The stand-off with the West has led to Iran cozying up with Russia and China. But Iranians should be clear, Russia is no friend, no ally – and must be deeply distrusted by Iranians. In many ways, the Russians are far worse for Iran and Iranians than the West. Yes, they are both thieves ready to steal Iranian assets, but the Russians have been far more successful at stealing Iranian assets since the ‘revolution’ in 1979 – than the West.
Russia has basically swindled Iran out of its sovereignty in the Caspian sea, costing Iran Trillion in lost oil and gas revenues, swindled Iran with the sale of the Bushehr Nuclear power plant (which led to Iran being sanctioned for over 20 years due to its Nuclear program), and then essentially kept Iran out of the global oil markets, leading to a bonanza for Russian oil and gas revenues.
Quite simply, the Russians have ***ked Iran – much worst than the West ever could. Here are more details.
- Russia IS the big winner from Trump’s Iran Sanctions and oil boycott- Iran Swindled out of Trillions
The biggest winner from Donald Trump’s clampdown on Iranian oil exports is Vladimir Putin and Russia. That much became clear even before Secretary State Mike Pompeo made the official announcement early Monday. Crude oil prices, already up 44% this year, jumped nearly 3% more.
On Monday, Pompeo announced that the United States would end sanctions waivers for countries that import Iranian oil. “Our goal has been to get countries to cease importing Iranian oil entirely,” Pompeo said. “Last November, we granted exemptions from our sanctions to seven countries and to Taiwan. We did this to give our allies and partners [a chance] to wean themselves off Iranian oil, and to assure a well-supplied oil market. Today I am announcing that we will no longer grant any exemptions. We’re going to zero.”
It was all part of Trump’s efforts to put the squeeze on Iran, halting its ability to fund terrorist operations and consistent with his move to torpedo Barack Obama’s deal to end Iran’s development of nuclear weapons. So now, unilaterally, the Trump administration declared that the US would no longer allow China, Japan, South Korea and five other countries to buy any oil from Iran.
Within minutes after the move became known, oil prices began to spike—a boon for Russia, one of the world’s largest oil suppliers. But not so good for a whole lot of other countries—including American motorists who’ll be paying a lot more for gasoline this summer. China, a nation whose leaders Trump is courting hard for his much-needed trade pact, did not react well to his oil edict.
With oil exports comprising some 60% of Russia’s total merchandise exports and 30% of its GDP, every dollar increase in the price of oil translates immediately into a dramatic improvement in Russia’s financial position. This cannot help but offset some of the impact of the sanctions that the United States and Western Europe continue to level on Russia as a result of the Kremlin’s seizure of Crimea and its ongoing activities in Eastern Ukraine.
In hard dollar terms, the impact is even more apparent. With Russia producing some 11 million barrels of oil a day, each dollar increase in the price per barrel of crude oil adds at least $4 billion to the Russian economy each year. Moreover, Russia ran a budget surplus last year that was close to 3% of its GDP, higher than forecast, as Russia’s Economy Minister Maxim Oreshkin told the Financial Times in December. It was the first such annual budget surplus since 2011.
As it happens, oil prices are one of the few economic indicators that are effectively a zero-sum game. While the oil price increases already anticipated by today’s American action may boost Russia’s economy, they also add substantially to the burden on America’s allies in Western Europe, who consume some 13 million barrels of oil per day.
Moreover, there are other real threats to the Europe’s oil supplies, particularly from the ongoing unrest in Libya, just across the Mediterranean, which had been pumping some 1.2 million barrels a day before the latest unrest, much of it destined for Europe. There are fears that unrest could lead to cutbacks of as much as half that output, further raising oil prices—and again providing another healthy boost to the Russian economy.
At least Russia and China, a leading victim of Monday’s Trump embargo action, have been preparing for this day for years. In January 2018, the second Russia-China oil pipeline came online, boosting Russia’s capacity to satisfy rapidly expanding Chinese oil requirements—and more cheaply than with a long sea voyage in expensive super-tankers from Iran to the nearest Chinese oil port.
But beyond all these short-term effects of Monday’s decision to screw down the hold on Iran even tighter are other black swan impacts that can still be seen on the horizon. These include the ability of large multi-national companies, especially in the oil patch, to forecast accurately the supply-demand-price equations that figure deeply into their decisions to invest or their pricing of products that require large amounts of petroleum. Not to mention any sudden increase in gas prices at the pump as Americans head out for their summer holidays.
Finally, of course, there are any number of geopolitical implications of the United States again dictating the trajectory of the world oil market and the broader economics that are so deeply dependent on this path.
All these are issues that the President should have considered before embarking on this course and that may be far more difficult to undo than to implement.
- Nuclear Program & JCPOA – Swindled out of $100 Billion
Iran’s quest for the development of nuclear program has been marked by enormous financial costs and risks. It is estimated that the program’s cost is well over $100 billion, including the construction of the Bushehr reactor making it one of the most expensive reactors in the world. Much of this has gone to Russia.
Here are is the basic facts: The Bushehr nuclear reactor took nearly four decades to complete and cost almost $11 billion (measured in today’s dollars), making it one of the most expensive reactors in the world. But the Bushehr reactor provides merely 2 percent of Iran’s electricity needs, while 15 percent of the country’s generated electricity is lost through old and ill-maintained transmission lines.
The truth is that despite aspirations to be self-sufficient, Iran’s relatively small uranium resources will inhibit the country from having an indigenous nuclear energy program. And, strangely, most ominously, the Bushehr reactor sits at the intersection of three tectonic plates.
Ironically, rather than focusing on Nuclear power, the only sustainable solution for assuring that Iran’s energy future is Solar energy. Iran’s solar energy potential is estimated to be thirteen times higher than its total energy needs.
Not only have the Russians sold Iran THE MOST EXPENSIVE nuclear reactor in the world, but the program was constantly delayed by the Russians – i.e. there has been significant opportunity cost in the construction of the reactor. After more than 20 years since the Russians took over construction from the Germans, only one Reactor has become operations and phases 2 and 3 of the plant have yet to come onstream. Since Bushehr’s nuclear reactor has been under construction by different firms and consultants, the constituent parts have also different origins. 24% of the parts are German in origin, 36% are Iranian-made while 40% are Russian-made.
Not only has Iran been swindled, but it is clearly an ridiculous project to begin with.
- Caspian Sea – Swindled out of $3.2 Trillion
Underlying the one-year anniversary in mid-August of the signing of the ‘Convention on the Legal Status of the Caspian Sea’ is one of the greatest oil industry swindles in recent years.
When representatives of the five Caspian littoral states meet on the 11th and 12th of August, Iran intends to seek some redress from Russia on Moscow’s maneuvering last August. The Islamic Republic believes that it was robbed of its historical rights in the Caspian, conned out of a US$50 billion per year income, and left without Russia’s support against the re-imposition of U.S. sanctions.
Little of any apparent consequence was decided last August when the five Caspian littoral states – Russia, Iran, Kazakhstan, Turkmenistan, and Azerbaijan – signed the ‘Convention on the Legal Status of the Caspian Sea’. The limited publicity that surrounded the signing stated only that the agreement stipulated that relations between the littoral states would be based on the broad principles of national sovereignty, territorial integrity, equality among members, and the non-use of threat of force.
It refrained from specifically going into details about share allocations in the Caspian Sea resource and talked only vaguely about giving the area ‘a special legal status’. However, a senior oil and gas industry source who works closely with Iran’s Petroleum Ministry told OilPrice.com that there was a secret second part to the deal that has proven explosive for the perennially fractious relations between the Caspian states.
At stake is the massive Caspian Sea hydrocarbons resources prize that has been fought over since the dissolution of the USSR in 1991 resulted in three additional partners – Kazakhstan, Turkmenistan, and Azerbaijan – to the original partnership of Russia and Iran. Prior to the fracturing of the USSR into its constituent independent states, Iran and the USSR had struck the original agreement in 1921 to split all ‘fishing rights’ in the Caspian area 50-50. This was amended in 1924 to include ‘any and all resources recovered’, meaning in practical terms that all hydrocarbons resources would be shared equally between Russia and Iran.
“Iran should have said back then that Russia should have shared its Caspian stake with the three former USSR states, but it [Iran] was content to wait for the official legal dispute to be settled,” underlined the Iran source.
At stake is the allocation of revenues from the wider Caspian basins area, including both onshore and offshore fields, that is conservatively estimated to have around 48 billion barrels of oil and 292 trillion cubic feet (Tcf) of natural gas in proved and probable reserves. Around 41 percent of total Caspian crude oil and lease condensate and 36 percent of natural gas exists in the offshore fields, with an additional 35 percent of oil and 45 percent of gas estimated to lie onshore within 100 miles of the coast, particularly in Russia’s North Caucasus region.
The remaining 12 billion barrels of oil and 56 Tcf of natural gas are believed to be variously located further onshore in the large Caspian Sea basins, mostly in Azerbaijan, Kazakhstan, and Turkmenistan. The area accounts for an average of 17 percent of the total oil production of the five littoral states that share its resources, on average totaling 2.5-2.9 million barrels per day (mbpd).
Before the ‘Convention on the Legal Status of the Caspian Sea’ agreement was signed last August, oil output targets for each country were set three months in advance, with all revenues paid into a central Caspian oil account, which was then split in equal proportions of 20 percent between the five littoral states, said the Iran source. The revenues, at least prior to the re-imposition of sanctions against Iran by the U.S. late last year, usually comprised 95 percent U.S. dollars and Euros, but with some local currencies in the mix.
Against this backdrop, the legal designation of the Caspian as either a ‘sea’ or a ‘lake’ would have far-reaching repercussions on the assignment of revenues from it. If it was designated a sea then coastal countries would apply the ‘United Nations Convention on the Law of the Sea’ (1982), in which event each littoral state would receive a territorial sea up to 12 nautical miles, an exclusive economic zone up to nautical 200 miles, and a continental shelf. In practice, this would mean that countries such as Turkmenistan and Azerbaijan would have exclusive access to offshore assets that Iran would not be able to access.
If it was designated a lake – and this was the informal designation before the August agreement – then the countries could use the international law concerning border lakes to set boundaries, by which each country effectively possesses 20 percent of the sea floor and surface of the Caspian.
In the preparations for the signing of the ‘Convention on the Legal Status of the Caspian Sea’ last August, Iran had engaged lawyers to challenge the established 20 percent share that each littoral state had informally agreed upon, based on the fact that Russia should have used its own original 50 percent share to make good stakes for its former USSR states.
Iran was confident at that point that Russia would show some flexibility as, after the U.S. pulled out of the nuclear deal last May, Moscow immediately made a deal with Iran that would effectively have given it control of all of Iran’s oil and gas resources. Specifically, the deal was that Russia would hand Iran US$50 billion every year for at least five years. This would cover all of Iran’s estimated US$150 billion of costs to bring all of its key oil and gas fields up to Western standard, with US$100 billion left over for the build-out of other key sectors of its economy.
“Russia also pledged to veto all attempts in the United Nations Security Council [UNSC] to have sanctions against Iran increased or to have the terms of the original nuclear deal re-drawn to include further sanctionable actions such as missile testing or not allowing snap inspections of all military facilities, which it could do as it is as one of just five Permanent Members on the UNSC,” said the Iran source.
In exchange for this, Iran, in addition to giving Russia preference in the oil and gas sector, was also to tighten its military co-operation with Russia, including buying Russia’s S-400 missile defence system, allowing Russia to expand its number of listening posts in Iran and doubling the number of senior ranking Islamic Revolutionary Guards Corps (IRGC) officers that are seconded in Moscow for ongoing training, to between 120 and 130.
The catch for Iran was that, under the terms of the agreement, there was no clause that allowed Iran to impose any penalties on any Russian developer firm for slow progress on any field for the next 10 years. The Russians, though, during this entire 10-year period, would still have the right to dictate exactly how much oil was produced from each field, when it was sold, to whom it was sold, and for how much it was sold. Russia also had the right to be able to buy all of the oil – or gas – being produced from fields that their companies were supposedly developing at 55-72 percent of its open market value for the next 10 years.
“The Iranians naively thought this meant that they had entered into a genuine two-way partnership with Russia, but Russia didn’t see it that way,” the Iran source said. “In the Russian way of seeing things, once it had secured Iran in this deal, effectively making it a client state, it had no reason to honor any other of its previous obligations,” he added. “The situation was also worsened for Iran by the fact that Russia had its own problems with U.S. sanctions and didn’t want to make things worse by siding so thoroughly with Iran,” he highlighted.
Given these considerations, and the fact that Russia wanted to strengthen its relations with the previous USSR states, Moscow was the prime mover in having the Caspian designated as a sea, not a lake. This was on the basis that because Russia had opened up the channel from the Volga River into the Caspian to prevent the levels dropping, the Caspian no longer conformed to the legal definition of a lake, which is that it is a localized water deposit standing independent of any river that serves to feed it.
“This meant, effectively, that Russia could divide up the shares as it saw fit, and the way it saw fit was to benefit its existing ally, Kazakhstan, which was assigned a 28.9 percent share, and its wished-for ally, Azerbaijan, which secured a 21 percent stake, while Russia saw a slight increase, to 21 percent, while Turkmenistan’s share goes down to 17.225 percent, as it is seen as a softer touch by Russia, and Iran’s share goes down to just 11.875 percent,” said the Iran source.
“This switch from 50 percent to just over 11 percent means that Iran will lose at least US$3.2 trillion in revenues from the disputed and lost value of energy products going forward,” concluded the Iran source.