Hey OPEC, Russia is Just Not That Into You

Watching OPEC’s continued courtship of Russia has somehow turned into a season of Friends without the laugh track. Just when it seems like Rachel and Ross are going to get together, the audience is left hanging until next season.

New hints of a union emerged this week as OPEC prepared for its meeting Sunday, when it will decide whether to cut oil production further. The not-so-subtle invitation from Iran’s oil minister and recent statement circulating from Deputy Prime Minister Igor Sechin about its commitment to cutting oil deliveries, has fueled speculation of a future with Russia as an OPEC member. Russia, the largest non-OPEC oil producing country in the world, volunteered to cut production in the weeks leading up to December’s special OPEC meeting — a move it has resisted in the past. But analysts pointed out Russia’s overture was largely symbolic since its production was expected to decline anyway due to government policies that have discouraged investment and hurt domestic producers.

Russia and OPEC have become increasingly close in the past five years since the OPEC-Russia Energy Dialogue was started, an annual meeting meant to increase cooperation on oil production and to discuss energy policy, research and ongoing oil market development. OPEC also has Energy Dialogues with the European Union and China.

Russia has attended OPEC conferences for some time, but Sechin’s attendance at September’s meeting was seen as a sign of the country’s increased commitment to the cartel. Sechin’s attendance as well as a meeting in Moscow between Russian and OPEC representatives the following month, spurred hand-wringing among consumer countries like the U.S. and Britain.

And for good reason. Russia has been known to use its massive oil and natural gas reserves as a political weapon. The idea of its inclusion in the gas club, which already accounts for nearly 40 percent of global oil production, evokes all sorts of uneasy thoughts about what it might mean for the world’s economic stability.

The September meeting as well as a special December meeting came and went without Russia formally throwing its hat into the ring. There were hints from President Dmitri Medvedev about joining the organization and proposals for a memorandum of cooperation were submitted by both Russia and OPEC. The proposal is expected to be discussed at Sunday’s OPEC meeting.

Richard Wachman over at the Observer laid out a case for why Russia is eager to form an alliance. I don’t doubt Russia wants an alliance. They just don’t want the commitment of a full-blown relationship.

Here’s why I doubt Russia will ever officially join OPEC. For one, as the WSJ pointed out last year, it is incredibly difficult for Russia to stop producing oil one day and then flip the switch back on.

Logistics aside, even if Russia could easily flip the production switch, it doesn’t want to. The best scenario for Russia is exactly what they have now: A semi-official relationship with OPEC without all the messy commitment.

Just take a look at Russia’s export duty. This is how Russia controls its exports of oil, or at least it’s the most effective way. A higher tax or duty reduces oil exports, while a lower tax encourages exports.

So, if Russia can’t easily cut production on the ground, but says it supports and will “participate” in cuts to oil deliveries, why-oh-why would the country continue to slash its oil export duty? Russia’s foreign minister said Tuesday it will cut its oil export tax from $115.3 to $108-$112 per metric ton from April 1, according to Russian news agency Novosti. This comes after numerous cuts to the tax last year and a change from its bimonthly practice of revising the tax to a monthly review in order to respond more quickly to world oil prices. Russia’s oil export tax was $372.2 per metric ton back in October.

If Russia raises the tax, it means it is serious about cutting output, as the folks over at Street Professor pointed out last year. That has yet to happen and I don’t expect it will any time soon.

Of course, stranger things have happened and Russia could decide to join the cartel. I suspect Russia will continue to string OPEC along, promising closer cooperation, and step back to allow the member countries cut production and take the financial hit.