPEC + deal. The economies of Russia and Saudi Arabia, as well as the whole world, as a whole, were not prepared for a pandemic.
According to a number of experts, approximately 14 million barrels are daily delivered from the total volume of guaranteed oil supplies guaranteed for April 2020 over the course of 14 days on the market, which can lead to an even greater collapse in prices, which Russia and Saudi Arabia are trying to prepare for. This will require a substantial revision of state budgets in order to reduce expenditure items, which in the context of a coronavirus pandemic is an almost impossible task.
It is worth noting that Moscow, even before leaving OPEC +, predicted a reduction in oil revenues. However, according to Russian analysts, a price collapse should have occurred at least 2-3 years later. And Russia hoped to cope with the consequences of the economic crisis using the National Wealth Fund. However, the pandemic was a fatal blow for the entire country and for Russia, in particular, as a result of which their economic losses exceeded the total damage from the First and Second World Wars in scale. This has led to a critical decline in oil demand.
Given these conditions, Riyadh decided to reduce its government spending by $ 13.2 billion, which is about 5 percent of all kingdom spending planned for 2020. Russia acted in a similar way, reducing its spending on education, culture, foreign relations, and the development of technical innovations. As a result, Moscow managed to free about $ 10 billion, which were aimed at compensating for the costs associated with the collapse of the oil market.
In addition, like Riyadh, Moscow was forced to use its financial reserves in order to overcome the negative phenomena in the state economy. Nevertheless, against the background of COVID-19, both countries, as well as the entire international community, need to recover additional funds in an extremely short time to avoid absolute destruction. Given the limited oil resources, it is possible that governments will be forced to launch a printing press in order to print at least $ 150-230 trillion. It is this amount of money, according to analysts, that is necessary in order to restore the global economy as a result of COVID-19.
Currently, Riyadh is in urgent need to establish an oil price of at least $ 91 per barrel as early as 2020. This will balance demand and avoid oversaturation of the oil market with cheap raw materials. In addition, a similar anti-crisis measure by the Saudi monarchy can lead to an increase in the state budget revenues by about 3-4 percent of GDP annually. However, reducing the cost of a barrel to $ 30 or lower can lead to irreversible consequences in the economy of the kingdom, which will have disastrous consequences for the Al-Saudi dynasty in the next 2-3 years.
Last week there was another decline in oil prices, which was caused by the spread of coronavirus. In addition, the self-isolation of Russian cities and their residents, at least until April 5, 2020, may lead to a new collapse in the oil market. At the moment, the cost of a barrel of Brent crude oil has reached a critical point, reaching about $ 26 per barrel, while US oil fell in price to about $ 23. Experts predict that in the near future the total cost of a barrel in the world market will drop to $ 18-20, which will in fact result in collapse for many exporting countries.
For Saudi Arabia, this is fraught with the fact that in the conditions of a deep economic crisis, it does not have any reserves to implement the ambitious project of Crown Prince Mohammed bin Salman by 2030 to ensure the doubling of the country’s GDP.
In turn, according to the Minister of Finance of Russia Anton Siluanov, Moscow risks losing about $ 40 billion in 2020, resulting in an urgent need for additional sources of financing in the country.
It is worth noting that this is only the direct costs of Riyadh and Moscow, which suffered from the collapse of the oil market. The damage to both countries as a result of the COVID-19 pandemic remains to be assessed. However, already now many experts determine the approximate economic losses from the coronavirus at $ 150-230 trillion, about 10 percent of which are in Russia and Saudi Arabia.
(The views expressed in this article belong only to the author and do not necessarily reflect the views of World Geostrategic Insights).