Iran-Russia oil deal; mutual advantages

This major oil deal, estimated to be worth $ 1.5 billion a month, was subject to modifications. The two countries finally agreed on 100,000 b/d, largely down from the previous figure.

Russian Minister of Energy Alexander Novak recently announced that Iran's oil exports to Russia within the framework of an oil-for-goods program would start soon. Novak has spoken about the finalization of details of the agreement between Tehran and Moscow, but Iran and Russia seem determined to start this project.

However, this project has faced challenges and elicited diverse reactions. Sometimes, there are words about the enforceability of this project and sometimes related news is dismissed downright.

The present article aims to examine existing challenges before analyzing the prospects of this deal.

Challenges

Ever since news emerged of oil-for-goods deal between Iran and Russia, several significant challenges came up. Either of these challenges may easily scupper such an agreement. The most important challenges of this type are as follows:
First, it is not yet clear how Iran plans to deliver its oil to Russia. In other words, it is not clear whether Russia would receive this oil in the Caspian Sea or in the Persian Gulf from Iran. In case the Russians are to receive this oil in the Persian Gulf, they will have to pay for transportation. That comes a time when there is currently no possibility for the delivery of this oil to Russia in the Caspian Sea. The reason is that Neka terminal, which is Iran's biggest oil terminal in the Caspian Sea, is in no position to let very large crude carriers dock. In fact, one of the most important weak points in Neka oil terminal is the impossibility of berthing for VLCCs. Therefore, it is necessary to build new jetties to let oil tankers dock.

Second, it is not clear what Russia plans to do with this oil. Does Russia intend to consume this oil in Russia or sell it on world markets? It is noteworthy that Russia is currently the largest producer of oil in the world. Therefore, if it wants to sell Iran's oil in world markets it has to buy at a lower price from Iran to be profitable for Moscow. Furthermore, if this oil is supposed to be used domestically, its price must be the same as in Russia and any price higher than that will not be profitable for this country.

Third, it is not clear which commodities Iran would import in return for giving oil to Russia. As it is said, if Iran imports wheat, steel and some equipment from Russia that would not be advantageous for Iran, because Tehran would give a strategic product in return for non-strategic goods. In fact, in case the commodities Iran would import in return for giving oil to Russia are not strategic such a deal would not be beneficial for Iran.

Fourth, the method of implementation of this agreement and the mode of pricing for Iranian crude oil and Russian commodities has yet to be decided. According to what has already been said a company which is not present in global markets is expected to be registered in Russia to represent Rosneft. The idea is that in case after Iran and Russia sign an oil-for-goods deal the US imposes sanctions on both parties will Rosneft remain immune. Nonetheless, it is not clear if the newly planned company is placed on the US sanctions list what would happen to the deal.

Fifth, the planned oil deal between Iran and Russia has since the very beginning faced tough opposition from the Americans. In view of the Americans, such a deal would be a way to get round sanctions on Iran. The US officials have warned that signature of such a deal could lead to the imposition of sanctions on the parties to the contract.

Sixth, the oil-for-goods deal was agreed upon between Iran and Russia when Tehran and six world powers had not concluded their landmark nuclear agreement, dubbed the Joint Comprehensive Plan of Action (JCPOA). Now that the sanctions have been lifted on Iran following the implementation of the JCPOA in January 2016, serious doubts have emerged over Iran's intention to remain interested in such a deal with Russia. In the post-sanctions era, major Russian oil companies are willing to invest in Iran's energy sector and Tehran can sell its oil without any restrictions and purchase its necessary commodities from different sources. Therefore, under conditions when there is no longer any restrictions for Iran in importing commodities, implementation of oil barter deal between Iran and Russia and limiting Iran to Russian goods would look unjustified.

Bright Perspective

Although the challenges listed above indicate that the planned Iran-Russia oil-for-goods deal faces many obstacles and its implementation is facing ifs and buts which could not be resolved in the short term, the future of such a deal looks bright in case it goes ahead according to what Iran's minister of petroleum, Bijan Zangeneh, had earlier said.

Minister Zangeneh had said that Iran planned to sell its oil to foreign customers via Russia and in return, it will receive half the price in cash and spend half on buying Russian services and commodities. Such a method would serve the long-term interests of both Iran and Russia.

1. The Iran-Russia oil deal, which is referred to as oil barter trade or oil-for-goods, is by no means a barter deal because Iran can use its own money to purchase commodities and services which it needs. Meantime, Russia will be able to sell its commodities and equipment to Iran and that would be profitable for Moscow.

2. The Iran-Russia oil deal is an appropriate method for Iran to diversify its oil buyers. Under the deal, Russia will export Iran's oil to any country. Since Iran's oil has a quality similar to the oil extracted from Russia's Ural area, Iran's oil will be sold by Russia easily. Meanwhile, by selling Iran's oil Russia will be able to gain a bigger share of Europe's markets, which would be a long-term energy strategy pursued by Moscow.

3. Implementation of the Iran-Russia oil deal will increase Iran's oil exports, which would help improve Iran's economy post-sanctions. Such an oil deal will be profitable for Russia too because it will let Moscow receive transit rights for selling Iran's oil to other countries.

4. The Iran-Russia oil deal is a golden change for Tehran and Moscow which are both willing to develop long-term trade ties. That can prepare the ground for the development of trade ties between the two countries in the energy and other economic sectors.

5. An important advantage of the Iran-Russia oil deal is the facilitation of trade between the two countries. Currently, Iran-Russia trade is more than half the revenue from 100,000 b/d of oil. Therefore, such a plan would facilitate the Iran-Russia trade and the two countries could scrap money in their transactions.

Given the advantages mentioned above, it seems that it would be possible for Russian businesspeople and companies to help Iran find international oil buyers. In return, Iran will spend its petrodollars on buying Russian-made products. This project can be profitable for both countries in the long-term. In fact, the mutual advantages of oil deal will convince both Tehran and Moscow to follow up on its implementation more seriously.

*Shuaib Bahman, Senior researcher at Iran-Eurasia Research Center, PhD student at the Peoples' Friendship University of Russia

Source: Iran Petroleum monthly, 62nd edition

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