Putin’s Mideast Gains Trump $27 Billion Loss From Iran Agreement
(Bloomberg – bloomberg.com – Henry Meyer, Stephen Bierman – April 14, 2015)
As Russian President Vladimir Putin has shown in Crimea and eastern Ukraine, he’s willing to take an economic hit to expand his political influence.
He’s taking the same approach with Iran.
Lifting sanctions and allowing Iranian oil onto global markets would threaten to deepen the plunge in crude prices, curbing revenue from Russia’s biggest export. The cost: about $27 billion, based on estimates from the central bank in Moscow.
“The strategic benefits are much more important for Russia,” said Nikolay Kozhanov, an expert at the Royal Institute of International Affairs in London and a nonresident fellow at the Carnegie Moscow Center. “Incorporating Iran into pro-Moscow organizations, Russia is hoping to secure its share in this market or divide zones of influence.”
Putin will get an opportunity to bolster an ally, stymie regional adversaries and open business opportunities. The approach was underscored by his decision this week to lift a ban on shipping S-300 air-defense missile systems to Tehran under an $800 million contract.
A deal with world powers over Iran’s nuclear program has the potential to shift the balance of power in the Middle East as Iran competes against Saudi Arabia, a U.S. ally.
Russia, which has lagged behind the U.S. in regional influence since the end of the Cold War, is working with the Persian Gulf state to shore up Syria’s Bashar al-Assad and oppose Saudi-led air strikes on pro-Iranian Houthis in Yemen.
The U.S. and five other global powers, including Russia, aim to complete negotiations with Iran by the end of June to end a decade-long dispute over its nuclear program. In return, sanction that have cut its crude exports by more than half would be removed.
Russia is entering its first recession in six years, worsened by sanctions over its support for separatists fighting the government in eastern Ukraine and its annexation of Crimea. The main cause of the slump is the 50 percent drop in oil prices since June 2014 to about $55 a barrel. The price could tumble another $15 a barrel once sanctions on Iran are lifted after a final nuclear deal, the Energy Information Administration said on April 7.
Oil at $40 a barrel could shave almost 2 percent from Russian gross domestic product, according to estimates by the Russian central bank last month before the Iran framework was announced. The Bank of Russia predicts gross domestic product will shrink 3.5 percent to 4 percent this year at an average oil price of $50-55 per barrel under its base case. The economy may contract as much as 5.8 percent under the bank’s risk scenario, which assumes an average oil price of $40 per barrel.
“Some Russian experts say that the longer sanctions remain for Iran, the better it will be for Russia because of the risk of falling oil prices,” said Elena Suponina, a Middle East expert and adviser to the director of Moscow’s Institute for Strategic Studies. “But Russia supports the lifting of sanctions against Iran because it is a long-standing partner and ally, including over many regional problems.”
One of those problems is Syria, where Assad has managed to cling to power during a four-year civil war, as military and financial support from Iran and Russia countered Gulf states’ backing for his foes.
U.S. Secretary of State John Kerry signaled a change of policy of pushing for Assad’s immediate ouster last month, saying that the U.S. and its allies will have to negotiate with him to secure a political transition.
In Yemen, where Saudi-led air strikes are in their third week, Russia has been pushing for a UN Security Council resolution to call for an end to the military operation aimed at restoring the ousted Saudi-backed president.
An Iran nuclear agreement would increase the country’s ability to support its allies in Syria, Yemen and Iraq, and benefit Russian arms exports, said Firas Abi Ali, head of Middle East and North Africa Analysis at research group IHS Country Risk. “The Iranians and Russians have a shared fear of Sunni militancy.”
Russia and Saudi Arabia have had increasingly strained ties since they found themselves on opposing sides of the Syrian civil war in 2011 and some Russian officials accused the kingdom of conspiring with the U.S. to push down oil prices.
In fact, the revival of Iran will be a “huge problem” for Russia’s energy industry because of the “serious impact” on the oil market from increased supplies and the likelihood the Iranians will compete with gas exporter OAO Gazprom, Chris Weafer, a senior partner at Moscow-based consulting firm Macro Advisory, said by e-mail.
That could be offset by increased opportunities in a sanctions-free Iran, according to Radzhab Sattarov, head of the Iran committee at the Moscow Trade and Industry Chamber.
Gazprom, its oil arm, OAO Gazprom Neft, and OAO Lukoil have had projects in Iran interrupted by sanctions, and Rosatom is seeking further contracts at the Bushehr nuclear power plant in Iran.
Russian-Iranian cooperation on oil shouldn’t be underestimated, Russian Deputy Foreign Minister Sergei Ryabkov said on Monday, according to the Interfax news service. Russia is already supplying goods to Iran in exchange for oil, Putin spokesman Dmitry Peskov said on Tuesday.
“For Russia, it is more beneficial if Iran becomes a normal country you can have regular business with,” said Fyodor Lukyanov, head of the Moscow-based Council on Foreign and Defense Policy. “There will be more competition but still Russia will have more advantages compared to American companies in doing business with Iran as the U.S. will remain the symbol of everything they hate.”
The political benefits may not only be in the Middle East.
Iran could join the Shanghai Cooperation Organization, a group that includes Russia, China and Central Asian states, thereby boosting Russian ability to influence Iran’s policies in Central Asia and Afghanistan, Kozhanov said.
“In Russia’s strategic thinking, Iran’s role is increasing,” Kayhan Barzegar, director of the Tehran-based Institute for Middle East Strategic Studies, said in a phone interview. “Russia and Putin have come to the conclusion that relations with Iran must increase.”
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