Why Isn't Russia a Part of OPEC?

By Rich Smith Markets Fool.com

OPEC, the Organization of the Petroleum Exporting Countries, has a big hole in its membership roll. Although it counts six of the top 10 oil-producing nations in the world as member-countries, OPEC does not include the world's No. 1 biggest oil producer: Russia.

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Why is that? Because OPEC's interests and Russia's have never aligned -- and probably never will.

Russia may be a petro-state, but it doesn't want to join the petro-state club. Image source: Getty Images.

Absent at the foundation

To understand why Russia isn't part of OPEC, you need to remember what OPEC is, and how it began. OPEC emerged just 15 years after the end of World War II, when Iran, Iraq, Kuwait, and Saudi Arabia -- countries that not long before had been colonies of the warring Western powers -- joined with Venezuela to form an oil cartel. Newly independent, these nations banded together in 1960 to form an organization that would help them to secure "permanent sovereignty over their natural resources in the interest of their national development."

Thus, OPEC's founding objective was to free its members from the influence of developed nations -- of which Russia, in the form of the Soviet Union at the time -- was one. OPEC invited "any country with a substantial net export of crude petroleum, which has fundamentally similar interests to those of Member Countries" to join OPEC. But even if Russia exported "substantial" quantities of crude (and it did), Russia's interests were not "fundamentally similar" to those of OPEC's founding members.

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This all explains why Russia did not join OPEC at its formation in 1960. But why is Russia still not a member of OPEC today?

RSVP ... pretty please?

After all, while it didn't initially invite Russia to join, OPEC has asked Russia to become a member several times since. For example, in 2013, Saudi Arabia was reported to have urged Russia to join OPEC.Russia declined then, and just a few months later, oil prices fell off a cliff.

Hoping to stop the bleeding, OPEC again invited Russia to join in 2015, as one can infer from a news report from TASS. At the time, TASS quoted Rosneft CEO Igor Sechin demurring: "The Russian government ... agrees to observer status in OPEC but cannot accede as a full-time member."

Sechin explained that in contrast to OPEC's other member countries, Russia's oil industry is largely privatized. Technically at least, these oil companies aren't under Russia's complete control, and so the Russian government cannot just ratchet oil production up and down as directed to by the outcome of an OPEC meeting.

That may seem a specious argument, given that Russia holds a majority stake in Rosneft and has had little compunction about seizing and redistributing other "private" oil assets in the past. (For example, in 2004, oil company Yukos was sold to pay an alleged tax debt and eventually ended up in the hands of Rosneft).Still, this is Sechin's story, and apparently Russia is sticking with it.

"All animals are equal, but some animals are more equal than others"

A more likely reason that Russia doesn't want to officially join OPEC is that it might not want to put its national security in the hands of a committee. After all, taxes and export levies on oil and gas contribute as much as 50% of Russia's budget revenue. That makes oil a strategic industry for Russia, and critical to funding the Russian military.

It's unlikely that a would-be superpower like Russia would willingly delegate to OPEC the right to tell it how much oil it can produce. Quite literally, the fate of the Russian army can turn on decisions such as these.

Not that Russia is above coordinating oil policy with OPEC when it suits its interests.

In October, OPEC invited Russia to attend an OPEC meeting in Vienna, to discuss ways to support world oil prices -- which is in both OPEC's, and Russia's interest as oil producers. In December, negotiations that began at that meeting culminated in a joint decision by OPEC, Russia, and other non-OPEC producers to slash oil production by 1.8 million barrels per day, beginning in January.

OPEC would ultimately cut 1.2 million barrels per day, Russia 0.3 million,and other non-OPEC producers another 0.3 million. This was the first time since 2001 that Russia had agreed to go along with such a plan. Whether it will succeed in bolstering the price of oil remains to be seen.

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