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Russia and Iran sign 5 year deal for oil cooperation

The proposed crude deal between Russia and Iran will complicate their relations with the West, argues Anthony Woolich, a partner at law firm Holman Fenwick Willan

Under the cosh of Western sanctions, Russia and Iran are plotting a way to help each other. On 5 August, Alexander Novak, the Russian energy minister, and his Iranian counterpart, Bijan Zanganeh, signed a five-year memorandum in Moscow, which included co-operation in the oil sector and could be worth $20 billion.

A large oil-for-goods deal was part of the discussion, although no confirmed details emerged about either the volumes involved or the timeframe for implementation. “Based on Iran’s proposal,” said a Russian statement, “we can participate in arranging crude oil shipments, including to Russia.” Volumes would be determined by “market needs”. 

Any deal that sees Russia buy large quantities of oil from Iran may fall foul of extra-territorial US sanctions against Iran, which seek to limit exports of Iranian oil. Ironically, Russia is one of the countries - alongside the UK, US, China, France and Germany -- which recently agreed to continue until 24 November the partial suspension of sanctions against Iran, as agreed in November 2013. Under the extra-territorial US sanctions, waivers have been given to certain nations which continue to purchase Iranian oil, but have significantly reduced their purchases of Iranian oil, in particular India, China, South Korea, Japan, Turkey and Taiwan.  Russia has received no such waiver.

Russia may feel that it is already in sufficiently hot water with the US in relation to Crimea that it need not  be concerned about a possible breach of the US sanctions against Iran. And the proposed deal could be large. Russia would buy up to 500,000 barrels a day (b/d), or a third of Iranian oil exports, in exchange for Russian equipment and goods. (Some press reports put the figure much lower, at 70,000 b/d).

This could help Iran to increase oil exports substantially, undermining Western sanctions. The goods Iran receives in exchange for its oil could potentially include, for example, equipment and technology for its oil and gas industry – circumventing rules that stop US and EU suppliers exporting that kind of kit to Iran, and boosting its goal to double oil production by 2018. Iranian oil output capacity is now 2.9 million b/d, according to the International Energy Agency

The plan

Russia is hoping deals with China and Iran will reduce the impact of sanctions
Russia is hoping deals with China and Iran will reduce the impact of sanctions

Quite what Russia, the world’s second-largest oil exporter, would do with the Iranian crude is another question. Russia does not have refineries close to its ports and there are no oil pipelines between Russia and Iran, so the oil would have to be shipped. One theory is that Russia would sell the oil on to China, to satisfy its obligation to supply 290,000 b/d for 25 years. Russia has had trouble honouring that commitment, not least because some of the oil was supposed to flow to China from Kazakhstan’s much-troubled Kashagan oilfield, where gas problems have again delayed start up. But if this is the plan, it would raise questions about the waiver China received from the US, which was based on its agreeing to lessen its imports of Iranian oil. If the waiver were lifted (say, after 24 November), then the US government could impose sanctions on China. The US government could also impose sanctions on Russia.

Iranian oil is getting to market, anyway. Recent reports suggest an extra 525,000 b/d of ultra-light oil has reached Asian buyers. This puts the levels above those imposed by the US, and is worth about $1.5bn of additional trade to Iran.

Nonetheless, Iran is still feeling the squeeze of Western sanctions on its oil. Sanctions of another kind are putting pressure on Russia, too. There is some logic, then, in these two oil producing giants teaming up to help each other in their respective crises – even if Russia has a conflict of interest, given its involvement in negotiations with Iran over the nuclear issue and the sanctions that are part of it.

The latest deal could complicate things still further, deepening the EU and US suspicions about Russia’s foreign policy and exacerbating the difficulties caused by Russia’s recent activities in Crimea and Ukraine. How far will Russia go in antagonising the West?

 

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