Iran, Russia and an Improbable Oil-for-Goods Deal

Iran, Russia and an Improbable Oil-for-Goods Deal 

Stratfor 17-Jan-14 

Russian media is again reporting that Moscow and Tehran are continuing talks related to an oil-for-goods agreement that could be worth as much as $1.5 billion per month. The Iranians are again politely refuting the reports, saying no such talks are on the agenda during Russo-Iranian bilateral meetings. Russia's proposal for the agreement was first leaked by "Russians familiar with the negotiations" to Reuters on Jan. 10, and Moscow has continued its attempts to keep the story in the media spotlight despite Iran's objections. 

Details about how such a deal would be implemented are unclear, but the leaks suggest that Iran would deliver some 500,000 barrels of crude oil to Russia per day in exchange for various material goods, ranging from agricultural exports to basic machinery and supplies. We are skeptical that such an agreement will take place. Though both sides may see short-term benefits for keeping the dialogue going, the actual implementation of the deal, at least as presented by the media leaks, poses a strategic risk to both countries. 

What is a Geopolitical Diary? George Friedman explains. 

With this announcement, Russia is attempting to derail the U.S.-Iran talks, hoping to subtly complicate negotiations between Tehran and the P-5+1 group. This would give Moscow the opportunity to position itself in a Middle East in which Iran is closer to the West. The oil-for-goods deal may also prove popular inside Russia as a potential boost for the country's faltering industrial sector. 

However, Russia would also begin incentivizing production in a country that could become its competitor in oil markets, should Tehran reinvest in and expand its energy production. Indeed, the program would boost oil production. 

The Kremlin sees greater utility in trying to disrupt Iran's ongoing negotiations with the United States. Russia would prefer that the United States remain bogged down in Middle Eastern issues such as the Syrian civil war. However, this plan could lead to increased Iranian hydrocarbon exports to Asia, which buys the most Iranian crude and which Russia has been trying to tap. 

Russia has attempted to leverage its relationship with Tehran against U.S.-Iranian relations in the past, most notably through oft-repeated and oft-refuted claims that Moscow was ready to supply Iran with S-300 air defense systems. With the Iranians and Americans now engaged in serious negotiations, the likelihood of an American strike on Iranian facilities -- and the need for advanced air defense systems -- has dropped dramatically. 

With Russia attempting to present itself as a more pragmatic mediator after negotiating the Syrian chemical weapons deal and ahead of the Olympics, the Kremlin is now trying to throw off U.S.-Iran talks not through military equipment but through agricultural products and civilian machinery. The United States has already expressed unease with such a plan because it would circumvent sanctions, according to several news agencies, including al Jazeera. 

The U.S. Senate has backed off from its push for additional sanctions legislation since Washington and Tehran finalized the terms of the initial nuclear deal Jan. 13. However, the oil-for-goods deal could compel the Senate to renew its efforts, which would jeopardize Iranian President Hassan Rouhani's attempts to sell the nuclear negotiations deal to his country. 

In the short-term, discussions over an oil-for-goods deal would give Iran a bargaining chip in its negotiations with the West. It would show that Tehran is not entirely crippled by sanctions and has other options for the future. Moreover, the agreement would provide some immediate benefits to the Iranian government: the influx of 500,000 barrels per day's worth of oil. And Russian machinery and goods could help assuage some of the financial strain on Iran. 

That said, the risks seem to outweigh the benefits for Tehran. Iran's negotiations with the United States and the P-5+1 group are necessary. While attractive, the revenue from 500,000 barrels of oil per day does not obviate the need to reduce or remove the sanctions regime. There is also a question of what the Iranians would gain directly through the deal. Admittedly, heavily sanctioned or monitored goods have been difficult for the Iranians to procure, but we have seen scarcely any verifiable evidence that the Iranians have been unable to import sufficient quantifies of foodstuffs, iron, steel, medicine and electronics equipment. 

By exchanging oil for Russian goods, Tehran might reduce its import bill and increase oil production. But this undermines Iran's own domestic manufacturing and business activities, and it is unclear if Tehran really needs much of anything that Russia could barter for with oil. Ongoing sales of oil to Syria on credit with large and low-interest loans to the al Assad regime belie reports that the Iranian government's economic situation is on the brink of disaster. With an initial agreement with the United States in hand and potential easing of European financial sanctions expected in the coming weeks, pursuing a separate deal with Russia could cost Iran the gains it has already made in negotiating with the West. 

Iran is also only in the early stages of seeing a potential boost in its exports to reliable Asian and regional consumers as a result of its deal with the West. Therefore, it seems as though Russia does not seriously think Iran will go for such a deal but is trying to use the possibility that it would as leverage for its own relationship with the West and the United States. However, Russia and Iran have an interest in managing expectations and placing some pressure on the United States and the P-5+1 group as the framework and implementation of the initial nuclear agreement is being worked out in Geneva. Of course, that does not mean that Iran sees Russia as a reliable partner for stabilizing its domestic economy. The oil-for-goods agreement would create too great a dependence on Moscow for the Iranians to be able to comfortably tolerate.