Iran-Russia Oil-for-Goods Deal

In January 2014, it was first reported that Russia and Iran were discussing an oil-for-goods deal. Under the agreement, Moscow would buy up to 500,000 barrels a day of Iranian oil, in exchange for Russian equipment and goods. This would enable Tehran to increase its energy exports in defiance of Western sanctions.

A Russian source has now stated that Moscow had “prepared all documents from its side” and that completion of the deal was awaiting agreement on what oil price to set. The source added that the deal was expected to reach $15 to $20 billion in total and would be done in stages, with an initial $6 billion to $8 billion tranche.

Two separate Iranian officials have said that the deal is valued at $20 billion. One of the officials said it would involve exports of around 500,000 barrels a day for two to three years: “Iran can swap around 300,000 barrels per day via the Caspian Sea and the rest from the (Middle East) Gulf, possibly Bandar Abbas port.”

In return, Iran will receive “Russian goods” – and possibly help in building a second nuclear power plant at Bushehr in the south of the country. There is some confusion over whether the deal will include military equipment. An Iranian official said that it would, but the Russian source said that it would not.

The aim of the agreement is designed to help both sides. Iran will be able to increase its energy exports in the face of Western sanctions, while Russia will take another step in its political aim of moving towards dollar-free trade – or what the Kremlin calls a “de-dollarised” world.

As a net exporter of oil herself, what does Russia intend do with all this Iranian oil? The answer is likely to sell it at a mark-up to China.

The Russian government is currently looking for an intermediary company to sell the Iranian oil. Moscow needs a trader registered in Russia, in order to minimise the risk of outside pressure. This excludes the obvious choice of oil giant Rosneft, which is only 75% owned by the Russian state.

Other problems remain to be solved. The most immediate problem is how to physically transport 500,000 barrels daily from the south of Iran. In theory, Russia could export the oil to China via Kazakhstan, but Kazakhstan has its own plans and it could prove difficult to reach a deal.

Perhaps the most pressing issue is whether or not this deal will bring real long-term benefits to each country. The downside for Russia is that the more Iranian oil which comes onto the market, the harder it will be for Russia to sell its own oil. If Moscow starts selling Iranian oil to China, might this not mean that China ends up buying less Russian oil?

Experts of Russian oil have been decreasing in recent years. In 2012, the export of oil fell to 239.9 million tons, a drop of 1.8% compared to the previous year. The reason for the decrease is the greater uptake in crude oil by Russian refineries, which are currently undergoing modernisation.

Another loser might be the Russian consumer. If Moscow is to export foodstuffs to Tehran, this will inevitably lead to higher prices in the home market, due to a shortage in supply.

Similarly, is the deal good for Iran in the long-run? What happens if, after signing the contract, the West eases its sanctions on Tehran? According to reports from the International Energy Agency, Iran has 37 million barrels of crude, which are currently sitting in tankers and waiting for buyers.

If this oil finds its way onto the world market, the price of oil will drop, dealing a serious blow to the Russian economy, which needs a price of around $90 per barrel to balance its budget. So, in this sense, Russia gains from having sanctions on Iran in the first place and then helping Iran to evade these sanctions.

Under the agreement, Iran provides its oil, but what does it get in return? In Moscow, the talk is of providing Tehran with metal products, machines, energy equipment and foodstuffs. This means that Iran is forced to acquire goods, possibly inferior to what it might have otherwise acquired on the world market, in return for its “black gold.”

On top of this, Tehran will likely be forced to negotiate a much lower price for its oil that it would otherwise receive on the open market. An Iranian official has confessed: “The price (under negotiation) is lower than the international oil price, but not much ... in general, a few dollars lower than the market price.” Oil is currently priced at around $100 a barrel.

There is another reason why this agreement might be better for Russia than it is for Iran. In June 2013, Rosneft signed an unprecedented deal worth $270 billion deal to supply China with 360 million tons of oil over 25 years.

Much of the oil was supposed to be transported from Kazakhstan’s giant Kashagan oilfield, but it is now out of action until at least 2017. The oil for China could instead come from Iran – and the surplus sold onto the global market, possibly through Morgan Stanley’s oil trading desk, part of which Rosneft bought in December 2013.

The Rosneft deal with China envisages an annual volume of 46 million tons, which will be pumped directly to Mohe County in north-east China. But the Eastern Siberia-Pacific Ocean pipeline, which is operated by Transneft, faces competing demands on the pipeline from two other domestic companies – Gazprom Neft and Bashneft.

The pipeline is also required for supplying crude to Rosneft’s own project in the Far East, where it plans to construct a petrochemical plant near the city of Nakhodka at a cost of over $18 billion. In this case, the Iranian oil would come in very handy in making up for the potential Russian shortfall...

But why should Tehran allow its national assets to be used to cover any Russian inability to fulfil its obligations to China? Iran is China’s third largest supplier of oil, behind Saudi Arabia and Angola, and just ahead of Russia. This makes Russia a rival of Iran in the market to sell oil to China.

Ali Majedi, Iran’s deputy oil minister for international affairs and trade, has himself confessed that the two nations will find it hard to strike a deal – precisely because they are rivals in the energy markets. He told reporters at a conference in Dubai: “This is very difficult because both countries are producers and exporters of oil and gas ... it’s not easy and up to now no contract, no agreement, has been signed between the two countries. But the negotiation is continuing.”

As a supplier of both oil and natural gas, Russia naturally is interested in getting Iran on its side. At the moment, powerful countries like Saudi Arabia and Qatar can dictate their own terms. But allied with the likes of Iran and Venezuela, Russia could form a rival block. Once again, though, is it in the interests of Iran itself to be used in Russia’s economic and geo-political games?

Like the rest of the world, Russia knows that sooner or later sanctions on Iran will be lifted – and an almighty battle for the Iranian market will begin. Of course, Moscow wants to be there first. But if Iran also knows this, might it not be better for Tehran to wait, rather than commit itself to what appears to be a rather one-sided barter agreement?

Why is Tehran siding with Moscow in a deal which seems to bring so few economic benefits to Iran herself? Could the reason be the close historical connections between Russia and Ali Khamenei, Supreme Leader of Iran?