Iran-Russia Oil Deal: Will it Go Through?

22 Apr, 2014    ·   4400

Ayesha Khanyari analyses the challenges and opportunities facing the realisation of the deal 

Iran and Russia are negotiating an oil-for-goods agreement worth US$1.5 billion a month that would see Iran export oil to Russia in exchange for unspecified goods and equipment from Moscow. The deal would further enable Iran to raise oil exports substantially, undermining Western sanctions that helped persuade Tehran in November 2013 to agree to a preliminary deal to curb its nuclear programme in exchange for temporary and modest sanctions relief.

It is not surprising that the US government has been quick in criticising Russia for trying to seal an oil-for-goods agreement with Iran. If the deal materialises, it would raise serious concerns as it defies the terms of the P5+1 agreement with Iran. It could possibly trigger fresh US sanctions.

Though the oil-for-goods agreement has been rumoured for months, new reports highlighting positive developments towards the finalisation of the deal have emerged. These developments came as tensions between Russia and the West flared up after the US and the European Union enacted a series of sanctions targeting Moscow, in response to the Crimean crisis. By negotiating this agreement publicly, both Russia and Iran are sending a message to the Obama administration.

Iran’s Objectives
First, periodic reports have emerged ever since Hassan Rouhani’s election, discussing the possibility of Moscow’s interest in building new nuclear plants inside Iran - there have been negotiations over four new nuclear plants. While there has been no confirmation about the oil deal from either side, it is likely that the oil exports would be able to finance the new nuclear plants in Iran.

Second, the barter agreement could pave the way for Iran to gain access to the highly advanced Russian weapons industry, which Tehran has always been interested in. The trade deal has also sparked concerns that Russia will import sanctioned military hardware, capable of violating the terms of the interim nuclear deal signed by Iran. Iran could benefit from the transfer of items of significant value to Iran’s military and nuclear programme.

Third, the deal would ease the pressure on Iran’s battered energy sector and further help restore Iran’s links with Russia. It will ease economic pressure and benefit the Iranian economy.

Finally, it is not clear whether the deal would be implemented before the finalisation of a nuclear agreement between Iran and the six world powers by July 2014. The agreement could act as a positive motivator for Iran. The deal could be used to pressurise the US in the talks, particularly amid reports that the Senate is nearing agreement on a bill that would call for new sanctions on Iran.

Russian Motivations
Russia is willing to expand its market and shift towards the Asian countries so that it becomes less dependent on Germany and the EU, is hence looking for options in countries like Iran and China.

Russia has not imposed sanctions on Iran, unlike the US and the EU. Although it is involved in the nuclear negotiations with Iran along with the other five nations, the fact is that Russia is least concerned about the prospects of a nuclear or non-nuclear Iran.

In the latest round on the nuclear negotiations in Vienna, Russia and the US worked together, unaffected by the unfolding events in Ukraine. However it would be wishful thinking to assume that Russia will continue to cooperate and not square accounts despite the tensions building up between Russia and the West. If cornered, Russia will be tempted to use all levers at its disposal to retaliate against the penalties imposed by the West.

Apart from the barter agreement between Iran and Russia, Moscow could also go ahead and resume transactions with entities in Tehran. Trade routes which were opposed by the US could also be revived.

Will the Deal Go Through?
While Russia and Iran might strategise to gain leverage with the US, their ability to cooperate against it is limited. There are grim chances of this deal translating into a long-term relationship between Russia and Iran; each would gladly give up its commitment towards the other in exchange for concessions from the US.

Iran will also be mindful of whether or not to meddle in the east-west tensions. Iran has maintained a cautious stand in its reaction to the Crimean crisis. Moreover, the decrease in the dependence on Russian oil and gas opens a window of opportunity for Iran as an alternative energy exporter for EU nations.

Also, both Iran and Russia are oil exporters and producers and thus rivals in the market, which will make it difficult for the two countries to come closer. It is harder to strike a deal with a fuel exporter like Russia than importer like China. Hence it will be a tough deal to seal.

Hassan Rouhani does not want to reverse the inroads and risk his country going back into deep isolation. Despite the benefits in the short-run of rekindling ties with Russia, Iran’s main objective is to fix its economy with the help of Western finance, investment and technology, not tie it to a faltering Russian economy burdened with its own set of sanctions.