Geopolitics
Iran and Russia

Iran & Russia Begin Huge Oil-for-Goods Swap. This Is Not Good For The West.

Burgess COMMENTARY

Peter Burgess

Iran & Russia Begin Huge Oil-for-Goods Swap. This Is Not Good For The West.

A little over a week after Western powers and Iran inked a framework agreement, Russian President Vladimir Putin has inaugurated an oil-for-goods swap with the Islamic Republic that strikingly reveals Moscow's determination to strengthen ties with Iran. With US and Iranian reports over the contents of the framework deal still widely at variance, and with more doubts surfacing on the likelihood of a final deal in June, Putin's move is something to keep a very close eye on. Today's announcement reveals the similarities between Russia and Iran in terms of the positioning of both in relation to the West. Both are subject to Western sanctions, both economies are heavily oil-dependent, and both countries have suffered under the weight of the oil price drop and devaluations in their respective currencies. In other words, a growing friendship between the two countries is a) not surprising and b) poses a growing threat to the West as the emergent Iran-Russia partnership is largely forming with an anti-Western (specifically, anti-US) orientation. Oil-For-Goods Swap Has Begun The Kremlin said Monday that Putin inked a decree rescinding Russia's own prohibition on the delivery of the S-300 anti-missile rocket system to Iran. This removes a major obstacle to the relations of the two countries. In 2010, Russia cancelled a contract for the delivery of the system to Iran due to pressure exerted by the West. A senior government official told Reuters that Russia has begun supplying equipment, grain and construction materials to Iran in exchange for crude oil per the terms of a barter agreement. Over a year ago, Russian sources told Reuters that an agreement valued up to $20 billion was being discussed with the Islamic Republic and would entail Russia purchasing up to 500,000 barrels of Iranian crude per day in return for Russian goods and equipment. Since that time, Iranian and Russian officials have issued a series of contradictory statements on whether a barter agreement has been inked, but Russian Deputy Foreign Minister Sergei Ryabkov signaled that one was already in effect. 'It Takes Two To Tango' Ryabkov told a briefing with members of the upper house of parliament regarding discussions with Iran, 'I wanted to draw your attention to the rolling out of the oil-for-goods deal, which is on a very significant scale...In exchange for Iranian crude oil supplies, we are delivering certain products. This is not banned or limited under the current sanctions regime,' Reuters reported him as saying. Iran is currently the third-largest purchaser of Russian wheat, and the two countries have been discussing a barter agreement for over a year, Reuters reported. Last Fall, Russia's state-run grain trader lowered the value of its potential grain supplies to Iran per the barter deal to $500 million per year. In December, Iran's oil minister Bijan Zanganeh denied the two countries were nearing a deal. Ryabkov also indicated that Russia was optimistic that its support for Iran would soon yield energy cooperation once Western sanctions against the latter are rescinded. Reuters quoted him as saying, 'It takes two to tango. We are ready to provide our services and I am sure they will be pretty advantageous compared to other countries...We never gave up on Iran in a difficult situation...Both for oil and gas, I think the prospects for our cooperation should not be underestimated.' When asked by a fellow lawmaker whether lifting sanctions on Iran could undermine Russia's position on world energy markets (most notably as Europe's principal gas supplier), he responded, 'I am not confident as yet that the Iranian side would be ready to carry out supplies of natural gas from its fields quickly and in large quantities to Europe. This requires infrastructure that is difficult to build.' Russia & Iran: Notice The Similarities Not The Differences Russia and Iran have both been subject to Western sanctions. The former, for its actions in Crimea; the latter, for its nuclear ambitions. In addition to the economic impact of these sanctions on their respective economies, the fall in the oil price has also worsened the economic predicament of the countries. Thus the growing partnership between the two countries, based in part on shared pains perceived to be inflicted by the West, is not surprising. Russia enter image description here In Russia, energy export revenue represents more than half of the government's budget. The collapse of the ruble in late December further crystallized Russia's dire economic situation, with the Russian central bank saying then that it estimated that GDP could drop by 5% in 2015. O&G revenue represents more than half of the Russian federal budget and two-thirds of its export revenue (approximately 300 billion annually). The IEA estimates that 68% of Russia's foreign currency earnings are sourced from the oil-export business, and about half of its annual budget is underwritten by the industry. And while western sanctions imposed last year on the oil and gas sector have harmed the country's economy, the fact that Russian companies must repay $100 billion-worth of foreign debt in 2015 has even more done so. Iran enter image description hereOil revenue's contribution to Iran's government coffers Months of declining oil prices and uncertainty whether the country will secure a nuclear deal rescinding international sanctions led to the weakening of Iran's rial beginning last year. And Iran has been hit so hard by falling oil prices that its government late last year announced that its government was offering young men the choice of buying their way out of an obligatory two years of military service, the New York Times reported at the time. Existing sanctions on Iran are already withholding roughly 1 M/bd of Iranian oil off the market. Iran's oil exports have been cut in half- by just over 1 M/bpd to 2.7 M/bd- since 2012 as a result of Western sanctions. Thus, with Iran already exporting less oil now than it did prior to the sanctions regime, falling prices have further curtailed the country's economic outlook.