Medvedev Hints at Joining OPEC

Facing a looming budget deficit amid low oil prices, President Dmitry Medvedev indicated for the first time Thursday that Russia was ready to join OPEC and coordinate its exports with the oil cartel.

The apparent reversal from a Kremlin that has long prized Russia's oil independence drew immediate skepticism from industry players who said Medvedev's comments might amount to more talk than action.

Urals blend crude prices have tumbled from an all-time high of about $145 per barrel in July to $40 on Monday. It closed up 9 cents at $42.24 on Thursday, far below the $70 that the government needs to avoid posting a budget deficit next year.

Medvedev, speaking at a conference in the city of Kurgan on Russia's border with Kazakhstan, said Moscow might cut oil output and join OPEC to bolster international oil prices. He also opened the door to participating in the creation of a much-discussed OPEC-style gas cartel.

"We are ready for this, we must defend ourselves — this is our source of income, both oil and gas," Medvedev said, without mentioning any specific organization by name, Interfax reported.

"Protective measures of this sort may involve a reduction of oil production and membership in current organizations of producers and in new organizations if we, as it were, are able to reach the necessary agreements," Medvedev said.

The president stressed that Russia was looking out for its own interests and would not sacrifice them if it joined an oil- or gas-producing organization.

"Let me repeat: What is on the agenda is the source of income for our country, the development of our country. … It's about our national interests. We will do what we think is necessary," he said.

Moscow has long resisted calls by OPEC member countries to coordinate production, instead relishing the clout that independence gave to its energy policy. But the deep slide in oil prices after eight boom years has rattled the Kremlin, which has sometimes coordinated cuts with OPEC in the past.

Valery Nesterov, oil and gas analyst at Troika Dialog, said Medvedev's comments appeared aimed more at showing that Russia was willing to take steps toward stabilizing oil prices than actually joining OPEC.

"There are definite plusses and minuses [in joining OPEC], and the minuses far outweigh the plusses," he said.

He said a plus would be more stability to oil prices, but the minuses would include a loss of independence on its energy policy and an obligation to constantly cut production to support prices that could, in turn, hurt Russia's strategy of expanding its oil business.

"Also, the West is already quite irritated with some of OPEC's actions, and Russia entering the organization could further irritate them," he said.

A year ago, Russia would not even consider joining because its agenda was to move closer to Group of Eight countries like the United States, which views OPEC as an illegal cartel, and the European Union, said Chris Weafer, chief strategist at UralSib. "It would require a sea change in Russia's stance within the last six months to join OPEC," he said.

There could be some political fallout in the West if Russia joined OPEC, "but that has never stopped Russia in the past," said Ronald Smith, chief strategist at Alfa Bank. "Joining OPEC would give Russia a huge leverage over the oil market," he said. Without Russia, OPEC controls just 40 percent market share. Russia joining would increase market share to 52 percent. It is in Russia's interest to work with OPEC to keep prices above the wells."

Weafer linked Medvedev's statement to a meeting to formally create the structure for a gas OPEC later this month. "Russia is very keen to push ahead with the establishment of a gas OPEC and … would want the cooperation of some of the OPEC members for that," he said.

Urals oil trades at a discount to U.S. crude, which soared 11.05 percent to $48.33 in mid afternoon trading in New York after Saudi Arabia announced that it had cut output as promised to OPEC. European benchmark Brent crude was up $5.20 at $47.60. Further propping up prices, the International Energy Agency said global growth in oil demand would resume next year after shrinking in 2008 for the first time since 1983.