In Stratfor's 2017 Annual Forecast, we mention that as Saudi Arabia prepares for Saudi Aramco's initial public offering in 2018, it will broaden the scope of its Public Investment Fund to adopt riskier investments abroad in a bid to turn it into a true sovereign wealth fund. We also say that Russia faces a prolonged period of economic stagnation and will have to adhere to a conservative budget until oil prices rise meaningfully again. Saudi King Salman's visit to Moscow is a part of both of these narratives: Saudi Arabia and Russia are in vulnerable economic positions and both stand to gain from a closer relationship.
Saudi King Salman just made history as the first-ever Saudi king to visit Russia. Saudi Arabia and Russia aren't on the friendliest of terms, but circumstances have aligned in such a way that each needs the other. King Salman will spend four days in Moscow, meeting with high-ranking Russian officials, including President Vladimir Putin, mainly on energy and the economy. But the two sides will also try to find common ground on other more contentious issues, including Russia's involvement in Middle Eastern conflicts and Saudi Arabia's ties to Muslim regions in Russia.
Saudi Arabia cut ties with the Soviet Union during the Cold War over divisions that have not completely mended. Moscow accuses Saudi Arabia of financing Muslim separatism in Russia in the 1990s, leading to two brutal wars in the Northern Caucasus. So it can hardly be blamed for worrying about Saudi Arabia's current ties to Russia's Muslim republics. The Kremlin is concerned that Muslim separatism could rise again, given that many Muslim regions, including Tatarstan, have vocally criticized the Russian government recently, and that regions, such as Chechnya, have independent, powerful military forces. Both Tatarstan and Chechnya have looked to Saudi Arabia for investment and financing in recent years. Moscow hopes that by opening a line of communication with Saudi Arabia it can curb any covert support to its Muslim regions and avoid instability.
Meanwhile, Russia is a visible and powerful force in many of the Middle Eastern conflicts on which Saudi Arabia is keenly focused, including those in Syria, Yemen and Libya. Russia and Saudi Arabia often find themselves on opposite sides in these conflicts, but sometimes there is utility in being on different sides of the same table. Saudi Arabia's chief adversary, Iran, has a complex relationship with Russia that the Saudi government could be hoping to exploit. Despite Russia's significant collaboration with Iran over the past few years, their interests don't always line up, and Saudi Arabia could use this to its advantage as it works to counter Iranian expansion in the Middle East.
Their differences aside, when it comes to energy and the economy, Russia's and Saudi Arabia's interests are overlapping more than ever. The economic yield of this week's visit is expected to be substantial: State-run energy company Saudi Arabian Oil Co., or Saudi Aramco, and the Russian Direct Investment Fund (RDIF) will reportedly be announcing a $1 billion fund for oil-services projects in Russia, and Saudi Arabia and the RDIF will set up a $1 billion technology fund; the Saudi government is expected to announce a $150 million investment into Eurasia Drilling Company; Saudi Aramco is expected to discuss a potential investment into Novatek's Arctic liquid natural gas project and to talk about a joint venture with Sibur Holding to build a synthetic-rubber manufacturing plant; memorandums of understanding will be signed, such as one planned between Saudi Arabia and Rosatom; and Saudi Arabia Military Industries has already agreed to begin negotiating the potential purchase of a significant number of Russian weapons and military equipment.
As two of the three largest oil producers in the world, Russia and Saudi Arabia are vital to any globally coordinated action on oil markets, and right now their interests align. Energy ministers Khalid al-Falih and Alexander Novak met Oct. 5 to discuss oil markets and the effort to extend a deal to reduce global oil production. Neither minister admitted they were working jointly on an extension deal, but both will certainly be closely monitoring energy markets over the next few months and, if needed, will work together on an extension. A day before the energy meeting, Putin said that he would be open to extending the deal to the end of 2018 but that a decision would not be made until around March of next year. One thing is clear: Neither country can afford for the oil market to crater because of a disorderly exit from the deal. If an extension is not negotiated, Saudi Arabia and Russia need to organize what that exit would look like.
The mutual benefits of the trip attest to the fact that the visit is mostly about Saudi-Russian economic and energy collaboration. Saudi Arabia has the hard cash that Russia needs for the myriad projects it's developing. For its part, Saudi Arabia needs Russian buy-in on its energy plans, which are vital to its broader Vision 2030 economic plan. Collaborative Russian-Saudi projects, such as the synthetic-rubber plant that would be built in Saudi Arabia, help achieve Saudi Arabia's Vision 2030 aims. Any political benefit from the visit will be less immediate, but it's clear that Saudi Arabia and Russia have an interest in building closer ties for both political and economic reasons.