The Russian Direct Investment Fund is creating a $10bn fund to invest in Saudi Arabia’s public offering of shares in the state-owned oil company, Aramco; according to interfax, the fund is also facilitating Chinese investment.
The Saudi state-owned company is planning a 5% sale of the company, with valuations ranging from one to two trillion dollars. London, New York, and Hong Kong competing for Aramco’s public offering, that is, a company with exclusive rights to over 21% of proven global reserves that could raise over $100bn.
With Saudi public debt rising from 1,6% of GDP in 2014 to 13,1% in 2016, the need for diversification is pressing.
However, the attraction of Russian investors also has political significance in its own right. It was a political agreement between Russian and Saudi Arabia that allowed oil producers to curb production and boost prices.
The United States has since 2011 become a net exporter of oil and gas, mainly on the back of new shale technology. However, as shale has a bigger production cost, increased output from Saudi and Russia had a devastating effect on US producers.
In 2017, the two oil producers coordinated action to subdue production and regain profit margins.That coordination was more urgent as Iran was coming back into the global market, that is, a global player with whom the Saudi Kingdom is engaged in at least two proxy-wars.
The closer strategic ties also make sense from a Russian perspective. With a long-term structural challenge of underinvestment in Russia, Saudi capital appears ready to take risks. According to the Financial Times, Russia’s Novatek and Aramco are planning joint exploration projects in the Arctic Circle.
For Russia, Saudi investment addresses the shortfall in liquidity due to international sanctions. For Saudi Arabia, the 5% sale is not only a much-needed boost for public finances but also underpins a strategic partnership that allows OPEC to credibly affect oil and gas supply.