Russia looks likely to cooperate with OPEC as oil prices continue to fall

Yesterday I spoke about the troubles plunging oil prices are having on many nations with one in particular being Saudi Arabia, the leader of OPEC, whose government is finding it difficult to source income to alleviate the losses it has been bleeding from such a dramatic drop that some investors are getting worried.

Going one step further we know Russia is another big player in the oil market who holds a significant amount of reserves but at present finds itself in a tight spot not only by a lower oil price but also the fact that it's been sanctioned by the US and the European Union over its annexation of Crimea in 2014 after a number of political turning points raised tensions between Russia and the West renewing fears of a second "Cold War"scenario playing itself out.

However as we fast forward a year and a half later the economic implications of sanctions imposed on Russia by the West have now taken their course and we see an economy struggling to find a cosy place to cushion a hard landing. The latest measures announced by finance minister Anton Siluanov envisions government departments cutting a further 10% off spending after the same figure was shaved off fiscal spending last year alone.  

The dramatic fall in oil prices leaves Russian president Vladimir Putin in a difficult position with the likelihood of his government cooperating with OPEC looking seemingly possible given the severity of the oil glut that won't stop.

Russia on war footing leaves finance minister to scrape by: TV interview @olyatanas @AndrianovaAnna @ryanchilcote https://t.co/2HvRaQirWj

— Emerging Markets (@BloombergEM) January 14, 2016

 In September last year Bloomberg published an article (Why Vladimir Putin Won't Be Helping OPEC Cut Production) stating reasons for Russia's lack of interest in OPEC after Venezuela suggested that the Kremlin join in cooperation with the oil body to bring about a significant halt to production.

Some of the reasons given for the reluctance to work with OPEC pertained to issues surrounding Russia's inability to turn off its oil supplies due to differing geographical climates making it difficult to work in tandem with proposed production cuts as well as Saudi Arabia's strong ties with the US.

The article went further to say that the threshold needed for Russian producers to break even sat at $60 per barrel, a number which wasn't too far off from the prevailing price of $47 at the time of publication. The number also represented a much lower level than that of higher cost producers within OPEC who were seeking a price of $100 and upwards to put their head above water.

However the price has now fallen below $30, a 50% decline in price from September last year which does indicate the seriousness with which the Russian government needs to treat such a drop as it will require them to prioritise a sector of the economy that plays an important role and could possibly be the derail economic activity if a sustainable solution is not found soon.

This places Russia in trying times where it will need to make a tough choice of exerting more short term pain on its citizen who have already felt immense pressure from economic sanctions. It certainly erodes the confidence in voters that previously thought it wise to place Putin & Co in power but ultimately questions the instability created from a government whose policies incite defiance of those world powers who hold greater rank in the order of things.