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Russia signs $20bn oil deal with Iran to bypass Western sanctions
Russia agreed a five-year deal in July with Iran worth about $20bn that could help sidestep Western sanctions on its energy sector operations. Under terms of the deal, Russia has the option to buy up to 500,000 b/d of Iranian crude in exchange for Russian equipment and goods, writes Brian Davis.
Under the memorandum of understanding, Russia will help Iran organise oil sales as well as ‘cooperate in the oil-gas industry, support construction of power plants, grids, and supply machinery, consumer goods and agriculture products’, according to a statement by Russia’s Energy Ministry.
However, the Russian government later withdrew this statement, offering no reason for the action. More details will be fleshed out between Russia and Iran at the Intergovernmental Commission Meeting in Teheran on 9–10 September.
The European Union (EU) has also implemented measures to restrict sales of certain oil products and E&P equipment to Russia due to concerns about the Ukraine crisis and about possible links with rebels in the shooting down of Malaysia Airlines’ Flight MH17.
Meanwhile, Iran faces sanctions over its controversial nuclear programme, and the negotiation period with Western nations has been extended until November. According to Platts, despite the sanctions which reduced Iranian oil exports to 1.1mn b/d last year, crude exports have edged up steadily and climbed to 1.46mn b/d in May
Will sanctions stick?
According to Daniel Martin, Partner in law firm Holman, Fenwick, Willan, two distinct issues are raised by the Russia-Iran deal. First, whether the US or EU actually has any power to sanction businesses which engage in this trade? Second, whether the US extra-territorial sanctions directed at the export of crude oil from Iran worldwide ‘will stick’. ‘Essentially, if a bank finances transactions in Iranian crude or a company engages in the purchase of Iranian crude, the US government will impose punishment,’ explains Martin.
The turning point was 24 November 2013 – under the Geneva interim agreement, a pact was signed between Iran and the P5 + 1 countries (five permanent members of the UN Security Council – US, UK, France, China and Russia – plus Germany) for a freeze on portions of Iran’s nuclear programme in exchange for decreased economic sanctions. In return, Iran was allowed to continue to supply crude to six countries – China, India, Japan, Republic of Korea, Taiwan and Turkey.
‘The interim agreement (now called the Joint Action Plan) “requires” these countries not to increase the amount of oil they require from Iran above pre-suspension levels,’ says Martin.
However, there have been Chinese whispers regarding increased Iranian crude transactions. So how strong are the sanctions?
Martin told Petroleum Review: ‘The purpose of the sanctions against Russia and Iran, taken separately, is to put pressure on both regimes to change their behaviour by targeting (or restricting) them economically. However, this new $20bn deal reduces the effectiveness of our [Western] ban on crude sales globally as a negotiating tactic. Therefore, if we want to keep up the pressure on Iran, we may have to think of something else.’
Likewise: ‘Depending what Russia is getting in return, if Iran is providing oil and gas equipment which is of a kind that the EU is seeking to restrict by virtue of the recent EC regulation, then you could see European restrictions on something else.’
Martin maintains: ‘Sanctions are still valid if the alternative option is not considered to be as attractive as the position if sanctions were lifted. I don’t see the Russia-Iran deal as being an equivalent swap for the deals they could enter if both countries were free to contract with anyone globally.’
News Item details
Journal title: Petroleum Review
Region: Middle East|Russia & Central Asia
Subjects: Policy and Governance, Crude oil
