Russia and Iran are expected to sign new trade deals in September, and that has some experts attempting to model the impact of greater economic collaboration on the Russian economy.


Russian President Vladimir Putin (right) passes Iran's Foreign Minister Mohammad Javad Zarif during their meeting in Moscow's Kremlin January 16, 2014. Photo: Reuters

In September, Russia and Iran plan to sign a set of bilateral agreements on trade and economic cooperation. The two countries are also expected to discuss the recently signed memorandum of mutual understanding, which provides for the delivery to Iran of Russian equipment and consumer goods in exchange for Iranian oil. Despite the threat of fresh U.S. sanctions against Iran if the deal with Russia goes ahead, Tehran is looking to strengthen cooperation with Moscow.

The bilateral memorandum signed on August 5 provides for the expansion of trade and economic cooperation in the fields of energy and energy-related infrastructure, particularly the oil and gas sector, as well as “the supply of machinery, equipment, consumer goods, and agricultural products.” In exchange, Iran will ship 500,000 barrels of oil per day in the other direction. Specific contracts and agreements could be signed during the meeting of the intergovernmental commission slated for September 9-10 in Tehran.

Moscow believes that the agreement could have a significant impact on the economic development of both countries. Russia, in particular, is attracted by the prospect of greater access to Iran’s highly promising hydrocarbon reserves.

Moreover, by the Kremlin’s logic, Russian companies will have more opportunities to increase exports of their high-tech equipment abroad.

In recent years, many experts have noted a rising imbalance in oil exports from Russia and the country’s proven reserves. Russia is second only to Saudi Arabia as a supplier of oil to the world market, but its proven reserves are not so vast.

Russia’ proven reserves are a mere 93 billion barrels, to be precise, or 5.5 percent of the world's proven oil reserves. Many fields in Russia have peaked, and new deposits are located in complex geological and climatic conditions.

These new fields cannot be brought on stream without the use of modern, expensive technologies, and production is generally a cost-intensive process. What's more, U.S. and EU sanctions on the supply of processing equipment for oil and gas production could seriously hamper the commercial exploitation of new deposits in the Russian Arctic and oil production at the Bazhenov basin.

Iran faces a different set of circumstances. Its hydrocarbons are among the most abundant in the world with proven oil reserves of 157 billion barrels (9.3 percent of the world’s proven oil reserves) and proven gas reserves of 33.8 trillion cubic meters (18.2 percent of the world's proven gas reserves). By comparison, Russia’s reserves now total only 31.3 trillion cubic meters (16.8 percent of the world's proven gas reserves). In South Pars, Iran has one of the world's largest oil and gas fields.

Lastly, another important advantage of Iran's oil and gas production is the relative accessibility of reserves and, accordingly, the low cost of production. Low cost not only makes it easier to export, but also potentially creates an ideal base for the development of the gas chemical industry, among others. However, despite the presence of huge hydrocarbon reserves, Iran remains a rather modest global exporter.

Under U.S. and EU sanctions, the country was able to supply just one million barrels of oil per day to the world market. Over the past year, these economic sanctions have been somewhat mitigated; for instance, supplies of liquefied natural gas to China and Korea have increased. But despite the easing of pressure, Iran is still far from realizing its potential as an oil and gas producer and exporter. The agreements reached with Russia could raise Iranian exports by 50 percent, which would have a marked effect domestically.

No less significant are the possible consequences of Russian exports of technological equipment in the opposite direction. For Iran, the supply of new equipment in the power, mining, and transport sectors are crucial, since in recent years economic sanctions have resulted in a dearth of processing equipment, especially in the energy industry. Russia also stands to gain from this arrangement.

In recent years, Russian exports have been predominantly made up of minerals and raw materials. For example, in 2013 mineral products (oil and gas) accounted for 71.6 percent of the country’s exports; metals, precious stones, and related wares (metallurgical products) accounted for 10.5 percent, while machinery and equipment accounted for just 5.4 percent.

In the past three decades Russia’s structure of exports has undergone some significant changes — with the share of primary commodities rising and that of high-tech products and machinery falling sharply.

These changes were largely related to market factors, particularly rising energy prices, making exports of raw materials highly profitable. But some were due to the collapse of economic relations with the countries of Eastern Europe in the 1990s and the loss of markets in developing parts of the world.

As a result of these changes, the Russian Federation has become entrenched globally as an exporter of commodities and an importer of ready-made products. (The country’s structure of imports effectively mirrors that of exports, with machinery, equipment, and means of transportation accounting for 48.6 percent of imports and mineral products 2.2 percent.)

It is obvious that being locked into one export commodity group is fraught with serious economic imbalances and risks associated with an overdependence on market conditions in the raw materials market and the negotiating clout of oil and gas consumers. Russia urgently needs to diversify its export structure and achieve a more balanced national economy, in which regard the signing of contracts for the supply of technological equipment abroad is crucial.

However, the main provisions of the memorandum on supplying Iran with technology and goods in exchange for oil contain certain restrictions. To a large extent they relate to the positions of the U.S. and the EU on Iran, and the possible reaction that the agreements could provoke.

A worsening of relations between the two countries could significantly complicate the success of future economic development, since economic ties between Russia and Iran could prompt Europe, and especially the United States, to consider more serious sanctions on the supply of technological equipment to Russia and the country’s financial sector. As for the possible re-export of Iranian oil, it is too early to say, as the only document signed so far is a memorandum of intent.

The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.

Read another view: The Russia-Iran energy deal is a losing proposition