By Ivan U. Kentros

In 2016, the Saudi Arabian Oil Company (Aramco) announced its intention to open up to foreign investment for the first time in its history, planning to sell a 5 per cent stake in stocks. While the exact details of the IPO are not yet known, investors are preparing to buy a stake in what could be the most valuable company of the world. Now Russia’s own bid for the company’s share is taking shape. On 15 February, Kirill Dmitriev, head of the Russian Direct Investment Fund (RDIF) announced the creation of a pool of Chinese and Russian investors for taking part in the IPO, further clearing the fund’s previously mentioned plans to invest in Aramco.

Russia’s interest in the Aramco IPO is not surprising as it is slated to be the largest in history. However, Russia’s recent foreign policy posture provides extra context for understanding the interest in Aramco. The fallout from its Crimean venture, and the modern relationship between Moscow and Riyadh provide a lens through which to better understand this move into Saudi.

Russia’s sovereign wealth fund

RDIF was established in 2011 at the president’s initiative. Its stated purposes are to attract FDI to Russia and to funnel it into the country’s infrastructure and tech industries. Russia’s roads are well known for their poor state, and infrastructure deficits are constraining growth in various industries in Russia, such as for the booming agricultural sector. Another one of its concerns is Russia’s Far East, a relatively poor, underdeveloped region, which constitutes the base for Russia’s Asia-Pacific aspirations. For these reasons, attracting investment and migration to the region have been among the government’s long-term goals. Indeed, the RDIF has partnerships with various local companies, such as Vladivostok’s international airport. Since being placed under US sanctions in 2015, the RDIF has sought to diversify its partnerships abroad, particularly increasing its bonds with China.

Russia looking for partners

RDIF’s announcement can be seen in the context of Russia’s broader foreign policy, particularly as responding to two policy imperatives: the need to diversify Russia’s economic relations away from the West, and to increase its presence in the Middle East.

The first imperative responds not only to the growing acrimony between Russia and its Western partners, but also to the effects of expanding financial sanctions. The most direct impact of these has been in limiting access to Western credit for Russian companies, reducing their means to acquire financing from abroad. While they have been able to adapt and mostly offset the effect of sanctions, the compounding effect of the drop in energy prices has made economic recovery slow, and the need to find new partners more urgent.

The second aspect is Russia’s strategic (re)assertion in the Middle East. Russia sees the region as a potential source of increased clout in world affairs, as its role as a mediator and a capable partner is acknowledged by the region’s leaders. While spearheaded by its expansive stake in the Syrian conflict, it has also been accompanied by other measures, such as Moscow’s offers to mediate conflict resolution talks in Yemen and between Israel and Palestine. However, Russia’s inability to reach an acceptable endgame and withdraw from Syria, and the mounting economic and human costs may be putting pressure on Moscow to find other venues to pursue its ambitions in the Middle East. This may be reflected in that nine of RDIF’s twenty-five partnerships are with Middle Eastern funds, and six of these are based in Gulf countries.

Moscow and Saudi Arabia: towards a strategic partnership?

While Saudi has not recently enjoyed the same prevalence in Moscow’s strategic plan for the Middle East as Turkey or Iran, the Russo-Saudi relationship has moved steadily from confrontation to cooperation, the catalyst for which was an agreement between Moscow and Riyadh on energy markets. Before the 2014 drop in oil prices, Saudi and Russia saw each other primarily as competitors, and they have since cooperated to increase energy prices, coordinating production levels in an ‘OPEC Plus’ format. Moreover, as their relationship improved, it became fruitful in other areas, such as arms sales, crowned by the 2017 sale agreement of the T-400 surface-to-air missile system. For the RDIF in particular, a partnership with Saudi Arabia’s sovereign wealth fund led to a US$10bln strong joint Russo-Saudi investment fund, and close cooperation in energy development projects

Nevertheless, the rapprochement between the two countries may be limited to self-serving economic cooperation, as their interests diverge in other areas, most notably on the Syrian civil war. Moreover, as relations deteriorate between Russia and the US, Saudi Arabia may increasingly have to maneuver between them. Finally, it is also possible that Moscow sees its budding partnership with Riyadh with a short or medium-term perspective, as its traditional partners in the region, Egypt, Iran, Syria, and Turkey may offer a more reliable support to its Middle East strategy. Sanctions and the 2014-2018 recession have prompted Russia to look for capital abroad, making Saudi Arabia’s wealth attractive. Russia’s bid on the Aramco IPO is a strong signal of its commitment to strengthen economic cooperation with Riyadh and to attract investment from Gulf countries.

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Ivan U. Kentros is an Erasmus Mundus scholar, currently finishing his master’s degree at the University of Glasgow and the University of Tartu.