Untested Russia-Iran Friendship: Will Moscow Help Tehran To Overcome November Oil Crisis?

Fuad Muxtarlı Analysis 31 October 2018
Untested Russia-Iran Friendship: Will Moscow Help Tehran To Overcome November Oil Crisis?

Shared and common interests of Russia and Iran dictate them to put aside their disagreements to focus on strategic issues they see eye to eye to overcome pending harsh difficulties amid approaching U.S. sanctions. The two nations divided by waters of the Caspian Sea seem now driven by time-honored adage “no nation has friends, only interests”.

Since the demise of the Soviet Union, relations between Moscow and Tehran has permanently improved as their political and economic interests push them towards turning a blind eye to disagreements and making compromises to each other due to shared interests. Iran helps and backs Russia’s military involvement in Syria and opposition to a unipolar world led by the U.S., - Tehran’s arch enemy. Iran has been intensively backing the Kremlin policy to turn into a crucial player vis-à-vis Washington’s alliance with Saudis and Israelis to extend its influence across the whole of the vital region. Tehran’s would not have done so if not cornered by the U.S. policies as Moscow and Tehran are competitors on the global energy market and U.S. sanctions have made the energy exporters to cooperation and synchronization of policies on certain issues.

Moscow-Tehran relations

Moscow’s efforts to regain great power status led it to the annexation of Ukraine’s Crimea and thus several rounds of crisis and sanctions by the West. The Syrian civil war and an access to the greater Middle East – the region where states prove to be kingmakers – tempted Moscow to yet another endless intervention in Syria in September 2015. Russian air power together with Iranian support on the ground gave the Syrian army the upper hand on the battlefield, allowing them to retake most of the territories held by the rebels. Strategic alignment on Syria has created the necessary goodwill for further widening of relations.

Despite expanding political, economic and military ties, it is hard to describe Russian-Iranian relations allied as they have not been time tested. Strategically, Moscow and Tehran have been rivals for over two centuries since Iran’s ambitious plans for the South and North Caucasus clash with Russian national interests and therefore, the Kremlin even protect Armenia’s borders with Turkey and Iran to counter any influence coming from Tehran. Iran is also not happy about rapprochement between Moscow and its arch enemy Saudi Arabia.

When needed by their national interests, Iran and Russia never hesitate to undermine each other’s interests and they did so as they realize that the current state of affairs drive them to benefit from shared interests and take tactical decisions, not a long-term strategy.

Russia is able to boost its strategic position in the Middle East through military, economic and political instruments vis-à-vis the regional major actors. On the other hand, Iran has limited options. Its opportunities in the region are limited to a number of isolated and relatively small players, such as Hezbollah and the Syrian government.

Internationally, the situation is far worse due to Trump’s Iran policy and sanctions. Therefore, Tehran’s relations with Russia are not so much a choice or trust issue as a necessity based on temporary benefits.

U.S. sanctions

Ahead of the November sanctions against Iran’s oil sector, Tehran resorted to a new way of selling crude oil in energy stock market with supply of 1m barrels of oil – the first ever move with the outcome in limbo. After many ups and downs, selling export crude oil in stock market started and will last until November 5 when the U.S. sanctions come into force.

The National Iranian Oil Company (NIOC) said on October 27 that banks of Pasargad, Tejarat, Tose-e Saderat Iran, Sepah, Saderat, Mellat, Melli and Parsian were qualified to issue guarantees for crude oil trades in the stock market. Applicants willing to join the deal are required to deposit 10% of order value in cash into the account.

Once the deal is made, this figure will be considered as a part of 20% of oil price in rials basis, NIOC added. The plan for selling export crude oil through energy stock market – IRENEX - is carried out for the purpose of diversifying crude oil export ways and involvement of private sector. NIOC put the total volume of oil supply in stock market at 1m barrels of oil per day (bpd) and all oil buyers can take part in oil transactions. The procedure of selling oil in energy stock market will be based on 20 and 80 per cent in rials and foreign currency respectively.

Iran has had its most recent peak of oil exports in April 2018 when it sold 2.4 mb/d to international buyers. According to the International Energy Agency exports have fallen to 1.6m since then. The new round of sanctions that will be enacted on November 5 could have a significant impact on Iran’s oil industry.

Some analysts predict that an additional amount of 1m barrels will be taken from the global market. Several major buyers of Iranian oil, primarily in Asia, such as Japan and South-Korea have already stopped importing oil from Iran and China said it would also stop buying Iranian oil.

Primarily Beijing’s decision to cut back or continue buying oil will determine Washington’s success in coercing Tehran. The trade war between the U.S. and China has been in Iran’s advantage due to two reasons: first, Chinese importers have stopped buying American oil - which needs to be substituted. Iran is more than happy to lure buyers with discounts if they are able to circumvent American sanctions. Second, China could put pressure on trade negotiations with Washington by increasing imports from Iran. An armada of oil tankers carrying up to 20 million barrels was already on its way to Chinese buyers.

While China’s role is clear, Russia’s has gone somewhat unnoticed despite close political relations. Due to American sanctions, most western companies are unable to continue doing business in Iran. A rare opportunity looms for Russian and Chinese companies. “Russia is ready to invest $50 billion in Iran’s oil and gas sector,” said senior adviser to Iran’s Supreme Leader Akhbar Velayati after the U.S.’ withdrawal from the Iran nuclear deal. Another option of circumventing sanctions is the reintroduction of the oil-for-goods barter system.

It is unclear what this barter system will look like. There are several options. For starters, oil could be sent to Russia where it would be resold to European and Asian customers. However, due to geographic reasons, this doesn't make sense. Some traders have also said that they are not willing to buy refurbished Iranian oil. In that case, Russian companies could use the oil for their domestic market which would free up more of their own produce for the international market. Another option would be to use Russian tankers to pick up Iranian oil. This would, however, undermine the business of Iran’s own National Iranian Tanker Company.

With Western companies unable to continue doing business, Iran is in a dire need of Russian financial and technological support. Despite Moscow stating its commitment concerning massive investments in Iran's oil and gas industry, Iranians do not have the highest confidence in their northern neighbor. However, their options are limited due to U.S. sanctions. Relations between Russia and Iran are ambiguous and pragmatic, but as the current situation won’t change any time soon, cooperation is likely to continue into the near future.