The nuclear deal between Iran and the P5+1 nations could lead to a flood of new oil hitting global markets. That could result in a significant drop in oil prices. While that would be damaging to Russia – already reeling from low prices – the Kremlin apparently believes an expanding presence in the Middle East outweighs the potential crude price collapse.
The Energy Information Administration projects that a successful conclusion of negotiations in June that would result in a removal of sanctions on Iran could lead to a $5 to $15 per barrel price decline for oil in 2016. That would mean, according to the EIA, its forecast of $75 for Brent in 2016 could conceivably drop back down to $60. Related: Resource Dependence Could Prove Fatal For Canadian Economy
Russia already forecasts a budget deficit of $46 billion this year and a contraction in its GDP of 3.7 percent. Lower than expected prices for 2016 would prolong and deepen the pain.
On its face, that would suggest Russia would not see a whole lot to gain from allowing a competing oil exporter to return to the fold. Iran could ramp up oil exports by 1 million barrels per day, which Russia’s central bank forecasts could result in a $27 billion fall in Russian revenues.
But the Russian government seems to think the loss of revenues from a potential fall in oil prices will be made up for by increased trade with Iran and other strategic gains in the Middle East.
Russia has had an active relationship in Iran in the past. Gazprom Neft, the state-owned oil firm, signed a memorandum of understanding with the National Iranian Oil Company in 2009 to develop oil fields in Iran. The relationship fell apart after delays, in part due to Gazprom’s fear of sanctions. Prior to the sanctions, Gazprom’s CEO Alexei Miller had worked towards building a long-term energy relationship with Iran, meeting with former Iranian President Mahmoud Ahmadinejad. Gazprom helped develop parts of Iran’s giant South Pars gas field, and even considered Iranian gas as a potential source of supply for Russia’s now-defunct Nabucco pipeline. Related: U.S. Seizes On Venezuelan Weakness To Regain Caribbean Energy Foothold
International sanctions put the relationship on hold. Russia backtracked on a plan to sell S-300 surface-to-air missiles in 2010, banning sales to Iran after international pressure. However, that issue roared back to life on April 13, 2015 when Russia lifted its ban on S-300 sales to Iran, to the howls of the United States and Israel. Although the move will only give ammo to U.S. hardliners opposed to any nuclear deal with Iran, Russia’s Foreign Minister Sergei Lavrov said the move was in the “spirit of goodwill,” citing progress in negotiations. He emphasized that its ban was self-imposed and did not fall under any United Nations’ action. But Russia is merely trying to get a leg up on new business with Iran, eyeing a final deal in June. A top Iranian official said that he believes Russia will deliver the missiles sometime this year.
Russia’s move to sell missiles to Iran comes after news in February that Rostec, a Russian state-owned defense company, offered to sell Iran Antey-2500 anti-ballistic missile systems. Russia has also agreed to swap oil for goods with Iran, another piece of evidence suggesting Russia is prioritizing business ties with Iran ahead of the nuclear deal. And of course, Iran has long used Russian nuclear technologies at its nuclear facilities, and if the international community greenlights some nuclear activity in Iran, Russia would also seize on the economic opportunities. Related: Why Cheap Natural Gas Could Be Here To Stay
A stronger trade relationship with Iran will build on Russia’s other overtures in the region.
Gazprom recently agreed to ship 35 cargoes of LNG to Egypt over the course of five years. Egypt is suffering under an acute and growing energy crisis, and expects to pay $3.55 billion for LNG imports between 2015 and 2016. Russia is capitalizing on this, expanding its relationship with Egypt through the energy deal.
Gazprom Neft is also surveying oil fields in the Kurdish region of northern Iraq, where most of the company’s Iraqi projects are located. Fellow Russian oil firm Lukoil operates in southern Iraq near the giant oil fields of West Qurna-2 near Basra. In both Iraq and Iran, Russian oil firms have picked up the pieces that western companies left behind when they were forced to leave after war and sanctions.
With Russia’s neighbors in Europe becoming increasingly inhospitable, the Kremlin is looking to the Middle East and China to expand its trade and influence. While the West may not like it, Russia is not waiting for the nuclear deal with Iran to be finished before it expands its economic presence in the region.
By Nick Cunningham Of Oilprice.com
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