Russia and Iran appear to be working together to get around Washington's stricter sanctions by joining forces in an oil deal that doesn't appear to make much financial sense.
Earlier this month, Russian Energy Minister Alexander Novak and his counterpart in Tehran, Bijan Zanganeh signed a five-year memorandum of understanding in Moscow, which includes helping Iran ship crude oil even into the oil-saturated Russian market, reports Reuters
The agreement appears to be an oil-for-goods swap that will allow Iran to ship out more oil and get around Western sanctions. The deal initially called for Russia to buy up to one-third of Iran's oil exports, up to 500,000 barrels a day, in exchange for equipment and goods, sources told Reuters.
The deal has been in the works since January, and while the Russian government initially announced earlier this month that an agreement had been reached, it later pulled back its statement and released a new one that gave no specifics on volumes or time frames on the deal, saying just that "volumes are to be determined by market needs."
However, while Russia was not giving details about the deal, The Telegraph of London
, quoting sources from Moscow, reported that Russian President Vladimir Putin had agreed on a $20 billion trade deal with Iran.
Russia is under a series of strict sanctions from the United States and the European Union, including measures against oil exploration and drilling related products. Likewise, Iran is under sanctions because of its nuclear program, and has been involved in talks with world powers for months in Vienna.
Meanwhile, Iran has been attempting to double its oil production by 2018, reports The Telegraph
, setting a new output target of 5.7 million barrels of crude oil a day.
But to sell that oil, Iran will need international oil companies, such as those in Russia, to help.
Fortune Magazine's Cyrus Sanati
, however, said the pact will not have much effect beyond making Washington nervous over its sanctions.
"While a pact between the two countries may make sense politically as they both face economic sanctions from the West, the two sides truly have little in economic benefit to offer each other," said the analyst.
The pact makes sense on paper, he wrote, but in reality, neither country has anything the other wants.
"The last thing Russia needs is more oil," he said, pointing out that Russia is the world's second-largest oil exporter, putting out about 5 million barrels a day.
"Russia lacks the basic infrastructure to import foreign oil," Sanati wrote. "There are no oil pipelines that link Iran and Russia, meaning that everything would need to go by ship."
Russia also has no coastal refineries, so it would not be able to receive or process crude oil, he continued, and the country's pipelines pump oil out of Russia, not into it.
Meanwhile, he said, Russia has little to offer Iran beyond oil exports, which Iran does not need. In addition, Russia will likely not offer agricultural exports, as Putin has banned all foods coming in the West and has to either make up the difference from neutral countries such as Brazil and Turkey or boost its own domestic production.
Russia may also be looking to boost its own oil production through Iran, The Quartz reported
earlier this year. Russia signed a $270 billion supply agreement with China in 2013 that promises 290,000 barrels of oil daily for 25 years, but may be having trouble meeting that agreement.
The oil was to be shipped out of the Kashagan oilfield in Kazakhstan, but the facility's launch was delayed until the end of this year, or later, because of a gas leak. Instead of sending Russian oil, Moscow could be looking at selling China oil from Iran.
And with the sanctions, Russia could still sell its surplus through Morgan Stanley's oil trading desk, owned in part by Russia's Rosneft since last year, reports The Quartz.
The amount of oil under discussion has also changed drastically. While at the beginning of the year, talks were underway to sell Russia some 500,000 barrels a day, Troy Media reports
that Moscow's Kommersant business daily said discussions put that amount at about 70,000 a day, just a portion of the 3.2 million barrels a day Iran produces.
Iran has already found another way to get round Western sanctions and by exporting higher amounts of an "ultralight oil" to the Asian markets, reports The New York Times
Iranian customs data shows the country has exported 525,000 barrels a day of the ultralight oil, or condensates, in recent months. This figure is more than twice what Iran exported last year, and as a result, the sales have already brought in some $1.5 billion in extra trade .
This has resulted in Iran making an overall increase to the Asian markets beyond what the United States has called for in its sanctions, which called for Iranian oil exports to remain at about one million barrels a day. However, the condensate sales have allowed Iran to export 1.4 million barrels a day between January and May, the Energy Department reports.
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