Is the lack of clarity about the Iran-Russia oil-for-goods deal intentional?

Nader Habibi unpacks the possible motivations for the mixed signals from Moscow and Tehran regarding a proposed oil-for-goods deal between the two countries. Both countries, he argues, face domestic opposition to the deal but want to maintain the possibility of a deal as a hedge against tightening Western sanctions.


By Nader Habibi

The growing tensions between the United States and Russia in recent months have further complicated their strategic cooperation in P5+1 nuclear negotiations with Iran. On one hand, the United States has imposed economic sanctions on Russia and, on the other hand, it insists that Russia must respect the economic sanctions against Iran. These contradictions escalated in early August as Iran and Russia announced a framework for a future oil-for-goods economic agreement worth $20 billion over a five-year interval. The Obama Administration’s point man on Iran sanctions, David Cohen, warned Russia that this agreement would violate anti-Iran sanctions and that the United States will impose additional sanctions on Russia if it implements this deal. Russia has rejected this objection and has argued that the agreement does not violate the sanctions.

The details of the proposed agreement are gradually emerging. Under this agreement Iran would export 500,000 barrels of crude oil per day to Russia (either direct delivery to Russia or delivered to oil tankers in Persian Gulf on behalf of Russia). There is no clear and finalized list of items that Iran would purchase in exchange for this crude oil. The potential list, based on various news reports in Iran and Russia, includes heavy machinery, sale of electricity up to 500 megawatts, railroad construction material, additional nuclear power plants, and investment in Iran’s oil and gas industry.

Iran and Russia began their negotiations on this economic agreement in November 2013 and finally issued statements about the signing of agreements in July and August. However, some official statements about the agreement have been vague and contradictory. The statements by Iranian and Russian officials did not match each other. Furthermore, the Russian statement was later changed to indicate that what had been achieved was a memorandum of understanding instead of a formal agreement. It is safe to say that what has been signed so far is a memorandum of understanding which serves as a framework agreement with the commitment to workout the details at a future date. Another high-level meeting between Iranian and Russian officials is scheduled for mid-September. This vagueness and contradiction is not entirely accidental. There are two possible explanations for it. First, it could be a result of Iran and Russia’s attempts to use each other as bargaining chips in their dealings with the United States. Second, there are interest groups in both countries that are slowing down the progress of these negotiations.

Vague by design: Despite becoming the target of a growing set of U.S. and European sanctions, Russia has so far cooperated with the P5+1 negotiations. It has not tried to spoil the Western effort against Iran by insisting on a more lenient Western position or threatening to withdraw from the negotiations. Such moves on the part of Russians would not have been unusual or unexpected, in light of the open hostility that Russia has faced from the U.S. and Western Europe. Yet Russia has preferred to remain cooperative and instead manage its relations with Iran as a signal to the U.S. and Europeans that it has the capacity to undermine the economic sanctions if anti-Russian hostilities continue. The vague news releases about the agreement with Iran are perhaps meant to convey this implicit threat.

Similarly, Iran has faced more stringent demands from P5+1 in the recent months in Vienna negotiations and the gap between the positions of Iran and the U.S. is still significant. Yet as the hostilities between the U.S. and Russia intensified, Iran chose to follow a cautious neutral position. Neither President Rouhani’s negotiating team nor the Supreme Leader tried to exploit the U.S.-Russia tensions by offering explicit diplomatic support to Russia in an effort to obtain more support from that country in the negotiations. Instead, Iran engaged in economic negotiations with Russia and increased diplomatic exchanges between the two countries.

Russian Energy Minister Alexander Novak
June 16, 2014 - Russian energy minister Alexander Novak at the 21st World Petroleum Congress in Moscow. In early August, Novak signed an energy cooperation framework between Russia and Iran. (Andrey Rudakov/Bloomberg via Getty Images)

The highest diplomatic exchange took place in Shanghai as President Putin and Rouhani held a meeting during a regional Asian summit on May 21st. There have also been several meetings between the two countries’ foreign, oil, and energy ministers. An energy cooperation framework was signed between Alexander Novak (Russia’s energy minister) and Bidjan Zangeneh (Iran’s oil minister) in their most recent meeting on August 6th. While publicizing these agreements the Iranian officials have also rejected the American objections to the Iran-Russia trade packages by arguing that they comply with the international sanctions.  Iran’s foreign minister, Mohammad Djavad Zarif, will meet with his Russian counterpart, Sergei Lavrov, for the third time this year on August 29th. This will be followed by another meeting between Putin and Rouhani in the upcoming Caspian Sea littoral states summit in September.

In moving forward with the diplomatic and trade negotiations with Russia but remaining vague about the final agreement Iran is also sending a signal to the United States. It is hinting that, while the Islamic Republic would like to resolve the nuclear dispute, it will not allow the U.S. to extract more concessions by threatening to intensify the sanctions. Such new sanctions, Iran is suggesting, would be (partially) bypassed through increased trade with Russia.

Vague by Nature: A second explanation for why there are conflicting news releases about this deal is that it has not been finalized yet due to a lack of full commitment on both sides. While President Putin directed the Russian government in November 2013 to move forward with the negotiations and finalize the agreement, the pro-Western and pro-Israel lobbies in Russia have managed to slow down the process and delay the final agreement. On the Iranian side the cabinet of President Rouhani, particularly his oil and gas minister, are more interested in improving Iran’s economic ties with the West after the sanctions are lifted than with concluding a deal with Russia. Many members of Iran’s business and technocratic elite have also maintained a preference for trade and investment partnerships with the West after the 1979 revolution and do not view Russia as an ideal substitute for Western trade partners in a post-sanctions era. These political groups have partially offset the efforts of the more conservative supporters of the Supreme Leader who prefer closer economic and strategic ties with Russia in order to confront the West.

In addition to these negative lobbying pressures in both countries, there is also an underlying lack of trust between Russia and Iran that casts a shadow on their bilateral relations. Russians are aware of the pro-Western tendencies in some segments of Iran’s political elite and fear that Iran will step back from this agreement once the sanctions are lifted and trade with Western nations becomes feasible. These suspicions have been reinforced by recent statements of some Iranian officials about Iran’s readiness to supply gas to Europe if Russian supply, (which accounts for 30% of Europe’s gas imports,) is disrupted. Such statements were made at the same time that Iran involved in economic negotiations with Russia.  

Iran, in turn, is skeptical that if U.S.-Russia and EU-Russia tensions diminish before the sanctions against Iran are lifted Russia might abandon or delay some of its economic agreements with Iran under pressure from the West. This skepticism is partly due to Russian refusal to deliver the S-300 missile defense system. Iranians also point to the prolonged delays in completion of the Bushehr nuclear power plant, believing that these delays were politically motivated in spite of Russian claims that the delays were due to technical difficulties.

Strategic Considerations: At the same time that the mutual distrust between Russia and Iran has acted as a deterrent against the expansion of economic relations between the two, common strategic and diplomatic objectives in the Middle East and Central Asia have had an opposite effect. While Russia, like the United States, opposes Iranian acquisition of nuclear weapons, Iran and Russia share a common objective in their desire to reduce American influence in the Middle East and Central Asia. The Syrian civil war has brought Iran and Russia closer together as they have both supported the Assad regime. Now it appears that Russia has joined Iran in providing support to the Iraqi government against the Islamic State (formerly ISIS) forces by accelerating the delivery of several Mi-35 helicopter gunships and Su-25 warplanes in late July. Russia views the survival of Iraqi government as essential to its support for Syria because Iran will be more capable of supporting the Assad regime if it can maintain ground access to that country through Iraq.

From Iran’s point of view a long-term economic deal with Russia and increased Russian economic investment in Iran can increase Russia’s commitment to the security of Iran against a potential military strike by Israel or the United States. Russia will have an added economic incentive to help the Islamic regime, in addition to their shared interests in Syria. The proposed five-year deal is part of a longer-term economic cooperation plan that includes several additional nuclear power plants, and expansion of Iran’s North-South railroad and electric power grid.

Furthermore, expansion of economic ties with Russia will also increase Iran’s chances of joining the Shanghai Cooperation Organization (SCO) in which Russia and China are the dominant members. For several years now, Russia and China have limited Iran’s participation in SCO to observer status. Their main excuse for rejecting Iran’s application for full membership has been that Iran was subject to UN-approved economic sanctions. Iran’s growing economic ties with Russia can help it secure Russian support for full membership in SCO. All of these considerations are relevant in Iran’s calculations as long as hostilities with the U.S. and its regional allies continue.

Conclusion: Iran and Russia are both using their potential economic and strategic cooperation as a bargaining chip in their dealings with the West. By moving forward with a $20 billion oil-for-goods economic package with Iran in an opaque manner Russia is warning the West that it can derail the sanctions and spoil the nuclear negotiations if the Ukraine crisis further escalates. Iran is similarly using the deal to warn the United States that the threat of additional sanctions will not work.  

As a result it appears that the growing tensions between the United States and Russia are likely to reduce American leverage in nuclear negotiations with Iran. Not only can Iran rely on trade with Russia to partially offset the Western sanctions, but the growth of Iran-Russia economic ties could increase the likelihood of Russian military support for the Islamic regime of Iran against foreign attack and domestic uprisings. Yet, at the same time it must be noted that rather than adopting hostile and threatening rhetoric, the Iranian government is hopeful that by showing its Russia card it can convince the United States to be more flexible in the ongoing negotiations. 

Nader Habibi is Henry J. Leir professor of the economics of the Middle East in the Crown Center at Brandeis University, where he is also senior lecturer in the Department of Economics. His current research project is an analysis of the excess supply of university graduates in the Middle East ( Professor Habibi's latest book is Three Stories One Middle East.