RIYADH, 21 November 2007 — Saudi Arabia’s relations with Russia (and formerly, the Soviet Union) date back to 1924. Indeed, the Soviet Union was the first state to establish full diplomatic relations with the Kingdom, in 1932 — a year which also saw a visit to Moscow by the then Prince Faisal, who became King in 1964. But diplomatic ties between Riyadh and Moscow were maintained only until 1938.

Relations between the two countries were eventually restored in September 1990, at the height of tensions in the Gulf, following Iraq’s invasion of Kuwait in August of that year.

When then Crown Prince Abdullah went to Moscow in September 2003, he became the most senior Saudi official to visit Russia since 1932. And in February 2007, President Putin became the Russian first head of state to visit Saudi Arabia.

Prior to the 1990s, trade between Russia and the Kingdom was virtually non-existent. It was only from the mid-nineties onwards that we saw significant trade between the two countries take hold. Russia’s exports to Saudi Arabia in 1997 were valued at SR419 million ($112 million), which made it the 34th largest exporter to the Kingdom. By 2006, Russia was ranked at 24th — with total exports amounting to SR2.6 billion ($693 million), an increase of 533 percent.

Within that growth, the past two years (2005 and 2006) have been the best yet in the history of Saudi-Russian trade relations. Russian exports for 2004 had reached SR990 million ($237 million) — but jumped by 51 percent in 2005 to SR1.5 billion ($400 million), and by a further 77 percent in 2006 to the figure mentioned above. In 2007, we expect Saudi imports from Russia to achieve a record SR3.1 billion ($826 million).

Traditionally, the barley crop and a variety of metal products have been Russia’s major exports to Saudi Arabia. The Kingdom is one of the world’s largest barley users and imported a total of 7.5 million tons in 2006, equating to SR4.5 billion ($1.2 million). In fact, Ukraine is the largest exporter of barley to Saudi Arabia, with a 39 percent market share (2006), followed by Australia with 33 percent and Russia, providing 9.2 percent. Livestock operations account for 78 percent of all barley use — sheep being the largest consumers, followed by camels. Although barley and various iron products had been the principal Russian exports, 2006 saw pure copper rods and sticks — used in many electrical engineering applications — become the Kingdom’s single largest imported item from Russia.

The trade amounted to SR747 million ($199 million) worth of copper rods and sticks, in addition to other copper and semifinished iron products. In total, during 2006, the Kingdom imported SR1.1 billion ($293 million) in semifinished iron and steel — with Turkey and the Ukraine as the principal exporters of these products.

For Saudi Arabia — unlike other countries such as Syria, Egypt and Libya — Eastern Europe has not traditionally been a major source of imports. But since 2001, import volumes have increased not only in line with the Kingdom’s economic growth, but also as a result of quality improvements and cost advantages (mainly labor costs) in Eastern Europe. Imports from the region (including some member states of the EU-25) have risen by 94 percent in the two years ending 2006. As an example, around one-third of mobile phones imported into Saudi Arabia are manufactured in Hungary.

Saudi Arabia has historically exported very little to Russia, due largely to the lack of diplomatic ties during the Soviet Union years. Moreover, Saudi exports to Eastern Europe as a whole were never substantial, as those countries derived their oil from the Soviet Union and, since the nineties, have sourced oil and related products from Russia and the Central Asian Republics.

However, Saudi exports to Russia have witnessed a marked improvement since the late 1990s, albeit starting from a very low base of negligible trade. Only in 2002 did Saudi exports reach a meager SR25 million ($6.6 million) — increasing to SR46 million ($12.2 million) in 2005. Russia ranked as the 76th largest recipient of Saudi exports in 2006, up from 106th position in 1997. The Kingdom’s principal exports are currently surface paint, fresh grapes, and iron towers for use in the shipbuilding industry.

While it continues to procure arms and weapon systems from established suppliers in the West, the Kingdom is actively seeking out new sources of military hardware.

Helicopters are currently the focus of much attention. At the recent Dubai Air Show, Saudi Arabia’s interior ministry announced that it had reached an agreement to acquire 40 helicopters from United Technologies’ Sikorsky Aircraft Corporation. The deal comprises 16 of the S-92(R) model, 15 of the S-76(R) multi-mission version and nine Schweizer 434 training helicopters.

“On the face of it...it seems that we are rivals. But considering the world’s growing demand for energy, that is not so...Russia and Saudi Arabia are the world’s leading energy producers and exporters — and here, it is easy for us to find common ground,” said Russian President Vladimir Putin during his visit to the Kingdom.

Together, Russia and Saudi Arabia account for a quarter of the world’s oil production (including natural gas liquids).

Russia at times produces even more oil than Saudi Arabia, as happened on occasions during 2006. Also in that year, Saudi Arabia with SR357 billion ($95 billion) and Russia with SR360 billion ($96 billion) were among the top five current account surplus holders in the world.

According to the Energy Information Administration (EIA), Russia holds the world’s largest natural gas reserves, the second largest coal reserves and the eighth largest oil reserves.

In 2006, as the leading oil producer in Europe and Eurasia, Russia delivered 12.3 percent of the world’s total oil production.

In the Middle East region, Saudi Arabia is the largest producer, responsible for 13.1 percent of global oil output in 2006. In the same year, according to the IEA (International Energy Agency), Russia was the world leader in natural gas, with 21.8 percent of global production, and also the biggest natural gas exporter, with a 24 percent share of the international market.

As a result of the global oil price boom, Saudi Arabia and Russia have accumulated huge official foreign assets. As of October 2007, the combined foreign assets of Saudi and Russian central banks amounted to SR2.5 trillion ($691 billion). In 2004, unlike the Kingdom, Russia established a stabilization fund, which is invested abroad only to prevent high inflationary pressures.

In November 2007, the value of the fund was estimated at SR551 billion ($147 billion) — an increase of 80 percent since August 2006.

Over the past three years, Russian investments in Saudi Arabia have enjoyed considerable prominence. LUKoil was awarded a tender (LUKoil Saudi Arabia) to develop the 11,200- square-mile “Zone A” natural gas field in the Rub Al-Khali, signing a 40-year contract with Saudi Arabia to explore and develop the field.

LUKoil Overseas holds an 80 percent stake in LUKoil Saudi Arabia, with the remainder held by Saudi Aramco.

Meanwhile, Stroitransagaz, the engineering arm of Russia’s state-controlled gas monopoly Gazprom, has established a joint venture with construction company Saudi Oger to bid for contracts with Saudi Aramco.

Gazprom itself holds a quarter of the world’s known gas reserves, produces 16 percent of global output and supplies 25 percent of EU needs, via the Ukraine and Belarus.

Such joint initiatives bode well for the future of Saudi-Russian trade relations — and perhaps bear out Putin’s assertion that the way forward lies in collaboration, not competition.

(Dr. John Sfakianakis is chief economist, SABB. He is based in Riyadh)