Javad Kaypour

Challenges and Opportunities of the Recent Iran-Russia Oil Deal

Date of publication : April 19, 2017 18:23 pm
A general view shows the Ahwas oil field in southwestern Iran on July 7, 2016 in Ahwaz, Iran

Following the recent meeting with Russian Energy Minister, the Iranian Oil Minister announced the sale of a hundred thousand barrels of oil per day to the Russian, and then Russian Energy Minister, on the sidelines of the economic summit in Sochi, outlined some other aspects of the contract:
1. Iran will hold a workshop next year in St. Petersburg to sell its oil to Russia.
2. Iran will sell a hundred thousand barrels of oil to Russia based on world prices in exchange for cash (50 percent) and purchasing goods and services (the other 50 percent) from Russia. Mr. Zanganeh has reiterated that it does not mean barter!
3. A wholly state-owned enterprise, Promsyreimport, belonging to the Russian Ministry of Energy will carry out the purchase.
4. Russia will determine where Iranian oil should be exported to, but the final destination is outside of Russia.
The first opportunity this contract provides for Iran is that it will diversify its oil customers. The more the number of the Iranian oil customers are, the higher the security of its supply is. Another opportunity it provides for Iran is that since this is agreed that half of the payment will be in the form of purchasing Russian goods and services, this can help implement importing from non-dollar channels. In particular, the strong point of this contract is that in addition to goods, it can also cover imports of services. Finally, with regard to the commercial aspect of the contract, we see that expanding military and security cooperation with Russia will be also followed by developing trade relations with this country.
But another dimension that must be interpreted with caution is how Iranian oil is sold by Russia. According to rumors, Iranian oil will be sold to customers chosen by Russia. If so, it is possible that Russia will use this opportunity to penetrate markets that previously had no presence in them - most notably India. Russia has recently paid special attention to the energy markets of South Asia and the Indian subcontinent, and has tried to increase its influence in the market. For example, Russia has paid attention to gas exports to these countries as well as the sale of oil to India. The use of Iranian oil for sale to India can be regarded as one of the options, and this can be considered as a potential threat for Iran, because if Russia provides Iranian oil, even as much as a hundred thousand barrels, to India with better conditions than Iran, it will affect the oil interaction between Iran and India.
China can also be another option for Russia, because Rosneft has concluded a contract to export 360 million tons of oil worth about $ 270 billion over 25 years, but the capacity of the Eastern Siberia - Pacific Ocean (ESPO) pipeline is still not enough to cover this amount of oil, so the capacity of a hundred thousand barrels of Iranian oil can compensate a part of the obligation. Here Iran’s role in the Chinese market, and the type of game that Russia can play at odds with Iran in this market should not be ignored as well. Iran has recently returned to its original position in China’s oil market, and exports more than 800 thousand barrels of oil per day to this country - a market that has always had a high value to Iran.
Overall, the share of trade between Iran and Russia out of Russia’s total foreign trade balance in 2015 is not even 1%, and we see that Iran has no place in the first ten trade partners of Russia. So we cannot talk about the strategic commercial interests of this contract for Russians. From the perspective of the oil market, Russia now exports over 3.5 million barrels of oil per day to Europe, and if Russia considers all the one hundred thousand barrels of oil for the European market, this country will only witness an approximate growth of 3% from its presence in this market. If we see this case according to what has been said on Iranian oil that it is similar to the base oil of the Volga-Ural region of Russia, the Volga-Ural region produces now 2.2 million barrels of oil, and adding a hundred thousand barrels to that amount will increase its growth approximately 4.3 percent.
Thus, the contract will slightly increase Russian influence in the oil markets, but it is still not significant. Meaning, in general, the figure of a hundred thousand barrels will not be even 1 percent of the current amount of oil Russia produces now - more than 10 million barrels of oil. Perhaps the economic benefits from intermediation in the sale of oil can answer this question. But due to the fact that Iran has announced that the sales contract is a 30 day payment contract and based on the customary price for other contracts, the contract does not seem to be very economically attractive as well.
Also, since Iranian oil is not imported to Russia, the feasibility of Swap is also questioned. Therefore, I should again return to the issue that the Russian buyer of Iranian oil is a “state-owned” enterprise, and this could be a sign that confirms the mutual willingness of the two governments to find opportunities to deepen their cooperation. This is what Iran should also pay attention to. If by relying on interactions, though small, such as the current contract, we can develop cooperation with Russia in the energy market, perhaps these areas of cooperation can be expanded in the future.
Javad Kaypour, a researcher on energy issues, is the guest contributor to IRAS.
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