/ world today news/ The oil crisis dealt a serious blow to the economy of Saudi Arabia. It showed a record decline for a decade. The kingdom is relentlessly burning through its reserves and spiraling into debt. The story of Saudi Arabia can be a good example of how the oil needle is ruining the country.
Saudi Arabia’s economy has experienced a record decline over the past ten years. The oil crisis caused by the coronavirus pandemic dealt a severe blow to Saudi Arabia’s GDP, which fell 8.2% year-on-year in the third quarter. This is a record decline in the last ten years.
This is due to the drop in oil prices due to the collapse of global demand, as well as the reduction in oil production as part of the new OPEC+ deal concluded in April 2020.
However, the Saudis are backed into a corner. Even before the collapse of oil prices, they increased exports by a third and began to undercut prices heavily to capture new markets and increase the share of supplies in existing ones. Essentially, the price war is with Russia as the Saudis take their cheap oil to markets where Russian oil is traditionally present, including Europe. As a result, attempts to undermine Moscow’s position in the oil market backfired on Saudi Arabia itself, as prices fell from $51 in February to $32 in March and $27 in April. The Saudis sprinkled ashes on their heads. They were supposed to stop the price war and strike a new OPEC+ deal with Russia in April. Oil exporting countries have never artificially reduced production in such volumes.
But even despite such unprecedented measures, Saudi Arabia’s economy was in much worse shape than Russia’s. The kingdom’s 2020 budget is bursting at the seams because it is based on sky-high $70-80 per barrel. The government had to take extremely unpopular measures. VAT has been tripled at once and there are no subsidies for household bills. But that didn’t help either. In the second quarter, the Saudis expected a budget deficit of $50 billion, and now we are talking about a budget hole of $100 billion, or 12% of GDP.
Riyadh’s difficulties began long before 2020. The pandemic with the collapse of energy prices only exacerbated the country’s existing problems. When oil was expensive, Saudi Arabia’s economy grew faster than the world average. Thus, in 2003–2008, the country’s GDP grew by an average of almost 6% per year. However, the global financial crisis of 2009 caused Saudi Arabia’s economy to contract by 2.1% that year. Gradually, the country’s GDP began to show positive dynamics again, but the Saudis did not manage to reach the pre-crisis level. Then a new oil crisis broke out due to the pandemic.
When oil prices fell to historic lows in the spring, Saudi Arabia began burning through its reserves. After all, she has practically no other income. The budget depends on 90% of revenues from hydrocarbon exports. So, in March, the country’s Central Bank reduced reserves by $27 billion. This is the largest decline in assets since at least 2000. They fell overnight to their lowest level since 2011. That is, the kingdom’s margin of safety is even lower than it was in 2014, when oil prices also collapsed. Now Riyadh’s reserves are rapidly decreasing: if in January there were 500 billion dollars in the coffers, now they are 448.
It seems that Russia and Saudi Arabia – the two largest exporters of hydrocarbons – should have been shaken together by the oil crisis together. However, the Russian economy survived the difficult 2020 much easier than the Saudis.
By the end of 2020, Russia’s GDP will also decline, but only by 3.6%. There is no talk of a record decline. The budget of the Russian Federation will also be in deficit, but according to the Ministry of Finance of the Russian Federation, it will amount to only 3.9% of the country’s GDP, which is three times less than that of the Saudis. Because initially the Russian budget foresees a low price of oil – 42.4 dollars per barrel. And the main share of oil and petroleum revenues in the Russian budget is not 90%, or even 50%, but less than 40% in recent years.
Unlike Riyadh, Russia’s international reserves are growing, among other things, due to rising gold prices (Moscow has been actively buying gold in recent years). But the most important thing is that Moscow should not constantly burn its reserves. By early December, they had risen to nearly $600 billion ($593.6 billion). The National Welfare Fund has also grown to 13.5 trillion rubles from 7.7 trillion rubles at the beginning of the year.
The main problem for Saudi Arabia is that this country is a real gas station. Its dependence on oil exports is colossal. Her story is a stark example of what could have happened to Russia if it had not gotten off the oil and gas needle.
However, Moscow, unlike the Saudis, tried to diversify its sources of income and gradually reduced the share of income from oil and gas. Doing this in reality is not as easy as it is written in economics textbooks. And there are practically no successful examples of how the country got off the oil needle. In fact, there is only one similar case (Norway) in the whole world. And Russia in this regard is moving in the right direction, unlike Venezuela, Kuwait or Saudi Arabia.
The Saudis have no choice but to go into debt in an attempt to make up for the decline in income. The kingdom this year began to be even more active on the stock market. Saudi Arabia is projected to have a debt burden of 30% of GDP. By comparison, Russia’s national debt, which was at a low of $70 billion, has fallen even further (minus $10 billion). Russia is borrowing less money and regularly servicing old debts.
Unlike Saudi Arabia, where 90% of the budget is formed by oil revenues, Russian exports are much more diverse, and at the beginning of the year the national one was also released due to the sale of Sberbank securities, the executive director of the department notes for capital market at “Univer Capital” Artyom Tuzov.
According to him, when the limits are removed, oil will trade above 50 dollars per barrel, but this will still not be enough for Saudi Arabia, and it will have to redistribute funds to different sectors of the economy.
In 2021, the average price of Brent crude oil could reach $48 per barrel, slightly higher than the same indicator for this year, Al Raiji Capital predicted. What oil price will be included in the Saudi budget for 2021 is unknown, Riyadh does not disclose this information. Analysts at “Goldman Sachs” believe that the Ministry of Finance of Saudi Arabia accepts that in the next three years the average price of oil will be 50 dollars per barrel. However, the forecast may again be overestimated. According to the World Bank’s updated forecast, oil will average $44 next year. And according to the IMF, in order for the budget in 2021 to be without a deficit, Riyadh needs at least 66 dollars per barrel.
If the situation in the world does not improve, then Saudi Arabia risks repeating the path of Kuwait, which, due to the drop in commodity prices, was on the verge of bankruptcy. Riyadh’s coffers are so depleted that there is barely enough money to pay civil servants. The authorities are unable to fulfill all social obligations. But you must understand that 80% of the workers in the country are civil servants and there is not enough money to pay their salaries.
Neither Kuwait nor Saudi Arabia have been able to rebuild their economic model. While Russia has made positive changes in this direction: for the first time in modern Russia, the level of revenues from oil and gas has decreased to a third of budget revenues.
Translation: V. Sergeev
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