Rewind to 2014. The nuclear talks are gaining momentum but no breakthrough is imminent. Iran’s oil exports have been cut in half by U.S. and EU sanctions for two years, capping out at about 1.1 million barrels a day (b/d). The good news is oil prices sit above $100/barrel–but that won’t last. The bad news is Iran isn’t selling oil for dollars or euros. Instead, it’s selling oil for rupees or yuan and those local currencies can only be tapped to pay for certain imports.
A trimmed-down deal is already in the works and there is speculation that it could be expanded or extended.
Facing these constraints and desperate to raise oil exports, recover some value, and end its international isolation, Iran turned to Russia. Fast forward to 2018 and a similar story is playing out today. President Trump quit the Iran nuclear deal on May 8 and his administration is promising to impose the toughest sanctions in history. Iran’s oil customers now have until November 4 to significantly reduce imports or they will be blacklisted by the U.S. Treasury.
Naturally, rumors have started swirling again about an oil deal between Tehran and Moscow, two budding allies that are closer today than they were four years ago. A trimmed-down deal is already in the works and there is speculation that it could be expanded or extended.
In January 2014, news broke that Iran and Russia were preparing a blockbuster “oil-for-goods” deal worth maybe $20 billion a year. Iran was to deliver 500 thousand b/d of discounted oil to Russia, according to initial reports. The scheme wasn’t so different from what Iran was forced to pursue with other countries: rubles owed to Iran would accumulate in Russian accounts and the value would be drawn down to pay for exports to Iran, possibly including non-humanitarian goods like military hardware, power plants and nuclear technology.
What made the Iran-Russia deal unique was that both countries were major oil exporters. For Iran, it was an attempt to cement a relationship and keep exports high. For Russia, it was a way to buoy local industries and resist U.S. pressure in the wake of the Ukraine crisis. The two sides signed a memorandum of understanding in August 2014. It briefly looked like Iran might raise its oil export volumes by 50% with Moscow’s help.
Once the nuclear deal was done, and Iran was allowed to trade oil for euros again, the oil-for-goods deal was effectively dead, although officials wouldn’t declare it so.
Yet the original deal was doomed by details that didn’t add up. “The Iran-Russia oil-for-goods deal may be logistically impossible; from a market perspective, it’s a bad deal for Iran; and those involved will likely be vulnerable to U.S. sanctions,” Sam Cutler and I wrote right after the MoU was signed. It wasn’t long before the deeply flawed oil-for-goods deal was overcome by events. In July 2015, Iran finalized the Joint Comprehensive Plan of Action (JCPOA) with the five permanent members of the UN Security Council (the U.S., UK, France, China, and Russia) plus Germany. Once the nuclear deal was done, and Iran was allowed to trade oil for euros again, the oil-for-goods deal was effectively dead, although officials wouldn’t declare it so.
At various times throughout 2014, Tehran said it was off and Moscow said it was on. Denials were issued after the Russians announced that oil and money started changing hands in 2015. Thereafter, officials blamed the deal’s inertia on low oil prices and impending sanctions relief. The deal appeared to be shelved in 2016. With sanctions lifted, Iran ramped up exports, while the Russians focused on reaching a supply pact with OPEC that would raise oil prices.
Shortly after President Trump took office, however, the deal was suddenly revived. Iranian oil minister Bijan Zanganeh announced in February 2017 that Iran was ready to deliver 100 thousand b/d in exchange for Russian goods. In December his counterpart Alexander Novak confirmed that a state-owned Russian company, Promsyryoimport, had delivered a one-million-barrel test cargo of Iranian crude to an unnamed third country.
According to Novak, volumes were to reach 100 thousand b/d in 2018 and half the revenues were to be reserved to finance Iranian imports from Russia (the other half would be paid to Iran in euros). How does it work exactly? Promsyryoimport is being paid for a service, Novak told Russia’s Interfax last year. “It is not buying, it is not paying with its own money. Promsyryoimport cannot afford to pay the full price for the delivered crude,” he said. “It finds a buyer, which actually purchases the oil. As always, there is a certain commission fee.”
Zanganeh assured Iranian media outlets early this year that deliveries via Russia were on track. The Russians, however, are having second thoughts.
It only took four years and many false starts, but by 2018 a mechanism had been worked out, the volumes were agreed to, and a test cargo was delivered. It seemed the defunct oil-for-goods deal might be revived, albeit on a much smaller scale than originally hoped. Zanganeh assured Iranian media outlets early this year that deliveries via Russia were on track. The Russians, however, are having second thoughts.
Novak complained in April that follow-up sales had failed to materialize because “end buyers” were hard to find. It’s unclear whether any more Iranian oil has been sold via Russia since last November. The future of the deal is also in doubt. Although Novak recently expressed a desire to extend the oil-for-goods deal for years, he said this month that Moscow must consider whether sanctions will affect the scheme. This seems virtually guaranteed.
100,000 b/d is not an insignificant amount. That volume represents 4% of Iran’s current crude oil and condensate exports; at today’s prices, that oil could be valued at about $2.6 billion on an annual basis, depending on the commission structure. If the Trump administration is going to impose the toughest sanctions in history then it can’t overlook the oil-for-goods deal.
100,000 b/d represents 4% of Iran’s current crude oil and condensate exports; at today’s prices, that oil could be valued at about $2.6 billion on an annual basis, depending on the commission structure.
Moreover, if the White House adopts similar language found in Obama-era executive orders, then the deal could be in trouble. Executive Order 13608 (signed in 2012 and rescinded after the JCPOA) made it a sanctionable offense to violate or conspire to violate sanctions. The 2018 version of the oil-for-goods deal is clearly designed to do just that by using a Russian state-owned company as an agent for Iranian oil sales.