Charles de Gaulle once said: “no nation has friends, only interests.” Cooperation between Russia and Iran has been increasing over the years. The countries are drifting towards each other due to shared interests over topics such as Syria and opposition to a unipolar world led by the U.S. Although Moscow and Tehran are competitors on the global energy market, U.S. sanctions have created room for collaboration.
Russian – Iranian relations
Since the crisis in Ukraine and the annexation of Crimea, Russia has been facing a united Western front concerning sanctions. Deprived of options and in an effort to assert great power status, Moscow intervened in the Syrian civil war in September 2015. Russian air power together with Iranian support on the ground gave the Syrian army the upper hand on the battlefield, allowing them to retake most of the territories held by the rebels. Strategic alignment on Syria has created the necessary goodwill for further expansion of collaboration.
Despite political, economic, and military cooperation, it would be farfetched to call Russian - Iranian relations an alliance. For starters, Tehran is not pleased with the recent rapprochement of Moscow with archenemy Saudi-Arabia. The Iranian regime has also not forgotten Russia using Iran as a bargaining chip as part of its negotiations with the West during the Medvedev presidency. Moscow and Tehran realize that the current situation is based on shared interests and tactical decisions, not a long-term strategy.
Russia is able to maximize its strategic position in the Middle East using military, economic, and political resources vis-à-vis the major players in the region. Iran, on the other hand, has a limited number of options. Its opportunities in the region are restricted to a number of isolated and relatively small actors such as Hezbollah and the Syrian government. Internationally the situation is far worse due to Trump’s Iran policy and sanctions. Therefore, Tehran’s cooperation with Russia is not so much a choice as it is a necessity.
American sanctions
Iran had its most recent peak of oil exports in April 2018 when it sold 2.4 mb/d to international buyers. According to the International Energy Agency exports have fallen to 1.6 million since then. The new round of sanctions that will be enacted on November 5th could have a significant impact on Iran’s oil industry. Some analysts predict that an additional amount of 1 million barrels will be taken from the global market. Several major buyers of Iranian oil in primarily Asia such as Japan and South-Korea have already stopped importing. A lot depends on the willingness of Tehran’s two biggest customers as to whether sanctions will have the desired effect: India and China. Related: Russia's Latest Geopolitical Power Grab Is Going Unnoticed
Primarily Beijing’s decision to cut back or continue buying oil will determine Washington’s success in coercing Tehran. The trade war between the U.S. and China has been in Iran’s advantage due to two reasons: first, Chinese importers have stopped buying American oil - which needs to be substituted. Iran is more than happy to lure buyers with discounts if they are able to circumvent American sanctions. Second, China could put pressure on trade negotiations with Washington by increasing imports from Iran. An armada of oil tankers carrying up to 20 million barrels is already on its way to Chinese buyers.
While China’s role is clear, Russia’s has gone somewhat unnoticed despite close political relations. Due to American sanctions, most western companies are unable to continue doing business in Iran. A rare opportunity looms for Russian and Chinese companies. “Russia is ready to invest $50 billion in Iran’s oil and gas sector,” said senior adviser to Iran’s Supreme Leader Akhbar Velayati after the U.S.’ withdrawal from the Iran nuclear deal. Another option of circumventing sanctions is the reintroduction of the oil-for-goods barter system.
Circumventing U.S. sanctions
It is unclear what this barter system will look like. There are several options. For starters, oil could be sent to Russia where it would be resold to European and Asian customers. However, due to geographic reasons, this doesn't make sense. Some traders have also said that they are not willing to buy refurbished Iranian oil. In that case, Russian companies could use the oil for their domestic market which would free up more of their own produce for the international market. Another option would be to use Russian tankers to pick up Iranian oil. This would, however, undermine the business of Iran’s own National Iranian Tanker Company.
With Western companies unable to continue doing business, Iran is in a dire need of Russian financial and technological support. Despite Moscow stating its commitment concerning massive investments in Iran's oil and gas industry, Iranians do not have the highest confidence in their northern neighbor. However, their options are limited due to U.S. sanctions. Relations between the Russian Federation and the Islamic Republic of Iran are ambiguous and pragmatic, but as the current situation won’t change any time soon, cooperation is likely to continue into the near future.
ADVERTISEMENT
By Vanand Meliksetian for Oilprice.com
More Top Reads From Oilprice.com:
- Can Angola Overhaul Its Struggling Oil Industry?
- Is A Diesel Crunch Coming?
- Is Libya's Latest Oil Production Target Too Ambitious?
The growing close relations between Russia and Iran are based on shared interests and tactical decisions, not a long-term strategy like the Russian-Chinese Strategic partnership. Their successful cooperation in Syria and the fact that both of them are battling harsh US sanctions have created the necessary goodwill for further expansion of collaboration between them. One aspect of such collaboration is how Russia could help Iran frustrate US sanctions against its crude oil exports.
An oil-for-goods barter trade agreement between Russia and Iran does exist. Accordingly, Iranian crude oil could be shipped to Russia where it can either be used for the domestic market or alternatively exported as part of Russian oil exports. In return, Russia could provide Iran with goods as well as financial and technological support and also investments.
Iran’s oil exports have been averaging 2.2 million barrels a day (mbd) this year.
I am on record having been saying that US sanctions on Iran’s oil exports are doomed to fail miserably and that Iran will not lose a single barrel from its oil exports. My reasoning has always been based on the following market realities.
The first reality is that the overwhelming majority of nations of the world are against US sanctions in principle and particularly on Iran as unfair as Iran has not violated the terms of the nuclear deal.
The second reality is that the petro-yuan has made the US sanctions useless and has provided a way by which Iran could bypass the petrodollar and the sanctions altogether. Even the Swift, the cross-border transaction settlement service, will prove futile as buyers of Iranian crude can pay for their purchases by barter trade, national currency exchange agreements and the petro-yuan.
The third reality is that China which has been subjected to intrusive US tariffs against its exports to the US and Russia which has been battling harsh US sanctions since 2014 will ensure the failure of the US sanctions against Iran.
The fourth reality is that China could singlehandedly nullify US sanctions altogether by importing the total Iranian oil exports amounting to 2.2 mbd and paying for them in petro-yuan. China will be more than happy to oblige as a retaliation against US escalating trade war against it particularly if the coming meeting between President Trump and Chinese President Xi Jingping in November fails to produce a breakthrough ending the escalating trade war between them.
The fifth reality is that 95% of Iranian oil exports go to China (35%), India (33%), the European Union (20%) and Turkey (7%) which have already declared that they are not going to comply with US sanctions. The remaining 5% goes to South Korea and Japan which have already applied for US sanction waivers and they will get them.
An important pointer is France’s confirmation that the ‘special purpose vehicle’ (SPV) that the European Union (EU) set up to help European companies to do business with Iran while evading US sanctions could also be used more broadly to protect European companies in the future from the effect of illegal US extraterritorial sanctions.
Claims that China and India are reducing their purchases of Iranian crude oil are total fabrication. On the contrary, China has been increasing its purchases of Iranian crude oil partly because of rising domestic demand and growing refining capacity and partly to spite the United States for its escalating trade war against it.
India on the other hand is going ahead with its purchases of Iranian crude oil in increasing quantities thus ignoring pressure by the United States to halt these purchases or at least reduce them. India wants to keep importing oil from Iran, because Tehran offers some discounts and incentives for Indian buyers at a time when the Indian government is struggling with higher oil prices and a weakening local currency that additionally weighs on its oil import bill. Moreover, India is reported to be thinking about ditching the US dollar in its trading of oil with Russia, Venezuela, and Iran and paying for its oil imports by barter trade and currency swap agreements or by using the petro-yuan.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London