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Russia stakes out Iranian market

Both Russia and Iran see a shared interest in deepening economic ties, parallel to the P5+1 talks.
From R-L: Foreign Ministers Sergei Lavrov from Russia, Erlan Idrissov from Kazakhstan and Mohammad Javad Zarif from Iran gather for a family photo session during the Caspian Sea littoral states conference in Moscow, April 22, 2014. REUTERS/Maxim Shemetov (RUSSIA - Tags: POLITICS) - RTR3M69D

Over the past few weeks, Russia has taken steps to develop its trade and economic ties with Tehran, which plunged to a record low of $1.59 billion last year. In 2013, according to Russian Minister of Energy Alexander Novak, this amounted to a reduction of 31.5%, a consequence of the unilateral US and EU sanctions imposed in mid-2012, which forced companies such as Lukoil and Gazprom Neft to leave the Iranian market.

The situation should have changed with the agreement reached between Russian President Vladimir V. Putin and his Iranian counterpart, Hassan Rouhani, during the SCO Summit in Bishkek in September 2013, which caused a stir and under the terms of which 500,000 barrels per day of Iranian oil would be delivered in exchange for Russian goods and equipment. By rough estimates, that is 12% of the oil extractable daily in Iran.

Nothing was known, however, about concrete steps to put this agreement into practice until Foreign Minister Sergey Lavrov’s visit last December to Tehran, during which ways to implement it were discussed. One of the items on the table appears to have been the price of the oil, given Moscow’s request for a discount. It was clear that, with the sanctions still standing, the problem would also likely be who would purchase the oil and make the payments and how, considering the threat of US sanctions. According to the Russian newspaper Kommersant, one of the possible options initially suggested was that Rosneft buy the oil. But at the beginning of April the Ministry of Energy decided to choose an authorized trading company which, as the newspaper source explained, “will be a company registered in Russia that — contrary to Rosneft —does not trade on the world market and is thus immune from pressure.” 

While it was undeniable that the Iranian side was interested in breaking the trade embargo and obtaining the goods it needed, analysts had to ponder the reasons guiding the Russian side. It was evident that Moscow was not moved by an urgent need to obtain energy carriers from its Middle Eastern partner. During one of the talk shows on the Russian TV channel RBC, participants were even asked the question: “Why should Russia buy Iranian oil?” Actually, back in February, Iranian Ambassador to Russia Mehdi Sanai suggested that, in the negotiations on the supply of Iranian oil in exchange for Russian goods, Moscow and Tehran might agree to invest in the construction of a second unit at the nuclear power plant in Bushehr.

Many Russian analysts were convinced that Russia, predicting the possibility of, if not a full, then at least a partial normalization of Iran's relations with the West and seeing a sharp increase in interest in Iran in Western business circles, set as a first priority the task to “stake out” a place for itself in the Iranian market. While the range of Russian products to be delivered to Tehran in exchange for oil is generally known, though not precisely defined (e.g., metallurgical products, machinery, power equipment and other goods), the basic parameters of the Iranian oil deliveries to Russia have not yet been revealed. It is unknown whether the sides have managed by now to resolve all the issues linked to this deal and come to a final agreement on its implementation.

It remains unclear to where the oil will be transported. If to the north, to Russia, then how will this be accomplished? After all, the main oil fields are in the south of Iran, on the shores of the Persian Gulf where all oil export terminals are also located. The managing director of the National Iranian Oil Co., Rokneddin Djawadi, shed some light on this issue. According to Russian media citing Mehr News Agency, Djawadi stated that Moscow and Tehran were negotiating a project of reverse pumping of oil from the south to the north. However, Russian analysts have expressed doubts that the ports on the Caspian Sea could handle such a large amount of oil as was being discussed in the current deal.

Could it be instead that the oil would be loaded onto tankers and shipped to the clients of Russian companies abroad in lieu of Russian oil? Such an option appears more attractive commercially. Russian media citing Reuters reported that Russia was negotiating with Iran about the supply of Iranian oil to the Asia-Pacific Region (APR) in exchange for goods, for a total volume that could reach 20 million tons per year and a value of up to $20 billion. (Recall for comparison that once the Soviet Union also negotiated a swap deal with Iran, by which Soviet oil should have been delivered to the north of Iran, whereas Iranian oil — to offset the Soviet oil supplied — would be exported from the Persian Gulf according to Moscow’s export contracts.) A mixed system was also quite possible: As reported by RBC news agency, nowadays Iran could supply up to 300,000 barrels of oil per day through its ports on the Caspian Sea, while the remaining volume could go via the Persian Gulf.

In the ongoing debates on whether the normalization of relations between Iran and the West, if it does indeed happen, will have an impact on the prospects of Russian-Iranian cooperation, different points of view have also been voiced, from pessimistic (“Russia will lose out a lot”) to optimistic (I, for one, have expressed precisely such point of view in previously published articles). I believe that, in any case, Iran will be interested in further developing relations with Russia, in the same way that Russia is now clearly taking its relations with Iran to a new level.

In the heated discussions surrounding the possible developments of the situation around Iran, a group of Russian experts has expressed the opinion that chances are high for normalization on the basis that Iran comply with all the basic requirements set forth by the P5+1 Group (the five permanent UN Security Council members plus Germany) regarding its nuclear program, concomitant with the complete removal of sanctions.

This confidence is based on several arguments. First, today the Iranian leadership clearly sees normalization as a priority task, having been convinced of how painful sanctions are. Second, the United States, for its part, considers it a priority to secure nuclear nonproliferation in the region and to protect Israel’s security interests, while being unwilling to engage in an armed conflict with Iran. Third, Western companies are showing exceptional interest in working in the promising Iranian market. In Moscow, a general lowering of tensions over Iran’s nuclear program has also been noted. For instance, it was no coincidence that a statement by Brig. Gen. Uzi Eilam — the former head of the Israel Atomic Energy Commission — appeared in the Israeli newspaper Yediot Ahronoth to the effect that Iran wouldn’t be able to build nuclear weapons for another 10 years and that he was “not sure that Iran wants the bomb.”

Another group of experts is skeptical about the prospects of normalization based on that the West not only considers unacceptable the possibility of Iran developing a nuclear bomb, but also Iran’s regional policies, in particular with respect to Israel, the Middle East peace process, the Syrian issue, the situation in Iraq, its support for Hezbollah, etc. Although Washington has seemingly agreed to de-link the question of Iran’s nuclear program, in the negotiations of the Group of Six with Tehran, from the issues of regional politics, these experts argue that even in case of success in the negotiations, the United States will put pressure on Iran, demanding further concessions to which the Iranian leadership won’t be able to agree. In other words, full normalization is impossible even in the event of guarantees of Iran’s non-nuclear status.

Nonetheless, for Russia, the possibilities of collaboration with Iran are not limited to this deal. Moscow and Tehran are planning to significantly expand cooperation in the electricity sector. On April 27, Russia’s Minister of Energy, Alexander Novak, held talks in Teheran with his Iranian counterpart, Hamid Chitchian, about collaboration in this field, where likely deals of as much as $10 billion were discussed. The talks touched upon, inter alia, the construction of thermal and hydroelectric power plants and the possibility to export 500 MW of electricity from Russia to Iran.

As Rick Gladstone wrote in the New York Times on April 28, “Officials at the United States Treasury Department, which enforces economic sanctions against Iran, did not immediately respond to queries about whether the Russia-Iran energy deal would technically violate those sanctions, which prohibit dealings with a range of Iranian government entities and industries and penalize foreigners who subvert them.”

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