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Al-Monitor – In recent weeks, Tehran has been trying to prevent the damaging impact of the reimposition of US secondary sanctions targeting the Iranian petroleum industry. Protecting the strategic value of its petroleum sector — both in terms of hard-currency earnings as well as technological impetus for industry — will, however, depend on Tehran’s ability to attract foreign investment and technology as well as continuing to export crude and petroleum products. Considering that the major Western oil and gas companies will withdraw from Iran, the answer to Iran’s needs lies with Russia.
Following a recent visit to Moscow by Ali Akbar Velayati, senior foreign policy adviser to the supreme leader, Ayatollah Ali Khamenei, news emerged that Russia had agreed to invest $50 billion in Iran’s petroleum sector. It is unclear whether the figure includes actual investments or whether it refers to the volume of barter trade involving Iranian crude oil, but the key issues are what Russia can actually do for Iran’s petroleum sector with regard to investments as well as its potential role as an intermediary for Iranian crude exports.
Without details of the reported agreement, especially what Russia will commit to, it is difficult to assess the feasibility of the understanding, which Iranian analysts are approaching as a puzzle. The questions are what might be feasible and whether that will be desirable from the Iranian perspective.
The most obvious framework that the $50 billion figure might involve is the existing oil-for-goods scheme originally signed in 2014, before the lifting of nuclear-related sanctions under the Joint Comprehensive Plan of Action (JCPOA). After the implementation of the nuclear deal in January 2016, Russian Energy Minister Alexander Novak said the scheme was no longer necessary. In March 2017, however, in light of the hesitation of international banks to process transactions with Iran, a new version of the deal was reached.
In April, the two sides agreed to extend the oil-for-goods agreement for five more years and to include crude exports of “up to 500,000” barrels per day in return for Russian goods. This would mean that the total volume of Russian exports to Iran could reach “$20 billion in five years,” potentially explaining one part of the $50 billion figure.
What exactly could Russia export to Iran? The quantitative potential is sufficient, especially as Russia produces the types of machinery, equipment and installations Iran needs in its strategic petroleum, mining, construction and transportation sectors. If such items are part of the deal, however, it means Iranian stakeholders will have to lower their quality expectations, as it would represent a move away from top-notch Western standards.
One of the topics of discussion after the US withdrawal from the JCPOA earlier this year has been a further expansion of this framework, potentially up to a volume of 1 million barrels per day of Iranian crude. In the past — during the Iran-Iraq War (1980-1988) and during the sanctions years (2007-2013) — Tehran used barter extensively for trade with end consumers of Iran’s crude oil, among them India. The agreement with Moscow presents a challenge, however, as Russia, itself a major oil producer and exporter, will only play the role of intermediary.
One question in this context is the actual operational framework. Would Iranian oil be shipped to Russia before its export to the end consumer? In most cases, geographically and operationally, it does not make sense to ship oil to Russia and from there to European and Asian markets. One alternative would be to ship the oil from Iranian export terminals in Russian tankers, but this would undermine the business of Iran’s own National Iranian Tanker Company to the benefit of Russian shipping companies.
The most significant question from Tehran’s perspective would be who will be in charge of marketing crude sales. If Russia does the marketing and becomes the face of Iran’s oil supply among major international customers, would Tehran be able to regain those customers if the relevant legal statutes change and sanctions are lifted? In other words, there may be some short-term gains, but with potential long-term losses for Iran.
Looking beyond the oil-for-goods scheme, what Iran needs as urgently is actual investment in its petroleum sector. Incidentally, in April, the conservative Mashregh News, a critic of the Hassan Rouhani administration, reported “Russian interest” in investing in Iran’s petroleum sector and even mentioned the figure of $50 billion. Of interest, Russian companies are involved in 12 of the 19 project-related memorandums of understanding or agreements signed in Iran’s petroleum sector since the lifting of nuclear-related sanctions in 2016. If all 12 projects were signed off on as actual contracts, similar to the accord signed with Zarubezhneft to boost oil production, then one will see a genuine flow of massive Russian investment into the Iranian petroleum sector over the next few years.
One should keep in mind, however, that perceptions of Russian companies are not ideal among Iranian decision-makers. It is no secret that Iranian technocrats and petroleum sector decision-makers do not have the highest confidence in the technological and financial capabilities of their northern neighbor.
In their effort to secure Iranian projects, Russian companies will have a difficult time convincing Iranian technocrats and industry players that they will provide technologies on par with their Western competitors. Iran had a negative experience with China during the first wave of withdrawals from its market by Western oil and gas companies in 2007-2008, and it does not want to waste more time in the process of exploiting the potential of the country’s massive energy sector.
It also would be an affront to Iranian pride to be in a position where Iran has no alternative to Russian and Chinese investors and technology providers. As such, it can be anticipated that Iranian authorities would insist that Russian contractors also engage smaller European technology providers to guarantee the flow of the latest European technology to Iran.
One project that may offer itself as a signature project would be Iran’s ambitious but unfinished project begun in the 2000s with the aim of annually producing 10 million tons of liquefied natural gas (LNG). It was operationally suspended due to the non-availability of technology from foreign sources, and now that US secondary sanctions will return, none of the European sources of LNG technology will be willing to assist Iran with the project (especially as many technological components are US-made). Russian technology providers could, however, offer the needed know-how. Growing LNG capacity has been a strategic development in Russia as well, and it remains to be seen whether Tehran and Moscow can pave the way for cooperation in this field as well.
While trade and investment could help Iran and Russia achieve their ambitious goal, a core question is whether Tehran will trust Moscow’s intentions. Ali Adyani, a member of the parliament’s Energy Commission, has said that Iran views “Russia, China and sometimes India as strategic partners,” which is a “prerequisite for cooperation in the energy sector.” Some Iranian experts, however, believe that Tehran should not trust Moscow, as they believe the Russians will not confront the United States on Iran policy. Interestingly, during the harshest phase of the anti-Iran sanctions, 2007-2013, many Iranians viewed Moscow’s actions as a stab in the back. Indeed, the sense was that Russia was happy to renege on its commitments to Iran in return for concessions from the United States.
Yet it is valid to argue that geostrategic conditions have changed for both countries and that a new era of cooperation might be feasible, despite Russia and Iran — the two top natural gas reserve holders — being competitors. What is certain at this stage is that more work will be needed to realize the potential for cooperation between the two countries.
