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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Russia Could Replicate Iran's Strategy To Skirt Oil Sanctions

  • The EU’s ban on Russian oil imports by sea could impact as much as 75% of Russia’s crude oil delivery to the bloc.
  • Russia is looking to skirt sanctions by using a decades-old smuggling route through Iraq, Jordan and Syria to send oil to Europe.
  • For Asian-bound shipments, the reliable methodology has allegedly involved Malaysia (and to a lesser degree Indonesia) in forwarding oil exports to China. 

The ban by the European Union (E.U.) on Russian oil imports by sea, in the first instance, is likely to affect around 75 percent of Russia’s crude oil delivery to the bloc, with this figure rising to about 90 percent by the end of this year, according to comments last week from European Council President, Charles Michel. The true degree to which the ban will be implemented is questionable – as analysed in depth by OilPrice.com recently – but, nonetheless, the prospect of any significant reduction in crude oil export revenues as a result of the now agreed E.U. ban, to add to the existing U.S.-led one, has prompted Moscow to look for ways around the sanctions, as any enterprising rogue state would do. Happily for the Kremlin, as Iran has demonstrated during on and off sanctions over more than 40 years, there are several good smuggling options available to Russia. 

So adept has Iran been at circumventing sanctions both from the E.U. - especially from 2011/12 up to the agreement of the Joint Comprehensive Plan of Action (‘nuclear deal’) in 2015 – and from the U.S. since the 1979 Islamic Revolution, that in December 2018 at the Doha Forum, Iran’s Foreign Minister, Mohammad Zarif, stated that: ‘If there is an art that we have perfected in Iran, [that] we can teach to others for a price, it is the art of evading sanctions.’ Towards the end of 2020, Iran’s then-Petroleum Minister himself, Bijan Zangeneh, added a little detail to one such tried-and-trusted method: ‘What we export is not under Iran’s name. The documents are changed over and over, as well as [the] specifications.’ 

There are a plethora of methods by which Iran has successfully evaded the bulk of the sanctions ranged against it all these years, and these are analysed in depth in my new book on the global oil markets. Several of them, though, involve neighbouring Iraq, over which Iran still holds considerable power through a combination of political, economic, and ethnic factors reinforced through its military proxies in the region. The core strategy simply involves ‘rebranding’ Iranian oil as oil from Iraq – which remains broadly unsanctioned as an oil exporting entity – and then moving it on freely to wherever Iraq wants. The bulk of this can be done through Iraq’s existing crude oil export infrastructure, including very large crude carriers loaded in and around the southern export hub of Basra. It can also be done directly into southern Europe via the Turkish port of Ceyhan through the crude oil pipelines running through the semi-autonomous Iraq region of Kurdistan, although these have been subject to ongoing disruptions for years, and there are also plans for further pipelines from Iraq to Jordan and Syria.

 

These crude oil export methods from Iraq can be supplemented where necessary by various shipping-related methods, as also analysed in depth in my new book on the global oil markets. One of the basic ones is the disabling – literally just flicking a switch – on the ‘automatic identification system’ on ships that carry Iranian oil, as is just lying about destinations in shipping documentation, as mentioned by Zanganeh himself. In Europe, this oil – all of which is discounted in price from the benchmark – has historically gone into some of the less rigorously policed ports of southern Europe that need oil and/or oil trading commissions, including those of Albania, Montenegro, Bosnia and Herzegovina, Serbia, Macedonia and Croatia. From there, the oil can easily be moved across borders to Europe’s bigger oil consumers, including through Turkey. 

For Asian-bound shipments, the reliable methodology has allegedly involved Malaysia (and to a lesser degree Indonesia) in forwarding oil exports to China, with tankers bound ultimately for China engaging in at-sea or just-outside-port transfers of Iranian oil onto tankers flying other flags. Iran had also been able to re-flag its vessels under the flag of Panama until the U.S. began to vigorously enforce its shipping sanctions. In addition, as highlighted in the furor over the Adrian Darya 1 tanker, Iran continues to be a major supplier of oil to Syria. These direct methods to enable Iran to side-step sanctions for crude oil shipments have increased in intensity since the full launch of the Guriyeh-Jask pipeline that when operating at its peak will allow Iran to ship at least 1 million barrels per day (bpd) of its own crude oil anywhere in the world.

It is apposite to note at this point that there are a number of Russian crude oil grades that are also extremely close in specifications to the comparable grades in Iran, and therefore Iraq. Indeed, this similarity in specifications between oil from Russia, Iran, and Iraq, has for a long time been a key reason why all of Russia’s 10-year cooperation deals with Iran included the ‘understanding’ on Tehran’s part that it was not to seek to send significant amounts of its light oil (or gas, for that matter) into Europe, as this would challenge Russia’s crude oil (and gas) flows into Europe and the corollary geopolitical power that came from them. 

Related: Citi: Oil Is Overvalued By $50 Per Barrel

OilPrice.com understands from sources close to Iran’s Petroleum Ministry spoken to exclusively last week that there was ‘significant change’ to this previous longstanding agreement on the ‘apparent’ demarcation of crude oil flows coming from Russia, Iran, and Iraq, during the very recent trip of Russian Deputy Prime Minister, Alexander Novak. “The basis for a new arrangement regarding crude oil flows coming from ‘Russia/Iran/Iraq had been laid out at the January meetings [in Moscow, when Iranian President, Ebrahim Raisi – the first visit of an Iranian president to Russia in almost five years at that point], and these were discussed further in the last couple of weeks,” the source told OilPrice.com.

The key point now for Russia in all of this is not Iran’s sanctions-evading networks to move crude oil to China – Moscow has this covered itself, as examined in depth by OilPrice.com – but rather Iran’s networks to move oil into Europe. According to E.U.’s own estimates, its bans are expected to hit about 2.3 million bpd of Russian crude imports within six months and another 1.2 million bpd of refined products imports by the end of the year. For Russia, all of Iran’s existing methods to evade sanctions are open to it – including the nearly-always successful ones involving Iraq – and there are signs that Iraq may be able to open up even more direct routes for crude oil supposedly starting its journey from Iraq and ending up in Europe. 

According to comments last week from Alaa al-Yasiri, the director general of Iraq’s State Organization for Marketing of Oil (SOMO), to the Iraqi parliament’s oil, gas and natural resources committee, the state firm has approached French trading entities about the possibility of supplying Europe with crude oil. Yasiri said that Iraq is targeting refineries globally to process its crude, which would provide OPEC’s second biggest producer with the opportunity to benefit from Europe’s search ‘for alternative supplies from Russia’. As highlighted by OilPrice.com several times, Iraq does not have any ‘extra oil’ to send anywhere until it addresses its key crude oil infrastructure constraints, so it remains an interesting question as to where all of this new oil that it is pledging to French trading firms will come from. 

Interestingly, at around the same time as Iraq was touting the possibility of sudden and abundant new supplies of oil to come from it, Kremlin spokesperson, Dmitry Peskov, stated that Russia is embarking on “targeted, systemic action that will allow us the minimise the negative consequences [of any E.U. ban on Russian oil flowing into Europe].” This comment follows a series of similarly-themed comments from Russian Foreign Minister, Sergeyi Lavrov, in recent weeks that the country is finding new ways to continue trading with countries who want to continue to trade with it, without recourse to the Western financial architecture. He stated, when talking in India but applicable to all similar situations, that: “I have no doubt that a way would be found to bypass the artificial impediments which illegal unilateral sanctions by the West create. This relates also to the area of military-technical cooperation.”

By Simon Watkins for Oilprice.com

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